Your Need-to-Know on the Budget (September 27)

Update 301:  Your Need-to-Know on the Budget
GOP Takes What Could be Final Fiscal Bites

In what could be its fiscal swan song, the GOP congressional majority has, as of this writing, approved about 75 percent of discretionary spending for FY 19, which starts on October 1.  

Will the bill(s) be enacted and a shutdown averted with nary a whimpering about a wall?  Or will that wait until December 7, when the agreements all but struck this week expire? See below.  




The GOP has been busy trying to keep the governent funded by combining separate spending bills into the following “minibus” packages:

  • Minibus I — $147 billion

On September 21, President Trump signed into law the first FY19 spending package (H.R. 5895) covering military construction and veterans affairs, the legislative branch, and energy and water. The funding bill passed the Senate 92-5 and the House 377-20.

  • Minibus II — $854 billion

On September 24, the Senate approved a comprehensive spending bill 93-7 funding the departments of Defense, Health and Human Services, and Labor and Education. The House version (H.R.6157) passed yesterday 361-61 and it will now make its way to the President’s desk. Importantly, it includes a Continuing Resolution (CR) to fund all other agencies through December 7. Assuming the legislation is signed by the President, this takes the heat off the more contentious negotiations currently under way on the third minibus package containing Financial Services and General Government (FSGG).

  • Minibus III — $58.7 billion

The third package of bills (H.R.6147) includes funding for Interior, Environment & Agriculture, Rural Development, FDA, Transportation-HUD, and FSGG, and is currently in conference between the House and the Senate. The House version passed narrowly 217-199 and along mostly party lines. The House Republicans have placed dangerous policy riders in their version of the package while the Senate has a clean version, evident by their much less partisan 92-6 vote. There has also been disagreement over a Republican-introduced $585 million savings account within the House bill that is only to be accessible when the federal deficit is eliminated— ironic given the GOP’s recent deficit-busting tax cuts.

The latest out of the conference committee suggests that House Republicans have been pushing hard on a number of the policy riders so a deal is unlikely. If the conferees cannot reach a deal this week, then the CR passed in Minibus II will fund operations until December 7. There is a small possibility that the President decides to refuse to sign the bill, so as always, watch this space… a press conference President Trump is delivering at 5PM today might offer insight into his decision one way or the other.

FSGG Spending Toplines

Here are the most recent topline appropriations levels in the House and Senate bills for the relevant agencies, which have generally been noncontroversial and subjected to limited partisan debate:

Internal Revenue Service

  • House: $11.3 billion
  • Senate: $11.3 billion

This topline figure is over $100 million less than FY 2018 and much lower than the $12.1 billion budget approved before the GOP took back control of the House in 2011.

Securities and Exchanges Commission

  • House: $1.7 billion
  • Senate: $1.7 billion

This is actually over the 3.5 percent increase requested by the agency and the additional money will go toward 100 new jobs, including 13 in investment-adviser and investment-company examinations.

Small Business Administration

  • House: $730.6 million
  • Senate: $699.3 million

The House version of the bill includes a $31.3 million “Disaster Loans Program Account”. Much of the SBA volatility comes as a result of this disaster assistance, which varies year to year. For example, fiscal years following disasters like Hurricanes Katrina, Sandy, and Irma all had increased funding to the SBA.

Commodity Futures Trading Commission

  • House: $281.5 million
  • Senate: $281.5 million

This is equal to their budget request for FY19. For years, the CFTC has argued its budget is not enough for it to fulfil its mission as the derivatives market regulator, so this funding match would be good news for the agency.

Pernicious Policy Riders

Unlike these appropriations, there are a number of contentious policy riders in the House bill, including unnecessary changes to capital markets and provisions that increase systemic risk. The eight FSGG policy riders are bills included in the S.488 JOBS 3.0 package, which incidentally now looks stalled in the Senate. These riders absolutely need to be stripped from the final bill. Rep. Lowey insisted during the September 13 conference deliberations that if these riders are not removed, Dems would “keep these bills in a holding pattern.”

December Shutdown?

For the first time in 10 years, an interior appropriations bill and a financial services appropriations bill were debated on the Senate floor. Despite that, Minibus III will likely be passed as a CR that will expire on December 7, with most of the riders stripped out. Because funding for President Trump’s wall has been left out of legislation and December 7 is after the midterms, a government shutdown then is much more likely. Republicans are already facing a potentially huge loss of seats in the House, so shutting down the government before the election would be reckless at best and destructive at worst.

Whither Social Security, on the Vine? (June 8)

Update 277 – Whither Social Security, on the Vine? Or Really Just in Need of a Fix in Time?

This week’s Social Security Trustee Report — little noticed only in part because it was not alarming — was another reminder that the nation is in arrears in maintaining its social infrastructure. This we have long known.

