Opinion | Why Are Democrats Helping Trump Dismantle Dodd-Frank?
The collapse of Lehman Brothers in 2008 led to the passage of the Dodd-Frank Act, which imposed new regulations on financial firms. A bill being considered in Senate would roll back many of those regulations.CreditPeter Foley/European Pressphoto Agency
By Mike Konczal
March 6, 2018
This week, the Senate begins debate on the Economic Growth, Regulatory Relief and Consumer Protection Act, known as the Crapo bill for its primary sponsor, Mike Crapo, a Republican senator from Idaho. The bill would roll back or eliminate parts of the Dodd-Frank Act.
The Crapo bill is unusual in today’s hyperpartisan environment: It has over 10 Democratic co-sponsors, many from swing or red states and up for re-election this year — like Joe Donnelly of Indiana, Heidi Heitkamp of North Dakota, Jon Tester of Montana and Claire McCaskill of Missouri — making its passage possible.
Why would some Democrats provide support for a rollback of Dodd-Frank? Proponents argue that this bill provides much needed relief for community banks and credit unions, which, these proponents claim, face enormous difficulties. They also say that it doesn’t endanger financial reforms aimed against the largest and most dangerous players.
But that view is mistaken: This bill goes far beyond the health of community banks and credit unions. It removes protections for 25 of the top 38 banks; weakens regulations on the biggest players and encourages them to manipulate regulations for their benefit; and saps consumer protections.
What do Democrats get in return? Nothing substantive that they should want. They could demand better funding for regulators or an appointment to the Consumer Financial Protection Bureau — or a vote on gun control.
The Crapo proposal would relax important regulations for major banks. Though often described as medium in size, these banks are still very large. Dodd-Frank introduces regulations for banks with assets of more than $50 billion, regulations that increase in strictness as the banks get larger and riskier. This ensures that they have enough cash to survive a crisis, quality equity to manage problems and a living-will plan for how they can fail without bringing down the economy.
This regulation affects the 38 largest banks. By comparison, the more than 5,000 community banks in our country generally have $1 billion dollars in assets or less.
The bill would move that line up to $250 billion. This would exempt 25 of the largest banks, which in total account for $3.5 trillion, or 16 percent of total banking assets. Authors of the bill argue that the regulators could still enforce tighter rules on some of these banks. But history tells us they won’t until it is too late.
The costs could be severe, with regulators less prepared to deal with the next financial crisis. The failure of Countrywide (around $200 billion in size) in 2008 caused panic and problems in the mortgage market. The Trump administration
recently admitted that it needed the regulations in Dodd-Frank to handle the failure of financial firms and that its alternative of a new bankruptcy chapter works only with these heightened rules that will be rolled back for these 25 banks.
Other changes make life much easier for the largest players and encourage regulatory shenanigans. Dodd-Frank introduced more “stress tests” — fire-drill-like exercises that ensure the banks can handle a major downturn. The Crapo bill
reduces their frequency for all the major players’ internal tests, from Citigroup to JPMorgan Chase on down.
The Crapo bill will
introduce a one-word change from “may” to “shall” that will pave the way for the biggest, most politically connected financial firms to argue that regulations should be tailored to be weaker for themselves, creating a race-to-the-bottom dynamic in what has been, so far, fair rules written for all banks to follow together. It allows community banks to violate the Volcker Rule, introduced in Dodd-Frank to prevent banks from engaging in hedge-fund-like gambling with their own funds.
Foreign banks that pose major risks, such as the Trump-friendly Deutsche Bank, will see their United States subsidiaries deregulated with the bill. It attacks the supplemental leverage ratio — an essential reform that provides a clear, straightforward funding rule to ensure banks are stable — by watering it down for two of the largest eight banks.
Reporting shows other large banks like Citigroup and JPMorgan Chase are fighting to expand this further. This starts the rule down a path of not being informative or useful for regulators and capital markets. This is why the Congressional Budget Office not only assumes that it is 50 percent likely these megabanks will abuse this loophole, but also that this bill increases the chance and cost of a financial crisis overall. Given the sheer opportunity to abuse porous rules introduced by the Tax Cuts and Jobs Act, it is overkill to give finance even more rules to abuse for its own profit.
Moderate Democrats could fight for a narrower bill that would benefit small banks — with the understanding that community banks aren’t actually suffering. According to the Federal Deposit Insurance Corporation,
community banks had $6 billion in profits in the fall of 2017, a rise of 9.4 percent over the previous year. Furthermore, since Dodd-Frank, several waves of deregulation bills for small banks have already passed.
Communities must have banks that can meet their needs. By rolling back requirements for medium-size banks, the Crapo proposal will accelerate mergers and consolidations rather than postpone them. This could cause even fewer community banks and more concentration in the long run. If we are concerned about a top-heavy financial sector, the way to handle that is with breaking up the banks and structural reforms for the biggest players, not by removing basic rules at the bottom.
This bill also hurts consumers. It removes protections on mobile homes and appraisal requirements in rural areas, while getting rid of the requirement that smaller banks prove that borrowers can repay subprime loans they make and keep on their own books. All of these read as if they were written to appease a specific lobbying group, rather than out of a concern for consumer security.
The most serious consumer protection rollback involves banks reporting on the mortgages they offer. The Crapo bill will exempt banks that make fewer than 500 mortgages — which includes nearly 85 percent of banks — from reporting important mortgage data. This data is used to ensure that discriminatory or other abusive practices aren’t happening. This exposes minority communities and rural areas, voters Democrats need to win over to gain viability, to increased predation.
This exemption also prevents the government from being able to analyze and counter discrimination where it happens. Given the real threat that the Trump administration has been to the collection of reliable data needed to carry out government functions, it is absurd for Democrats to willingly help Mr. Trump and his Republican allies here.
Instead of signing a bill that is well targeted to community banks or strengthens other parts of Dodd-Frank, Democrats got an agreement that consumers can freeze their credit scores once a year. Consumers are going to need that with the abuses President Trump is allowing to happen, now with moderate Democratic support. The Democrats promised a better economic “deal” than Mr. Trump. Those supporting this bill instead show that they can’t make any deal at all.
So, 51 REPUBLICANS and 13/49 Democrats, but your title focuses on the Democrats
The Republicans wouldn't have 60 votes if it wasn't for the Dems.
This.
This is why shyt like this is so dangerous. Deregulation is a position of the GOPs platform, not the Dems. The fact that there are some dems in certain areas of the country signing on to this shyt does not mean that this is the position of the Democratic Party.
This both sides equivalency shyt needs to end...it's an erroneous position to have, and all it does is show that you're out of your depth when it comes to understanding politics in this country.
fukking Joe Manchin is a senator from West Virginia for crying out loud..why are some of you so fukking clueless?
They didn't vote for the tax law. Its obvious what's going on behind the scenes when it comes to banking sector. And it is incredibly short-sighted policy.
