Can Democrats Win by Losing Wall Street?
Wall Street is once again on the rise in Washington. At least that's what congressional Democrats, in broadsides levied at Republicans and the Obama administration alike, are yelling in increasing numbers. The party's seizing of the anti-Wall Street narrative is instructive as Democrats face the new reality of operating in the minority in both chambers of Congress.
Through two proxy battles playing out right now, Washington and Wall Street are getting a preview of the strategy, tactics, and strength of an increasingly frustrated and vocal left wing that is eager to employ the kind of clout it hopes will be a factor in the 2016 presidential campaign.
Led by Massachusetts Senator Elizabeth Warren, Democrats have come out in increasing numbers against President Barack Obama's nominee for undersecretary of domestic finance, Antonio Weiss, because of his ties to Wall Street. Warren has also been the leading voice urging Democrats to reject the compromise in the $1.1 trillion government spending bill because it includes language that would cut down a narrow rule guiding how banks can hold derivatives imposed by the 2010 Dodd-Frank financial reform law. Democratic opposition to that provision nearly killed the spending bill in the House, where lawmakers narrowly eked out passage 219-206.
"Certainly the Weiss fight is a proxy fight over Wall Street regulation and probably one over the direction of the Democratic Party," said Brian Gardner, director of Washington research for the investment banking firm Keefe Bruyette & Woods Inc. The fight over the derivatives provision probably has to be viewed "as a proxy fight as well, since it’s mostly symbolic" given the small sliver of derivatives held by the world's largest banks the provision actually affects, he said.
In other words, according to Gardner, the fights are less about the actual issues than what those issues represent. As Democrats strain to find their voice in the wake of a sweeping defeat in the midterm elections, these fights provide a test of how much leverage the party really has to force changes, and, perhaps more importantly, how much patience the White House will have when those changes fly in the face of the president's preferred path forward.
Warren's argument is that Weiss, the global head of investment banking at Lazard Ltd., doesn't have the requisite experience to take the position that sets policy for U.S. financial and debt management. “Not every person who swoops in through the revolving door should be offered a top job without some serious cross-examination,” Warren said Tuesday. “Qualifications matter, and Weiss doesn’t have them.”
Weiss's firm's work on corporate inversions (Lazard has advised on three of the four most recent deals in which a U.S. firm moved its legal headquarters to another country for tax purposes) has drawn its share of criticism. Several Democrats who have joined Warren in publicly opposing Weiss have specifically mentioned inversions as a reason, or the reason, to oppose him. The irony is that Obama, the man who picked Weiss, helped make inversions a national issue by attacking the practice in the lead-up to the 2014 midterm elections.
Still, Weiss is in many ways an odd symbol for Democrats choose as the embodiment of what they oppose about Wall Street. His time at Lazard has been spent advising companies on their operations, from negotiating and financing deals to the broad navigation of capital markets and regulation. Lazard isn't a commercial bank (i.e., it received no money from the 2008 bailout) and during the financial crisis it often helped structure deals to aid firms and governments on the brink. The high-flying trading operations that helped fuel the crisis? You won't find them in the Lazard portfolio.
Weiss is as reliably Democratic as it gets on Wall Street, with a donation history that, according to Federal Election Commission filings, is dedicated exclusively to the party's candidates. He's listed as a co-author on a 2012 paper on reforming the U.S. tax code put out by the Center for American Progress, one of the left's top policy and advocacy organizations.
“There is a need for us to have someone who has experience in the markets, in the financial world, and I think Antonio is extraordinarily well qualified, comes with a background that is, I think, as strong as one could ask, and with a kind of integrity and belief in policy principles that are consistent with the administration,” Treasury Secretary Jack Lew said this week at the New York Times DealBook conference.
The seeds of this dispute were sown in 2013, when Obama was considering candidates to lead the Fed. Warren and Senators Jeff Merkley and Sherrod Brown were instrumental in ensuring that former top economic adviser Larry Summers was not picked for the job. Their success caught the administration off guard, according to officials involved in that process.
This time around, the administration's defense of Weiss has been robust, with surrogates penning opinion pieces and providing supportive quotes to reporters. Besides his public work to boost the nomination, Lew is actively working behind the scenes for Weiss, and the White House has no intention of pulling the nomination.
The playing field will soon shift to the next Congress, where Republicans will control the nominations process. Senator Orrin Hatch, the Utah Republican in line to chair the Senate Finance Committee, has already said he supports Weiss. In other words, Democrats may be putting their own nominee through a bruising confirmation battle that, if Republicans fall in line behind Hatch, could go through anyway.
So what's the worry? According to many former administration officials, it's this: Why on earth would qualified candidates ever want to go through the nominations process if they are treated this way by their own party?
Warren has helped lead another insurgency that flared over the must-pass spending bill, where bipartisan negotiations led to rolling back part of the Dodd-Frank financial reform law. The bill would ease one specific rule on how, and where, banks hold derivatives, the financial instruments that helped fuel the 2008 financial crisis.
It's a provision that has a long and tortured history, starting from its initial inclusion into the drafts of what would become the financial reform law (where it was opposed by then-Fed Chairman Ben Bernanke, then-FDIC Chairman Sheila Bair, the Obama administration's Treasury Department, then-Senate Banking Committee Chairman Chris Dodd and then-House Financial Services Committee Chairman Barney Frank, both Democrats).
Banks including Citigroup and JPMorgan Chase & Co. hate the provision, which they deem equally onerous and unnecessary, and have made no secret of their lobbying push to get rid of it over the last four years. The spending bill, it turns out, has finally given them an opening. Jamie Dimon, JPMorgan's CEO, made calls to lawmakers in support of the bill, according to people familiar with the lobbying. But it's not as if Wall Street lobbyists are operating on their own. Republicans and Democrats have supported previous bills to strip the provision. A version went to the House floor in 2013 and 70 Democrats joined 222 Republicans to support its passage. Senate Democratic leadership, wary of re-opening the financial reform law, never took the measure up even as many of their own members likely would have supported its passage.
Yet removing it from the spending bill has now become a rallying cry for the party. Warren took to the Senate floor to rip the compromise on Wednesday and returned on Thursday to call on Republicans to join her in opposition. House Minority Leader Nancy Pelosi called Frank, now retired, and asked him to raise objections, which he did forcefully. Outside progressive groups and even the party campaign committee have used the issue to rile up grassroots supporters. Representative Maxine Waters, the top Democrat on the financial services committee, publicly and privately urged the members of her caucus to oppose the spending bill because of the inclusion of the derivatives provision.
Democrats were central players in the spending bill negotiations and signed off on the inclusion of the derivatives language. In exchange, the Securities and Exchange Commission and Commodity Futures Trading Commission, the two derivatives regulators, were given modest funding increases. People involved in the process said other Republican-backed policy changes to the law were blocked. The White House was aware of the trade off and while Obama opposes the Dodd-Frank changes, he supports the bill's passage, according to White House Press Secretary Josh Earnest.
As the spending bill works its way through Congress, one thing is clear: the past few weeks have given Democrats the opportunity to make Wall Street their issue and they have increasingly grabbed onto it with both hands.
In a letter to her colleagues sent out after it first became clear Republicans were having trouble pulling together the support for final passage of the bill, Pelosi noted that even in the minority, the Democratic stance has been an example of the caucus using its leverage. She concluded the letter with a message that might as well apply to everyone watching this new dynamic play out: "Stay tuned."