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With Dodd-Frank Rollback, The Big Bad Banks Are Back

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Around nine o’clock last night, the House passed a massive $1.1 trillion spending plan. This action averted a government shutdown—a good thing. Less good was the fact that the bill also contained a provision, said to be written by Citigroup, repealing a key part of the Dodd-Frank Act.

The provision enables the big banks once again to use insured deposits and other taxpayer subsidies and guarantees to gamble in the derivatives markets—the very type of business that drove the 2008 financial crisis and the economic devastation that followed.

The bill now goes to the Senate where it is expected to pass in the coming days. After four years of twisting arms in Congress, Wall Street had finally found the perfect moment to reshape financial regulation—less than three hours before the government was about to run out of money.

Even Obama administration officials were forced to work late into the evening lobbying Democrats to support the bill, arguing that this bill was less bad than any deal than they would get next year when the GOP controls both chambers of Congress. The measure ultimately passed 219-206, with 57 Democrats supporting the bill.

On the surface, the House vote was a huge legislative victory for the big banks.

“Yet Citi may regret its big victory on Capitol Hill,” writes by Rob Blackwell in the industry-friendly American Banker. That’s because “in finally getting what they wanted, big banks also thrust themselves back into the limelight in the worst possible way, simultaneously reminding the public of their role in causing the financial crisis and in their continuing influence over the various levers of the U.S government. In one fell swoop, they undid whatever recovery to their battered reputation they'd made in the past four years and once again cast themselves as the prototypical supervillain in a comic book movie.”

"Wall Street's determined lobbying on Section 716 provides compelling evidence that Wall Street's business model depends on the ability of large financial conglomerates to keep exploiting the cheap funding provided by their 'too big to fail' subsidies," said Arthur Wilmarth, a professor of law at George Washington University. "Shame on Congress if it allows megabanks to continue to pursue the same business strategy that brought us the financial crisis."

“Making matters potentially worse,” writes Rob Blackwell, “news reports quickly surfaced that Jamie Dimon, JPMorgan Chase's CEO, also personally lobbied lawmakers on the bill. That helped rebut arguments by some that the provision wasn't a big deal to the big banks and that they weren't lobbying heavily for it.”

"On net, Wall St lost this week," tweeted Brian Gardner, an analyst at Keefe, Bruyette & Woods.

Wall Street vs The People

As to why Congress is acting on behalf of the financial sector against the interests of the country as a whole, one doesn’t have to look far. “In the current election cycle, Wall Street banks and financial interests have so far reported spending more than $1.2 billion to influence decision-making in Washington, according to an updated report by Americans for Financial Reform. That works out to just under $1.8 million a day. It represents an average of about $2.3 million spent to elect or influence each of the 535 members of the Senate and House of Representatives.”

The companies and trade associations in the sector with the highest level of combined spending on lobbying and contributions (from their PACS and employees) include:

  • National Assn of Realtors (NAR) - $94,035,737
  • Bloomberg LP - $21,104,333
  • American Bankers Assn (ABA) - $18,212,935
  • Prudential Financial - $13,958,068
  • Wells Fargo - $13,028,554
  • Elliott Management - $12,616,216
  • Credit Union National Assn (CUNA) - $12,266,050
  • JPMorgan Chase & Co - $12,157,587
  • Securities Industry & Financial Market Assn (SIFMA) - $11,789,925
  • Citigroup Inc - $11,543,276
  • MetLife Inc - $11,451,106
  • Financial Services Roundtable (FSR) - $10,718,454
  • Investment Company Institute (ICI) - $10,692,287
  • Goldman Sachs - $9,919,549
  • American Council of Life Insurers (ACLI) - $9,898,250”

Lest we forget why we had a financial crisis in 2008

So let’s recap: why did we have a financial crisis just a few years ago? The history is clear:

  • In 1998, banks got the green light to gamble with the repeal of the Glass-Steagall legislation
  • Low interest rates fueled an apparent boom.
  • Asset managers sought new ways to make money in a low interest rate environment.
  • The credit rating agencies gave their blessing.
  • Fund managers didn’t do their homework and perform due diligence.
  • Derivatives were unregulated.
  • The SEC loosened capital requirements.
  • Compensation schemes encouraged gambling.
  • Wall Street became “creative.”
  • Private sector lenders fed the demand.
  • Financial gadgets milked the market with “innovative” mortgage products.
  • Commercial banks jumped in.
  • Derivatives exploded uncontrollably.
  • The boom and bust went global.
  • Fannie and Freddie jumped in late in the game to protect their profits.
  • It was primarily private lenders who relaxed standards.

The parallels to what’s been happening in the last few years are eerie.

Just last week, the annual report released from the Treasury’s Office of Financial Research, concluded that the overall financial system is becoming steadily riskier, owing to the financial sector’s involvement in riskier businesses, insufficient liquidity and lack of transparency..

The news that the Dodd-Frank legislation is now being rolled back is unsurprising but hardly reassuring. "History may not repeat itself," Mark Twain wrote, "but it does rhyme." With big banks once again on the rampage, another major financial crisis is inexorably in the making.

And read also:

Lest We Forget: Why We Had A Financial Crisis

Why Financialization Has Run Amok

Banks: From Bubbles To Nuclear Winters

Why Another Financial Crisis Is (Still) Inevitable

The five surprises of radical management

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Follow Steve Denning on Twitter @stevedenning