- Aug 20, 2000
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Found below is the entirely compelling story of how the U.S. Democratic Party played lip service to Main Street while actually servicing Wall Street. Or at least that's how Rolling Stone's Matt Taibbi writes it. It's a long read from an even longer article, but well worth it.
Wall Street's Big Win
Wall Street's Big Win
It started with Senate rookie Scott Brown, who demanded major changes to Merkley-Levin on behalf of big Massachusetts banks in exchange for his vote. But Senate sources I talked to insist that Chris Dodd, the powerful chair of the Senate Banking Committee, was just using Brown as a cover to gut the Volcker rule. "It became far more than accommodating the Massachusetts banks," says one high-*ranking Senate aide. "It became a ruse for Treasury trying to get as far as they could, with Dodd's help."
From the start, Dodd had been opposed to the ban on proprietary trading. "Hey, I would gladly dump the Volcker rule," he told industry lobbyists. "But I can't, because of the pressure I'm getting from the left." Now, with Brown pressing for concessions, Dodd agreed to let Merkley-Levin be spattered with a wave of loopholes.
If you can imagine a 4,000-pound lizard pretending to cower before a Cub Scout clutching a lollipop, then you've grasped the basic dynamic of a grizzled legislative titan like Dodd caving into Brown, the cheery GOP newbie with the Pez-*dispenser face.
First, in what amounted to an open handout to the financial interests represented by Brown, insurers, mutual funds and trusts were exempted from the Merkley-Levin ban. Then, with the floodgates officially open, every financial company in America was granted a massive loophole – one that allowed them to skirt the ban on risky gambling by investing a designated percentage of their holdings in hedge funds and private-equity companies.
The common justification for this loophole, known as the de minimis exemption, was that banks need it to retain their "traditional businesses" and remain competitive against hedge funds. In other words, Congress must allow banks to act like hedge funds because otherwise they'd be unable to compete with hedge funds in the hedge-fund business. With the introduction of the de minimis exemption, Merkley-Levin went from being an absolute ban on federally insured banks engaging in high-risk speculation to a feeble, half-assed restriction that will be difficult, if not impossible, to enforce.
The driving force behind the exemption was not Scott Brown, but the Obama administration itself. By all accounts, Geithner lobbied hard on the issue. "Treasury's official position went from opposed to supportive," one aide told reporters. "They may have even overshot Brown's desires by a bit."
Throughout the negotiations over the bill, in fact, Geithner acted almost like a liaison to the financial industry, pushing for Wall Street-friendly changes on everything from bailouts (his initial proposal *allowed the White House to unilaterally fork over taxpayer money to banks in unlimited amounts) to high-risk investments (he fought to let megabanks hold on to their derivatives desks).
Geithner went all out for the de minimis exemption; one Senate aide was told flatly by "those who are in charge of counting noses" that the proposal was not subject to negotiation. This was the horse-head-in-the-bed moment of the Dodd-Frank bill – the offer that couldn't be refused. "We were told that there needed to be de minimis or there would be no bill," the aide says.
When Merkley first got the news about the exemption, he tried to keep it small. "I was hoping to limit it to one percent" of a company's tangible equity, he says. "The night before the conference, Geithner was pushing for two percent. In the end, it got even worse – it was three percent." When Merkley tried to put a specific dollar limit of $250 million on high-risk gambling, Geithner shot him down. "He didn't want the sub-cap, and we lost," Merkley says.
Still, during the last round of negotiations, Merkley and Levin managed to pare back some of the worst of the exemptions. In one victory, they eliminated a proposal by Geithner that would have allowed banks to make unlimited trades "in facilitation of customer relations" – a loophole so laughably broad that it would cover, in the words of one Senate aide, "pretty much everything" that banks wanted to do. By June 25th, when the bill headed to its final meeting of the conference committee, it looked like Merkley and Levin would *finally get their vote.
But that was before the senator from Wall Street showed up. In the final hours of negotiations, a congressional delegation from New York, led by Sen. Chuck Schumer, decided to take one last run at gutting the Volcker rule. It was as though someone had sent the scrubs off the court and called in the varsity.
Schumer, a platitudinous champion of liberal social *issues, moonlights as a pillbox-hat bellhop to Wall Street on economic matters. The self-*aggrandizing New Yorker has not only fought to keep taxes low on hedge-fund billionaires, he got up onstage with Goldman Sachs CEO Lloyd Blankfein at a Democratic fundraiser in 2006 and performed "nostalgic furniture-store jingles."
This bears repeating: The person in whose hands America had placed its hopes for finance reform was someone who once sang furniture jingles onstage with Lloyd Blankfein.
Now, as the bill headed into final negotiations, the Schumer coalition suddenly decided that the de minimis exemption for banks simply wasn't big enough. In a neat trick, Schumer's crew agreed to keep the exemption at three percent – but they raised the limit dramatically by making it three percent of something else.
