Wall Street and Obama Gird for Game of Chicken on Dodd-Frank

  • Warren vows to fight reform changes included in budget deal
  • Industry looking to repeat last year's success on swaps easing

President Barack Obama may have to decide whether it’s worth shutting down the government to protect tough rules for Wall Street.

Lobbyists for the biggest banks are trying to force the Obama administration into a game of chicken to see how far it’s willing to go to maintain industry reforms and some of the sweeping changes enacted in the Dodd-Frank Act of 2010. Despite Obama’s veto threats, they’re pushing lawmakers to include provisions that would roll back some of those changes in the end of year spending bill that has to be passed next month.

After failing to get enough congressional support for revisions such as a delay of strict rules known as a fiduciary standard for brokers who give retirement advice, the banking industry sees the appropriations bill as its last chance to win concessions this year. Lobbyists are following last year’s playbook, when they persuaded lawmakers to slip a provision that watered down rules for the $700 trillion derivatives market into a bill that funded the government.

“Issuing a veto threat of a standalone bill is a very different thing from having a large appropriations bill on your desk,” said Terry Haines, head of policy analysis for Evercore ISI.

Democratic lawmakers, led by Wall Street critic Senator Elizabeth Warren, along with key Obama administration officials, are going on the offensive early to rally support and prevent a repeat of what happened with derivatives. Some Democratic backing will be necessary for any changes to financial rules that are included in the appropriations bill since Republicans control only 54 seats in the Senate and at least 60 votes are needed.

‘Never Again’

Banks’ 2014 victory on the swaps rule sparked a populist uprising, with Warren and other Democrats using a series of press conferences and television interviews to criticize the financial industry. Following the controversy, Obama pledged in his January State of the Union address to block any legislation that weakens Dodd-Frank.

“Never again. No one is going to be surprised this time,” Warren, a Massachusetts Democrat, said in an interview. “Republicans made their move. They got an industry-written bill attached to a must pass budget bill last year.”

Congressional appropriators are negotiating this week the details of a $1.1 trillion spending package that would keep the government open after Dec 11. The banks are hoping Republican control of both congressional chambers will aid them once again so the bill includes changes to Wall Street reforms. The legislation is supposed to adhere to levels set forth in the bipartisan budget deal signed by Obama earlier this week that suspends the debt limit into March 2017.

“My hope is now that they build on this agreement with spending bills that also invest in America’s priorities without getting sidetracked by a whole bunch of ideological issues that have nothing to do with our budget,” Obama said at the bill signing, referring to Democratic and Republican leaders.

A spokeswoman for Obama declined to comment further.

Fiduciary Standard

One of the most contentious issues is the fiduciary standard put forth by the Labor Department that large banks such as Morgan Stanley, Citigroup Inc. and Wells Fargo & Co., as well as mutual fund companies, independent brokers and insurers, have spent five years trying to kill. It would require brokers who handle retirement accounts to put their clients’ best interests first. Obama along with Labor Secretary Thomas Perez have pushed for the rule, saying it will protect investors from high fees and greedy brokers.

The Labor Department is expected to enact the rule in the first quarter of 2016, leaving the industry with little time to win a delay. The House and Senate spending bills include measures preventing the Labor Department from finalizing its fiduciary rule by withholding funding.

Jill Hoffman, vice president of government affairs for the Financial Services Roundtable, said it’s important to make sure that the rule doesn’t prevent consumers from getting meaningful advice about their retirement accounts.

“We will keep all options on the table to make sure we preserve that access,” Hoffman said.

The fiduciary standard has been the source of some internal Democratic party strife, which could pave the way for its inclusion in the appropriations bill. Last week, House Democrats led by Representative Jared Polis of Colorado circulated a letter asking the department to extend the comment period for the proposal. Separately, 96 House Democrats sent a letter to Perez expressing concern the rule could cause market disruptions. And six Senate Democrats sent a letter in August saying the rule could “stifle access to meaningful investment advice.”

SunTrust, PNC

Senate Banking Committee Richard Shelby is trying to use the appropriations bill to rein in the Consumer Financial Protection Bureau, a regulator hated by the financial industry. The Alabama Republican inserted into the appropriations bill earlier this year language that requires the CFPB to be led by a five-member commission instead of a sole director.

Shelby also introduced a bill that ended up being included in the current Senate version of the spending legislation that would make it easier for regional banks to escape being labeled systemically important. The designation imposes tough capital requirements on firms such as SunTrust Banks Inc., U.S. Bancorp and PNC Financial Services Group Inc. and subjects them to stiff oversight.

The Alabama lawmaker, who has also put language increasing oversight of the Federal Reserve in the appropriations bill, said during remarks Tuesday night that more scrutiny is necessary given the Fed’s expansion of regulatory powers following Dodd-Frank.

Senator Sherrod Brown, the top Democrat on the Banking Committee, and Representative Maxine Waters, the top Democrat on the House Financial Services panel, sent a letter last month to congressional leaders and appropriators urging them to not use the budget process to roll back rules for Wall Street.

“If Republicans get their way with these riders it could put the financial system back where it was 10 years ago,” Brown said in an interview. “That’s so irresponsible.”

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