Less appreciated is how many modest policy fixes, phased in over time, can not only bind and secure the social contract but can also help address a growing inequity that makes Social Security more important than ever if the millions of Baby Boomers retiring every year are to avoid poverty.

Something to look forward to. Good weekends all .




Trustees’ Toplines

This Tuesday, the Social Security Board of Trustees released its annual report detailing the state of the Old Age Survivors Insurance (OASI) and Disability Insurance (DI) programs. The report highlighted the continued fiscal challenges that face the Social Security program (SSA), which on current trends, without supplements, would not be able to pay 100 percent of benefits in 16 years.

Topline figures from the Social Security Trustees Report:

  • Disability Insurance (SSDI): income sufficient to pay full benefits on program though 2032
  • Old Age and Survivors Insurance (OASI): income sufficient to fund program through 2034
  • In 2011, the Board projected that Social Security would be unable to provide full benefits in 2036, they have now adjusted that projection to 2034.
  • Social Security is now paying out more in benefits than it receives in total revenue, years earlier than was previously projected.

The Report describes the above dates as the years when these programs will be “depleted.” However, the debate around the status of the OASI and DI programs has centered around the program’s looming “insolvency.”

This faulty analogy belies the fact that Social Security does not go insolvent. The term is at best wrong and at worst misleading. Similarly, suggesting Social Security is or may become insolvent or bankrupt raises cackles needlessly even as it belights idealogues.

While looming benefit cuts are a serious concern that can and should be avoided, the SSA is not a business, it is a facet of the American government that has an obligation to guarantee retirement funds to the American worker.

Screen Shot 2018-06-11 at 9.13.07 AM.pngSource: Peter G. Peterson Foundation

Looming Shortfall; Several Simple Solutions

Experts warn that the longer Congress waits to solve Social Security’s pending shortfall, the more expensive to it will be to fix. In 2011, the Social Security Board of Trustees estimated it would take $6.5 trillion to avoid benefit cuts over the next 75 years. This year, they calculate that it would take $13.2 trillion.

Fixing the program that economists call the most “valuable component of our retirement system,” will be relatively straightforward. House Republicans propose cutting benefits and raising the retirement age to buoy the SSA. Thankfully, this solution appears dead on arrival, given the public’s overwhelming support for maintaining or increasing current levels of Social Security benefits.

A particularly promising proposal in the House Ways and Means Committee is H.R. 1902, the Social Security 2100 Act. The bill currently has 172 Democratic cosponsors and would strengthen Social Security benefits by:

  • increasing monthly benefits by two percent
  • indexing cost of living adjustments to Consumer Price Index- Elderly (CPI-E)
  • creating a new special minimum benefit equal to 125% of the poverty line

The bill would keep the Social Security Trust Fund “solvent,” ie paying out full benefits, for the next 75 years according to the SSA Board of Trustees. It would accomplish this by applying the payroll tax to income over $400,000 and gradually increasing the payroll tax rate on both employees and employers, among other measures.

Congress could also consider applying unearned income such as capital gains to Social Security tax. If we were to FICA a tiny portion (1-3 percent) of capital gains, we would solve the Social Security problem easily — in fact, it would present a significant opportunity to increase benefit levels substantially, possibly by two times.

Midterm Opportunity

With such straightforward solutions available, Congress has no excuse not to address Social Security’s long-term shortfalls. Exacerbated by a brand new $1.5 trillion hole in the budget, this is a year when people will hear threats to Social Security, they will infer it from what Republicans are saying, and they may believe it themselves. Democrats, as they have in the past, will provide reassurance. This cycle especially, it is likely to provide a large benefit for them in the midterms.

The Dog Catches the Bus (Apr. 13)

Update 263 – The Dog Catches the Bus:
Mick Mulvaney’s Mysterious Mission at CFPB

This week saw Consumer Financial Protection Bureau (CFPB) Director Mick Mulvaney appear before both the House Financial Services and Senate Banking Committees. After years of working aggressively in Congress to shred the Bureau to pieces, Mulvaney is charged with the operating it; the dog that chased the bus so long now finds himself in the driver’s seat.

The particular spectacle may not be repeated.

Mulvaney’s mission is slated to end soon, as the President may appoint a full time Director this summer to replace him.  Former Director Richard Cordray’s term would have ended — and therefore Mulvaney’s time as Acting Director is set to end — on June 22.

What has Mulvaney done, or not done, with, or to, the Bureau?  We examine this below.

Good weekends all,


CFPB’s Intended Mission

The Consumer Financial Protection Bureau was created under the Dodd-Frank Act to bring all financial protection regulatory mandates under the roof of a single agency and to provide consumers with a remedy against predatory mortgage brokers, credit card issuers, payday lenders, and other fraudulent financial actors.  The Bureau was intended to be funded independent of political considerations and lobbying campaigns.

