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See How Citigroup Wrote a Bill So It Could Get a Bailout

Erika Eichelberger — Fri, 24 May 2013 17:19:22 +0000

On Friday, the New York Times reported on the front page that Citigroup drafted most of a House bill that would allow banks to engage in risky trades backed by a potential taxpayer-funded bailout. The Times notes that "Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill." Special-interest lobbyists often play a role in writing legislation on the Hill, but such sausage-making is rarely revealed to the public. In this instance, members of Congress and a band of lobbyists have been caught red-handed, and Mother Jones has obtained the Citigroup draft that is practically identical to the House bill. As you can see in the side-by-side comparison below, the lobbyists for Citigroup really earned their pay on this job.

The bill, called the Swaps Regulatory Improvement Act, was approved by the House financial services committee in May and is headed for a vote on the House floor soon. It would gut a section of the 2010 Dodd-Frank financial reform act called the "push-out rule." Banks hate the push-out rule, which is scheduled to go into effect on July 13, because this provision will forbid them from trading certain derivatives (which are complicated financial instruments with values derived from underlying variables, such as crop prices or interest rates). Under this rule, banks will have to move these risky trades into separate non-bank affiliates that aren't insured by the Federal Deposit Insurance Corporation (FDIC) and are less likely to receive government bailouts. The bill would smother the push-out rule in its crib by permitting banks to use government-insured deposits to bet on a wider range of these risky derivatives.

Here is the key section of the legislation that Citigroup cooked up compared to the same section of the final bill:

The bill is sponsored by Republican and Democratic members—Randy Hultgren (R-Ill.), Jim Himes (D-Conn.), Richard Hudson (R-NC), and Sean Patrick Mahoney (D-NY)—and its passage would be great news for Citi and other financial titans. Five banks—Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America, and Wells Fargo—control more than 90 percent of the $700 trillion derivatives market. "The big banks support [the bill] because it means that they'll get to keep the public subsidy"—FDIC insurance and the implicit promise of a taxpayer bailout—"to their derivatives-dealing business," explains Marcus Stanley, the policy director at Americans for Financial Reform.

The origins of the Citigroup proposal date back to 2011, when several large banks fought to repeal the push-out rule entirely. When it became clear that full repeal couldn't pass, Citigroup pitched an alternative: allow banks to use FDIC-insured money to bet on almost anything they wanted. It proposed letting banks keep most types of derivatives trading in-house, requiring only that derivatives based on certain pools of assets, such as mortgages, be moved into separate entities. Citigroup was not able to get the measure passed before the end of the last Congress, but its allies on Capitol Hill reintroduced it this year.

Citi's move to expand the types of derivatives it can trade comes as banks have increasingly been shifting derivatives out of their investment banking divisions (which aren't backed by FDIC insurance) and into taxpayer-backed entities. "The rule is needed more than ever," says Mike Konczal, an expert on financial reform at the Roosevelt Institute. The financial services committee passed the Citi-written bill on a 53-to-6 vote; all the no votes came from Democrats.

This is certainly not the first time that the financial industry has shaped financial reform laws for Congress. Citigroup was a central player in the 1999 repeal of the Depression-era law called the Glass-Steagall Act that forced banks not to engage in investment activities. Its lobbyists flooded Capitol Hill for that fight. "Citigroup was of course the bank that administered the coup de grace to Glass-Steagall," says Stanley.

Citigroup's drafting of the anti-push-out measure fits into "a long history of things being written by industry—and that generally has not worked out very well," says Konczal. "This is very bad news."

See how the Citigroup proposal allows more risky dealings by taxpayer-backed banks:

Expert: Congress Shouldn't Listen to Apple's Tax Plan

Erika Eichelberger — Fri, 24 May 2013 14:54:02 +0000

The revelation that Apple used a web of baroque tax strategies to legally pay little to no taxes on tens of billions of dollars it earned overseas has re-ignited the debate over reforming the US tax code. But the non-partisan Center on Budget and Policy Priorities (CBPP) warned this week against proposals pushed by Apple and other large multinational corporations that would reduce taxes on offshore profits in order to encourage companies to bring that money back home.

Offshore profits are currently taxed at the same rate as onshore profits: 35 percent. Big US corporations have lobbied aggressively for the United States to shift to what is called a territorial tax system, in which foreign profits would be subject to low or no US taxes. The idea was a cornerstone of former Republican presidential candidate Mitt Romney’s economic platform last year. Now, Apple CEO Tim Cook is calling for a single-digit tax rate on overseas profits, as well as a reduction of the overall US corporate tax rate to the mid-20s.

