The Republican Strategy To Repeal Dodd-Frank

By Simon Johnson

On January 7, 2015, Day 2 of the new Congress, the House Republicans put their cards on the table with regard to the 2010 Dodd-Frank financial reforms. The Republicans will chip away along all possible dimensions, using a combination of legislation and pressure on regulators – with the ultimate goal of relaxing the restrictions that have been placed on the activities of very large banks (such as Citigroup and JP Morgan Chase).

The initial target is the Volcker Rule, which limits the ability of megabanks to place very large proprietary bets – and their ability to incur massive losses, with big negative consequences for the rest of us. But we should expect the House Republican strategy to be applied more broadly, including all kinds of measures that will reduce capital requirements (i.e., make it easier for the largest banks to fund themselves with relatively more debt and less equity, taking more risk while remaining Too Big To Fail and thus benefiting from larger implicit government subsidies.)

The repeal of Dodd-Frank will not come in one fell swoop. Rather House Republicans are moving in several stages to reduce the scope of the Volcker Rule and to gut its effectiveness.

The first step in this direction came on Wednesday, with a bill brought to the floor of the House supposedly to “make technical corrections” to Dodd-Frank. This legislation was not considered in the House Financial Services Committee, and was rushed to the House floor without allowing the usual debate or potential for amendments (formally, there was a “suspension” of House rules).

Buried in this legislation is Title VIII, which will extend the deadline for one important aspect of Volcker Rule compliance to 2019. (The specific topic is by when big banks should divest themselves of some Collateralized Loan Obligations, CLOs – on how these investments function as internal hedge funds at the largest three banks, see this primer from Better Markets, a pro-reform group.)

Some very large banks and House Republicans previously asked to extend this deadline for CLO compliance through 2017, and a full extension was actually granted by the Federal Reserve in 2014. (Specifically, in April 2014 the Fed extended the divestment deadline for CLOs to 2017and then, in December 2014, extended the divestment for all covered funds under the Volcker Rule until 2017.)

Now that Citigroup, JP Morgan Chase and Wells Fargo already have the extension through 2017, they immediately ask for… an extension through 2019.

The strategy here is clear: delay for as long as possible. Perhaps the regulators will cave in, again, under pressure. Perhaps the White House will agree to another rollback of Dodd-Frank, for example attached to a spending bill – which is what happened in December 2014. (Remember that government spending is only authorized until September 2015, so there will be plenty of opportunities).

And perhaps, after November 2016, a Republican president will work with a Republican Congress to eliminate all parts of Dodd-Frank that crimp the style of very large leveraged financial firms.

On Wednesday, the Republican bill that would have weakened the Volcker Rule actually failed – under the suspension of the rules, it needed two-thirds of all members present in order to pass, and the vote was 276 in favor and 146 against. When enough Democrats hold together, they can make a difference.

But all of this is just a warm-up. In coming months we should expect: the largest few banks (always masquerading as representing the social interest) will pressure for a change in technical definitions, e.g., what kind of hedge fund they are allowed to own and what it means to “own” something. They will ask for more delays and “clarifications”. And they will argue that lending to some category of firms (“job creators”) should be exempt from any kind of restriction.

Section 716, which would have forced big banks to keep their derivatives business somewhat separated from their insured deposits, was repealed in December 2014. This measure primarily benefited Citigroup and JP Morgan Chase. At the time, some Democrats – including people close to the White House – said, not to worry, “we’ll always have the Volcker Rule.”

In fact, the signal from the repeal of Section 716 is that the store is open. The White House had previously said “no” to any proposed repeal of Dodd-Frank, including when attached to a spending bill. This moratorium has clearly been lifted, and the lobbyists are hard at work.

The House Republican rhetoric will be “technical fixes” and “job creation”. But the reality is that they are determined to strip away all meaningful restrictions imposed on Citigroup, JP Morgan Chase, and other megabanks – and to roll-back Dodd-Frank as far as possible, until it becomes meaningless or they are finally able to repeal it completely.

32 thoughts on “The Republican Strategy To Repeal Dodd-Frank

  1. Would it help the Dodd-Frank repeal situation, Mr. Johnson, if all us “little people” stopped doing business with the big banks and went to a credit union?

