Anyone who follows politics in Washington knows that lobbyists play a huge role in the political process. Despite what politicians say about bills not being swayed by big business when drafting legislation, they almost always are. And even though the new financial regulation bill is depicted by Congress as putting consumers first at the expense of the financial industry, you can see lobbyists' fingerprints all over the new bill. There are easily dozens of sections where their persuasion can be felt, but here are several striking examples.
Auto Dealer Exclusion
Perhaps one of the most egregious lobbyist influences was a key exclusion from the Consumer Financial Protection Bureau. When you think about consumer credit, a few products immediately come to mind: mortgages, car loans, and credit cards. But wait! Car loans -- one of the most prevalent types of consumer loan -- are excluded entirely from the Bureau's reach. While it isn't likely that auto loans will ever cause a financial crisis, neither will credit cards. Yet there are certainly auto loan shops that could use dastardly tactics worthy of as much attention as the regulator pays to credit card companies.
Derivative Spin-Off Provision
To see a truly strange legislative effort, check out how one of the more controversial derivatives provisions in the bill turned out. Initially, all banks would be forced to put their derivatives business in a separately capitalized subsidiary. That is, until lobbyists got their hands on it. Now, banks can create certain sorts of derivatives, but not other sorts. Foreign exchange and interest rate swaps, for example, are okay. But commodities and energy swaps aren't. Is corn riskier than the euro? Probably not. So what's the explanation? One industry source I spoke with theorized that futures exchanges may have pushed for the ban on commodity and energy derivatives created by banks. The over-the-counter derivatives (a market run by banks) market ate away at exchanges' market share once banks started getting into the business. Now banks are out of the picture regarding these products.
Another extraordinarily watered-down provision compared to the original conception is the so-called "Volcker Rule," meant to limit proprietary trading by banks. The final bill limits the amount of money dedicated to this function to 3% of a bank's Tier 1 Capital. That should allow all but a few banks to proprietary trade in the same way they have in the past. Moreover, the rule inexplicitly limits the amount of a private equity venture or hedge fund that a bank can own to 3%. This ultimately benefits banks, because they need less skin in the game to convince outside investors to participate in a venture or fund.
Non-Bank Resolution Authority
You might think that large financial institutions would be very scared at the prospect of no longer being too big to fail, but you would be wrong. In fact, late last year, JP Morgan's CEO Jamie Dimon even wrote an op-ed in the Washington Post arguing for the need for a Non-Bank Resolution Authority. Think about it: if a big institution's creditors can be reasonably sure that the government will hand them most of what they're owed if the firm fails, that provides a huge advantage to these firms. Creditors for its smaller competitors will only get whatever a bankruptcy court awards.
Fannie and Freddie
If you want to see the raw power of the government-sponsored entities combined with that of the real estate industry, then look for the section of the bill that deals with Fannie and Freddie. The document weighs in at over 2,300 pages, but provides just two-and-a-half on this topic. That's despite the fact that Fannie and Freddie played a major part in the financial crisis and were the largest of bailout recipients. The financial reform bill only calls for a study on ending their conservatorship.
The lesson here isn't necessarily that lobbying is all bad. Indeed, a few of the changes above will probably be better for the U.S. economy than if the legislation was more aggressive. But it's utterly clear that lobbyists play a major role in the shaping of federal legislation. If their mark can be felt throughout a bill that's meant to champion consumers and crack down on an industry, imagine how much influence they have on regular less-controversial legislation.
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