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How Democrats Are Helping Trump Dismantle Dodd-Frank

Republicans are on the verge of attaining a long-coveted prize—with the assistance of Senate Democrats who have ties to the financial industry.

Chip Somodevilla/Getty Images

As the U.S. approaches the tenth anniversary of the 2008 financial meltdown, it faces a massive test of the post-crisis regulatory apparatus—thanks in no small part to Democrats in Congress.

A deregulatory bill, S.2155, introduced by Republican Senator Mike Crapo of Idaho, chairman of the Senate Banking Committee, proposes a major rollback of the 2010 Dodd-Frank Act. Dubbed The Economic Growth, Regulatory Relief, and Consumer Protection Act, it cruised through the committee in January. Although there are several elements to the bill, the most eye-popping provision is a significant shift in which banks are considered “systemically important” and thus subjected to greater oversight and tighter rules. Currently, banks with $50 billion in assets fall into that category. The proposal would move the threshold to $250 billion—a 500 percent jump that would erase the mandate of enhanced scrutiny for 25 of the 38 largest banks in the country.

The measure’s framework is expected to eventually pass the Senate thanks to a dozen finance-friendly and swing-state Democrats who have openly announced their co-sponsorship. With Republicans in control of the House, the bill seems destined to reach President Donald Trump’s desk this year.

Despite the vocal opposition of more liberal colleagues such as Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, the bill’s leading Democratic co-sponsors expect it to be debated as soon as next week, according to a senior Senate aide involved in the process. The intra-party debate regarding the regulatory rollback is giving new insight into the battle for the direction and identity of the party ahead of this year’s midterms, hardening a divide between those who would move the party left to energize the base as well as populist independents and those attempting to appease more conservative voters and the party’s deep-pocketed donors.

Many progressive activists, led by the anti-corruption organization Rootstrikers, have taken to calling the Democratic co-sponsors the #bailoutcaucus. Nine of the twelve Democrats supporting the deregulatory measure count the financial industry as either their biggest or second-biggest donor, according to an analysis of Federal Election Commission data listed by The Center for Responsive Politics.

When questioned about this correlation, and whether it would aggravate concerns that the Democrats in support of this bill are being affected by industry money, a spokesperson for Senator Tim Kaine responded, “Campaign contributions do not influence Senator Kaine’s policy positions. He supports this bill because it provides relief for small community banks and credit unions in Virginia, helps prevent further harmful consolidation in the banking industry, and strengthens consumer protections for all Americans.”

Hillary Clinton’s former running mate was not alone. Mark Warner, Kaine’s fellow senator from Virginia, is also co-sponsoring. “Campaign contributions have never influenced Senator Warner’s decision making on policy matters and never will,” his press office asserted in an email.

Senator Joe Donnelly’s office characterized his co-sponsorship as simply resulting from a long-held conviction that smaller financial institutions have been inadvertently burdened by well-intentioned rules and regulations meant to hold Wall Street accountable. Sarah Rothschild, Donnelly’s communications director, emphasized the Indiana politician’s continued support of other reforms resulting from Dodd-Frank.

Supporters are championing consumer benefits that have been tacked to the legislation, particularly a provision meant to protect veterans’ credit from medical debt and another that, inspired by the Equifax debacle, allows people to freeze and unfreeze their credit at will.

Americans for Financial Reform, a group that has been fighting for the strict enforcement of Dodd-Frank since its inception, have characterized those provisions as “tokens” designed to give cover to a bill that is largely made up of financial sector “giveaways.”

AFR also accuses the bill of rolling back certain mortgage-lending protections and weakening the Volcker Rule—a centerpiece of Dodd-Frank that prevents banks from using their own money to trade in certain higher-risk, speculative securities. The purpose of the Volcker Rule was to reduce the industry’s exposure to the highly leveraged derivative instruments that played a large role in the 2008 market crash. The rule, in essence, blocks additional sources of revenue and imposes some compliance costs, creating tighter margins, so the industry has longed harbored an antipathy towards it, despite continued overall profits.

Volcker himself has given a mixed review of Crapo’s bill, expressing conditional support for certain provisions and firmly rejecting others. “I am pleased that the Senate Banking Committee has forged ahead with meaningful bipartisan financial reform to ease the unnecessary strain on small banks,” he said in a letter addressed to Senator Brown. However, “an increase to $250 billion would go too far,” Volcker added, referring to the bill’s most controversial provision.

Pointing out that many banks below this valuation had to be bailed out by the U.S. government, Volcker suggested a $100 billion threshold or lower would be more reasonable. He rejected relaxing the amount of cash on hand—or capital requirements—banks have to keep.  And while he said he was in “strong agreement” with exempting banks with less than $10 billion in assets from the Volcker Rule, he advocated for “alternative” rules to ensure “small loopholes” aren’t “gamed and exploited with unfortunate consequences.”

Despite Volcker’s reservations, his letter bolsters the complaint that the 2010 reforms geared towards ending “too big too fail” created a system of “too small to succeed.” That grievance has found sympathetic ears at the nexus of academia, Washington, and economic think tanks. Alan Krueger, chairman of the White House Council of Economic Advisers during the Obama administration, also expressed openness to “a smart way” to “maintain strict requirements on the systemically important financial institutions ... and then ease up on some of the unnecessary burden on the smaller banks” during an interview on Bloomberg TV last year.

