The Senate finally took action on Tuesday. Not to break the immigration impasse, move forward on guns or hammer out a plan to rebuild the nation’s decaying infrastructure.
Instead, a bipartisan group of 67 — 17 of them members of the Democratic caucus — voted to advance a bill that would roll back and revise regulations imposed on banks by the 2010 Dodd-Frank law.
Democratic supporters of the legislation, almost all of them either up for re-election this fall and/or from red or purple states, insist that its sole purpose is to loose small lenders and community banks from the chains of excessive federal oversight and give a shot of adrenaline to bootstrapping entrepreneurs and business owners.
“Main Street businesses and lenders tell me that they need some regulatory relief if we want jobs in rural America,” Sen. Jon Tester, a Montana Democrat who voted for Dodd-Frank (along with seven other Democratic supporters of the new bill), said during a hearing in November of last year. “These folks are not wearing slick suits in downtown New York or Boston. They are farmers, they are small business owners, they are first-time homebuyers.”
That, in a nutshell, is the messaging. The reality is rather less idyllic.
The vast majority of the benefits tucked into the bill, which either unravels or dilutes important pieces of the existing law, rewards, if not the very biggest, then extremely large institutions. Among them, a group typically referred to as “midsize banks,” are familiar faces like BB&T, SunTrust and the American outposts of foreign giants like Deutsche Bank, BNP Paribas and Banco Santander. The latter trio hold relatively smaller assets in the US, so they too would benefit.
Before getting into the messy politics here, let’s review the policy.
The bill has three main planks: 1) Banks with less than $10 billion in assets would be exempted from the Volcker rule, which put the brakes on certain kinds of risky trading in the wake of the 2008 financial crisis; 2) The list of banks deemed “too big to fail,” and thus faced with tighter restrictions, would be thinned by raising the threshold from $50 billion in assets to $250 billion; and 3) One size fits all regulations, even for the mega-banks — the ones, as Tester put it, with employees “wearing slick suits in downtown New York or Boston” — would be vulnerable to new pressures, with the Federal Reserve now required to work alongside those institutions to customize certain rules.
The last piece could set off a race to the bottom, with the largest players on Wall Street demanding more freedom and, if they’re denied, being able to point to the competition as evidence to help make their case. But the bulk of the benefits in the bill go to the so-called medium-sized banks. Here, per CNNMoney’s Donna Borak, is what would change for banks with assets up to $250 billion:
“They would no longer have to hold as much capital to cover losses on their balance sheets. They would not be required to have plans in place to be safely dismantled if they failed. And they would have to take the Fed’s bank health test only periodically, not once a year.”
How dangerous would that be? The nonpartisan Congressional Budget Office weighed in with its take on Monday, before the initial vote, and came to the conclusion that the bill, if passed, would increase the chances of another 2008-style collapse.
“CBO’s estimate of the bill’s budgetary effect is subject to considerable uncertainty, in part because it depends on the probability in any year that a systemically important financial institution (SIFI) will fail or that there will be a financial crisis,” the report says, before adding this considerable caveat (emphasis mine): “CBO estimates that the probability is small under current law and would be slightly greater under the legislation.”
Oh, and it would also increase the federal deficit by $671 million.
So, why — as a matter of policy and politics — would so many Democrats side with Republicans in supporting this bill?
For that, we turn to some of its most insistent backers, moderates from Trump states facing re-election this fall. Tester is one, along with Sens. Heidi Heitkamp of North Dakota and Joe Donnelly of Indiana. Sens. Claire McCaskill of Missouri and Joe Manchin of West Virginia are also on board. All of them face tough re-election fights. CNN rates all but Tester’s contest in Montana as a “tossup.”
“This legislation would make it easier for Hoosier families to gain access to mortgages and small businesses to access capital,” Donnelly said in a statement, “and it also includes important new consumer protections, such as free credit freezes, in response to the Equifax data breach.”
Sen. Tim Kaine of Virginia, who is strongly favored in his coming re-election bid, has also talked about “consolidation of the banking industry in Virginia” as an unintended consequence of Dodd-Frank’s current language. If smaller banks are freer to pursue the business they desire, the theory goes, the more likely they are to thrive on their own.
If the policy end of this is, most charitably, complicated, then the political end seems downright impenetrable.
The conventional wisdom going into 2017 was that red state senators might have to stray from the party line every now and again to show off their independence and solidify their standing with the Republican and independent voters who will mostly decide their fates this November. But like so many political assumptions in the Trump era, it was largely disproved. Democrats, most notably in the many fights to preserve Obamacare, stuck together.
With an energized base on their side, and poking at it when they threaten to go wobbly, Democrats are looking at better-than-expected polling and hearing a chorus of canaries singing in GOP coal mines. But with the bank bill, they are showing the limits of that unity — and offering up some jarring, if fundamentally unsurprising, insight into where their priorities lie.
The loudest criticism of the bank bill in Washington has come from Sen. Elizabeth Warren, a Massachusetts Democrat who is eyeing a White House run in 2020, and has seen the Consumer Financial Protection Bureau she crafted as part of Dodd-Frank undermined by the administration. Democrats might have used their leverage here to backstop the CFPB, but never made it a sticking point.
A frustrated Warren on Tuesday tweeted out the names of the Democrats who voted to advance the bill, and added this: “Senate Republicans voted unanimously for the #BankLobbyistAct. But this bill wouldn’t be on the path to becoming law without the support of these Democrats. The Senate just voted to increase the chances your money will be used to bail out big banks again.”
The CBO report said as much, so this was hardly a cheap shot. Sen. Bernie Sanders, the Vermont independent who’s another vocal critic and 2020 contender, asked in a statement, “Are our memories so short that we have learned nothing from (the 2007-2008 financial) disaster?” This bill, he added, would “lay the groundwork for another massive financial collapse.”
Neither Sanders nor Warren impugned their colleagues’ motives or political savvy. Maybe they should have. Because the politics here don’t make much sense. It’s true that Trump was elected, in part, on a platform of economic populism. For all that’s happened since, that hasn’t changed. The idea, then, that red state voters would turn on a Democrat who voted against a gift to the financial sector simply doesn’t compute.
Where in the past this kind of deal might have passed relatively unnoticed, the current state of heightened awareness, especially among liberals, will make that impossible. Hence the leadership’s opposition, even if they don’t seem to be whipping others to follow. However it plays out, a swift backlash isn’t guaranteed, but increased suspicion and cynicism going forward are a good bet.
And for Democrats, in 2018 but especially when it comes time to challenge Trump, that might be the most dangerous thing of all.