  2. If you change the language slightly and consider the Republican Party and neoconservatives as ‘reform busters’ and use all the same techniques: consider here:

  3. I thought that this was already done when the budget was passed. When an exclusion was done on derivatives.

  4. Russian Roulette: Taxpayers Could Be on the Hook for Trillions in Oil Derivatives
    Posted on December 19, 2014 by Ellen Brown
    “The sudden dramatic collapse in the price of oil appears to be an act of geopolitical warfare against Russia. The result could be trillions of dollars in oil derivative losses; and depositors and taxpayers could be liable, following repeal of key portions of the Dodd-Frank Act signed into law on December 16th.

    On December 11th, Senator Elizabeth Warren charged Citigroup with “holding government funding hostage to ram through its government bailout provision.” At issue was a section in the omnibus budget bill repealing the Lincoln Amendment to the Dodd-Frank Act, which protected depositor funds by requiring the largest banks to push out a portion of their derivatives business into non-FDIC-insured subsidiaries.

    Warren and Representative Maxine Waters came close to killing the spending bill because of this provision. But the tide turned, according to Waters, when not only Jamie Dimon, CEO of JPMorgan Chase, but President Obama himself lobbied lawmakers to vote for the bill.

    It was not only a notable about-face for the president but represented an apparent shift in position for the banks. Before Jamie Dimon intervened, it had been reported that the bailout provision was not a big deal for the banks and that they were not lobbying heavily for it, because it covered only a small portion of their derivatives. As explained in Time:”

  5. Jamie Dimon Got What He Wanted in the US Budget
    “It may well be that the head of JPMorgan Chase, the President’s personal banker, wanted his losses covered and that’s what he got when the budget was passed. Jamie Dimon got the public to pay again.”
    Posted on December 28, 2014 by Frederica Stein
    “Under Dodd Frank, FDIC-insured banks were not allowed to put depositor funds at risk for their bets on derivatives, with certain broad exceptions. At FDIC insured banks, interest rate, currency, gold/silver, credit derivatives referencing investment-grade securities, and hedges werepermissible activities within an insured depositary institution. Those not permitted included “equity, some credit and most commodity derivatives.”

    A fraction, but a critical fraction, as it included the banks’ bets on commodities. Five percent of $280 trillion is $14 trillion in derivatives exposure – close to the size of the existing federal debt. $3.9 trillion of this speculation is on the price of commodities.
    Among the banks’ most important commodities bets are oil derivatives.
    …The drop in the price of oil by over $50 a barrel was completely unanticipated and outside the predictions covered by the banks’ computer models. The drop could cost the big banks trillions of dollars in losses. And with the repeal of the Lincoln Amendment, taxpayers could be picking up the bill.”
    Posted on December 28, 2014 by Frederica Stein

  6. Presenting The $303 Trillion In Derivatives That US Taxpayers Are Now On The Hook For
    Tyler Durden’s picture
    Submitted by Tyler Durden on 12/13/2014 00:52 -0400
    “Courtesy of the Cronybus(sic) last minute passage, government was provided a quid-pro-quo $1.1 trillion spending allowance with Wall Street’s blessing in exchange for assuring banks that taxpayers would be on the hook for yet another bailout, as a result of the swaps push-out provision, after incorporating explicit Citigroup language that allows financial institutions to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp, explicitly putting taxpayers on the hook for losses caused by these contracts.”