Chuck Marr, the director of federal tax policy at the CBPP, explains that such a system would only make overseas profit-making more attractive—and that would weaken the US economy:

Multinational companies like Apple currently have a strong incentive to defer US corporate taxes by shifting and keeping profits overseas… [A] territorial system would create greater incentives for those companies to invest and book profits overseas rather than at home—and that, in turn, risks reducing wages at home by encouraging investment to flow overseas, increasing budget deficits by draining revenues from the corporate income tax, or raising taxes on smaller companies and domestic businesses to offset the revenue loss.

Democrats and trade unions agree, arguing that the United States should move in the other direction and tax foreign profits in the years they are made. They contend this would stem the corporate practice of deferring tax payments until the cash is brought back to the United States.

"We are dismantling vital government services because we don’t have revenue to support them," Damon Silvers, the policy director of the AFL-CIO told the Financial Times earlier this week. "And we have one of the most profitable corporations in the world [Apple] stashing $100 billion in [low-tax] jurisdictions."

Other high-tech companies are increasingly shifting profit-making overseas. The revelations about Apple's shenanigans—which apparently are legal—have drawn attention to similar behavior by many high-tech firms, including Google, HP, and Microsoft. "These [tax] incentives are creating unfair advantages for multinationals and draining much-needed tax revenue," says Marr. "The president and Congress should resist the lobbying campaign and instead focus on reducing the incentive to shift profits and operations overseas."

Elizabeth Warren Attacks House GOP on Student Loan Bill

Erika Eichelberger — Fri, 24 May 2013 14:52:34 +0000

On Thursday, Sen. Elizabeth Warren (D-Mass.) slammed a Republican student loan bill the House just approved that would allow interest rates on student debt to skyrocket.

"The student loan bill passed by House Republicans takes a bad situation and makes it worse," she said in a statement.

On July 1, rates for federal student loans called Stafford loans are set to double from the current rate of 3.4 percent to 6.8 percent. The GOP bill, which passed the House on a mostly party-line vote of 221 to 198, would allow interest rates on those loans to rise or fall from year to year with the government's cost of borrowing, ending the system in which rates are fixed by law. Because market rates are low right now, the initial rate for those loans would be about 4.4 percent, but in coming years it could increase up to a cap of 8.5 percent.

Warren, who has proposed her own student loan plan which would cut student loan rates to near zero, accused Republican lawmakers of making students into cash cows:

Our students should not be a profit center for the government, and the July 1 deadline should not be turned into an opportunity to make more money at the expense of young Americans who are working hard to get an education. This is about our values. We should be investing in higher education to strengthen our economy and grow the middle class.

The student loan bill proposed by Warren, a version of which was introduced in the House by Rep. John Tierney (D-Mass.), is called the Bank on Students Loan Fairness Act. Under Warren and Tierney's plan, student loan interest would be cut to the low .75 percent interest rate that banks pay to the Federal Reserve for short-term loans. After a year, a longer-term student loan solution would be drawn up.

"If we can invest in big banks by giving them low interest rates on government loans," Warren said in the statement, "we certainly can do the same to help students get an education."

The Republican bill faces opposition in the Democratic-controlled Senate, and President Obama has threatened to veto it.

GOP Food Stamps Proposal Would Discriminate Against African-Americans

Erika Eichelberger — Thu, 23 May 2013 14:15:44 +0000

On Wednesday the Senate agriculture committee approved a GOP proposal that would amend the farm bill the Senate is considering to ban "convicted murderers, rapists, and pedophiles" from getting food stamps. On its surface, the idea sounds unobjectionable, but the measure would have "strongly racially discriminatory effects," according to the non-partisan Center on Budget and Policy Priorities (CBPP).

The amendment, introduced by Sen. David Vitter (R-La.), and agreed to by unanimous consent in the committee, would bar anyone who has ever been convicted of certain violent crimes—even if they committed the crimes in their youth and have served their sentence—from ever getting food stamps (called SNAP benefits) ever again. CBPP president Robert Greenstein slammed the amendment in a statement Tuesday, calling it "stunning." Because African Americans are incarcerated at a higher rate than other races, he says, "the amendment would have a skewed racial impact. Poor elderly African Americans convicted of a single crime decades ago by segregated Southern juries would be among those hit." Under current law, there is only a lifetime ban on food stamps for convicted drug felons, and many states have opted out of that ban.