The CFPB has taken action on behalf of consumers in the aftermath of issues like the Equifax data breach and the Wells Fargo’s fake account scandal. Since the Bureau’s opening in 2011, it has taken enforcement action in cases of unfair, deceptive, and abusive acts and practices, discrimination, illegal mortgage-related compensation, and illegal debt-relief advance fees. It has also returned $12 billion to almost 30 million consumers who suffered losses at the hands of predatory lenders and debt collectors.

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Mulvaney’s Contempt for the Mission

Enforcement: Mulvaney has made it his mission so far to weaken the agency from the inside.  Through his first five months he has not opened a single enforcement action and has discontinued four that were started by Richard Cordray.  While Mulvaney claims that his predecessor likewise did not issue an enforcement in his first six months, the acting director is unlikely to issue new enforcements going forward like Cordray did.  Yesterday, he confirmed that “Regulation by enforcement is done, we’re not doing it anymore.”

Funding:  Mulvaney is working to starve the CFPB of funding. Each quarter, the CFPB requests funding from the Federal Reserve. In January, Mulvaney requested $0 in funding for the CFPB, insisting $177 million in its bank would be sufficient. Fiscal conservatives applauded the move, but most observers were baffled. Without proper funding it is unlikely the Bureau will be able to carry out whatever limited function Mulvaney allows for.

Payday Lending:  Mulvaney has also opened up a re-examination of the final payday lending rule, which was exhaustively commented on and revised during Cordray’s Directorship. Payday loans started borrowers on negative long term debt cycles leading to credit card delinquency, unpaid bills, overdraft payments, and bankruptcy. The payday lending rule requires lenders to consider borrowers’ ability to repay a loan by completing a full-payment test on loans, having a principal payoff-option for certain short-term loans, providing less risky loan options, and limiting the amount of times a borrower can be debited. Mulvaney is expected to weaken the rule and its enforcement. Consumer advocates view CFPB dropping the Golden Valley Lending and three other payday lending cases involving interest rate charges of up to 950 percent as worrisome precedent.

Mulvaney’s Ideology

Director Mulvaney has been caught speaking from both sides of his mouth. This week, before the relevant House and then Senate committees, Mulvaney has actively campaigned against his own position as Director and pleaded for slashes to its budget and funding mechanism.

Funding:  Per Dodd-Frank, the CFPB is not subject to the Congressional appropriations process and instead is funded by the Fed. This is not uncommon in the banking regulatory space as it prevents political winds from derailing Wall Street’s watchdogs. Mulvaney claims this is inappropriate and wants to see the Bureau subject to the same funding shenanigans that the IRS suffers under. This would be uniquely dangerous for the CFPB as the acting director himself voted in 2012, 2013, 2014, and 2015 to defund the consumer agency while a member of the House.

Governance:  While Mulvaney pleads for more Congressional interference in the Bureau’s funding mechanisms, he suggests that the Bureau’s governance structure be altered from the single Director model to a Board. He claims that this is to prevent radical shifts in the CFPB’s mission and function as leadership changes while simultaneously arguing that he is not acting with any partisanship as acting director, instead enforcing the letter of the law. Mulvaney also went so far as to advocate for Congressional approval of CFPB rules, which would be a stunning abdication of a federal agency’s rulemaking responsibility. Finally, Mulvaney wants to give the President direct authority over the agency’s director, making the director easier to fire.

Oversight: Mulvaney also wants more policing of the CFPB, asking Congress for an inspector general’s office to be housed at the agency to monitor the bureau. This increased legal scrutiny is largely unnecessary and would make the bureau function less efficiently.

Small Business Perspective

Recent polling reveals that entrepreneurs and small-business owners support the CFPB’s mission. The small business poll showed 84 percent of entrepreneurs believe the CFPB is needed to prevent predatory practices, ensure fair treatment of small businesses and consumers, and provide fraud protection.  Just 29 percent of small-business owners think CFPB funding should be subject to Congressional appropriations.

What Comes Next?

Mulvaney’s hearings came along with reporting that the CFPB is exploring enforcing an unprecedented $1 billion fine against Wells Fargo for auto insurance and mortgage lending abuses. This stems from an investigation started under Richard Cordray. Such a fine would be the Bureau’s first under Mulvaney’s stewardship, and would align with the CFPB’s intended mission. Given Mulvaney’s apparent disdain for the organization he runs, these reports are far from certain.

