The Republican-led Congress, armed with their largest House majority since the 1920s and lined up in opposition to any further restrictions on Wall Street, nonetheless is on the verge of cutting over $16 billion in subsidies that go exclusively to big banks—and the proposal they’re using comes out of the Congressional Progressive Caucus budget. According to Bloomberg, the subsidy first came under scrutiny after I argued for its elimination in a New Republic article last year. Now, even Senate Majority Leader Mitch McConnell agrees with me. Go figure.
Why would the leadership of the party of big business attack a handout to giant financial institutions? The story reveals how policy sometimes works in Washington: It’s haphazard and irrational, but sometimes the key to success on Capitol Hill is having the right proposal ready at the right time, no matter how hopeless its drafting may seem.
The subsidy is a 6 percent dividend on stock that 2,900 banks hold in the Federal Reserve system. Banks must purchase this stock, a set percentage of their capital, to be members of the regional Fed banks, but it has a set value that never changes and cannot be sold. Banks cannot lose money on the stock; they’re even paid out if their regional Fed bank disbands. It’s basically a membership fee to fund the regional Fed banks’ activities, but the fee awards them a 6 percent dividend every year. The dividend has held constant since the founding of the Federal Reserve in 1913: If you’re JPMorgan Chase and have held stock since then, you have made your investment back six times over, without ever risking any loss.
The Fed originally offered the dividend to member banks to attract them into the system. But these days, nationally chartered banks must join by law. And even state-chartered banks must abide by the requirements of membership. So this is just a risk-free, lump-sum payment that has outlived its initial purpose, and carries on through inertia.
When I wrote about this back in March 2014, the only movement toward limiting the Fed dividend came from the Progressive Caucus, which proposed cutting the “excessive” dividend in half for “the country’s largest banks,” from 6 percent to 3 percent. And there, the proposal sat for over a year. In the roll call on the Progressive Caucus’ entire budget, the only time the Fed dividend was technically on the floor, it got just 89 votes.
However, a year later, the Republican leadership had a problem: They needed to fund their transportation bill before authorization for highway and bridge projects expired. Some House Republican leaders, in partnership with Democratic Senator Chuck Schumer, wanted to allow corporations to bring back money stashed overseas at a low tax rate and use that money to fund infrastructure.
But McConnell had a different idea. He wanted to save the corporate tax holiday as part of overall tax reform. And he wanted a transportation bill that would get through the Obama presidency, gambling that the next president would offer a more favorable deal for Republicans. The only obstacle to this plan was scraping up enough money to keep infrastructure projects funded for two years.
In that search, McConnell went into deliberations with Democratic Senator Barbara Boxer, the ranking member of the committee that handles transportation spending. And she brought up the Fed dividend proposal. By reducing the dividend from 6 percent to 1.5 percent for all banks with more than $1 billion in assets—thereby leaving community banks out of the equation—the government could raise $16.3 billion over 10 years.
McConnell, desperate for a pot of cash, went along with the idea. It became part of the Senate’s compromise bill, which funds highway projects for three years. Despite reservations from Senator Richard Shelby, chair of the banking committee, and even Fed Chair Janet Yellen, the Senate passed the bill limiting the Fed dividend with 65 votes at the end of July.
That was when highway funding was supposed to expire, but a stopgap bill moved the expiration date to the end of October. While House Majority Leader Kevin McCarthy initially was bullish on Schumer’s corporate tax holiday-for-infrastructure swap, this week Schumer said he was “not optimistic” about its prospects. So now the clock is ticking on the House. They can either accept the Senate bill or let highway funding expire.
The Fed dividend cut is easily the largest pay-for in the bill—over one-third of the total—and if you take it out, it would be incredibly difficult to find a suitable replacement. In a closed-door meeting, McConnell flatly told banking industry executives that “there was no way” he would take the Fed dividend pay-for out of the bill. Despite Wall Street pressure, there’s not much of a path for anything else.
Wall Street banks may argue in court that limiting the dividend represents an unconstitutional taking, but this is hardly the biggest benefit bestowed by the Federal Reserve on member banks. They receive ultra-cheap loans through the discount window, services like check clearing and wire transfers, and interest on their excess reserves, another risk-free funding source which dwarfs their dividend. That doesn’t even count the ocean of support the Fed gave functionally insolvent banks during and after the financial crisis.
But $16.3 billion in pure corporate welfare is not nothing. And the lesson here is the importance of having policies available on a shelf. Many observers deride the Progressive Caucus’ budget as an exercise in futility. But without the inclusion of the Fed dividend policy, Barbara Boxer wouldn’t have known about it when negotiating the highway bill. Even in a time of minority governance, having a storehouse of ideas that can be pulled out in opportunistic moments matters a great deal.
That dynamic of ensuring that good policy hangs around on the sidelines waiting for its chance involves a feedback loop of congressional staffers, think tanks, advisors, and the media. So if I made a contribution, however small, to getting this $16.3 billion subsidy to big banks knocked out, you can just send my finder’s fee to the New Republic offices.