Big Wall Street banks are on a mission to reverse a section of the Dodd-Frank financial reform bill that requires them to post collateral when making internal derivatives transactions among their affiliates and subsidiaries. Congressional Republicans have supported the banks’ efforts for several years. Now a key House Democrat has taken up their cause.
Financial Services Committee member Representative Josh Gottheimer has begun urging regulators to act on the matter, spearheading a letter that asks them to take “quick action” to repeal the requirement. The letter, which is co-signed by 16 other Democrats, was drafted and circulated by Gottheimer’s office, according to a source familiar with the matter.
Gottheimer’s letter is the result of a lobbying campaign by the Financial Services Forum, a trade group comprised of the CEOs of eight of the largest U.S. banks, according to a report from Bloomberg. Gottheimer’s staff did not respond when asked by Sludge to confirm that the letter originated in their office. Gottheimer’s signature appears first in the list of 17 total signatories.
The provision requires financial institutions to set aside a cash cushion when making derivatives transactions among their affiliates in order to protect government-insured consumer bank arms from losses stemming from the activities of their riskier affiliates. Derivatives, which are financial instruments whose values are derived from underlying assets, played a major role in the 2008 financial crisis by simultaneously obscuring and distributing risks associated with the home mortgage market. At the end of 2018, U.S. financial institutions had nearly $40 billion set aside because of the inter-affiliate collateral requirement, according to a study by the International Swaps and Derivatives Association.
In the letter, sent to the heads of the Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency, Gottheimer and his colleagues argue that inter-affiliate swaps do not raise systemic risk concerns because “they do not create additional counterparty exposure outside of the corporate group and do not increase interconnectedness between third parties.”
Some consumer advocates, however, disagree. “Loosening this regulation is a straight-up giveaway to the biggest Wall Street banks whose high-risk trading activities got us all into deep trouble in 2008,” Carter Dougherty, a spokesperson for Americans for Financial Reform, told Sludge. “This rule is critical for protecting bank affiliates that handle customer deposits.”
As Gottheimer urges the regulators to gut the rule, he and his spouse own as much as $315,000 in finance industry stock, including stakes in several banks whose CEOs are among the eight members of the Financial Service Forum, according to Sludge’s review of his financial disclosures.
Gottheimer’s financial industry stock holdings includes Financial Service Forum members Goldman Sachs (worth between $1,001 and $15,000), JP Morgan Chase ($1,001-$15,000), Wells Fargo ($15,001-$50,000), and Morgan Stanley ($1,001-$15,000). He also has between $15,001 and $50,000 invested in iShares U.S. Financial ETF, an exchange-traded fund that holds shares in Bank of America and Citigroup, both Financial Services Forum members, among other American financial institutions.
Gottheimer’s congressional campaigns have been heavily funded by finance industry interests. According to the Center for Responsive Politics, Gottheimer received more campaign money from PACs and individuals in the finance/insurance/real estate sector during the 2018 election cycle than any other House Democrat. Over the course of his congressional career, Gottheimer’s top donor organization has been Blackstone Group, whose employees have given him $116,050 in campaign contributions since his first House campaign in 2015. Goldman Sachs is Gottheimer’s second largest career donor, with its PAC and employees contributing $80,150. Morgan Stanley’s PAC and employees have given Gottheimer $49,100, while JPMorgan Chase’s PAC and employees have given him $44,999.
The letter is not Gottheimer’s only recent expression of deference towards the big banks. At an April Financial Services Committee hearing on “Holding Megabanks Accountable” and featuring testimony from the eight CEOs that comprise the Financial Services Forum, Gottheimer praised the bankers and criticized his Democratic colleagues for not showing slides that reflect positively on the banks.
Josh Gottheimer's "questioning" before big bank CEOs in the House Financial Services Cmte was the most subservient display I've seen in quite a while. Here was the open: pic.twitter.com/yDrRQWwPlF
— David Dayen (@ddayen) April 10, 2019
Other Democrats signing Gottheimer’s letter include top recipients of campaign contributions from PACs and employees of commercial banks such as Representatives David Scott, Terri Sewell, and Gregory Meeks. In total, seven Financial Service Committee members signed the letter, including Gottheimer, Meeks, and Scott, along with Representatives Bill Foster, Michael San Nicolas, Ben McAdams, and Dean Phillips. Phillips, a freshman, owns up to $290,000 worth of stock in all eight of the banks comprising the Financial Services Forum, including up to $65,000 in both Bank of America and Citigroup.