Key will be CFPB’s decision on the payday lending rule. Given that then-Congressman Mulvaney’s campaigns were largely financed by payday lenders, it is hard to be optimistic that he will effectively curb payday lending abuses in any significant way.  It is unknown how long Mulvaney will stay on the job. His time as Acting Director expires on June 22, but he could stay in the role as long as President Trump does not appoint a successor to Richard Cordray. Who the President may ultimately appoint to lead the agency next is anyone’s guess.

Peering over the Fiscal Cliff (Apr. 11)

Update 262 — Peering over the Fiscal Cliff:
Trillion-Dollar Deficits Far as the Eye Can See

Earlier this week, the Congressional Budget Office (CBO) projected that the federal government’s annual budget deficit will reach $1 trillion next fiscal year.  Under current CBO expectations, the national debt will exceed $33 trillion by fiscal 2028, up from $20 trillion today.

Is this level of debt sustainable?  What are the implications for interest expense, for inflation, for policy choices, including entitlements and retirement security, of current tax and spending going forward?  We explore some of the implications of this fiscal future below.




The CBO report’s debt projections — which reflect last year’s Tax Cuts and Jobs Act and the spending increases in last month’s FY2018 Omnibus Appropriations Act — augur a fiscal future rife with uncertainty from retirees on fixed income to those making retirement plans, to millennial just entering or seeking to enter the workforce.

Some Republicans, perhaps intent on eviscerating the federal social safety net, have already begun arguing that the deficit they created will require spending cuts drastic enough to shred that net.  This despite the fact that discretionary social programs were already significantly underfunded before the 2011 Budget Control Act imposed sequester caps on them. Even after the Omnibus, FY 2018 non-defense discretionary outlays will not even match the levels of FY 2010.

The GOP is now targeting the domestic discretionary spending they themselves agreed to in the March Omnibus package.  Going forward, the threat that Republicans will try to take down vital social programs like Social Security, Medicare, and Medicaid will become increasingly real.  Yesterday’s executive order requiring government departments to suggest deep rollbacks in low income assistance programs shows the Administration is preparing more paring.

New Budget Baselines

The $1.3 trillion FY2018 Omnibus Appropriations Act Congress passed in March raised Budget Control Act caps for two years.  Topline appropriations for this year include:
• $629 billion in defense discretionary spending
• $579 billion in non-defense discretionary spending

The deal increased spending for appropriators by margins not seen since 2010:
• $80 billion above prior sequester-level restrictions for defense-related spending
• $63 billion more for non-defense related spending

Sequester-Era Austerity Over

The belief that domestic programs funding is wildly out of control is not universally shared.  From 2012 to 2017, budget caps on non-defense discretionary spending brought grinding austerity home to millions of American families in reductions to critical programs focusing on childcare, job training, low-income housing — all of which were brought down to historically-low levels of funding.

During the sequestration period, non-defense discretionary spending amounted to just 3.4 percent of GDP, and in 2017 this figure was only 3.2 percent.  The post-1962 average for non-defense discretionary spending was 3.8 percent of GDP. The new domestic figure in the omnibus will top out around 3.3 percent of GDP in 2019, well below the post-1962 average.

Here are a few areas that have suffered under the austere Budget Control Act:
Job Training:  Labor Department funding for state grants for career training and employment dropped by almost 20 percent since 2010 and 40 percent since 2001
Low-Income Housing:  Just a quarter of low-income households qualify for rental assistance due to funding shortages a decade after the foreclosure crisis
Social Security Administration:  The SSA’s administrative budget fell by 11 percent since 2010
Water Infrastructure:  Clean water infrastructure program funding is 35 percent below its 2001 level, including a nine percent cut (without adjusting for inflation) since 2008

Lack of Spending Parity in Omnibus

Many were relieved that Congress finally reversed some of the sequestration cuts imposed under the Budget Control Act of 2011. While sequester-era appropriations were insufficient to meet the country’s needs, the new caps in the omnibus are still broadly insufficient to meet the country’s domestic needs.

Democratic negotiators pushed for parity in the omnibus in domestic and defense increases.  The Bipartisan Budget Act did increase the spending caps for both defense and nondefense spending equally over their Budget Control Act limits.  But spending increases for defense exceed the increase in non-defense discretionary levels over sequester-level caps, and non-defense appropriations still fall well below levels reached in 2010.  Inflation-adjusted, the new cap for this spending is 5.3 percent below what it was in 2010.


GOP Split on Rescission Decision

The nondefense spending increases in the Omnibus elicited immediate backlash from fiscal conservatives, especially in the House.  In an attempt to appease these spending hawks, House Majority Leader Kevin McCarthy and President Trump are now considering a vote on a package that would rescind a number of domestic provisions from the new budget.  Although specific details on which programs would be targeted have not been released, the White House’s 2019 budget proposal outlined dozens of programs that could be up for cuts. (The President has also floated a line-item veto, previously ruled unconstitutional by the Supreme Court in 1998, in order to cut spending programs preferred by Democrats.)

