Chris Dodd vs. Big Banks’ Gambling Addicts

Will Senate Banking Committee Chairman Christopher Dodd, D-Conn., be seduced by the siren song of bipartisanship and allow the nation’s largest banks to gamble with what amounts to a taxpayer-paid insurance policy?

There was a somewhat encouraging word from Dodd at today’s banking committee hearing, featuring former Federal Reserve chairman and Obama administration economic adviser Paul A. Volcker, after earlier reports that Dodd is prepared to surrender a core provision of President Obama’s financial reform plan in order to woo Wall Street-friendly Republicans, particularly ranking minority member Richard Shelby, R-Ala.

Volcker defended his proposal that Congress build a legal wall separating traditional banking activities from proprietary trading. That wall would mean that financial institutions that engage in Wall Street trading activities would bear the full risk of those activities and could not lay claim to a taxpayer bailout to protect their Main Street banking operations.

Early in today’s hearing, Dodd said he “strongly supports” what’s come to be known as the “Volcker rule.” However, The Financial Times on Monday reported that Dodd “is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.” The FT quoted a Dodd staffer as saying, “Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan. … He is not going to risk bipartisan support to make the White House happy.”

Or, for that matter, the majority of the American public, which overwhelmingly supports robust financial reform.

Near the end of the hearing, Dodd reiterated his general support for the administration’s proposals but warned that there is a limit to what the Senate can legislatively digest and on financial reform “we’re getting precariously close to it. … I don’t want to be in the position of doing nothing because we tried to do too much.”

In any event, what was evident at the hearing was that Senate Republicans for the most part ranged from skeptical to outright hostile to the idea of building firewalls around risky financial behavior that could endanger the financial system. Sen. Bob Corker, R-Tenn., asserted that during the 2008 financial meltdown, “no bank holding company failed due to proprietary trading.”

Perhaps technically true, but consider what Bloomberg wrote about Citigroup on January 22 when President Obama unveiled his financial reform proposals:

Citigroup had to get a $45 billion bailout after a record $28 billion 2008 loss that stemmed from subprime-mortgage- related “collateralized debt obligations” and other investments made at least partly to facilitate customer business. Last year, Citigroup generated at least $3.93 billion of revenue from principal investments, or about 5 percent of overall revenue, according to the bank’s financial statements. In 2008, it lost $22.6 billion in that area.

Demos recently examined the increased danger posed by the nation’s largest banks and their combined banking and trading operations. Bank of America was goaded into a shotgun marriage with Merrill Lynch in 2008 to keep the latter firm from going bankrupt; according to the Demos report, the effect is that trading profits in 2009 were three times higher than in 2008, and more significantly, a key measure of the overall riskiness of its portfolio increased by 68 percent over 2008. That same risk measurement also went up during 2009 at JPMorgan Chase.

Sen. Mike Johanns, R-Neb., asked Volcker “what was the evil” that would be addressed by the “Volcker rule.” Volcker replied, “Taxpayer support for speculative activity…I don’t want my taxpayer dollars supporting somebody else’s speculative activity. Simple as that.”

Johanns argued that the Volcker rule would not have prevented the AIG bailout or the collapse of the Lehman Brothers brokerage firm. Of course it wouldn’t have by itself, said Deputy Treasury Secretary Neal S. Wolin, who accompanied Volcker at the hearing; that’s why it is also important to act on financial reform provisions that would in effect force companies such as AIG to agree to a sort-of “living will” that would guide an orderly winding down of the company’s operations in a way that does minimal damage to the economy as a whole.

Today’s hearing displayed a committee split between Republicans resisting anything that goes beyond window dressing (with the possible exception of Sen. Jim Bunning, R-Ky., playing the role of the cantankerous populist on the committee) and Democrats whose questioning for the most part offered little in the way of forceful defenses of Volcker and the administration’s proposals.

Dodd, as chairman of the committee, needs to know this: This can’t be a choice between getting something done and getting something right. Taking away the too-big-to-fail umbrella from the Wall Street giants has to be a nonnegotiable principle. And while there is some agreement that in the real world of 21st-century finance separating banking activities from the Wall Street casino of speculation is not quite as simple as it sounds, still, as Volcker put it today, “every banker I speak with knows very well what ‘proprietary trading’ means and implies”—so complexity is not a legitimate excuse to not address the problem.

Dodd also at the end of the hearing seemed set the stage for preemptively laying the blame on the Obama White House for not communicating its proposals well and earlier in the process. But it is Dodd who has the option to rally Senate Democrats to embrace strong reform proposals—pushing back against the banking lobby, the Chamber of Commerce and the conservative obstructionists—or to settle for a lowest-common-denominator proposal that Democrats will call “reform” but Wall Street will prize as their license to do business as usual. It’s time to tell Dodd which way he should go.


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