Nov. 3 (Bloomberg) -- During one of his first meetings
about overhauling U.S. financial regulations in February,
President Barack Obama had a question for his economic advisers,
who included Treasury Secretary Timothy Geithner and National
Economic Council Director Lawrence Summers.
“What about the families?” Obama asked, according to people
familiar with the discussions. He then asked them whether they’d
read the work of Elizabeth Warren, a Harvard Law School
professor and longtime advocate of a national consumer financial
protection agency. Michael Barr, a University of Michigan
professor who was a Summers aide at the time, jumped in to say
he knew Warren’s work.
“Well, what do you think about it?â€
“I think it’s a great idea,” Barr, 44, replied. The two
debated the merits of such an agency during several meetings
over the following three days. Then Obama offered Barr, whose
own work included research on the borrowing patterns of low-
income households, the job of assistant Treasury secretary for
financial institutions. He was confirmed by the Senate in May.
Thus an idea that the U.S. banking industry has learned to
hate moved a giant step closer to reality. The creation of a
consumer protection agency is part of the Obama administration’s
plans to enact the most wide-ranging financial regulations since
the Great Depression.
Following the 1999 decision to overturn the Glass-Steagall
Act that separated commercial banks from securities firms, bank
lobbyists have been able to shoot down virtually any proposed
rule they perceived as unfavorable to their industry, lobbyists
and politicians say.
Campaign Contributions
Banks and securities firms spent $193 million to fund
political campaigns for the 2008 elections and raise even more
money through events that their trade groups organize. They have
successfully fought the administration’s efforts to limit
executive pay and are battling against draft legislation
governing the $592 trillion market for derivatives.
When it comes to consumer banking, the industry’s lobbyists
are no longer all-powerful. Banks lost their bid to squelch new
credit card rules that Obama signed into law in May. They
lobbied for months before a bill that would have forced them to
renegotiate mortgages failed in the Senate.
Now the banks and their trade associations are lobbying
furiously to kill Obama’s plan to create the new financial
protection agency, which was approved by the House Financial
Services Committee in late October and is likely to face a full
House vote by the end of 2009.
Influence Lost
The different trade groups that represent the industry are
also divided over how they want the bill rewritten. They will
now shift their struggle to the Senate, which has yet to unveil
its version of proposals overhauling financial regulations.
“Banks have lost their influence on consumer issues,” says
Brian Gardner, an analyst monitoring Washington’s impact on
financial services for the brokerage firm Keefe Bruyette & Woods
Inc. Gardner says banks will retain their clout when it comes to
more complex financial issues such as derivatives. “Folks on
Capitol Hill still need to talk to the banks for the expertise
on highly technical areas,” Gardner says.
Members of Congress who have traditionally been supportive
of the banks’ positions are breaking ranks as popular opinion
shifts strongly against the institutions. Some 80 percent of the
public blames banks and other financial firms for the economic
crisis, according to an ABC News-Washington Post poll in March.
“Many members of Congress who have been pro-banking and who
have done the banks’ bidding are walking more cautiously since
the financial meltdown,” says Representative Maxine Waters, a
California Democrat.
Frank’s Priority
Representative Barney Frank, chairman of the Financial
Services Committee, says he’s making it his priority to create
the new agency to protect consumers.
“The existing structure for consumer protection in the
financial area, particularly in the area of bank products, has
failed miserably,” the Massachusetts Democrat told a news
conference in July.
Frank has gotten $2.1 million in campaign contributions
from financial firms over the past three elections, according to
the Center for Responsive Politics, a Washington-based research
group.
The biggest U.S. banks have a lot at stake. They rely on
the relatively stable revenue from consumer lending to balance
out the volatility of their investment banking operations. Bank
of America Corp., the largest U.S. bank in terms of assets, and
No. 3 Citigroup Inc. got almost half of their revenue from
consumer lending, including credit cards, in the first nine
months of 2009.