A rescission resolution could pass the Senate on a simple majority vote, per the 1974 Budget Act, but it is unclear that Republicans have the votes to overturn significant portions of a bill they just passed last month. Democrats are furious at the proposal, claiming that Republicans are pandering to their base after the deal received negative coverage in conservative media outlets.

Bipartisan agreement about the increased funding caps in the Bipartisan Budget Act was a reflection of the austerity consensus in recent Congresses in nondefense spending in the wake of the Budget Control Act left.  While the Bipartisan Budget Act of 2018 would still see domestic funding caps below their 2010 levels, it brought much needed relief to programs Americans depend on. With the midterms looming, many Republicans are wary of overturning these measures.

Work Requirements, Entitlement Reform Next?

Although domestic spending figures are below historical averages, Republicans are now working up “starve the beast” solutions after Congress just deepened the deficit.  Yesterday, President Trump joined the assault on entitlements, privately signing the “Reducing Poverty in America by Promoting Opportunity and Economic Mobility” executive order.  The Order directs department heads to review their department’s welfare programs in order to expand work requirements, “find savings” (read: make cuts), and give more power to states to direct welfare resources.  The order does not set any new policy, but it does reflect a hardline conservative approach to entitlement reform.

Republicans won two major fiscal priorities in recent months.  With the Tax Cuts and Jobs Act, they deficit-financed a major reverse transfer payment to wealthy and large corporations.  With last month’s Omnibus, they secured a substantial increase in defense spending. With these two priorities out of the way, Republicans now have their pretext for a familiar attack on entitlements and the nation’s poorest, most vulnerable citizens.

Omnibus Situation (Mar. 22)

Update 258 — Omnibus Situation:
Last Stop Before Two-Week Recess

As of this writing on Thursday afternoon, one more piece of Congressional business remains before members and staff can start a long and long-awaited recess.  Once again, Congress confronts a deadline of midnight tomorrow to keep the federal government funded. But no one wants to wait that long.

And once again, a budget that is not supposed to make new policy does so, with significant provisions and omissions, with some key Democratic gains.  Omnibus status and details, see below.




The Omnibus Toplines

Last night, congressional leaders and White House officials reached a deal on H.R. 1625, a 2,232 page, $1.2 trillion fiscal 2018 omnibus spending package.

Top line figures indicate:

• $629 billion in defense discretionary spending
• $579 billion in non-defense discretionary spending

The deal increases spending for appropriators by margins not seen since 2010:

• $80 billion above prior restrictions for defense-related spending
• $63 billion more for non-defense related spending

President Trump’s FY19 budget request proposed cutting $54 billion from the existing non-defense statutory cap. House Republican Appropriations bills were written at a level cutting $5 billion from the total cap.  Following the Republican majorities’ failure to enact Appropriations laws, the Bipartisan Budget Act of 2018 increased non-defense discretionary (NDD) spending by $63 billion. The omnibus conforms with the Bipartisan Budget Act of 2018 mandate.

Majority Leader McConnell, Minority Leader Schumer, Speaker Ryan, and Minority Leader Pelosi may adjust these spending numbers and strike the final deal to avert a government shutdown before midnight tomorrow.  The bill would extend the government’s spending cliff to September 30, guaranteeing six months without a major budgetary shutdown.

Negotiation Points and Resolution

The debate around the omnibus focused on a few key provisions each with their own nuances regarding funding levels, disbursement schedules, and administrative issues.  Democrats faired fairly well in these negotiations.

One victory was an item to permit the CDC to study gun violence by incentivizing municipalities to update the NICS database, which is used for background checks. Democrats also beat back attempts by Sens. Collins and Alexander to fund high risk pools in the health insurance marketplace.  Similar provisions: limiting the funding for Trump’s wall to narrow projects, primarily reinforcing and updating existing fencing.

But Democrats are not fully onboard with this bill.

—  there are no DACA protections
—  the Gateway, a key infrastructure project in New York and New Jersey is not directly funded
—  massive increases in military spending outstrip domestic discretionary increases

Freedom Caucus Republicans and Rand Paul are not enthused about this bill as it increases spending by $143 billion; they have said that Speaker Ryan and Majority Leader McConnell left too much on the table.

Policy Riders

Packed into this very large omnibus package are numerous policy riders on issues that run the gambit from health care to labor issues, to environment and more. With respect to economic policy, the following policy riders related to tax, infrastructure, and financial regulation were worked in.

Tax Riders: Apparently, the “meticulous” legislative process surrounding the Tax Cuts and Jobs Act missed a few details.