Instead of being pegged to a bank's "tangible equity," the exemption would now be calculated based on a financial firm's "Tier 1" capital – a far bigger pool of money that includes a bank's common shares and deferred-tax assets instead of just preferred shares. In real terms, banks could now put up to 40 percent more into high-risk investments. "It was almost double what Geithner was talking about the night before," says Merkley. "For Bank of America alone, it comes to $6 billion."
Schumer himself entered the change in the Senate version of the bill – and then asked the House to sign off on it 15 minutes later. Rep. Paul Kanjorski of Pennsylvania, who had worked hard on the Volcker rule, tried to get a vote to block the change. But Barney Frank laid into him. "You had plenty of time with this," Frank barked. "You knew what was coming – siddown."
Thus the Merkley-Levin across-the-board ban on risky proprietary trading became a partial ban in which insurers, mutual funds and trusts are completely exempt, and banks can still gamble three percent of their holdings. In practice, it will be up to future regulators to define how that limit will be calculated – and one can only imagine how far banks like Goldman Sachs will manage to stretch the loopholes in what's left of the Volcker rule. "It's not a total nothing burger," sighs one aide. "But, by the end, it didn't change a whole lot."
If the Volcker rule was a regulatory Godzilla threatening to stomp out Wall Street's self-serving investments, the proposal to shut down derivatives was nothing short of a planet-smashing asteroid headed straight at the heart of the financial industry's most reckless abuses. The key battle involved the so-called "Lincoln rule," put forward by Sen. Blanche Lincoln of Arkansas, which would have forced big banks to spin off their derivatives desks in the same way the Volcker rule would have forced them to give up proprietary trading.
Banks would have to make a choice: Either forgo access to the cheap cash of the Federal Reserve, or give up gambling with dangerous instruments like credit-default swaps. Banks, in short, would have to go back to making money the old-fashioned way – making smart loans, underwriting new businesses, earning simple fees on customer trades. No more leveraged gambling on whacked-out acid-trip derivatives deals, no more walking around with torches and taking out fire insurance on other people's houses, no more running up huge markers on the taxpayer's dime.
This, obviously, could not be permitted. Thanks to Clinton-era deregulation, the market for derivatives is now 100 times larger than the federal budget, and five of the country's biggest banks control more than 90 percent of the business. So the leadership of both parties pulled out all the stops to ensure that the Lincoln rule would be Swiss-cheesed to death before it ever saw the light of day.
The effort began with an extraordinary scene on the floor of the Senate – one that testifies to the nearly unanimous respect that senators hold for the human loophole machine known as Chris Dodd. In late May, the week the Senate voted on its version of the bill, Dodd came up with a hastily composed, five-page substitute to the Lincoln rule that would create a "financial stability" council with the power to unilaterally kill the rule.
Faced with opposition from members of his own party, Dodd agreed to withdraw his substitute two days before the Senate vote – but given his track record of legislative maneuvering on behalf of big banks, his fellow Democrats weren't about to take him at his word. A group of senators from Dodd's own party – including Maria Cantwell of Washington – arranged to stay on the Senate floor in shifts, ensuring that there would be someone there to object in case Dodd tried to push his substitute through *during one of those quiet, empty-hall, C-SPAN moments when no one was looking.
The fact that a group of Democrats had to come up with a scheme to prevent one of their own leaders from dropping a *roofie in their legislative drinks pretty much sums up the state of affairs in Congress. "Yeah, that's the way it went down," says a Senate aide familiar with the Dodd Watch maneuver.
With Dodd unable to introduce his plan to gut the Lincoln rule, the measure actually passed in the Senate, to the extreme surprise of almost everyone on the Hill. This was a rare example of the Senate leadership not just allowing a vote on a financial reform guaranteed to cost major campaign contributors billions of dollars, but actually passing it.
But the ink was barely dry on the Senate bill before a full-blown mobilization against the Lincoln rule was under way. Just days after the Senate vote, Barney Frank came out and voiced opposition to the rule, saying it "goes too far." He trotted out Wall Street's lame, catchall justification for unfettered speculation: Banks need derivatives to balance their portfolios and "hedge their own risk."
Not long after, a group of 43 conservative House Democrats calling themselves the "New *Democrat Coalition" refused to support the reform bill unless the toughest part of the Lincoln rule – section 716 – was gutted. "They were threatening to vote against the legislation unless accommodations were made for the banks, and the biggest accommodation was watering down 716," says Michael Greenberger, a Clinton-era *financial regulator involved in the talks.
It seemed like every Democrat who mattered was against 716: Dodd, Frank, the New Democrats, the Treasury department, the influential FDIC chief Sheila Bair, even Paul Volcker. Schumer and other New Yorkers lobbied mightily against it, arguing that it would be a drain on the income of Wall Street banks; New York mayor *Michael Bloomberg traveled to Washington specifically to lobby against the Lincoln rule.
But the crowd had turned against Wall Street, and the populist scrubs seemed like they were about to win big.
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