Dimon in Washington
Harvard’s Warren says the consumer agency she proposes will
affect the larger banks disproportionately: “It may cost the
community banks some nickels, but the real impact will be on the
big banks’ profit model.”
JPMorgan Chase & Co., the second-biggest U.S. bank, got 48
percent of its revenue from consumer lending in the first nine
months of 2009. The bank, which was one of the least scathed by
the crisis, has stepped up its lobbying. Chief Executive Officer
Jamie Dimon now visits the capital twice a month, meeting with
administration officials and congressional leaders, up from
twice a year in 2006.
JPMorgan also added two lobbyists to its Washington staff,
which includes former Commerce Secretary William Daley. Jill
Blickstein, who was previously chief of staff at the Office of
Management and Budget in the Obama administration, was one of
the new hires.
‘Weakened Position’
Citigroup and Bank of America are both partially owned by
the government following the bailouts of 2008, and have cut
their lobbying budgets as a result. The two banks spent a
combined $6.6 million to lobby in the first nine months of 2009,
down 12 percent from a year earlier, according to congressional
disclosures they have filed.
“No question that the banks and the rest of the industry
are in a weakened position,” says Bruce Thompson, who lobbied
Capitol Hill for 22 years on Merrill Lynch & Co.’s behalf. “They
used to be able to say, ‘This will hurt us,’ and Congress
wouldn’t do it. Now, they laugh at you.”
Waters says she has introduced or sponsored dozens of
legislative proposals to rein in banking practices. For example,
she proposed a 2003 bill that aimed to prevent predatory lending
by increasing the amount of information that banks would have to
disclose when offering mortgages. All were blocked by bank
lobbying, she says.
“They manage protecting their interests quite well,” she
says.
‘Losing Some Battles’
Consumer advocates agree.
“We couldn’t get a vote on bills banks opposed,” says Ed
Mierzwinski, the consumer program director at the U.S. PIRG, a
federation of state public-advocacy groups that lobby for
consumer rights. “Now, they’re losing some battles, winning
others.”
One fight the banks lost in 2009 was against the creation
of a credit card consumer’s bill of rights. The failure came
even though financial industry lobbyists, led by the American
Bankers Association and the largest individual banks,
outnumbered consumer lobbyists by 10 to 1, according to
congressional staffers involved in the talks.
The credit card bill, which was first introduced in 2008 by
Representative Carolyn Maloney, a Democrat from New York, passed
the House and then died in the Senate amid opposition by banks
and credit card companies. Christopher Dodd, the Democrat from
Connecticut who is chairman of the Senate banking committee,
sided with the banks. Dodd has received more than $8.4 million
in election contributions from financial firms since 2005,
according to the Center for Responsive Politics.
Banks Fought Bill
The financial crisis, and Obama’s election, improved the
bill’s prospects. Maloney reintroduced the measure in January,
revising it to incorporate elements from Obama’s campaign
platform, such as restricting how and when credit card issuers
can increase interest rates and late-payment penalties.
The ABA, along with Bank of America, Citigroup and
JPMorgan, argued that the bill would hurt the availability of
credit and jack up interest rates on cards. This time around,
Dodd didn’t try to convince fellow senators to support the
banks’ argument.
The banking committee chairman was humiliated in March when
it was disclosed that a bill he sponsored curtailing pay for
executives of firms bailed out by the government made an
exception for insurance company American International Group
Inc. The company’s derivatives arm is based in Connecticut,
Dodd’s home state, and the senator is the largest recipient of
campaign contributions from AIG. Dodd said the exemption had
slipped in during negotiations without his knowledge.
Bill Sails Through
In the spring of 2009, Maloney’s bill sailed through
Congress, getting 357 votes in the House and 90 in the Senate.
Banks also had to fight hard before they succeeded in
blocking the so-called cram-down provision proposed by six
senators led by Dick Durbin of Illinois and Chuck Schumer of New
York this past spring. The proposal, which would have given
judges the right to restructure mortgages during a personal
bankruptcy trial, was being considered by some of its sponsors
as early as 2007.
