The Corner

What’s the Dodd-Frank Fight That Could Shut Down the Government? (And What Does It tell Us About Liz Warren?)

One section out of hundreds in the so-called cromnibus spending bill is driving Republicans and Democrats apart just hours before the federal government runs out of funding. (The cromnibus hasn’t passed the House yet, where Democrats are needed to get to a majority because some Republicans oppose the bill for other reasons.)

Senator Elizabeth Warren, the popular Democrat from Massachusetts, and House minority leader Nancy Pelosi, are assailing Section 630 as a giveaway to Wall Street and a dangerous move for our financial system, pledging that they won’t vote for a bill that includes it. Specifically, the section repeals a provision in Dodd-Frank that bars banks with federally insured deposits from being dealers in special types of derivatives. Those banks will instead have to have separate subsidiaries deal in the market for certain specialized “swaps” (a type of derivative), or push out the business into said subsidiaries, which is why it’s sometimes been called the “swaps push-out.”

The rule is definitely not meaningless — some big banks badly want it undone — but it’s also a very marginal regulation that can’t be said to shift the riskiness of the financial system definitively one way or the other. Serious liberal financial reformers (see Mike Konczal of the Roosevelt Institute here) believe the rule would do some good. But Warren and Pelosi have picked a fight with big banks that really can’t be said to help or hurt the economy, the financial sector, or ordinary Americans a ton either way. What they do have, of course, is a regulation that sounds intuitively appealing and allows them to say they’re standing up to big banks.

The upside to this specific Dodd-Frank rule is that banks the federal government may feel, legally or informally, obligated to rescue from bankruptcy will have to stay away from a somewhat arcane and potentially risky business. But the case for getting rid of the regulation isn’t uncompelling: By making it harder for banks to deal in this business, it raises the costs of this kind of derivative. Specialized swaps, while they sound exotic, are not intrinsically risky or speculative. The kind of swaps we’re talking about here are complicated than, say, a derivative a farmer buys to hedge against the risk of corn prices’ dropping. But that doesn’t make them risky per se, or an exclusively Wall Street business: There are plenty of good uses for specialized or “bespoke” swaps. Sometimes dealing in them will increase the risk a bank is carrying, and sometimes they’ll decrease it.

As the Cato Institute’s Mark Calabria points out, a rule change like the federal government’s recent decision to drop down-payment requirements for federally backed mortgages to just 3 percent creates magnitudes more risk in the financial system than any amount the pushout provision could ever remove. A decent argument against banks’ being able to use these specialized swaps is the idea that regulators have a harder time monitoring them than they do regular derivatives, but that’s a little flattering to regulators. They don’t do a very good job of assessing the risk in any part of the financial system.

In fact, the debate is murky enough that there have often been Democrats on the side of getting rid of the pushout provision: Connecticut Democratic congressman Jim Himes proposed almost exactly the same language that went into the cromnibus as a standalone bill in 2013, and it passed the House with 70 Democratic votes.

Himes, it should be noted, is a former Goldman Sachs banker and represents a slice of southwestern Connecticut. It’s easy to see why he would be sympathetic to letting banks get back into the swaps business. But the impulses driving the original creation of the pushout were hardly august: It was inserted by Senator Blanche Lincoln as Lincoln was facing a primary challenge from her left and facing criticism that she was too easy on Wall Street. There are two simple and appealing aspects to the provision: People hate the idea of banks “making bets” with money that’s backstopped by the federal government and there were some kinds of derivatives involved in spreading the 2008 Wall Street meltdown (remember credit default swaps? Push them out!).

People who know a bit better are not huge fans of this rule. Fed chairman Ben Bernanke, no free-market crank, opposed the provision, as did then–Treasury secretary Tim Geithner; Bernanke has said it ought to be fixed. The general counsel of the Fed said it ought to be revisited, too, just “to make sense of it” because “you can tell that was written at 2:30 in the morning.”

The cromnibus isn’t exactly a careful revisiting of the issue — it gives relatively big banks what they’re asking for — but liberal financial reformers know this is hardly a hill to die on.

Yet, congressional Democrats, in the wilderness for the next two years, are going to start picking fights. It may be telling that Elizabeth Warren, once hailed as an indefatigable academic who could take on Wall Street, has picked a fight more convenient in its politics than convincing on its policy merits.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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