Congress began a new session at the beginning of 2015, with the Democrats in the House of Representatives handing the reins over to the Republicans. Though the previous Congress wasn’t exactly known for being tough on Wall Street, the recent bill proposed by Representative Michael Fitzpatrick (R-PA) was a predictable giveaway to large financial institutions by way of slashing regulations that kept banks from engaging in risky behavior. The Promoting Job Creation and Reducing Small Business Burdens Act was introduced late in the evening on the second legislative day of the 114th session, with no debate surrounding the issue. Washington Post columnist Harold Meyerson describes the move as “[Congressional Republicans] pushing mega-bank welfare to the head of the line, and sending a clear signal to Wall Street that they’ll do whatever it takes to further feather the bankers’ nests.”
Despite its cheerful title, the bill is little more than an attempt at stripping even more of the regulatory power written in the Dodd-Frank Act of 2010. Affectionately referred to as an “11-bill Wall Street Wish List,” the bill was framed as a simple list of technical corrections to the Dodd-Frank Act.
The problem with this description is that it’s true – ask anyone his or her opinion on financial regulation, and you’re likely to get an earful. But ask about the nuts and bolts of financial regulations, and you’re likely to receive anything from blissful ignorance to a demonstrated misunderstanding of the issues at hand. The 2,300 pages of rules governing the financial field are so specific and complex that popping the hood and rearranging the insides is virtually guaranteed to go unnoticed by any large number of people. Opponents of the rules have been chipping away at the Dodd-Frank Act for the last 4 years – only this time they stand to do some serious damage.
First, the proposed changes would allow federally insured (backed up by tax dollars) banks to continue to hold and begin to freely trade Collateralized Loan Obligations (CLO’s), or certain bundles of debt. Though some of these CLOS, particularly the low-rated bundles, have a higher risk of default than others, they also have a higher return for investors. The high possible return in the face of a low rating makes CLOs attractive for investors looking for a quick, short-term gain. Once the loans in the low-rated bundles begin to default, however, the high returns sharply decline and investors are out of luck.
Until now, the Volcker Rule ordered that federally insured banks that already held CLOs sell them off by 2015. The rule was previously given a 2-year extension, and the recent Republican bill seeks to extend the deadline out until 2019. Bankers cite their “unrealized gains” on these bundles of debt as the reason for extending their lifetime.
According to the New York Times,
“The creation of such securities has been torrid recently; $124.1 billion was issued last year, compared with $82.61 billion in 2013, according to S&P Capital IQ. Among the banks with the largest C.L.O. exposures are JPMorgan Chase and Wells Fargo; according to SNL Financial, a research firm, JPMorgan Chase held $30 billion and Wells Fargo $22.5 billion in the third quarter of 2014, the most recent figures available. The next-largest stake — $4.7 billion — was held by the State Street Corporation.”
These banks have understandably large positions at stake for asking for more time to deal with these securities. But in some cases their “unrealized gains” are turning into losses. Deals surrounding the future prices of commodities like oil are especially losing steam due to current global price drops.
Second, the new bill would give private equity firms freedom to charge more for the services they provide. By exempting private equity firms from registering as brokers with the SEC, even though they receive fees for investment banking activities like selling debt securities and advising mergers, they are able to avoid more scrutiny and rules from regulators.
Lastly, the bill allows for derivatives, or a security whose price is dependent on one or more underlying assets, to be traded privately and not at clearinghouses (third parties to all kinds of futures and options contracts). This shields these trades from scrutiny and regulation as well, increasing the risk of bubbles forming and further damage to the economy.
Though these attempts at deregulation have been occurring since the Dodd-Frank Act was passed in 2010, the latest attempt by a Republican-controlled Congress represents a serious threat to the progress made and to the stability of the economy. Now is the time to stand up and tell Washington to take these issues seriously instead of doing the business of their friends at the banks. Please contact your Representatives, Senators, and the White House to let them know you support tougher rules for the banks that nearly drove the economy off a cliff just 7 years ago. For more information on ditching your account with one of these banks and switching to a smaller, responsible, community-oriented institution, please visit http://breakupwithyourmegabank.org/.