Targeting Lincoln

Long after the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act crushed prospects for post-crash change by enshrining in law the principle of “too big to fail,” lobbyists for the major banks are still busy shooting the wounded. Among the few progressive elements in Dodd–Frank yet to be disposed of is Section 716, otherwise known to history as the Lincoln Amendment, which bans banks from speculating on certain types of derivatives while enjoying the safety nets of deposit insurance and Federal Reserve guarantees. Such speculation is still a major source of bank revenue, and has continued to be so while implementation of the measure is being negotiated. But July 16, the dread day when this will take place, is fast approaching, after which the banks will have to push out their derivatives trading to separate entities that lack taxpayer protection.

Blanche Lincoln as chair of the Senate Agriculture Committee, June 30, 2010. Photograph by U.S. Department of Agriculture

Given that such speculation — notably the infamous practice of credit-default swapping — was a major cause and accelerator of the 2008 crash, the ban would seem like a simple and necessary idea. Even so, it only made it to the statute book thanks to a fortuitous accident of electoral politics. The Lincoln Amendment is named after former Democratic senator Blanche Lincoln of Arkansas, who chaired the Senate Agriculture Committee prior to losing her seat in 2010. The committee has jurisdiction over derivatives, thanks to their origins as a means for farmers to hedge against the vagaries of crop prices. Lincoln thus enjoyed the attention and generous favors of Wall Street, whose Washington representatives, as one of them told me, “always considered her reliable.”

When financial reform first reared its head after the financial catastrophes of 2008, Lincoln appeared steadfast in the cause of her customary benefactors. Then fate intervened, in the form of a primary challenge from Arkansas lieutenant-governor Bill Halter. Unleashing a barrage of ungentlemanly references to her warm embrace of Wall Street, Halter forced her into a runoff. Panicked, she dashed to the left and unveiled her amendment, much to the vocal chagrin of Senator Chris Dodd, who was anxious to ensure that the bill posed no serious threat to his own Wall Street chums.

Dodd’s reaction sparked the irritation of Senator Maria Cantwell of Washington, who made angry and public complaint in the Democratic caucus over his disrespectful treatment of her sister-senator. Dodd beat a hurried retreat, and Lincoln’s measure was incorporated into the bill. The Connecticut senator figured he could water it down later, which he did — with Lincoln’s assistance, once she had disposed of Halter and thus her need for populist posturing. Nevertheless, enough of it survived to threaten the profits of the five major banks: JPMorgan Chase, Bank of America, Wells Fargo, Citigroup, and Goldman Sachs. The notional amount of assets linked to the derivative bets of JPMorgan alone amounts to around $70 trillion, a figure slightly larger than the entire global economy.

It should be no surprise therefore that Section 716 has been the target of repeated assaults since Dodd–Frank passed. Sometimes the attacks come boldly, in broad daylight, other times in a fog of obfuscation. Last year’s effort, H.R. 1838, could be classed as a daylight attack, bold in its effrontery. Humorously called the Swaps Bailout Prevention Act, it enjoined that Lincoln be wiped almost entirely from the books. Despite garnering bipartisan support in committee, the bill never made it to a floor vote.  This year’s effort, H.R. 992, the Swaps Regulatory Improvement Act, which emanated from the House Agriculture Committee, is of the stealthy variety. Indeed, it seems a pity that apart from a limited number of banking lawyers, few people will appreciate the ingenuity involved in conveying and simultaneously concealing its true meaning.

At first glance, the bill appears to keep the ban intact, but page three contains a provision allowing a bank to act as a “swap entity” (meaning one that deals in swaps) for “swaps or security based swaps” (meaning credit-default and commodity swaps). Another exception is made for “asset-backed securities,” such as securities backed by credit-card debt, or by leases, which remain banned unless “prudent regulators,” meaning banking regulators, say it’s okay. Given the indulgence routinely displayed by these regulators, it seems unlikely that the banks will face any problems there.

A source privy to future plans for this measure informs me that the House Financial Services Committee will pass a similar bill in a few weeks’ time, after which the two bills will be consolidated and voted through the House. Getting them passed by the Senate might pose more of problem, so the plan is to then surreptitiously add them to other, less-controversial legislation at the last hour. (This antidemocratic maneuver, known as “referencing,” is an increasingly common practice, the normal verbiage being, “The provisions of the following bills of the XXX Congress are hereby enacted into law: H.R.1234,” etc.)

Asked if this plan displayed especial legislative cunning, my source, who is well versed in such matters, reviewed it merely as “routinely brilliant” but a “huge gift to the five banks.”

Uncommonly for such semi-covert maneuvers, some legislators have paid enough attention to express a little discomfort. Following H.R.992’s successful passage through the agriculture committee, ranking member Colin Peterson, a conservative Democrat from Minnesota, reminded his colleagues of previous catastrophic cave-ins to the bankers. “You can vote any way you want,” he warned, “but this could come back and haunt you.”