After the government bailed out several of the largest U.S.
financial institutions in the fall of 2008, interest in the
measure grew. Citigroup, which got the biggest U.S. bailout --
$346 billion -- decided to back the cram-down provision,
reversing its previous stance. In January 2009, Durbin and
Schumer held a news conference together with Dodd to announce
the bank’s support for the provision.
Obama’s Role
It was the new political circumstances with Obama in power
that made the bank change course, former and current Citigroup
lobbyists say. Citigroup’s consumer-friendly position gave the
bank some positive publicity, too, these people say.
The House passed a version of the cram-down bill in March.
In the Senate, Durbin and Schumer needed at least a handful of
Republicans to muster 60 votes to avoid a filibuster. Without
the banks’ support, that majority wouldn’t materialize. So the
two senators started negotiating with the ABA, JPMorgan and two
trade groups that represent credit unions. The Independent
Community Bankers of America, which represents small banks,
later joined the talks along with Wells Fargo & Co. and Bank of
America.
After a few meetings, the ABA pulled out and lobbied
quietly against the cram-down bill, while the ICBA publicly
opposed it. The Financial Services Roundtable, which consists of
the CEOs of the top 100 U.S. financial firms, coordinated the
different groups’ efforts and meetings with members of Congress
from both parties, says Scott Talbott, the Roundtable’s chief
lobbyist. The provision died in the Senate in April.
Cramdown Is Back
The lobbyists’ success may be short-lived: In September,
Durbin and his allies introduced a new version of the cram-down
bill.
The next big test for the banks is whether they can
influence plans to create the new regulatory agency to protect
consumer rights.
“The administration’s proposal would hurt banks that never
made a subprime loan, and yet you’re going to pile a whole new
set of regulations and a new regulator on them,” says ABA
President Edward Yingling.
The ABA has organized its members to write 140,000 letters
to congressmen, provided Op-Ed templates for community bank
executives who want to write editorials in local newspapers and
set up hundreds of meetings between its members and their
congresspeople.
Lobbying Tips
In September, some 80 bankers from 28 states mingled at an
ABA reception at the Madison hotel in downtown Washington,
gearing up for meetings with congressmen representing their
districts. Floyd Stoner, the ABA’s chief lobbyist, circulated
among the crowd, stopping to chat with bankers and dispensing
lobbying tips.
The pressure from the community banks has had some impact:
In October, Frank’s committee revised the original proposal so
that small banks can stick with their existing regulators, which
will enforce the consumer agency’s rules.
The banks face opposition from consumer groups, which have
banded together in a 200-strong coalition to push for the
agency. Obama, who himself started in politics as a community
organizer, has been sympathetic to their concerns.
“In a financial system that has never been more
complicated, it has never been more important to have a watchdog
function like the one we have proposed,” Obama said in October.
The Treasury’s Barr has even appointed a former consumer
advocate at the Center for Responsible Lending, Eric Stein, as
his deputy in charge of consumer protection.
Leveling the Playing Field
While Barr asked the banks for their opinion of the
consumer agency during meetings in March and April, their
objections weren’t heeded, according to people familiar with the
discussions. He also asked consumer groups and community
organizations to weigh in, an unprecedented move when the
government considers financial regulation, according to
lobbyists.
“The status quo has fundamentally failed consumers and
helped to bring us to the brink of financial disaster,” Barr
says. “We need to level the playing field.”
While banks’ lobbying efforts may have been weakened, their
deep pockets still give them willing listeners on Capitol Hill
and in the White House, says Joseph Stiglitz, winner of the 2001
Nobel Memorial Prize in Economics.
“It comes down to the influence of money on our political
process,” the Columbia University economics professor says.
Even if Barr levels the playing field and the new agency is
created, banks bearing cash still may win the game.
To contact the reporter on this story:
Yalman Onaran in New York at
yonaran@bloomberg.net .
