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How did swaps regulation get into the CRomnibus? Ask this army of lobbyists

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Washington is abuzz right now in outrage over the partial Dodd-Frank repeal that made its way into the "cromnibus."

How could such a thing happen?

The short answer is banks worked really hard to make it happen. First, they wrote the darn bill. After all, who in Congress has time to write their own legislation? It's so much easier if you can get somebody else to do it - especially when it's on such a complicated subject.

Then, the banks and their allies just lobbied the hell out of it, making the case over and over and over again. And the other side just didn't have the resources to argue back at anything close to the same scale.

Below is a simple count of which organizations filed the most lobbying reports that mentioned H.R. 992, the "Swaps Regulatory Improvement Act." That's the Section 716 repeal bill that passed the House by an overwhelming 292-122 margin last year, with sizeable Democratic support. (The data, which come from the Center for Responsive Politics, go through the second quarter of 2014.)

Not surprisingly, Citigroup, which was responsible for writing the bill, led the way with 30 lobbying reports mentioning H.R. 992, followed by the American Bankers Association at 17 reports, Principal Financial Group at 13, the U.S. Chamber of Commerce and the Securities Industry and Financial Markets Association (SIFMA) at 12, and JP Morgan and Bank of America at nine.

Unions and diffuse interest groups like Public Citizen and Demos and the Leadership Conference on Civil Rights show up a few times. But they are simply dwarfed by the corporate lobbyists. By my count, the corporate lobbyists filed a total of 196 reports. The diffuse interests and unions combined filed only 13. That's a ratio of 15 to 1.

To be sure, it's generally impossible to tell form the lobbying disclosure reports what positions the organizations took (they list bills, but rarely positions). But it's generally a safe bet that the banks and business associations were for the repeal, and the diffuse interests and unions were against it.

Of course, lobbying reports are only a rough proxy for lobbying activity. Table 1 looks at a few other metrics. Consider the number of different lobbyists who appear on the reports - a rough measure of manpower devoted to the issue. Here corporate interests have a 371 to 45 advantage over the diffuse interests and unions (about 9 to 1).

But not all lobbyists are the same. Having Congressional staff and even former members on your side is a big help -- It's one of the rare consistent predictors of policy success in Frank Baumgartner and colleagues' landmark book on lobbying.

Here, corporate interests are at a special advantage. Based on information disclosed on lobbying reports (an admittedly incomplete source, but still a good proxy), corporate interests lobbying on H.R. 992 had a 45 to 0 manpower advantage on revolving door lobbyists. The finance industry also had four former members of Congress lobbying on their behalf - the only four former members who weighed in on H.R. 992.

What this means is simple: the banks and their allies devoted significantly more resources to making the case for the repeal than their opponents devoted to arguing against it.

But it's not as if the banks pushing for the repeal of Section 716 just said, "hey, how about you do us a solid and get rid of this provision that we hate."  They had an argument to make. And they made it over and over again.

Their case, as I understand it, went something like this: the provision was ill-considered from the start. Senator Blanche Lincoln, who wrote it, was only motivated by the short-term politics of proving she was tough on banks while facing a primary challenger to her left. While it sounds appealing to take derivatives trades out of banks that are backed up by FDIC insurance, the perverse consequence is that it makes the system more complicated and riskier. If the derivatives trading is done through subsidiaries, it becomes harder for regulators to keep track of who is doing what. And it will increase the costs of legitimate hedging contracts at U.S banks, which will mean that foreign banks will take over the derivatives business.

And Kevin Yoder, the Kansas Republican who was responsible for the provision, had an argument, too. According to the New York Times, his aides said that he was "looking out for regional and small banks, and farmers caught up in Dodd-Frank regulations." He was looking out for the farmers who use derivatives, they said. "This essentially is about creating predictability," Yoder said in making the case. "It's about consumer protection, and financial protection, and lastly it's about jobs."

It doesn't take a lot to imagine how this could become a convincing argument if you hear it over and over again. And if you want to believe it because the bank lobbyists are your friends and former colleagues.

Derivatives are a famously complicated business. It's not easy to tell where legitimate hedging activity blurs into inappropriate risk-taking. I'd guess few congressional staff and even fewer members of Congress understand the issue well enough to effectively explain it. Which means that mostly they have to rely on the expertise of others. And if the expertise of others is remarkably one-sided (as it clearly was here), that's going to have an affect on how decision-makers see the issue.

It's not hard to explain why this provision got so far. The banks made it easy for Congress, and then made a convincing case for it - over, and over, and over again. And the other side just didn't have the resources or the manpower to refute it enough.

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