You could certainly blame Citigroup for a regulation-gutting provision in the end-of-the-year spending bill. But you could also blame Barney Frank.
Here’s the story behind the notorious financial deregulation that ended up in the so-called Cromnibus spending bill:
In 2010, Sen. Blanche Lincoln, D-Ark., facing a primary challenge, used her chairmanship of the Agriculture Committee to shore up her Left flank. Lincoln inserted into the Dodd-Frank financial regulation bill new rules on derivatives, including the “push-out” rule: Banks could hold derivatives, but they would need to hold them in special subsidiaries that didn’t benefit from government backing in the form of FDIC insurance and access to the Federal Reserve’s lending windows.
It’s a sensible idea: Banks should be free to gamble with risky, opaque investments, but the average bank customer shouldn’t have to pay to back it up. But it was a controversial idea at the time, even among Dodd-Frank supporters.
“Administration officials and key congressional Democrats have also indicated they are uncomfortable with Lincoln's derivatives language,” Market News International reported at the time.
The worry: Derivatives can be risky, but banks also use them to limit risk on the loans they make. To give one example: A bank financing an oil-exploration project might purchase a derivative that goes up in value if oil prices fall.
Lincoln got her regulations, but soon after Dodd-Frank passed, members of both parties began working to kill or narrow the push-out provision. Megabank Citigroup helped, as the New York Times reported earlier this year: Citi lobbyists actually wrote the text of the measure.
The House Financial Services Committee, in February 2012, passed the Citigroup-crafted bill, titled the “Swaps Regulatory Improvement Act” and co-sponsored by Reps. Randy Hultgren, R-Ill., and Jim Himes, D-Conn. Congressional filings show many entities lobbied on the bill, including the Chamber of Commerce, the American Bankers Association, the Securities Industry and Financial Markets Association, Bank of America, Citigroup, General Electric, JPMorgan, the International Swaps and Derivatives Association, plus energy companies and mid-sized banks among others.
Barney Frank, then the ranking Democrat on Financial Services, supported the Hultgren-Himes measure. “I never myself thought it made a great deal of sense,” Frank said of Lincoln’s rule. “It added nothing in terms of protection.”
A couple of months after Financial Services passed the measure, though, JPMorgan suffered a multi-billion-dollar loss through bad and opaque bets on derivatives that were supposedly just hedges and risk mitigation, but were in fact speculative bets by the megabank—"hedge-ulation" as they call it.
JPMorgan’s so-called “London Whale” loss derailed the push-out fix until after the 2012 elections. In March 2013, the House Agriculture committee passed the same provision by a 31-14 vote, since the risk involved in loans to farmers is often mitigated through commodity-based derivatives. In October 2013, the full House passed the bill 292-122, with 70 Democrats voting aye. The bill never got a hearing in the Senate, which had by then become hopelessly gridlocked.
So House Republicans took an unusual step. In a June 2014 appropriations subcommittee hearing, Rep. Kevin Yoder, R-Kan., proposed the Hultgren-Himes measure as an amendment to the spending bill that funds financial regulators. Despite some Democratic grumbling, Yoder’s amendment passed the subcommittee by voice vote. One bank lobbyist speculated it was part of a deal: gut the push-out requirement in exchange for more funding for the Commodities Futures Trading Commission.
Three weeks later, a delegation of bankers visited Treasury to lobby the administration in support of the Hultgren-Himes-Yoder measure. Treasury Department records show that top Treasury officials met with executives from Bank of America, Wells Fargo, the American Bankers Association, and a few regional banks including Bank of Oklahoma and SunTrust. “The swaps push-out provision was at the top of the agenda, according to people familiar with the meeting,” wrote Wall Street Journal reporter Victoria McGrane.
This House measure was folded into the omnibus spending bill known as the Cromnibus, which House and Senate leaders of both parties crafted, and which the White House supported.
When the public finally got a look at the bill, and they noticed the Hultgren-Himes-Yoder provision, populist fury arose, stoked by Sen. Elizabeth Warren. Because Citigroup had written the legislative text years earlier, the bank was accused of sticking the provision into the must-pass legislation at the final minute.
Lobbyists representing both large and midsized banks tell me it’s unfair to blame Citi—that many banks of all sizes supported the bill.
The biggest remaining question is, who pushed Yoder to stick it in a spending bill? The lobbyists tell me they don’t know, and Yoder’s office isn’t answering queries.
There are reasons to point the finger at big banks: Citigroup’s authorship, and the reports that Jamie Dimon, CEO of JP organ, was calling around Capitol Hill when Warren took aim at the push-out provision.
But regional banks also have their fingerprints on it: They are arguably affected more by the rule, because big banks have been able to skirt derivatives rules by moving their swaps-shops into overseas subsidiaries — the Bank of Oklahoma, you might guess, has no subsidiaries in Europe.
Through this winding path, a bipartisan provision to help the banks became the touchstone of a brief populist flare-up.Timothy P. Carney, The Washington Examiner's senior political columnist, can be contacted at email@example.com. His column appears Sunday and Wednesday on washingtonexaminer.com.