As early as tomorrow, key votes on amendments to the Wall Street reform bill will begin. Over the next two weeks, dozens of amendments from both sides of the aisle will get a vote.
Many of these amendments will be pro forma – one from Barbara Boxer will “forbid the use of taxpayer dollars” to bail out a company, enforced by, well, by just saying that. But some would genuinely strengthen the reform – or genuinely weaken it.
The Safe Banking Act, introduced by Sherrod Brown and Ted Kaufman, which would cap the size and leverage of the largest financial institutions, currently lacks the votes to pass, according to Brown, though he believes they are closer to the magic number. Senators Corker and Dodd tag-teamed against the bill on the Senate floor on Friday, in fairly dishonest terms.
Senator Corker also stressed that businesses need to be able to hedge risks, e.g., regarding their input prices. This is a fair point but it is completely unrelated to how large our biggest banks should be. This is instead an argument for allowing the existence of derivatives market – like Gary Gensler of the CFTC, we take the view that requiring all derivatives to be traded on exchanges would not only reduce system risk, it would also be completely consistent with all legitimate and productive derivative-related transactions, and it would reduce the size of the largest broker-dealers (who currently have a great deal of market power when so much of derivatives trading is over-the-counter).
Both Senator Corker and Senator Dodd stressed that the biggest US banks are not the biggest banks in the world. But what does that have to do with anything? The largest European banks are again in seriously trouble this weekend – because they piled on exposure to the eurozone periphery in an irresponsible and frankly dumb manner. The largest Chinese banks are a complete mess in terms of governance and ability to make a sensible loan. And the biggest Canadian banks are underwritten by government guarantees of a nature and scale that make Fannie Mae and Freddie Mac look respectable during the go-go years (which they were not) – we have taken these points up at the highest levels within the Bank of Canada and they get this. So why would anyone think that any of these global banks is an appealing model for the United States to follow?
After the first $100-$200 billion, there are simply no economies of scale or additional diversification that banks can engage in to make their operations safer or more efficient. The political influence that comes with that massive size threatens our entire system of government. It would be a shame to let this opportunity to take on the banks fail, but I suppose it’s not surprising.
However, one of the amendments that would basically achieve a reduction of risk in the banks without size caps, like a reinstatement of Glass-Steagall reforms setting up a wall between the activities of investment and commercial banks, may have a better chance at passage.
Banning proprietary trading, or what amounts to gambling with other people’s deposits, has been described as an “existential threat” by the finance lobby. So has the proposal to force a spinoff of the swaps trading desks from large financial firms. Sheila Bair of the FDIC has come out against that change in derivatives rules, saying it would move the credit default swaps to an even more unregulated section of the financial system. I don’t know how that fits with a forced central clearinghouse, or an exchange, for all trades. It seems the regulation would be well in place, and that resistance to spinning off the swaps desks comes from a desire to preserve the profits of Goldman Sachs and the like.
While Republicans appear most interested in wrecking the consumer protection agency by securing carve-outs for every niche industry under the sun, even some of their amendments may strengthen the bill, including Susan Collins’ proposal to impose fiduciary requirements on “market-makers” like Goldman Sachs for retail and institutional investors. This is an attempt to reduce conflicts of interest like we saw with synthetic CDOs betting against the housing market while marketing other bonds betting for it. Of course, we could also just eliminate the damn synthetics, as Carl Levin proposed.
Finally, there is perhaps the most bipartisan amendment of the bunch, which may also be the most feared by the Obama Administration (I thought they liked bipartisanship!). Fifteen Republicans and Democrats have signed on to Bernie Sanders’ audit the Fed bill, which would strengthen the current language in the Dodd draft and force a GAO review. The AFL-CIO and SEIU released letters in support, and Rep. Alan Grayson is running a campaign as well to force Senators to support Federal Reserve transparency. A vote on that particular amendment is expected tomorrow.
There are a few other amendments of note (Jack Reed wants to make the consumer protection agency independent of the Fed, for example), but those are the big ones I’ll be tracking throughout the debate.