House bill weakens Dodd- Frank bailout restrictions

Nov 15, 2013

—Bill author claims it helps farmers, financial reform groups say it hurts economy

While other things were drawing the attention of the political and agricultural world, a bill—which some claim seeks to dull the teeth of the Dodd- Frank Act and could endanger investors—passed quietly through the House.

In late October, the bill—HR 992 Swaps Regulatory Improvement Act— passed the House in a 292 to 122 vote. “Yes” votes came from 222 Republicans and 70 Democrats, while “no” votes were almost entirely from Democrats, with three Republicans joining. Sixteen representatives didn’t vote.

According to the summary provided by the Library of Congress, the bill amends the “Dodd-Frank Wall Street Reform and Consumer Protection Act” to allow for government bailouts of U.S. branches of foreign banks, as well as allow additional swap activities.

The bill amends Section 716 of the Dodd Frank Act, which deals with what “swap entities” can and cannot receive governmental assistance, largely through word changes and additions to definitions.

For instance, the bill changes the wording on what entities are excluded from prohibition against receiving bailouts (i.e., what entities are allowed to be bailed out) to “covered depository institution,” then altering the definition of the phrase to include “a United States uninsured branch or agency of a foreign bank.”

The bill also tinkers with what activities a swap entity can engage in to be applicable for government bailout. Currently the Dodd-Frank Act’s section 716, subsection (d), requires banks to spin off speculative derivatives activity into non-bank subsidiaries. These subsidiaries are not eligible for government assistance. The bill’s alterations would redefine them into eligibility.

However, the bill’s author, Representative Randy Hultgren (R-IL), welcomed the passage of the bill, saying it would help farmers.

“When times get tough for farmers and manufacturers—when oil prices spike or corn prices plummet—they rely on financial products like swaps to weather the uncertainty. In its rush to address the financial crisis, the Dodd- Frank Act unfortunately spun off these swaps— products that farmers, manufacturers and hospitals rely on to hedge against skyrocketing energy prices, for instance— into less transparent and less stable entities,” said Hultgren.

“Main Street customers rely on their long-standing relationships with trusted financial institutions. The short-sightedness of Dodd- Frank broke those trusted relationships and limited Main Street customers’ access to products that help them handle risk. New Dodd-Frank regulations that supposedly targeted Wall Street have the unintended consequence of limiting the options of farmers and manufacturers, potentially raising costs and forcing them to move their business to unfamiliar and less stable institutions,” he added.

However, some groups oppose the bill, likening it to a return to the situation that led to the recent economic collapse. On the matter of the Dodd-Frank Act limiting what swap products are available to farmers, Americans for Financial Reform—a nonprofit group formed after the 2008 financial collapse seeking to improve the American financial system—called foul.

“Section 716 [of Dodd- Frank Act] bans taxpayer bailouts of a broad range of derivatives dealing activities. Note that the Dodd-Frank Act does not in any way limit the swap activities which banks or other financial institutions may engage in. It simply prohibits public support for such activities.”

Following the vote, Americans for Financial Reform responded with disappointment.

“The House vote to approve this legislation, largely written by Citibank lobbyists, reminds us that Wall Street is still doing everything in its power to protect the status quo that caused the financial crisis. The bad news is how many House members voted to roll back Dodd-Frank reforms and permit a few giant Wall Street banks to use publicly insured deposits to deal in exotic derivatives.”

The group said the good news was how little support exists for the bill in the Senate and the White House. The Senate’s sametitle analog, S. 474, has not made it out of committee where it’s been since early May.

“At a time when there is bipartisan agreement that subsidies to too-big-to-fail banks must end, this legislation moves in exactly the wrong direction,” said Americans for Financial Reform.

Another nonprofit consumer watchdog group, MapLight, noted that those who got large lobbyist contributions were far more likely to vote yes. The group found House Agriculture Committee members who voted in favor of the bill back in late March, which progressed it to the full House for consideration, received 7.6 times as much campaign contribution money from the political action committees (PACs) of the top four commercial banks than did those who voted against it.

MapLight also pointed out that those four banks— Bank of America, Goldman Sachs, JPMorgan Chase, and Citigroup — “collectively hold 93.2 percent ($208 trillion in notional value) of all derivatives contracts.” — Kerry Halladay, WLJ Editor