The acrimony that erupted Thursday between President Obama and members of his own party largely pivoted on a single item in a 1,600-page piece of legislation to keep the government funded: Should banks be allowed to make risky investments using taxpayer-backed money?
But perhaps even more outrageous to Democrats was that the language in the bill appeared to come directly from the pens of lobbyists at the nation’s biggest banks, aides said. The provision was so important to the profits at those companies that J.P.Morgan's chief executive Jamie Dimon himself telephoned individual lawmakers to urge them to vote for it, according to a person familiar with the effort.
The White House, in pleading with Democrats to support the bill, explained that it got something in return: It said that it averted other amendments that would have undercut Dodd-Frank, protected the Consumer Financial Protection Bureau from Republican attacks, and won double digit increases in funds for the Securities and Exchange Commission and the Commodity Futures Trading Commission. "The president is pleased," said White House spokesman Josh Earnest.
Earnest said that Democrats were upset about "a specific provision in this omnibus that would be related to watering down one provision of the Wall Street reform law. The President does not support that provision. But on balance, the President does believe that this compromise proposal is worthy of his support."
But "that provision" isn't just any provision. It's one that goes to the heart of the Dodd Frank reform because it would let big banks undertake risky activities with funds guaranteed by the federal government and, hence taxpayers.
The omnibus appropriations bill would do that by undoing the Dodd Frank provision that ordered banks to move their riskiest activities -- such as default swaps, trading commodities, and trading derivatives -- to new entities so that deposits guaranteed by the Federal Deposit Insurance Corp. would not be in danger.
House Minority Leader Nancy Pelosi (D-Calif.) pointed to this item as the main reason she would vote against a bill backed by her own president.
"What I am saying is: the taxpayer should not assume the risk," she said. She said the amendment went "back to the same old Republican formula: privatize the gain, nationalize the risk. You succeed, it's in your pocket. You fail, the taxpayer pays the bill. It’s just not right."
It isn't only liberal congressional Democrats up in arms about the proposed change. "It really is outrageous," said a former senior Obama Treasury official, who asked for anonymity to preserve business relationships. "This was the epicenter of the crisis. This is what brought AIG down, what brought Lehman Brothers down."
The nation's biggest banks -- led by Citigroup, J.P. Morgan and Bank of America -- have been lobbying for the change in Dodd Frank, which had given them a period of years to comply. Trade associations representing banks, the Financial Services Roundtable and the American Bankers Association, emphasized that regional banks are supportive of the change as well.
The banks have long argued that the Dodd Frank provision will limit their ability to extend credit to clients and that setting up separate entities to engage in derivatives and commodities trading isn't practical. The ABA’s top lobbyist, James Ballentine, executive vice president of congressional relations and political affairs, said in an e-mailed statement that the requirement that banks move some swaps in to separate affiliates "makes one stop shopping impossible for businesses ranging from family farms to energy companies that want to hedge against commodity price changes."
But the regulatory change could also boost the profits of major banks, which is why they are pushing so hard for passage, said Simon Johnson, former chief economist of the International Monetary Fund and a professor at the MIT Sloan School of Management.
"It is because there is a lot of money at stake," Johnson said. "They want to be able to take big risks where they get the upside and the taxpayer gets the potential downside," he said.
Johnson said the amendment of Dodd Frank only affects a small portion of derivatives. “I don’t want to make a mountain out of a molehill on this,” he said. But he added that “on a forward looking basis this could become very big.”
The effort to enact this language has been years in the making. Language that was written and edited in part by the major banks was originally inserted in a House bill that called for relaxation of the push out rules in 2013. Citi declined to comment on the role its lobbyists played in developing the legislation, which was originally disclosed in an e-mail exchange reported on by the New York Times. However, a blog post written in 2013 by the bank’s head of global public affairs, referred to the effort to modify this portion of Dodd-Frank as “a great example of how the industry and Congress can work together to find common ground.”
The banking lobby has always been a powerful force in Washington. The banks that could benefit from this change -- Citigroup and J.P. Morgan -- are among Washington’s most influential corporate players. Each firm, for example, spent over $5 million a year lobbying in recent years, both of them ranking in the top 90 firms for lobbying expenditures, according to data prepared by the Center for Responsive Politics. In addition J.P. Morgan contributed over $5 million to federal candidates and parties in 2012, compared with $2.6 million in the last election cycle for Citigroup. And both firms have strong connections on Capitol Hill and the White House. Citi, for example, includes among its stable of lobbyists former House Speaker Bob Livingston (R-La.) and former Senators John Breaux (D-La.) and Trent Lott (R-Miss.).
Former House Financial Services Committee Chairman Barney Frank on Wednesday also urged his former colleagues to reject the omnibus appropriations bill. He called the amendment inserted into the bill “a substantive mistake, a terrible violation of the procedure that should be followed on this complex and important subject, and a frightening precedent that provides a road map for further attacks on our protection against financial instability."
Frank added that “ironically it was a similar unrelated rider put without debate into a larger bill that played a major role in allowing irresponsible, unregulated derivative transactions to contribute to the crisis." He said people could disagree about how best to regulate derivatives but that the way to do that was "not for a non-germane amendment inserted with no hearings, no chance for further modification, and no chance for debate into a mammoth bill in the last days of a lame-duck Congress."