The measure wouldn't just hurt ex-cons. Greenstein points out that "the amendment would mean lower SNAP benefits for their children and other family members."

Plus the amendment could cause higher rates of recidivism. "Ex-offenders often have difficulty finding jobs that pay decent wages," Greenstein says. "The amendment could pose dilemmas for ex-offenders who are trying to go straight but can neither find jobs nor, as a result of the amendment, obtain enough food to feed their children and families."

The House of Representatives has also voted to cut food stamp funding from the farm bill; their plan would throw some 2 million people off the program.

There's still time to rethink the senators' ill-conceived plan, though, Greenstein says. "The farm bill is still on the floor, and the amendment can still be modified," he says. "Senators should gather the courage to step up to the plate and address this matter."

VIDEO: Elizabeth Warren Grills Treasury Secretary on Too Big to Fail

Erika Eichelberger — Wed, 22 May 2013 00:03:11 +0000

At a Senate banking committee hearing Tuesday, Sen. Elizabeth Warren (D-Mass.) grilled Treasury Secretary Jack Lew on too-big-to-fail banks—financial institutions that are so large that their failure would endanger the entire financial system.

"How big do the biggest banks have to get before we consider breaking them up?” she asked.

Too big to fail is far from over. The largest financial institutions are still ballooning in size. In the past few years, banks have been beset by one scandal after another—from money laundering, to rate-fixing, to foreclosure fraud, and have mostly received wrist-slaps as punishment—probably because, as Attorney General Eric Holder recently warned, prosecuting too-big-to-fail banks for bad behavior might spook the entire financial system.

Too big to fail almost died three years ago. Warren noted that as the 2010 Dodd-Frank financial reform law was being crafted, an amendment was proposed that would have broken up the banks, but it didn't pass—in large part, she reminded Lew, because the Treasury Department (then under Treasury Secretary Timothy Geithner) was against it.

"Have you changed your position," Warren demanded, referring to the Treasury department. "Or are you still opposed to capping the size of banks?"

Lew responded that "ending too big to fail is our policy and we're aiming to do it." But Warren wouldn't let him weasel out of the question with generalities. "I want to focus you in here," she pushed. "My question is about capping the size of largest financial institutions."

Lew refused to commit. "Our job right now is to implement…Dodd-Frank," he said. "I think this is not the time to be enacting big changes."

"Let me try the question a different way," Warren persisted. "How big do the biggest banks have to get before we consider breaking them up?" she asked, adding that the largest American banks are 30 percent larger than they were five years ago. "Do they have to double in size? Triple in size? Quadruple in size? Before we talk about breaking up the biggest financial institutions?"

Lew said that too big to fail "is an unacceptable policy", but urged Warren to have some patience.

She'd have none of Lew's excuses: "What we've seen…is one scandal after another in these largest financial institutions," she said. "It's clear they have not changed their risk bearing practices nor have they decided that they're suddenly going to start following the law."

Obamacare Doesn't Make Employers Cover Spouses. Does That Matter?

Erika Eichelberger — Mon, 20 May 2013 10:00:07 +0000

Despite the 37 bills to repeal it and the scores of lawsuits filed against it, Obamacare, a.k.a. the Affordable Care Act, is going to be in full swing soon. But the historic health insurance reform law is going to face many more bumps in the road as it is rolled out. One corner of Obamacare that hasn't gotten much attention is the fact that it will not require employers to cover spouses, which experts say could lead some employers to drop coverage for Americans' significant others.

The Affordable Care Act mandates that employers offer health insurance to workers and their dependents. But the law defines dependents as children, not spouses. And although some health care law experts say this is not going to result in any big changes in the way that employers provide insurance for husbands and wives, others contend that implementation of the law could end up leaving some spouses out of family plans, forcing them to buy insurance elsewhere.

"Right now there are virtually no employers that just offer coverage for the employee and their children," says Tim Jost, a health care law scholar at the Washington and Lee University School of Law who regularly consults with Obama administration officials on implementation of the Affordable Care Act. "Whether that will change or not, who knows. We will probably see at least some employers who will offer individual and child coverage, but not coverage for spouses."