IRS Funding – Despite Trump’s expressed desire to cut IRS funding, this deal increases its budget. The omnibus also allocates $320 million to the Internal Revenue Service to support the agency as it implements the new law. Though the IRS will still be prohibited from auto-completing parts of tax returns, a continued victory for tax preparers like Turbotax. In addition, the base IRS budget was cut by $125 million from 2017 in nominal terms, making the net gain of $195 million.

The Tax “Grain Glitch” Fix – Representatives from farming states have decried a glitch in the Tax Cuts and Jobs Act that gives farmers greater tax savings if they have sold crops to farm cooperatives at a disadvantage to corporate competitors. Agricultural trade groups pushed Senators like Chuck Grassley (R-IA) and Pat Roberts (R-KS) to change this “Grain Glitch”. The proposal, that limits farmers to a 20 percent deduction of their net income from sales to cooperatives, has been included in the omnibus.

Low-Income Housing Tax Credit – In exchange for the “grain glitch” amendment to the GOP tax law, Democrats were able to win an expansion of the low-income housing tax credit by 12.5 percent from 2018 to 2021.

Infrastructure Spending:  The omnibus also includes minimal increases in infrastructure spending. While the funds are badly needed, significantly more funding is needed to address the nation’s crumbling infrastructure.  The American Society of Civil Engineers estimates, conservatively, that Congress will require a $2 trillion investment over the next decade to adequately address the nation’s infrastructure needs.

Spending Increase – The omnibus sets aside $10 billion in new spending for infrastructure including:
◦ $2.6 billion more for the Federal Highway Administration
◦ $1.2 billion more for the Federal Railroad Administration
◦ $600 million for high-speed internet

Dodd-Frank Rider: Just after the Senate passed its bipartisan banking bill, S. 2155, House Republicans continue to take aim at the Dodd-Frank Act in the omnibus bill.  But the financial services rider the GOP won here is of marginal significance, merely requiring the OMB to report on Dodd-Frank’s cost.

Cost Estimates of Dodd-Frank Implementation – The omnibus includes a provision requiring the OMB to report to the Appropriations Committee on the cost of implementing the Dodd-Frank Act.

Omnibus State of Play

This morning, the House of Representatives narrowly passed a procedural rule 211-207 to open up debate on H.R. 1625.  11 Democrats, expected to vote no, were waiting to vote when the vote was gaveled closed in a disruptive break from precedent and norms.

The House ultimately passed the omnibus bill comfortably Thursday afternoon by 256-167 and now it moves to the Senate.  Sen. Rand Paul has expressed vehement opposition to the bill on multiple grounds. But the omnibus package is unlikely to change in the Senate.  The only question will be how long will Sen. Paul hold the floor before the Senate is able vote. While this bill will, barring sudden snowfall, be signed into law in advance of the midnight deadline tomorrow night, the drama in the details is yet to conclude.

S. 2155 Passes Senate, 67-31
 (Mar. 16)

Update 256 – S. 2155 Passes Senate, 67-31

Now, on to the House and Conference. Or Not.

On Wednesday night, the Senate passed S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, 67-31.  The bill is the most comprehensive rollback of the Dodd-Frank Act to clear a chamber of Congress.

A summary of the bill’s top line provisions and a look at the twists and turns ahead as the bill heads to the House and possibly to conference (16th seed odds) are below. And a word about unintended consequences.

Happy weekends all,


Review of Topline Provisions

The bill provides community bank relief and increases the threshold for the automatic application of enhanced prudential standards from $50 billion to $250 billion. This de-regulates 25 of the 34 largest banks in the country, altogether worth $3.5 trillion – one-sixth of the banking sector.  Together, these banks collected $47 billion in TARP bailout funds.

The bill also instructs the Fed to tailor regulations for banks over $250 billion, allows for the deregulation of several foreign banks, and allows certain banks to omit deposits at the Federal Reserve from being subject to the Supplementary Leverage Ratio (SLR).

Enjoying the support of over 60 Senators, bill cosponsors did not allow for significant debate on the many substantive amendments that were offered by opposing Senators. 16 Democrats and one Independent Democrat voted in favor of the bill.  The only permitted changes were amendments that failed to address the unintended consequences of deregulation for safety and soundness as well as a passel of bills adopted wholesale from the House. These included an amendment protecting the Fed’s ability to tailor down standards for foreign banks and another that undermined the Liquidity Coverage Ratio by allowing certain banks to invest in less liquid, riskier, assets.

Hensarling Playing Hard to Get

S. 2155 now goes to the House either to be passed as is, or altered and pushed to a Conference Committee.  House Financial Services Committee Chair Jeb Hensarling commented yesterday that the House will not be a “rubber stamp” for the Senate measure, so it appears that an extended negotiation between Senate and Republicans in the House may be on the horizon.

