President Obama wants to consign the financial crisis to the past and delegate the implementation of financial reform to others in his administration. But he needs to get personally involved. Why? Because Senator Carl Levin’s recent hearing on the JP Morgan Whale showed that nothing has changed at the largest banks or the bank regulatory agencies since the run up to the financial crisis. In the early months of 2012—two years after passage of the Dodd-Frank Act—JP Morgan acted deceptively, regulators remained clueless, and investors were the last to know about the true magnitude of the bank’s $6.2 billion in losses. Nevertheless, Republicans and some Democrats in Congress are today working to repeal reforms.
Yesterday, House Democrats joined with House Republicans on the Agriculture Committee to support several bills that would “fix” several Dodd-Frank provisions to regulate derivatives, effectively gutting measures designed to rein in bank abuses. Proponents of deregulation—both Democrats and Republicans—were hoping that these bills would move silently through the committee and then the Financial Services Committee, and then quietly onto the floor of the House for passage. Many Democrats, like Gwen Moore, Ann Kuster, and David Scott, support or even cosponsored these bills. And several others, most notably former Goldman Sachs executive Jim Himes, who currently serves as the Finance Chairman for the Democratic Congressional Campaign Committee, will help lead the effort when the bills come to the House Financial Services Committee.
Senator Levin issued a statement Tuesday saying, "It is incredible that less than a week after new JP Morgan Whale hearings detailed how the bank's London office piled up risk, hid losses, and dodged regulatory oversight, that some House members are again supporting the weakening of derivative safeguards." One bill, approved on a 31-14 vote, calls for altering a requirement that banks with access to deposit insurance and the Federal Reserve’s discount window move some derivatives trades to affiliates that have their own capital. The bill would allow banks—not their affiliates—to hold commodity, equity and structured swaps tied to some asset-backed securities. “You’re putting the taxpayers on the hook,” said Representative Collin Peterson of Minnesota, the panel’s top Democrat, at the mark up. “This could come back to haunt you.”
A second bill would allow a company to trade derivatives with its offshore affiliates without posting collateral to a third party. Exempting such trades from oversight could also help foster tax avoidance, since companies have used sham derivatives transactions in the past. A third bill would force the Commodity Futures Trading Commission to conduct economic cost-benefit analyses for new agency rules using guidelines that would be more favorable to Wall Street banks.
Is it too soon for President Obama to care? After all, it’s just one committee in the House. But this is precisely how momentum developed for passage of the JOBS Act, which loosened securities regulations for small companies, and which former securities regulators had harshly condemned during congressional consideration. The White House sat silent, Democrats joined to support the bill in the House, and it became too difficult, too late, for reform-minded Democratic Senators to improve its most egregious provisions. In yet another disappointment to those who care about preventing securities fraud, President Obama signed the JOBS Act, even over the (belated and weak) objection of his own SEC Chairman.
If the Treasury Department or White House do not weigh in strongly and soon against House efforts to undermine Dodd-Frank derivative provisions, the limited gains in Dodd-Frank may begin to recede. If Wall Street proponents succeed in passing this wave of Dodd-Frank “fix it” bills, more will follow. Wall Street reform is a legacy issue for the president. Does he really want a derivative deregulation bill to reach his desk in the coming months?
Unfortunately, President Obama has always been a delegator on Wall Street reform issues. In his first term, he picked disciples of Bob Rubin such as Larry Summers and Tim Geithner to implement policy, weighed in personally only to save from being strangled by his own Administration officials a Consumer Financial Protection Bureau and the “Volcker Rule” ban on bank proprietary trading, and then sat back and watched. As Noam Scheiber has said, in the spring of 2010, the Obama White House view was, in effect, “just send us any bill we can call financial reform.”
After passage of Dodd-Frank, President Obama has done little to support the regulatory agencies charged with its implementation, as those agencies face a well-funded onslaught of bank opposition. He doesn’t seem to care that a growing number of academics, experts, Federal Reserve officials, some Wall Street leaders and even his own Attorney General believe that Dodd-Frank didn’t end Too Big to Fail. Attorney General Holder said two weeks ago in Senate testimony that banks have become so large that their size and importance to the economy have become “inhibiting factors” in the Justice Department’s ability to police them. If the Justice Department has been more worried about “collateral consequences” than enforcing the law, that contradicts the President’s own lackadaisical claims that investigations (by two poorly staffed task forces) have shown that most of the Wall Street behavior that lead to the financial crisis was merely unethical, not illegal.
Now that the second term is here, and a new Treasury Secretary is in place, this is a good moment to see whether we can expect more than President Obama’s bank-friendly, first-term policies. The effort to undo key provisions of Dodd-Frank has begun, in earnest. The President must lead, either by issuing a veto threat or by having his Treasury Department stake out strong opposition to the most offensive elements in these bills. If not, Republicans in Congress will continue to push for what Wall Street wants, Democrats will sign on in growing numbers, Dodd-Frank will crumble bit by bit (even as regulators struggle to implement the original Act), and the Wall Street fundraising and lobbying machine will win again.
Jeff Connaughton, a former investment banker, lobbyist, aide to Senator Joe Biden, and Clinton White House lawyer, worked with former Senator Ted Kaufman on financial reform in legislation in 2009 and 2010. He is the author of The Payoff: Why Wall Street Always Wins.