If you live in a household that is in the upper-income range—one that takes in more than $94,000 a year (above 78 percent of households)—and you get dropped from your spouse's coverage, you won't be able to get a government subsidy to purchase insurance on the government-run insurance exchanges being set up by the health law. So, say there's a family in which each parent makes $47,000 a year, but only one has coverage. The spouse that is not covered would have to buy private insurance, which costs hundreds of dollars a month.

If you're middle income or poor, and your spouse's employer drops you from her health coverage, you'll be able to shop on the exchange with a subsidy. Even though your coverage would not be free, the idea is that at least it would be kind of affordable. Unless it's not. When people buy coverage on the exchange, their subsidy will be based on household income. As Jost points out, the problem is that household income for people using the exchanges will be measured before the household pays for the employer-provided health insurance. So the employee could be paying up to 9.5 percent of her income on health insurance for herself (the most that Obamacare will allow insurers to charge for employer-sponsored plans), or an even greater share of her income for individual and child coverage, and still her spouse's subsidy on the exchange would be based on that much higher pre-health-care-costs income level.

"It's a potential problem," says Ethan Rome, executive director of Health Care for America Now, a group that backs Obamacare. "There could be some folks that get lost in the shuffle. And that is not insignificant…If you're one of few people adversely affected by something, it doesn't matter that everyone else on the planet is getting the benefit." (The Department of Health and Human Services declined to comment for the story.)

But Rome adds that the situation "has to be put in context." He points out that this potential glitch doesn't change the fact that some 30 million people currently without insurance will get coverage under Obamacare. And Jonathan Gruber, an MIT economist who helped craft Obama's health care law, notes that "we're still a hell of a lot better off than we are today."

Judy Solomon, vice president for health policy at the nonpartisan Center on Budget and Policy Priorities, adds that it's unlikely that too many employers will drop spouses anyway. "Family coverage is valued employee benefit," she says. "I don't see that this provision is going to change what employers do." Rome agrees: "If you are an employer and you provide good quality health care for your employees, including dependent coverage, it's because you understand that a good benefits package is the best way to recruit and retain top-notch employees."

Still, Rome says that Obamacare advocates would like to be able to address technical issues in the law, such as this potential spousal coverage problem, but that the Republican-controlled House makes that impossible. "It is an imperfection in the law and there are some things many of us want to fix," Rome says. "And we could if we did not have a GOP House of Representatives obsessed with repealing the law."

Elizabeth Warren Slams Wall Street Again

Erika Eichelberger — Fri, 17 May 2013 21:29:03 +0000

On Thursday, bank-basher Sen. Elizabeth Warren (D-Mass.) slammed several bills headed for the House floor that would severely weaken Wall Street reform.

The Dodd-Frank Act, the 2010 law aimed at preventing another financial crisis, "put in place a variety of measures that work together as a system to protect consumers, hold big banks accountable, and reduce the risk of future crises," Warren said in a statement. "It is dangerous for Congress to amend the derivatives provisions of the Dodd-Frank Act." (Derivatives are financial products that have values based on underlying numbers, like crop prices or interest rates; some economists believe these products helped cause the 2007 financial collapse.)

Warren's condemnation of the bills, which just passed out of the House Financial Services Committee (HFSC), echoes a May 6th letter from Treasury secretary Jack Lew to House Financial Services Chair Jeb Hensarling attacking the bills. "The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put into place to strengthen our financial system by improving transparency and reducing risk for market participants," Lew wrote in the letter. "These reforms should not be weakened or repealed." Last year, former Treasury Secretary Tim Geithner denounced a series of nearly identical bills.

One of the bills now headed to the House floor would expand the types of trading risks that banks can take on. Another would allow certain derivatives that are traded within a corporation to be exempt from almost all new Dodd-Frank regulations. Financial reform advocates say these kinds of trades can still pose a risk to the wider financial system. A third bill would allow big, multinational US-based banks to escape US regulations by operating through international arms.

"Wall Street's aggressive determination paid off last week" when the bills passed out of committee, Warren said. The bills also have bipartisan support, and have a good chance of being taken up in the Senate. If they do, Warren says she'll go to battle: "Now is no time to go backwards," she said. "I will do what I can in the United States Senate to stand up to those who would chip away at reform."

GOP Bill To Hogtie Wall Street Watchdog Heads for Vote

Erika Eichelberger — Thu, 16 May 2013 14:20:52 +0000

A bill designed to tie the hands of a key Wall Street regulator is headed for a vote in the House this week.