After passing dozens of deregulatory bills through his Committee already this Congress and having announced his plan to retire after this term, Rep. Hensarling may be legacy-seeking, hoping to put his name on a marquis piece of legislation or looking to secure a post-Congress job.  Regardless, he is likely to make use of his soap box and perhaps raise money for colleagues from industry in anticipation of the midterms.

Speaker Ryan has reportedly promised not to advance the bill without Hensarling’s approval but odds are against Hensarling or Ryan turning this into a prolonged and substantive fight.  The House GOP is under intense pressure from the community banks to pass the bill, and Senate leadership and the White House are unlikely to have much patience.

Wait, Conference Occurred Already?

S. 2155 has already undergone a significant amount of quiet pre-conferencing.  40 provisions from a number of House bills were added to the Senate bill through last week’s manager’s amendment, an attempt to head off the need for a formal conference with ideological House Republicans. That could mean the only remaining House bills that Hensarling could demand to include during a conference — gutting the CFPB or further increasing the SIFI threshold — have already been deemed too toxic for Democratic cosponsors to stomach.

If Hensarling insists on taking a hard line in conference, the bill will lose its limited Democratic support and die on its return to the Senate. As cosponsoring Sen. Tester put it, “If [Hensarling] adds a bunch of crazy shit, it’s going to die.”

What to Watch For Now

While the possibility of a conference committee on S. 2155 is fairly remote, Republicans are in no rush to get the bill to President Trump’s desk. Letting Hensarling sound off on behalf of large banks will only help to raise more money in anticipation of the midterms and what is shaping up to be a real fight for a House majority.

Republicans will mostly likely hold onto the bill until right before an upcoming recess week (when members return to their districts to meet with community bankers) and then quietly strong arm Hensarling into accepting the bill as written.  Most observers expect the process to play out over the next two months.

For now, progressives will rest their hope on two outside shots.  One is that the bill gets worse in Conference and dies as Senate Democrats withdraw support. The other is that years of House frustration with playing second fiddle to the Senate boils over and the House GOP refuses to take the bill up. Given the amount of pre-conferencing the bill went though, these possibilities are remote.

Unintended Consequences of Deregulation

Much is said about the presumably negative unintended effects of regulation.  Much less is said about unintended consequences of deregulation. Congress can perhaps be excused for not understanding precisely how financial sector business cycles operate but they should know by now they are inevitable.

Banks have hauled down record profits three years running.  Loan rates are at historic norms, including at community banks, which have profited as much as the regional and megabanks.  We are seeing low loan losses, rising bank income, and increased risk appetites, supported often by retrospective risk models and rising collateral values. Deregulation accelerates this process and sends more institutions over the risk cliff in search of bigger margins. Does this sound familiar?

As former CEO of Morgan Stanley said just before the crisis of 2008, “We cannot control ourselves.”

Changes in Plans and in Perceptions (Mar. 11)

Update 255 — Changes in Plans and in Perceptions
Hurry Up, Wait for Increasingly Unpopular S. 2155?

S. 2155 – the Economic Growth, Regulatory Relief, and Consumer Protection Act — the largest revamp, rollback, and update of the Dodd-Frank Act (AFR) to date — returns to the Senate floor after session resumes late tomorrow afternoon. The legislative ride for the bill had been smoother than any other big-ticket item this Congress such as the health care and tax bills and the budget.

But something happened on the way to a Senate floor vote.  Despite clearing a 60-vote cloture hurdle on a 67-32 vote last Tuesday, this bill (which almost everyone expected to be on and off the floor last week) sparked disagreements regarding amendments and hours of debate, which combined required the bill to be pushed into a second week on the floor.

In the meantime, press stories haven’t been kind to some bill co-sponsors who reportedly received campaign contributions from some of the bill’s biggest beneficiaries.  Polling shows the bill and its big bank and too-big-to-fail provisions are underwater in most states by 30-35 points.  CBO said the bill would increase systemic risk.

What’s ahead for S. 2155?  See below.



Last Week’s Floor Action

Floor Speeches

Supporters and critics took to the floor to speak about the bill. Chief proponents were floor manager and Chair of Senate Banking, Sen Crapo, as well as Democratic Sens. Tester, Donnelly, Heitkamp, and Warner, Committee moderates.  Leading the opposition were the Committee’s Ranking Member Sen. Brown and Sen. Warren.

Proponents suggested that smaller institutions such as community banks have been constrained in extending credit to firms since the passage of DFA and that relationship banking has fallen by the wayside.  S. 2155 would slash compliance costs.  A sector burdened by supervisory regulations which preexisted DFA would find relief by a rollback of a law from which they were largely and deliberately exempted by Congress.