  7. by Karolina (courtesy of Thom Hartmann Program)
    Dec. 13, 2014 12:40 pm
    “Obama’s and Wall Street’s treason was brought home on Dec. 11, when JP Morgan’s Jamie Dimon, Barack Obama, and GOP Speaker of the House John Boehner joined hands to “whip” the omnibus spending bill (which they dubbed “cromnibus”) through the Congress with its poison pill that bails out Wall Street’s credit swaps derivatives by repealing the only “fig leaf” of Dodd Frank—Section 716 (which had been put in in 2010 by then Sen. Blanche Lincoln [d-ar]). The bill passed at about 9:45 PM on Dec. 11, only after Boehner had shut down the House for a 7-hour recess because he and Obama and Wall Street did not have the votes to pass the $1.1 trillion spending bill.”
    Thom Hartmann Program:
    Also (courtesy of Thom Hartmann Program
    Quote LPAC:
    Elizabeth Warren: “The American People
    Did Not Elect Us To Stand Up for Citigroup.”
    Saturday, December 13, 2014
    Sen. Elizabeth Warren delivered an eight-minute speech on the floor of the Senate on Dec. 10, urging the House, and especially its Democratic members, to refuse to vote for the budget deal until its provision guaranteeing government support for financial derivatives were repealed. She posted the video of her remarks to her Senate webpage, and urged people to share it with their friends “right now.” The transcript of those remarks, slightly shortened, follows:

    Mr. President, I come to the floor today to ask a fundamental question: Who does Congress work for? Does it work for the millionaires, the billionaires, the giant companies with their armies of lobbyists and lawyers? Or does it work for all of us?

    …And now the House of Representatives is about to show us the worst of government for the rich and powerful. The House is about to vote on a budget deal — a deal negotiated behind closed doors that slips in a provision that would let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.

    These are the same banks that nearly broke this economy in 2008 and destroyed millions of jobs. The same banks that got bailed out by taxpayers and are now raking in record profits. The same banks that are spending a whole lot of time and money trying to influence Congress to bend the rules in their favor.

    You will hear a lot of folks say that the rule that will be repealed in the Omnibus is technical and complicated, and that you shouldn’t worry about it because smart people who know more than you about financial issues say that it’s no big deal. Don’t believe them.

    Actually, the rule is pretty simple. Here’s what it’s called — the rule that the House is about to repeal — and I’m quoting from the text of Dodd-Frank: “PROHIBITION AGAINST FEDERAL GOVERNMENT BAILOUTS OF SWAPS ENTITIES.” What does it do? The provision that’s about to be repealed requires banks to keep separate a key part of their risky Wall Street speculation so that there’s no government insurance for that part of their business….

    We put this rule in place after the collapse of the financial system because we wanted to reduce the risk that reckless gambling on Wall Street could ever again threaten jobs and livelihoods on Main Street. We put this rule in place because people of all political persuasions were disgusted at the prospects of future bailouts. And now, no debate, no discussion, Republicans in the House of Representatives are threatening to shut down the government if they don’t get a chance to repeal it.

    …Wall Street spends a lot of time and money on Congress. Public Citizen and the Center for Responsive Politics found that in the run-up to Dodd-Frank, the financial services sector employed 1,447 former federal employees to carry out their lobbying efforts — including 73 former Members of Congress. And according to a report by the Institute for America’s Future, by 2010, the six biggest banks and their trade associations employed 243 lobbyists who once worked in the federal government, including 33 who had worked as chiefs of staff for members of Congress and 54 who had worked as staffers for the banking oversight committees in the Senate and the House. That’s a lot of former government employees — and senators and Congressmen — pounding on Congress to make sure the big banks get heard. No surprise that the financial industry spent more than $1 million a day lobbying Congress on financial reform….

    And now we see the fruits of those investments…. According to documents reviewed by the New York Times, the original bill that is being incorporated into the House’s spending legislation today was literally written by Citigroup lobbyists, who “redrafted” the legislation, “striking out certain phrases and inserting others.”

    It’s been opposed by current and former leaders of the FDIC, including Sheila Bair — a Republican who formerly chaired the agency, and Thomas Hoenig, the current vice-chairman of the agency. For those who are keeping score, this is the agency that will be responsible for bailing out Wall Street when their risky bets go sour….

    But this provision goes too far. Citigroup is large, and it is powerful. But it is a single, private company. It shouldn’t get to hold the entire government hostage — to threaten a government shutdown — in order to roll back important protections that keep our economy safe. This is a democracy, and the American people didn’t elect us to stand up for Citigroup. They elected us to stand up for all of the people.

    I urge my colleagues in the House — particularly my Democratic colleagues, whose votes are essential to moving this package forward — to withhold support from it until this risky giveaway is removed from the legislation. We all need to stand and fight this giveaway to the most powerful banks in the country.

