Ten years after the financial crisis brought the U.S. to the brink of another Great Depression, the Senate is preparing to roll back the Dodd-Frank banking regulations passed in 2010 to prevent another catastrophe like the financial crisis of 2008-2009 from reoccurring.
With enough support from Senate Democrats to muster the 60 votes needed to pass, the proposed measures to dismantle many key strengths of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act are inching closer to becoming done deal.
Lesser oversight for big banks
One of the major rollbacks of the new bill would raise the threshold at which banks are considered “too big to fail.” That trigger currently sits at $50 billion in assets but would rise drastically to $250 billion. The proposed change would effectively exempt about two dozen of the largest U.S. banks and other financial institutions from the highest levels of oversight by the Federal Reserve.
The 2008 financial crisis was the culmination of years of risky investments at both ends of the financial spectrum, from small-town community banks to the nation’s largest banks and financial institutions. Local banks and mortgage companies offered subprime loans to customers with poor credit and little chance of keeping up with their payments.
Those loans were sold to larger banks up the chain, which bundled them and used a series of exotic financial instruments to sell them to financial institutions around the world. As subprime borrowers started defaulting on their loans, the bonds and assets tied to the loans collapsed in value, nearly sending the global financial system into a tailspin.
It wasn’t until the Bush administration secured a $700 billion bailout package to float financial institutions such as Bank of America and Goldman Sachs with taxpayer money that the economy started to stabilize.
Dodd-Frank: bound and gagged
The Dodd-Frank Act put banks under stricter regulatory scrutiny and made it much more difficult for them to employ the same tactics that could undermine the entire financial system. It also tightened mortgage lending rules, set up whistleblower programs, and established the Consumer Financial Protection Bureau (CFPB), which has fallen under attack by financial lobbyists and GOP legislators emboldened by the Trump Administration’s anti-regulation stance.
But even with Dodd-Frank’s protections in place, “a number of large banks have been caught engaging in risky practices,” The Washington Post reported, underscoring the importance of the regulations and the need for stricter enforcement.
“On the 10th anniversary of an enormous financial crash, Congress should not be passing laws to roll back regulations on Wall Street banks,” Sen. Elizabeth Warren (D-Mass.) told The Washington Post. “The bill permits about 25 of the 40 largest banks in America to escape heightened scrutiny and to be regulated as if they were tiny little community banks that could have no impact on the economy.”
The move to dismantle Dodd-Frank comes after a massive lobbying blitz led by banking and Wall Street leaders, associations, and lobbying groups.
Financial firms strategically increased their campaign contributions to key Senate Democrats over the last year, The Washington Post reported. The top three Senate recipients of commercial bank donations so far this year are all Democrats who have broken rank and joined Republicans in the push against Dodd-Frank.
According to the Center for Responsive Politics, Sens. Heidi Heitkamp (D-ND) and Joe Donnelly (D-Ind). Sen. Jon Tester (D-Mont), received the most campaign cash from commercial banks in the 2018 election cycle.
The Washington Post reports that all three Senators are up for reelection in November in swing states that President Trump won by large margins, and all three helped negotiate the Dodd-Frank rollbacks with Banking Committee Chairman Mike Crapo (R-Idaho), who sponsored the bill.
Votes for sale
In light of these political connections, the alarming return to the regulations – or lack of them – that helped bring about the financial crisis could be considered business as usual on Capitol Hill, where money effectively buys votes.
Sens. Heitkamp, Donnelly, and Tester dispute any links between campaign contributions and their support for the Dodd-Frank rollback, but money influences votes.
A new study from the Roosevelt Institute and the University of Massachusetts Boston looked at the role lobbying money plays in politics, focusing on the Dodd-Frank Act and how some specific U.S. representatives moved to gut the landmark bill they once ardently supported.
The study, Fifty Shades of Green: High Finance, Political Money, and the U.S. Congress, found that:
… for every $100,000 that Democratic representatives received from finance, the odds they would break with their party’s majority support for the Dodd-Frank legislation increased by 13.9 percent. Democratic representatives who voted in favor of finance often received $200,000-$300,000 from that sector, which raised the odds of switching by 25-40 percent.
The study also uncovered a direct link between campaign contributions and voting behavior with telecommunications legislation. When the House was voting on net neutrality in 2006, every $1,000 in campaign contributions from an anti-net-neutrality company amounted to a 2.6 percent greater chance of voting in the interests of those corporations.
Many political analysts say that corporate and special interest money doesn’t just influence politics but drives it. And, while changing the way the U.S. political system works is possible, the first step would involve an overhaul of major laws, such as the Supreme Court’s 2010 Citizens United ruling, which opened the floodgates for unlimited outside political spending from corporations and other special interests.
Other reforms would have to be implemented, the study’s authors said, including publicly funding elections and adding a constitutional amendment barring all corporate and special-interest money from elections.