Wall Street Reform continues this week, as amendments to shape the final Senate bill will be flying fast and furious. At least three big amendments that will likely be voted on in the next few days. All warrant discussion, though for differing reasons.
1. Vitter 4003: The “GE Capital Regulatory loophole Amendment” (those are my words, modified from Mike Konczal). This could potentially be a disaster if it were to pass. I’m hearing rumors that this may even have been previously agreed upon by some Democrats, which is particularly concerning.
The impact of this legislation is fairly simple: A firm would have to derive over 85% (!) of its revenue from “bank like activity” to be regulated as a bank holding company. I call this “the GE Capital loophole amendment”, because GE Capital is part of the giant conglomerate GE, yet it only accounts for less than 50% (much less, actually), of GE’s total revenue. Yet, GE Capital is a HUGE player in the financial services field; they have practically become a financial engineering conglomerate all unto themselves. Furthermore, they presented significant systemic risk and required quite a bit of bailout support from the government, especially in the form of an extra-ordinary FDIC guarantee on it’s unsecured debt (the 2nd highest of any entity that received that particular bailout program), even though they have very little in the way of FDIC guaranteed deposits.
Worse yet, as the 85% threshold will be so easy to fall under, it is at least theoretically possible that a future AIG, Goldman Sachs, Morgan Stanley, and other broker-dealers will be able to evade prudential regulatory guidance by simply buying a non-financial commercial firm to account for 16% of their total revenue, and thus be under the 85% threshold required to be regulated like a bank, even though 84% of their revenue is derived from bank-like activity.
As the Shadow Banking Sector (non-bank financial firms engaging in bank-like activity), was at the heart of the financial crisis, this amendment preserves an avenue to continue this loophole and potentially allow shadow banks to evade regulation required for commercial banks.
2. Merkley-Levin: (Codified and expanded Volcker-Rule). While the above amendment would be alarming if it passed, this amendment would be a real shame if it didn’t pass. With the loss of the Kaufman-Brown SAFE act 2 weeks ago, and the likely weakening of the Lincoln derivatives bill (Section 106 forcing commercial banks to spin off their Swaps dealers), it is now very important that M-L passes. While there are many important amendments that will be voted on, this amendment is probably the single most important amendment in ensuring that we get real systemic reform of the financial system. I emphasize this importance for a number of reasons. First, it will bring real reform by banning the use of proprietary trading (aka. In House Hedge Funds ie. “casino activity”) for banks that have access to the Fed discount window or FDIC insured government deposits. Call it a “mini Glass-Steagall. While the current Senate bill has a weak Volcker rule, it allows an inordinate amount of regulatory discretion, and thus be vulnerable to regulatory capture from the cozy relationships between regulators and the banking entities that they are supposed to be regulating. By Congress doing its duty and providing real legislative decree, that vulnerability from capture will be greatly diminished. Second, this bill expands the Volcker rule by also addressing conflicts of interest between securities underwriters and their trading operations. This might be called the “Goldman Sachs Style Conflict of interest” – as it is at the heart of the allegations facing Goldman right now, with the accusation that their investment banking arm created securities “designed to fail” and then their trading arm and a hedge fund client (who also helped create the “designed to fail” security!) went ahead and bet against the security after selling it to the customer. M-L will address both sides of this conflict (Commercial Banking arm with Trading arm and the Investment Banking/Securities Underwriting arm with the Trading Arm). Finally, M-L is unique in that it is a bold piece of reform that actually has a chance to pass, but is by no means assured to pass. Unlike the SAFE act, which never had the support of the White House or Banking Chair Chris Dodd, this has the support of both. On the other hand, unlike, say, the Franken Credit rating reform Amendment that passed last week, which was a critical piece of legislation but also had 10 Republican supporters and was thus always assured passage, the M-L bill is right on the “knife edge” in terms of it’s odds of passage. In my opinion, its odds are no better than 50-50. Therefore, for all of the above reasons, if there was a single measure to push on, this would be it!
Call your Senator on this one: Whip Count here: http://www.citizen.org/where-senators-stand
3. Carper Amendment 3949: Critics will call this the “You can break state laws and the State attorney General can’t come after you” amendment. While I’m not going to claim to be a super-strong student of consumer finance, this amendment relates to issues around “pre-emption”. Let’s say you have a federal law on predatory lending, but a particular state has stronger laws. The bill will “pre-empt” those state laws, and the federal consumer protection bureau standards will apply. Furthermore, this bill would weaken State AG’s from enforcement of those lending laws. Supporters argue along the lines of “harmonization of regulations” – having one broad set of regulations across the country will allow multi-state enterprises to gain efficiencies from scale economies and not be burdened by the costs of 50 differing state regulatory frameworks. Interesting though, how many of the strongest promoters of “state’s rights” seem not be supportive of the concept when it comes to consumer protection laws from potentially predatory financial institutions….
My guess, this will probably pass, as it seems to have the support of Republicans, conservative Democrats and Democrats with large credit card company Headquarters in their states(Carper-DE, Warner-VA), though I wouldn’t give it overwhelming odds either.
For more, here is Mike Konczal giving as status on consumer financial reform amendments.