Opponents claimed that whatever impact the bill might have on community banks, the biggest beneficiaries are the biggest banks.  Understated in the debate was the fact that not only are community banks enjoying record profits, theirs are better than the bigger banks’ returns.  Records show the number of bank failures dropped by 40 percent in the five years immediately following DFA’s enactment.

Cloture Vote 

A cloture vote held Tuesday cleared the 60-vote filibuster hurdle, 67-32.   Four non-Committee Democrats who were not bill co-sponsors voted aye: Sens. Hassan, Nelson, Shaheen, and Stabenow.  The only other Democrat who was not an original co-sponsor but voted in favor of cloture was Sen. Jones, the newest member who serves on Senate Banking.  GOP support for the motion was unanimous.

Manager’s Amendment

Analysis of the changes Sen. Crapo’s manager’s amendment introduced Thursday makes to Title IV:

New Foreign Bank Provision

Section 401 includes a new subsection, Subsection G, which clarifies rules for foreign bank organizations.  The amendment aims to resolve concerns about deregulating intermediate holding companies of foreign banking organizations sized between $100 billion and $250 billion.  But the two paragraphs in the subsection are contradictory.

The first paragraph says Section 401 must not “affect the legal effect” of Fed rules for foreign banks with more than $100 billion. Yet the next paragraph says the authority of the Fed to tailor regulations for foreign banks with more than $100 billion must not be limited. This protection of tailoring means the Fed may reduce the application of enhanced prudential standards for these foreign banks.

Liquidity Coverage Ratio

The manager’s amendment takes aim at the Supplementary Leverage Ratio (SLR) to the benefit of custodial banks such as BNY Mellon and State Street by allowing them to deduct deposits at central banks from their balance sheet.  It also undermines the Liquidity Coverage Ratio by expanding the definition of High Quality Liquid Assets. This allows banks to be invest their emergency funds in less liquid, more risky, assets. While the substance of this change may not be cataclysmic it certainly highlights the ethos of this bill as a giveaway to Wall Street.

Corker Pre-Conferencing Section 402?

In S. 2155’s original form, Section 402 applied a very narrow quantitative definition of a “custodial bank” that referred to a depository institution where “assets under custody is not less than 30 times the total consolidated assets of the depository institution or depository institution holding company.” This narrow definition ensured that only small number of custodial banks, primarily State Street and BNY Mellon, would be able benefit from certain rollbacks on their SLR requirements.

Thereafter, the bill’s drafters changed this language, making this definition more vague.  As it stands now, Section 402 defines custodial bank as a “holding company predominantly engaged in custody, safekeeping, and asset servicing activities, including any insured depository institution subsidiary of such a holding company.”  This change prompted large institutions like Citigroup to argue that they too should be able to take advantage of Section 402’s relaxation of SLR rules, and lobbied for language to ensure they could take advantage of the measure.

To the disappointment of Citigroup mostly, last week’s manager’s amendment did nothing to address Section 402.  Sen. Corker announced an amendment on the floor on Friday which would restore the original definition of custodial bank in the bill text and ensure the provision would only apply narrowly to State Street and BNY Mellon.

Sen. Corker’s move may represent some modest pre-conferencing. The amendment is a moderating one. There is widespread agreement across the political spectrum that expanding access to the 402 rollback would unacceptably increase systemic risk in the economy.  That House Republicans are on board with this change is out of character, and don’t expect moderation to be the norm as S. 2155 heads to the House. Sen. Corker’s amendment is an important, but meager, part of S.2155.  Expect debate in the House to be intense, especially as conservatives try to deregulate as much as possible.

The Week Ahead


Efforts to add four amendments to the Crapo package, two from each party, were unavailing, part of the reason floor debate was extended into a second week.  Discussions are ongoing regarding the amendment process for the coming week.  Sens. McConnell and Crapo have not indicated how many or which of the hundreds of amendments filed, if any, will come to a vote.

The Senate reconvenes tomorrow at 4:30.  The cloture vote on the substitute is expected to occur at 5:30 p.m. on Monday,  If cloture is invoked, there will be up to 30 hours of post-cloture debate before a vote on passage of the manager’s amendment.  30 hours of post-cloture debate may occur prior to a vote on final passage.

Where from Here?

The House and President 

Barring a barrage of more embarrassing headlines for some Senators or other unforeseen event, the bill should clear the Senate by Thursday and conferencing with the House will begin in earnest.  Agreement is expected and the President will sign, though his radio silence on the bill may reflect concern about the reaction of his base to the bill.

The Midterms

The five Democratic Senators currently trailing announced or hypothetical GOP opponents in the re-election (some by narrow and perhaps meaningless margins) all support the bill and represent states Trump won by large margins, well over 20 points in many cases.  Given the extended debate, chances are greater now that the media portrayal of the bill will have some bearing on its popular reception and reelection prospects for proponents.