Still, plenty of other progressive economists like Paul Krugman, pointing to 75 straight months of job growth under Obama, have argued there is “zero evidence that Dodd-Frank has been holding back the economy.”

The elimination of so-called “job killing regulations” was a vocal campaign priority for President Trump. And though Republicans in Congress were able to slash some loopholes into Dodd-Frank by coaxing concessions from the Obama administration (what advocates called “death by a thousand cuts”), the GOP and their interest group allies have been licking their chops for a chance to dismantle the law.

The CHOICE Act, a deregulation package that passed the House last year, was too extreme for many Democrats. This new Senate bill may risk some opposition from the far right for not shedding enough rules, but so far the GOP looks to have effectively triangulated the issue.

Even under the watchful eye of a rising populist wing, Democrats remain close to the financial sector. Commercial banks, in particular, have stepped up campaign contributions to the bill’s supporters ahead of the vote. Crapo’s bill ostensibly gives centrist-leaning members the chance to both please an important donor base that has been howling “overreach” for a decade and to wave the flag of bipartisanship in an election year with a seemingly tough map for red-state Democrats.

Five of the Democrats co-sponsoring the bill are running for reelection in 2018 in states Trump won, and many of them faced competitive elections last time they ran in 2012.

  • Indiana: Joe Donnelly (Won with 50 percent of the vote in 2012)
  • Missouri: Claire McCaskill (55 percent)
  • Montana: Jon Tester (49 percent)
  • West Virginia: Joe Manchin (61 percent)
  • North Dakota: Heidi Heitkamp (50 percent)

The decision of these Democrats to tack towards Trump and the GOP not only operates under the assumption that the financial industry and Republicans are right that overreach is strangling growth; it also presupposes that working with Trump and the GOP to relax rules on bankers is a winning electoral strategy—that the bipartisanship itself is a selling point to swing voters. But there’s little evidence to suggest this is true, with studies showing that negative partisanship—i.e. hostility toward the opposing side—has been a stronger force in American politics in recent years. And while polls show that voters are sympathetic toward small banks, they support strong regulations of the banking industry as a whole.

There are three Senate Democrats from Trump states—Ohio’s Sherrod Brown, Pennsylvania’s Bob Casey, and Wisconsin’s Tammy Baldwin—who are running for re-election and who so far do not support the bill. Notably absent from the co-sponsoring crop of Democrats are those senators rumored to be mulling a run for president in 2020, including Senators Kirsten Gillibrand and Kamala Harris.

In an emailed statement, a spokesman for Harris said she “will oppose this legislation because it props up big banks at the expense of California homeowners and guts protections for consumers.”

This concern—that a bill sold on the bona fides of its regional and community bank support may actually engender more market concentration—is shared by watchdog groups. “This bill lets larger banks get even bigger by acquiring smaller banks without triggering any increased regulatory scrutiny,” Marcus Stanley, policy director at Americans for Financial Reform, told The Financial Times.

According to a Senate staffer close to the negotiations on the Democratic side, there is cautious optimism that there will be an open-amendment process, during which the senators currently opposed to the bill may propose amendments that might then allow them to reconsider their opposition. But advocacy groups like Indivisible and Public Citizen are rallying opposition on social media, furiously tweeting out damning quotes from fact sheets and citing polls showing support for more banking regulation. They are even hinting at primarying Democrat co-sponsors.

“Remember Countrywide?” Warren said in an interview with The New York Times, referring to the mortgage lender infamous for sub-prime lending abuses during the crisis. “It was about $200 billion, which is smaller than some of the banks that will be deregulated by this bill. ... [It] increases the risk of another taxpayer bailout, and I will continue to challenge supporters of this bill—from both parties—to explain why they stand on the side of big banks instead of working families.”

The biggest gamble in deregulating financial institutions is that banks could once again load up on highly leveraged, risky assets, precipitating another credit crisis. The political corollary of that gamble is this: In the event of a crisis, Democrats will not be able to point the finger at Republicans and Wall Street greed.

Share prices have now reached heights not seen since the dotcom bubble in 2000 and the crash of 1929. Goldman Sachs analysts are forecasting that the market is currently defined by a “rational exuberance” that could prolong the rally through 2020. But not all market analysts are so chipper. In a recent foreboding report, veteran strategists at Bank of America Merrill Lynch warned that the bullish mood could possibly end as early as 2019 in devastating fashion, citing signs of “bubble-like behavior” like record-high art prices and rapidly increasing global debt. “The big risk,” the report argues, is that “the tech stock euphoria ends” and America enters an era of “Occupy Silicon Valley, and war on inequality politics in 2019.” Whether a dip as severe as that comes soon or not at all, consensus is that the bull market is in its later stages.

If the bipartisan co-sponsors of S.2155 manage to put their bill on President Trump’s desk in its current framework, then they’ll certainly claim credit for any upswing in the fortunes of community and regional banks. The true test of success though, will occur in the years to come, when the system’s weakened shock absorbers are invariably put to the test.