An interesting vote took place in the House of Representatives at the beginning of this month. A vote completely overshadowed by constant Republican tantrums over the rollout of the Affordable Care Act. A vote that has potentially serious consequences in the future.
The Wall Street Reform Act of 2010 (Dodd-Frank) included Section 716, which ensured that banks insured Federal Deposit Insurance Corporation, move their ‘swaps’ (a certain derivative) into non-bank arms of the business that aren’t insured by FDIC; not eligible for bail out funds. It ensured protection for the consumer’s savings, and ensured protection for the taxpayer, by enforcing banks to place their more risky derivative deals outside of the realm of Federal assistance.
At the end of October 2013, House Resolution 992 passed the House by 292 votes to 122. The Bill – H.R.992 – or The “Swaps Regulatory Improvement Act” – severely limits the reach of Section 716 of Dodd-Frank, ultimately striking down a key regulation that Dodd-Frank implemented back in 2010. The implication, simply put, is that incredibly risky Wall Street behaviour surrounding the dealing of derivatives could be backed by a taxpayer funded bailout – for exchanges that are not at all related to banking – if it all goes wrong again.
Despite the Treasury raising concerns about striking down such an important provision, the House – including many Democrats – voted to pass H.R.922. But why? What is the motivation? Well, one only has to look at the lobbying on this Bill to understand just how this may have come about.
Contributions to House members from interests groups who expressively support H.R.992 are rather eye watering. On the list of top contributions to House Members, Jim Himes (D-CT4) – a co-sponsor of the Bill – received $437,179 from special interests in favour. More than any other Democrat in the House. The second ranking figure in the Democrat House Leadership chain of command, Steny Hoyer (D-MD5) received $266,510 from Wall Street supporters of the Bill. The most expensive ‘Yes’ vote for Wall Street comes to us via Eric Cantor (R-VA7), who received $525,400. The main sponsor of the Bill Randy Hultgren (R-Ill) received more contributions from the Securities and Investment industry than any other industry, at $136,500.
In all, special interests supporting H.R.992 contributed 5.9 times more to House members than those groups that opposed it. Wall Street has been staggeringly influential in ensuring regulations from 2010 are struck down. Citigroup were among the contributors. Citigroup also wrote ‘recommendations’ that appeared to be reflected almost word for word in the final draft of H.R.992. The Citigroup recommendations reads:
(d) Only bona fide hedging and traditional bank activities permitted. The prohibition in subsection (a) shall apply to any covered depository institution unless the covered depository institution limits its swap or security based swap activities to:
(1) Hedging and other similar risk mitigating activities directly related to the covered depository institution’s activities.
(2) Acting as a swaps entity for swaps or security-based swaps that are structured finance swaps, unless–
(i) such structured finance swap is undertaken for hedging or risk management purposes; or
(ii) each asset-backed security underlying such structured finance is of a credit quality and of a type or category with respect to which the prudential regulators have jointly adopted rules authorizing swap or security-based swap activity by covered depository institutions.
– Unsurprisingly, given just how much money Wall Street has spent buying its Congressional support for the Bill, H.R.992 reads:
(A) Hedging and other similar risk mitigation activities.
Hedging and other similar risk mitigating activities directly related to the covered depository institution’s activities.
(B) Non-structured finance swap activities.–
Acting as a swaps entity for swaps or security-based swaps other than a structured finance swap.
(C) Certain structured finance swap activities.
Acting as a swaps entity for swaps or security-based swaps that are structured finance swaps, if–
(i) such structured finance swaps are undertaken for hedging or risk management purposes; or
(ii) each asset-backed security underlying such structured finance swaps is of a credit quality and of a type or category with respect to which the prudential regulators have jointly adopted rules authorizing swap or security-based swap activity by covered depository institutions.
– Practically word for word. In fact, according to the New York Times, 70 of the 85 lines in the Bill were penned by Citigroup. A Bill that deregulates the risky aspects of the financial industry – and spreads the risk of failure and the obscene costs of such, to the taxpayer if it all collapses again – was written by the financial industry. Welcome to the House of Wall Street.
The Bill passed the House, and was referred to the Senate Committee on Banking, Housing, and Urban Affairs at the end of October. It is unlikely to pass the Senate, though if somehow it does, it is unlikely to be signed by the President. The White House has already registered its opposition to the Bill, though stopping short of threatening a veto. It might be worth noting that Jack Lew – current Treasury Secretary – worked as Citigroup’s Chief Operating Officer between 2006 and 2008, overseeing the Alternative Investments unit that invested in a hedge fund that had bet on the housing market to collapse.
The US is still recovering from the destruction wrought by, among others; Citigroup. In 2013, Citigroup and Wall Street have successfully managed to lobby Congress into ensuring that incredibly risky derivatives deals – that helped to cause the problems in the first place – are now fully exposed to a risk of a future bailout. This, despite the Federal Reserve reporting in 2012 that Citigroup was one of four financial institutions to fail its ‘stress test’; a test of the institutions ability to withstand another crisis like that of 2008. Also in 2012, Citigroup had to settle an investor lawsuit for $25,000,000 for allegedly misleading investors over the nature of its mortgage-backed securities. Why on earth is this institution allowed anywhere near the strings of government, to shape policy that has such far reaching implications?
Under such circumstances, Citigroup’s lobbyists must be in for a huge Christmas bonus. They’ve certainly earned it.