Friday, December 12, 2014

Did cromnibus kill Wall Street reform? (updated)

Back when Congress passed Wall Street reform (the Dodd/Frank bill), many liberals dismissed it as meaningless weak tea. But then, a few of them came around and recognized that - what do you know - Wall Street reform is working!

A couple of months ago, when Paul Krugman took to Rolling Stone in defense of President Obama, he outlined the three most important components of Dodd/Frank:
First, the law gives a special council the ability to designate ''systemically important financial institutions'' (SIFIs) – that is, institutions that could create a crisis if they were to fail – and place such institutions under extra scrutiny and regulation of things like the amount of capital they are required to maintain to cover possible losses...

Another key provision in Dodd-Frank is ''orderly liquidation authority,'' which gives the government the legal right to seize complex financial institutions in a crisis...

A third piece of Dodd-Frank is the Consumer Financial Protection Bureau. That's Elizabeth Warren's brainchild, an agency dedicated to protecting Americans against the predatory lending that has pushed so many into financial distress, and played an important role in the crisis.
So, what was the provision that cromnibus gutted? Here's how Michael Greenberger explained it at Mother Jones:
This provision guts the so-called push-out rule created by the 2010 Dodd-Frank financial reform act. This rule forbids banks from trading certain derivatives—complicated financial instruments with values derived from underlying variables, such as crop prices or interest rates. Instead, banks would have to shift these high-risk trades into separate nonbank affiliates that aren't insured by the Federal Deposit Insurance Corporation (FDIC) and are less likely to receive taxpayer bailouts. If the Citi-written measure becomes law, the largest FDIC-insured banks in the country will be able to make a wider range of these risky trades.
Now, don't get me wrong. Republicans threw this into the spending bill as a very ugly poison pill that was sure to rankle a lot of Democrats. Rightly so. But my point is that it DOES NOT gut the most important provisions of Dodd/Frank.

My suspicion is that Republican leadership threw it in knowing that progressive Democrats would react by joining with tea partiers to try to kill the bill. What John Boehner wanted all along was to watch this bill go down in flames and pass his alternative - a three month continuing resolution that would provide us with a series of government shutdown standoffs next year when all of Congress is controlled by Republicans. They had much more than the gutting of this one part of Wall Street reform in mind. That's why the White House lobbied for passage of a 12-month spending bill - even though they publicly denounced this part of it.

UPDATE: I just learned that the "push-out" rule that is eliminated in the cromnibus was the brainchild of former Senator Blanche Lincoln. So excuse me if I'm a little skeptical about how important it is. Apparently it doesn't affect  all derivative swaps - not even most of them.
In brief, the Pushout required federally insured banks to move-“push out”-some swaps dealing activities to separate subsidiaries that do not have access to federal deposit insurance. This does not apply to all swaps, mind you. Not even to the bulk of them (interest rate swaps, many CDS). But just to commodity derivatives (other than gold), equity derivatives, and un-cleared CDS.


  1. In other words: for the cost of an important but not central piece of regulation, Obama bought himself insulation from gop congress for 1/2 his remaining term.

    I can appreciate bitching at the bad shit, but I can also appreciate Obama taking the deal. He knows things are gonna get worse in the coming years, so insulating as much as he can for as long as he can from gop bullshit would be attractive.

    1. He bought no shutdowns for the entire remainder of his term. Nobody's shutting down the government three weeks before the Iowa caucuses. And it confirms that Boehner/McConnell have no intention of seriously disrupting the government's basic functions over immigration/healthcare/EPA and have now committed to funding Obama's core initiatives. Total public repudiation of their ultra-right wing nullification caucus.

      As a former congressional staffer, let me tell you that the fix was in. Pelosi was just stirring the pot to gin up frenzy and renewed focus among the Warren-type supporters and see if the Republicans would blink and pare back riders. Worth a shot: these House Republicans barely ever have a Plan A, let alone a Plan B. This is a perfectly good deal that allows the President to step back from legislative management and crisis defusing for the rest of his term and focus on higher level, international agenda items instead.

      Everyone should think back to winter 2010, when the GOP followed up a massive midterms victory by ceding away a bunch of long term beneficial Democratic policy items for some up-front corporate cash. Same deal.

    2. Thank you for the insights. Very helpful. Could you flesh out the last graph re: winter 2010? I'm not familiar with what happened.

    3. "He bought no shutdowns for the entire remainder of his term. Nobody's shutting down the government three weeks before the Iowa caucuses"

      Heh assumes more about gop intellect than I would, but ok. :P

    4. Tien Le, in 2010 Dems didn't resolve the Bush tax cuts sunset before the elections, so by law, rates would reset at the end of the year.

      Republicans had the ability to deny cloture to all outstanding senate items and roll them over to a new, GOP-dominated congress if they didn't get their way on upper income taxpayers (with more than a little Democratic consent for that protection among Blue Dogs). But the administration negotiated a two-year across the board extension in exchange for releasing various hostages (appointments, New START, and of course, DADT).

      Cut to two years later, START and DADT are forever, but Obama was reelected and the rates were hiked on the wealthy anyway. With Republican votes, even!

    5. Thank you very much for the history lesson. I appreciate it.

  2. The Republicans know the Dems were negotiating this thing from a position of weakness. Even thought they might have the votes, the clock is ticking.

  3. Systemic Risk Council is chaired by Sheila Bair and advised by Paul Volker. The oppose the roll back.

    Systemic Risk Council Statement About Repeal of Section 716 of Dodd Frank

    So does Simon Johnson:

    Don’t Repeal Swaps Push-Out Requirements (Section 716 of Dodd-Frank)

    Nobody cares who wrote the provision.

    1. No one wants it repealed, of course, but it's miniscule and impacts very little in the way of trading. If it was ginned up to make us nuts, kill the bill and thus shut down government, then why should we fall for it? I was very upset before reading this and several other excellent articles about how utterly inconsequential this is. I sure hope you're not someone who's still yelling to bring back Glass-Steagall (note - read up on Volcker Rule and that Glass and Steagall are dead) but will pay attention to facts. No - we'd like to have killed the amendment. But we don't HAVE to do that to retain the power of Dodd-Frank and the majority of the push out requirements. So gear up outrage for 2015...they will try this again, but not with the capacity to shut down the government at risk.

  4. Great information and discussion - will tweet