Bank Deregulation 2.0 Is Here

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(AP Photo/Jacquelyn Martin)

Just a couple months after Congress weakened financial rules and chipped away at the Dodd-Frank Act, bank deregulation 2.0 is here. It's following the common script for financial system corruption, with a toxic mix of legislative hatchet jobs and official neglect that enables Wall Street players to recklessly pile on more risk. The bipartisan nature of the effort is also sadly par for the course, but that doesn't excuse Democrats from their historical amnesia about the last time the banks got their way.

Bank deregulation 1.0 was known as the Crapo bill, as much a commentary on its content as its main author, Senate Banking Committee Chair Mike Crapo. It significantly degraded Dodd-Frank, stripping enhanced regulations from banks with up to $250 billion in assets and reversing data disclosures that could have detected lending discrimination.

This spring, 17 Senate Democrats joined Republicans to pass the Crapo bill, but the House's lead on bank policy, Republican Jeb Hensarling, initially balked. He wanted more deregulation included, measures he had already bulldozed through the House. Eventually Hensarling relented for the vague promise of a second bill, and the Crapo bill got signed into law.

Most believed the second bill would never come to pass. But on Monday, Hensarling announced a deal with the ranking Democrat on the House Financial Services Committee, Maxine Waters, on a package of 32 previously passed bills, remade into the “JOBS and Investor Confidence Act,” an expansion of a 2012 bill intended to expand startup activity called the JOBS Act.

Putting the word “jobs” in a bill can be irresistible in Congress. Within a day, the House put the JOBS and Investor Confidence Act on the floor. Waters, who recently urged supporters to publicly shame Trump cabinet members, called it “an example of true bipartisanship.” Most rank-and-file members of Congress take their cues from committee leaders, so it was no surprise that the bill passed overwhelmingly, 406 to 4. The White House praised the bill—again, a Maxine Waters bill—and promised to help push it through the Senate, where Mitch McConnell promised a vote “in the coming months.”

Despite gauzy rhetoric about how the JOBS and Investor Confidence Act will “encourage capital formation” and “help small businesses grow,” it's yet another stealth deregulation framed as a jobs measure.

Of the 32 titles in the bill, 11 of them were opposed by Americans for Financial Reform, the most careful tracker of financial regulation in Washington, when they were introduced. The bill “meaningfully weakens some investor protections and changes the structure of securities markets in unjustified ways,” AFR wrote in its opposition letter.

This includes doubling the length of time that startups have before their auditors must attest to the accuracy of the company’s financial reporting, giving more leeway for deceptive accounting and shady practices that rip off investors. Another title exempts merger and acquisition brokers from oversight from the Securities and Exchange Commission if they assist companies with up to $250 million in annual revenues, barring the Securities and Exchange Commission from investigating healthy-sized deals and opening a potential loophole for private equity firms to scoop up companies without regulatory scrutiny.

The bill would codify the definition of “accredited investor” at a level that does not protect retirees from being bilked by shady companies seeking capital. It would effectively block the United States from entering into international insurance agreements, giving the industry more power to block reforms at the state level. It would force the narrowing of SEC rules over trading exchanges, including enabling the creation of entirely new “venture exchanges” for brand-new startups, which could become a breeding ground for exploiting investors.

Waters contends that nothing in the bill would degrade Dodd-Frank. That's not actually true: It would weaken the “living will” process, whereby banks must describe how to unwind themselves in the event of trouble, and exempt non-banks from annual stress tests. But even if it were accurate, there are plenty of ways to harm oversight without touching that particular law. Waters also highlighted consumer and investor benefits in the bill, including the use of on-time rent and utility payments in credit reports, protections for seniors who invest, and crackdowns on corporate insider trading. But those benefits mostly come in the form of studies and task forces; the deregulation actively weakens securities laws.

It's not that the JOBS and Investor Confidence Act will usher in a crisis tomorrow. It's just part of a spate of deregulatory actions that, combined with a more laissez-faire attitude on the part of the regulators, gives Wall Street room to run in dangerous directions. And that's how crises historically have started, not with one bill but a pendulum swing.

For example, repealing Glass-Steagall alone didn't cause a crisis; it was part of a bank-friendly trend, from Riegle-Neal (which allowed banks to expand across state lines) to the Commodity Futures Modernization Act (which deregulated derivatives) to the Secondary Mortgage Market Enhancement Act (which along with a half-dozen other bills, brought mortgage-backed securities into existence). You can't point to one legislative effort that triggered the Depression, just dozens of smaller moves that encouraged speculators and ran up stock prices unsustainably.

It's a death by a thousand cuts, and the JOBS and Investor Confidence Act adds another ten or so.

And more are on the way. A bipartisan retirement bill with support from the financial-services industry has some interesting features, like allowing small businesses to band together to offer a multi-employer 401(k)-style plan. But it also includes a wet kiss to the annuity industry, by encouraging rollovers from 401(k)s to lifetime income streams which typically come with high fees. The bill would even give legal immunity to employers who choose an annuity provider. Other than handing over management fees to Wall Street, it’s unclear why the government should get into encouraging one type of financial product over another.

Because these minor deregulations are seen as relatively benign, they serve Democrats, as a cheap payback to financial lobbyists, with a way to grab a couple of campaign donations without being seen as total sellouts. But that needs to stop. Democrats are feeding into weakening the architecture of the financial regulatory state, going along with unnecessary benefits to a powerful industry. Just because it’s bipartisan doesn’t make it harmless.

Ten years ago, Americans watched helplessly as they lost jobs, savings, and homes owing to financial industry greed. The seeds of that destruction came in the form of small-ball, bipartisan regulatory rollbacks and public officials taking their eyes off the ball. We're re-running the same sad movie today. Why are Democrats participating in it?