Last week witnessed another dramatic end to the threat of a US government shutdown reminiscent of the situation of two years ago. The $1.1 trillion spending bill passed 56-40 by the Senate this time, is expected to fund most of the government agencies through September of next year. In the frenzy leading to it, however, a dangerous provision was slipped in at the last minute solely to benefit the Wall Street. The provision drew out rebels from the same & allies from the opposite side as it sought to compromise the landmark Dodd-Frank bill. The Dodd-Frank was passed by the Obama administration in 2010 to evade/ mitigate another financial crisis and its subsequent effects.
The provision in question here is the ‘Citigroup’ provision. It has been so named as it’s purported to be penned by the very lobbyists from Citi. The particular reform in the Dodd-Frank that the provision targets is the one pertaining to the bailouts provided to the Wall Street’s “Too big to fail” using the taxpayers’ money. The reform as stated in the bill, though ripe with complications, is simple at its core. It states that if one is a federally insured depository i.e. an institution where people have real bank accounts insured by the federal government, it cannot go around gambling with risky derivatives such as credit swaps and the like. And if it does, no future bailout shall be provided. Come to think of it, there is no logical argument against this rule. If Citi incurs heavy losses on account of its exposure to foreign currency default swaps, why on earth should it be the Government’s & consequently a taxpayer’s headache? An instance from not long ago that’s precisely what this bill strives to prevent is the infamous London Whale episode of JPMorgan Chase. There the whale, namely Bruno Iksil, while working in the Chief Investment Office (whose role ironically was to regulate the bank’s risk) used billions of federally insured money to deal in derivatives trades that had little to do with hedging, resulting in overall losses amounting to at least $6 billion. In spite of all that, Jamie Dimon last week went so far as to personally call the lawmakers expressing his support for the Citigroup provision.
It is rather unfortunate to see how these giants are eagerly coming together to undermine the bill that was put to ensure their longevity in the first place. Take for instance another critical reform suggested in the Dodd-Frank- one that restricts the amount of their NDTL (net demand & time liabilities) that the banks could lend & also subjects them to stringent lending practices. Though heavily criticised by the Wall Street (esp. those from JPMC after they recently realized they would have to increase their capital by $20 billion), it has led to banks becoming more stable and better capitalized thereby beating analysts’ earnings expectations on account of one of the lowest loan losses in the recent past. Also prior to its implementation, the average life of a bank was estimated to be 41 years. Now with increased capital standards & stress tests, it has increased to 200 years. Another precautionary reform particularly loathed by the banks is the Volcker rule- which restricts them from engaging in proprietary trading, while also limiting their investments in hedge funds and PEs. Here as well, the collective lobbying with the Fed had resulted in repeated delays to its implementation.
As would be evident, the part of the bill that the current provision seeks to compromise is in no way the most critical one. However the bigger and more worrisome picture is that this incidence might serve as a playbook for the banks to do away with the more important ones. And we have already seen Wall Street barefacedly vouching for those lawmakers who are expected to pursue their interests (Republicans in this case) in the past few weeks. This is evident in the abnormally skewed funding pattern in the conservatives’ favour (62%) in the elections that ended Nov 4. The very mention of the Wall Street critic Sherrod Brown as the prospective chairman of the Senate banking committee (if Democrats maintained their majority) was enough to have them open their wallets in favour of the Republican Senator Shelby, who has been a staunch Dodd- Frank critic for a good part of the past half decade. Also the previous influence of some of these big heads on either side- of Citi, for instance, on Democrats- has led to additional support for the provision by some of the veterans including current treasury secretary Jack Lew. Thus as long as the Wall Street continues to exert an influence on the Congress (through funding their party campaigns), it is tough to see a bill even as strong as Dodd-Frank have a full scale impact/check on the former’s activities.
The current episode however also saw a number of realists turning up, particularly notable of which was the Republican Congressman David Vitter who despite his side’s twisted agenda strongly advocated that institutions such as Chase unwind their hedge fund businesses from consumer banking, latter having federally insured deposits. Another fascinating observation this time was that the lawmakers didn’t hesitate to publicly accentuate the banks’ closed room dealings, thus responding tit-for-tat to the latter’s shameless pursuit of the same. Elizabeth Warren, the Senator who led the Democratic side during the week-long struggle started out as- “If anyone at Citi is listening, I would like them to know…” These occasions, though rare, have now become increasingly important to inspire others in the legislature to think beyond their short term interests & put into effect laws that could benefit their nation’s financial establishment in the long run.
Macro IN A NUTSHELL 