  8. The Insidious persistence of conspicuous consumption…and ….megalomaniacs in action…
    “After Dodd-Frank’s passage, lobbyists for the big banks and industry trade groups divided themselves into eighteen working groups, each organized around a different element of the new law. “That’s when the real work began,” Talbott tells me. One working group focused on derivatives reform, including the requirement that these complex financial instruments now be sold on open exchanges in the fashion of stocks and bonds. Another focused on efforts to hammer out the so-called Volcker Rule, which would limit the ability of federally insured banks to wager on risky ventures. A third tackled the new Consumer Financial Protection Bureau (CFPB), created to protect ordinary consumers from Wall Street deceptions involving mortgages, credit cards and other major profit centers for the banks.”
    How Wall Street Defanged Dodd-Frank
    Battalions of regulatory lawyers burrowed deep in the federal bureaucracy to foil reform.
    Gary Rivlin April 30, 2013

  9. A Window Into Washington in an Effort to Undo a Dodd-Frank Rule
    By Jonathan Weisman
    December 15, 2014
    “The “push out” provision reversed a piece of the 2010 Dodd-Frank law that prohibited banks from trading some of their most exotic financial instruments in units covered by the Federal Deposit Insurance Corporation or the Federal Reserve. The idea was to make sure trades in derivatives, credit-default swaps and other instruments that helped spur the financial crisis of 2008 would not be insured by taxpayers if they went bad.
    The nation’s biggest banks have been trying to reverse the provision ever since. A stand-alone bill to repeal the measure was drafted nearly word for word by Citigroup.”
    “….How Representative Kevin Yoder’s “push out” provision survived is not, as many have suggested, a tale of dark favors done in back rooms at the last minute. Instead, it is how powerful lobbies work their will, slowly, persistently, bit by bit — in other words, how Washington works.”

  10. by Robert Lenzner
    “I’m trying to wise up 300 million people about money & finance”
    “Wall Street banks like Citigroup and JP Morgan Chase have flexed the power of their influence to pressure Congress and the White House into a key change in the law that will allow the trading of risky financial derivatives in bank operations that are insured by the Federal Deposit Insurance Corp. This means the nation’s largest banks used the deadline for passing the Omnibus spending bill as pressure to reverse a key section of the Dodd-Frank bill of 2010 that was meant to prohibit a federal government bailout of swaps entities.”
    12/13/2014 @ 12:35PM
    A Christmas Present For The Banks From The Omnibus Bill

  11. ………………..”Manufacturing Consent………………..

    …………………The Political Consent of Mass Media” ……………

  12. We have enough “evidence” – Detroit, for example – that the right of every human being to make their life less miserable through honest work has been taken away by the gene pool of “enronistas” in USA, so I agree with Prof. Pezzuto – what is the surprise?

    The surprise is that there is no HUMAN “process” for containing them.

    According to their (“enronistas”) theories and ideas, anything that is alive and a part of the life chain – plants, birds, animals, fish, etc. – is irrelevant to the “economy” of “derivatives”:

    More misery for others = More $$$$ for ME ME ME

    The “mathematical certainty” of a rigged casino…fiat $$$$ distributed as debt….

  13. “On her Facebook page, Warren linked to a report from the Center on Budget and Policy Priorities that spelled out how a rule the House of Representatives approved could cause a “sudden, one-fifth cut” in benefits to those who rely on disability insurance. The legislation she was referring to would prevent fund transfers from the Social Security Trust Fund to the Disability Trust Fund, a maneuver that the CBPP said has occurred frequently in the past with little controversy. Still, the post had racked up more than 18,000 likes and nearly 8,000 shares on the social network as of Wednesday evening.”

  14. “Warren has pledged to fill out her Senate term, which ends in 2018. But her supporters are using a careful parsing of her language to keep alive their hopes of a presidential campaign. (She says “I’m not running for president” instead of “I’ll never run for president.”)

    Two groups, and Democracy for America, announced Friday that more than 200,000 people have signed their “Run Warren Run” petition encouraging her to seek the Democratic nomination.