The SEC Regulatory Accountability Act, introduced by Rep. Scott Garrett (R-N.J.) and co-sponsored by 23 other Republicans, sounds innocuously administrative. The bill would direct the Securities and Exchange Commission (SEC) "to conduct cost-benefit analyses to ensure that the benefits of any rulemaking outweigh the costs," according to a statement by the House Financial Services Committee. Plus, says Garrett, the bill is good for jobs, job-creators, and people who want jobs. "The American people are hungry for common sense reform that will help unleash the economy," he said in a statement. "I regularly hear from constituents, especially job creators, about how Washington red tape needs to be cut."

But financial reform advocates say the bill could kill tons of new regulations designed to rein in the industry that crashed the economy a few years ago. "Cost-benefit has become a favorite club used by industry to try and kill legislation," Dennis Kelleher of the financial reform group Better Markets told me earlier this year. The SEC is in the process of finalizing scores of new rules required by the 2010 Dodd-Frank financial reform law, and reformers say Garrett's bill would force the agency to study the impacts of regulations before they are known, and require analysis that would delay final rules. Not only that, says Kelleher, but the cost-benefit analysis the bill calls for includes only "industry costs," not potential longer term costs to the broader economy that could result from killing these rules. For example, the SEC would have to consider the cost of to industry of making foreign banks adhere to US regulations, but not the cost to the global economy of allowing those banks to be regulated by potentially weaker foreign rules. (Many federal agencies are required to consider cost-benefit analyses when developing major rules, but the SEC and other independent agencies—those outside federal executive departments that are headed by a Cabinet secretary—are exempt.)

The White House slammed Garrett's bill when it was approved by the House rules committee Wednesday, arguing that it would keep the SEC from doing its job. "The Administration believes in the value of cost-benefit analysis," the White House Office of Management and Budget said in a statement. "However, [the bill] would add onerous procedures that would threaten the implementation of key reforms related to financial stability and investor protection." Still, the president stopped short of saying he'd veto the bill.

As my colleague Tim Murphy reported Wednesday, Rep. Louise Slaughter (D-N.Y.), the top Democrat on the House rules committee, attempted to stymie the deregulatory bill by attaching an amendment that would have required political intelligence operatives to register under the Lobbying Disclosure Act and disclose their clients. It was voted down.

Now the GOP bill is headed to the House floor for a vote by Friday. Kelleher has his fingers crossed that the bill doesn't make it into law. "Financial reform does not exist to minimize cost on the industry that almost caused a second great depression," he says.

Why Won't the Feds Rein In the Firms That Tanked America's Economy?

Erika Eichelberger — Thu, 16 May 2013 02:36:31 +0000

It looks like one of the primary causes of the 2007 financial crash may be here to stay.

Before the crisis, the credit-rating agencies (such as Fitch, Moody's, and Standard & Poor's) that evaluate the relative risk of investment products offered by Wall Street banks, routinely assigned their highest ratings to bonds built out of junky, high-risk mortgages. Because of those ratings, the bad bonds sold like hotcakes, which in turn encouraged lenders to make more high-risk loans to sell to the banks to package into more risky bonds—and so on until the house of cards came down. (For a great read on all of this, see Michael Lewis' "The Big Short.")

Part of the reason the ratings agencies behaved so recklessly is that they were (and still are) paid by the banks whose products they rate. Yet even now, years after the financial crisis, the Securities and Exchange Commission isn't sure what it wants to do, if anything, about this loaded situation. So it held a roundtable discussion on Tuesday to think about it some more.

Credit-rating agencies "effectively took huge bribes from banks to misinform people about risk," says Marcus Stanley, policy director of Americans for Financial Reform. "This is a critical issue and [the SEC] has taken a complete pass on it" so far.

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Elizabeth Warren to Obama Administration: Take the Banks to Court, Already!

Erika Eichelberger — Tue, 14 May 2013 23:34:46 +0000

On Tuesday, fierce consumer advocate and needler of banks Sen. Elizabeth Warren (D-Mass.) called out Wall Street regulators for their habit of giving tepid punishments to misbehaving banks, and asked the agencies to justify their policy of settling with the wrongdoers out of court.

Warren sent a letter to the Justice Department, as well as to the Securities and Exchange Commission and the Federal Reserve, asking them for evidence on how a settlement that doesn't require a bank to admit guilt would be better policy than taking the bad apple to trial. If regulators at least show that they are willing to play tough, she argued, it will help deter bad behavior and allow regulators to negotiate bigger fines in the event of a later settlement.

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