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Banking Behind Closed Doors

America deserves and needs strong Wall Street protections. The Wells Fargo and Equifax scandals demonstrate that Congress should adopt additional reforms. The mega-banks remain too big to fail, and too big to jail. Yet on Dec. 5, the Senate Banking Committee approved a bill that heads in the opposite direction. And this isn’t a Republican-only bill; some Democrats helped.

Sen. Brian Schatz (D-Hawaii) lamented that four of his Democratic colleagues joined with all 12 Republicans to clear this bill. He contrasted this with the Democratic resolve to contest the tax bill that gives breaks to corporations. He noted his party’s defense of the Affordable Care Act. “What a shame that the one area where we can achieve bipartisanship is on a bill making banks more profitable.”

Officially, S. 2155 goes under the title “Economic Growth, Regulatory Relief and Consumer Protection Act.” Its chief sponsor is Sen. Mike Crapo (R-Idaho), chair of the committee. Unofficially, the bill is dubbed the “Bank Lobbyists Act“ because most of its measures come from straight from the banking industry.  These financial lobbyists number some 3,000, or about 5 for every member of Congress. The financial sector made $1.2 billion in political contributions leading to the 2016 election. That works out to $3.7 million for each member of Congress. These contributions come with a price; Wall Street wants payback for their largesse. Hence, the Bank Lobbyists Act.

Perhaps some sympathy might be found for the banking industry were it suffering. But it’s not. Banks of all sizes are making record profits.  And for all the whining about compliance burdens preventing banks from doing their job, the data shows this is false as well: Lending is at record level. The economy reflects this– unemployment is down, the stock market is setting new highs.

The most threatening provision in this bill is one that reduces oversight of 25 large banks. These are banks that hold between $50 and $250 billion in assets. There are only 13 banks that are larger, with more than $250 in assets. Collectively, these 25 banks between $50 and $250 billion hold $3.5 trillion in assets. Many of them faltered leading into the 2008 crash, and received $47 billion in taxpayer bailout funds. Because of this, the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act directed regulators to establish “enhanced supervision,” the details of which were left to the regulators. Under the new bill, the enhanced supervision would be reserved for banks with more than $250 billion in assets, though banks of that size could absolutely impact our economy– posing a systemic risk

What’s the benefit of eliminating enhanced supervision for these 25 large banks? The main benefit is for shareholders and especially the managers of these 25 banks. That’s because CEO compensation turns on the stock price. Without enhanced supervision, this class of 25 large banks will be able to finance more of their activity with borrowed money, and less from shareholder money. Profits are spread over a reduced shareholder base, increases the stock price, which increases the CEO’s stock-based paycheck.

What’s the harm of losing this special oversight for these sized banks? With less shareholder capital, and more borrowed money being used to operate the bank, unexpected losses could render the bank unable to pay back its debts. When its liabilities become greater than its assets, the bank fails. And if regulators decide that the failure of one of these large banks would harm the large economy, as they did with some of them in 2008, they may plunge into taxpayer wallets to help pay off the bank’s debts.

The “Bank Lobbyists Act” contains other harms, largely aimed at stripping away borrower protections. Under the bill, customers at smaller banks might be lured into unaffordable loans because they won’t see the cost of insurance and taxes in the proposed monthly payment through what’s known as escrow. Also under this bill, mobile home buyers can be steered by sales agents to lenders who might not offer the best terms. Another section of the bill voids some required appraisals, meaning that some borrowers might end up taking out loans that are larger than the value of the house.

Sen. Schatz joined six other progressives on the Senate Banking Committee to promote improvements to the bill by way of amendments. For nearly seven hours, these progressives advanced excellent ideas. Sen. Elizabeth Warren (D-Mass), for example, proposed several amendments to retain enhanced supervision for banks guilty of misconduct, or for those who dismiss whistleblowers. These drew only seven votes.   Sen. Catherine Cortez Masto (D-Nev.) proposed restoring the right of customers to join class action lawsuits when they’re scammed by financial firms. That also lost with only seven affirming votes. Sen. Jack Reed (D-R.I.) proposed that executives, not shareholders, pay for fines for bank misconduct. Blocked, again with only seven votes supporting. Sen. Robert Menendez (D-N.J.) proposed protections for student and military personnel borrowers. Also blocked. Sen. Sherrod Brown (D-Ohio), the ranking Democratic member on the committee, proposed retaining escrow services. That was also not accepted by the committee.

None of these commonsense amendment proposals prevailed that might have lessened the harm posed by the bill. Why? Because the bloc of Republicans and Democrats had cemented a deal in private. Some of these bloc members are on the committee, but others are not. Apparently, any new ideas posed regarding the bill would have needed the approval of this entire bloc.  Thus, the official Senate Banking Committee was effectively replaced by an ephemeral group that makes laws behind closed doors. Whether bank lobbyists join such meetings can only be imagined.

This is troubling. It’s troubling because campaign contributions shouldn’t define access, let alone policy. It’s troubling because Senators and Representatives are sent to Congress by the public to debate and shape bills in public. Private negotiations may be inevitable, but the real and final work should be available for everyone to monitor. Some of these same Democrats who joined in the Crapo negotiations had derided the tax bill negotiations, where senators were forced to consider a bill text that they hadn’t even seen, let alone subject to hearings.

As this bank deregulation bill looks to be on a path to reaching the Senate floor early next year, and unfortunately, due to the work of bank lobbyists, there may well be more than the 60 votes necessary to surmount a filibuster.

Americans should be worried. What led to the 2008 financial crash was a constellation of overlooked complexities: We know now that supervisors were asleep; we know now that frauds went unchecked; and we know now that fabricated mortgage applications and inflated credit ratings contributed to the problem. We didn’t pay enough attention to any of these issues before it was too late. What will cause the next financial calamity may be new or other overlooked complexities. It may be tied to lack of escrow, or appraisals, as provided in this bill or it may be a storm of financial contagion among these 25 large banks, each with as much as $250 billion in assets, and collectively with $3.5 trillion in assets.

Less than a decade after a crash that cost millions their jobs, their homes and savings in a crash that drained more than $1 trillion from the economy, Congress should not be looking to pad bank profits. Congress should approve stronger reforms.

Contact your senators and representative at 202 224-3121. Tell them that that if they want to pass a banking bill, make it one that serves Main Street, not Wall Street.