    During Thursday’s talk, Axelrod also noted the possibility of a double-legacy presidential election in 2016 if Hillary Clinton and Jeb Bush both secure their party’s nominations. “It puts a real burden on those candidates,” he said. “Nobody is looking for a nostalgia campaign.” ”

  15. “And perhaps, after November 2016, a Republican president will work with a Republican Congress to eliminate all parts of Dodd-Frank that crimp the style of very large leveraged financial firms.”

    You’re probably looking at the welcome mat situated in front of the White House for 2016: President Jeb Bush (with his First Lady,Columba Garnica Gallo) with his Vice-President that actually served in the military. President Bush had also checked the Diversity box; checked the box with social conservatives (Christian, pro-life) and checked the lunch-bucket working class by reinventing Reaganomic.

  16. I’m glad somebody’s working, but the law of numbers is not on our side here Bruce, we are out maned, but definitely not out gunned.

  17. Can we call them “French Fries” again instead of “Freedom Fries”?

    Why is it that every time the laser beam of solidified agreement (Populism?) is focused on fixing the ECONOMY, “terrorists” step in…

    If it is a Bush vs. Clinton match up, people will finally be free to set up a new seat of government besides D.C.

    We actually DO have the right to do that. It has always been a KNOWN known that power corrupts absolutely and when the character of the people who scratched and clawed and MURDERED their way to DC power is no longer an UNKNOWN, it is time.

    Every human being has the right to make their life less miserable through honest work.

    The ONLY role of government is to protect the individual against force and fraud.

    A Just War does not mean murder and mayhem – it may simply mean that we are no longer LISTENING to a cabal that does not listen to We the People when we are HORRIFIED over the injustice of their STUPID math:

    More misery for others = More $$$$ for ME ME ME

  18. Why would USA send a person to join a Free Speech march in France?! The current Supreme Court would find a way to find a loophole in something or other and declare it illegal….

    Militarized police were sent in to snuff out “Occupy Wall Street”.

    As if conducting economic genocide against 52 million Middle Class USA born and bred citizens was not an act of violence and “terror” because it was not done with a Kalishnikov….

  19. oh dear lordie – if there was any question about a “regime change” from the gene pool that set a goal and achieved it – we will go to the moon – to the let’s torture our way to securing our interests with the perpetual war model gene pool

    one need not look any further than this – possibly the MOST ignorant and bat sht crazy dude in the Senate getting this pay-ur-pal position for marshaling the resources necessary for infrastructure improvement across USA territory (using the knowledge NASA et al have)….

  20. From the desk of….
    B R E A K I N G * N E W S *
    Antonio Weiss out, Senator Elizabeth Warren ….in,

    From the desk of….

    “Updated, 8:51 p.m. | Antonio Weiss, a senior investment banker at Lazard, withdrew his name from consideration to be a senior Treasury Department official in the face of liberal opposition Monday, and will instead serve as a counselor to the secretary of the Treasury, Jacob J. Lew.”

    From the desk of…….

    Warren said Monday that it is imperative for Treasury to focus its energy on strengthening the enforcement of consumer protections on Wall Street.

    “We’ve already seen that the new Republican Congress is going to aggressively attack the Dodd-Frank Act. It is critical that the Treasury Department defend the Act from those attacks and push for strong implementation and enforcement of the law,” she said in a statement. “The risk of another financial crisis remains too high, and we should be strengthening financial reforms, not rolling them back to benefit Wall Street.”

    “Weiss also stood to gain $20 million from Lazard if he got confirmed for the Treasury post, a payout for not going to a competing financial group. That left some uncomfortable that Weiss would be inclined to give favorable treatment to his former firm.”

    And, yes… when Hillar(it)y (en)sues…


    smelly old fart gene pool producing the next gen – the Adam Lanzas and al queerda and hoody fashion conscious IS – next cartoon – the vanity involved in getting dressed for the public relations photos – what’s next? Calvin Klein (or any other “designer” label terrorist line of super soft fleece black face masks…?

    the flaws are not 50% more pronounced in the next gen – their strength is an exponential rise….

    More misery for others = More $$$$ for ME ME ME

    Once again, thanks to Baseline Scenario for non-censorship of “different” view points

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