The verdict is in on the big year-end tax and spending deal, and everyone agrees that Wall Street was one of the biggest losers. Bank lobbyists had a giant wish list of riders to attach to the must-pass package. They hoped to roll back Dodd-Frank regulations, deliver a mortal blow to the Consumer Financial Protection Bureau, allow investment advisors to continue to rip off their clients, and much more.
None of that panned out.
On top of that, big banks suffered a rare defeat in the long-term highway bill that passed into law earlier this month, with cuts to a risk-free subsidy they enjoyed for over 100 years that amount to a loss of about $1 billion per year. Efforts to mitigate that in the year-end deal fell short as well.
Does all this mean that Wall Street has been humbled in Washington, left friendless and alone, subject to unrelenting attacks? Well, no. Don’t weep for the financial industry: It’s achieved plenty of wins over the past week.
You can certainly make the case that Wall Street finds it harder to rally Congress to roll back monitoring of its activities. And for that, you can thank the presence of the senior senator from Massachusetts, Elizabeth Warren.
Randy Neugebauer (R-TX), one of Wall Street’s most prominent puppets in Congress, laid this out for the trade publication American Banker. “Some of the regulatory relief has become a fairly difficult political lift,” Neugebauer said, “and I think I attribute that to a couple of very vocal senators on the other side of the building… anytime there’s a discussion about fixing some unintended consequences, they’ll raise a red flag that somehow Republicans are trying to repeal Dodd-Frank.”
This is a brand-new dynamic in Washington. Financial reformers have never had someone with as broad and powerful a megaphone as Warren, who can amplify their concerns and force people to pay attention. Without that support, the “No Riders” movement that successfully cleared out many harmful policy changes from the omnibus would not have gotten so far.
But we shouldn’t overstate this swing. First, look at the playing field: We’re talking about whether or not to roll back regulations, not about whether the current regulations are adequate or if they need to be strengthened. As William Cohan reports in Politico, bankers are simply not worried that this will shift anytime soon, regardless of who wins the White House next year. Banks are doing just fine at preventing additional regulation, even if they occasionally lose on deregulation (and not all the time: A highway bill rider allows more banks to take a “rural lender” designation and avoid mortgage rules).
Second, people are ignoring all the wins in the year-end package for Wall Street. For example, lifting the oil export ban bails out the domestic oil industry, which has been on the verge of collapse for a year, with falling prices and a massive domestic oversupply. Opening a new revenue source for these companies tosses them a lifeline — as well as their financiers.
Oil exploration company defaults are a big part of the crackup in high-yield junk bonds. “Almost a quarter of that stuff is in the energy sector,” said Marcus Stanley of Americans for Financial Reform. While federal regulators did admirable work in forcing banks to stop issuing these risky corporate loans, banks still helped to arrange and distribute the bond deals. They’re part of the underwriting pipeline, and when investors get nervous and pull out, banks can get stuck with some exposure.
It’s one of the effects of Glass-Steagall repeal, actually: Megabanks’ role as dealers distributing securities means that they can face a hit when the music stops. But lifting the oil export ban bails them out.
There are also gifts for banks in the other half of this year-end deal, the so-called “tax extenders.” That makes permanent something called the “active financing exception,” which allows corporations to avoid taxes on earned financial income, like dividends or interest, if those profits are deemed to be earned offshore. The biggest beneficiaries of this are Wall Street banks, and their accountants have all sorts of tricks to claim that financial profits were earned overseas. This permanent tax break effectively legalizes offshore tax havens.
Another tax extender loophole eliminates capital gains taxes on startup buyouts. This makes acquisitions of small startup companies much more attractive, and mergers and acquisitions happen to be a huge Wall Street profit center, as the banks organize and underwrite the deals.
Looking beyond the omnibus reveals a bevy of other bank victories this week. The Federal Reserve’s interest rate hike, for example, enables banks to raise the cost of borrowing on small business, personal, auto and home loans. They rapidly did so on Wednesday after the Fed’s announcement, but one rate was kept the same: the interest rate these banks pay out on deposits. Charging more to lend but not handing out more to savers is a sure way to make money, as the jump in bank stock prices reflects.
Finally, the Commodity Futures Trading Commission (CFTC) gave banks a huge windfall yesterday when it finalized margin rules for derivatives trades. The initial version of this rule would have forced banks to post billions of dollars in up-front collateral for these trades. Now, when the deals are between affiliates of the same global parent, only one side has to post collateral.
As Americans for Financial Reform explained in a letter opposing the rule, collateral requirements “provide a buffer against the kind of rapid unanticipated changes in exposures that can occur during situations of financial stress.” But their opposition, as well as Elizabeth Warren’s, did not stop the CFTC.
This will make it harder to unwind systemically important financial institutions if they run into trouble, as a subsidiary with uncollateralized exposures cannot be sold off to avoid failure. This can spread through and threaten the entire financial system, as it did in 2008. “The lack of initial margin… creates a ticking time bomb,” said Better Markets CEO Dennis Kelleher in a statement condemning the CTFC’s action.
Federal lobbying records show that Goldman Sachs and Citigroup were among the biggest companies pushing for this margin rule. And they got what they wanted. So while the idea that banks have no clout in Washington makes for a good story, it is lacking in any factual basis. On a list of winners and losers in our political system, the general public still falls far below Wall Street executives.