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.

Best,

Dana
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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

Amendments

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.

Just A Community Bank Bill? (Mar. 6)

Update 254 — Just A Community Bank Bill?
Voters Weigh a Big Bank Bill and the Risks



Debate started on the Senate floor today on S. 2155, the broadest set of changes to Dodd-Frank ever thus far. Resumption of floor debate and possibly some votes on amendments are expected tomorrow. Right from the start, debate has started on whether this is a bill more for community banks and credit unions or for the biggest financial institutions in the country.

A manager’s amendment will include changes to the bill, such as legislation with bipartisan support in the House, Sen. Mark Warner said today. A vote on the manager’s’ amendment could come as early as Thursday.
Below we try to separate fact from fiction regarding the main beneficiaries of the bill.

Best,

Dana

 

S. 2155 is a rare and shining example of bipartisanship breaking through D.C. gridlock to help beleaguered, over-regulated community banks. Whether or not community banks’ profit margins are historically weak today is debatable. And S.2155’s most significant impact would have nothing to do with community banks. Most voters don’t believe S. 2155’s most significant benefits go to community banks.

Historical Profitability of Community Banks

Profit reports from the FDIC paint a different picture. Community banks reported $6 billion in profits in the Fall of 2017, a 9.4 percent increase from the year before. Community bank loan balances were up by 7.7 percent over this same period. Loan activity was widely dispersed throughout the community banking population, with 75 percent of community banks increasing their loan balances last year. These strong growth figures hardly paint a picture of an industry that’s drowning in regulatory burden.

Despite this, the community banking lobby has been actively lobbying Congress for regulatory relief for years. Republicans (and now some Democrats) have picked up this banner in order to argue that Dodd-Frank is crushing community banks.

Community Banks: Least-Burdened Firms Under DFA



Amid complaints of the extra-heavy burden Dodd-Frank represents on community banks, it bears remembering: no one did better in winning carve-outs during the Dodd-Frank negotiations process than the Independent Community Banking Association (ICBA). The Dodd-Frank Act gave community banks many exemptions, including:

  • Flexibility in underwriting when issuing mortgages, allowing community banks to benefit from Qualified Mortgage safe harbor.
  • Complete exemption from enhanced prudential standards including stringent capital rules, the LCR, and stress testing.
  • Less expensive FDIC insurance coverage relative to larger banks.

Through the ICBA, community banks have long insisted compliance costs are too high. This is as true in the post-Dodd-Frank Act era as it was prior to its passage. The Dodd-Frank Act is not the root of the problem.

How to Help Community Banks, Actually
The point here is not to demonize community banks. Local banks are an important part of the small business ecosystem and community banks are four times more likely to operate in rural communities. In short, they are a vital part of the national economy.

If we are serious about helping community banks, we should focus on their actual concerns. According to a GAO report published in February, community banks are mostly concerned about Home Mortgage Disclosure Act (HMDA), Bank Secrecy Act, and TILA-RESPA disclosure regulations.

While S. 2155 does attempt to address some of these concerns (in the case of HMDA requirements, quite controversially), the majority of the bill offers, at best, a bad magic trick for community banks. For instance, banks below $10 billion are exempt from the Volcker Rule which prohibits banking entities from proprietary trading or entering into relationships with equity funds. This is largely an empty gesture — few community banks engage in any of the activities outlawed by the Volcker Rule.

M & A A-Plenty
Even worse, it is possible that any marginal gains for community banks will be offset by Title IV’s dismantling of requirements on medium-sized banks, which, paradoxically, could trigger further consolidation in the financial sector. The resulting spike in merger and acquisitions will reduce in-market competition.

Many Republicans have lamented the original $50 billion SIFI threshold as being arbitrary and, by extension, inappropriate. Even granting the premise does not justify this new legislation, if the number is arbitrary then so is the $250 billion level they are raising it to. However, the change will have clear repercussions as institutions begin swelling their portfolios to raise to the new cap(s). Institutions that have previously floated just below the $50 billion threshold will start to consume community banks (merger and acquisition party time!) without any disincentive.

A Costly and Unpopular Bill
This bill is quite unpopular as voters begin to see through the facade and know what S. 2155 legislates. In a poll conducted by Americans for Financial Reform, 67 percent of people oppose the loosening of banking regulations in S. 2155.

Voters have realized that this bill deregulates much bigger banks than the “mom and pop” institutions proponents of the bill like to emphasize. It is evident to 67 percent of voters polled that this bill is not only going to deregulate the same institutions that sent America into a financial crisis, it could also increase the deficit and hurt Americans for years to come.

CBO estimates that enacting the bill would increase federal deficits by $671 million over the 2018-27 period. That deficit increase comes from an increase in direct spending of $233 million and a decrease in revenues of $439 million. Some of that cost and reduction in revenues would be recovered through collections from financial institutions in years after 2027.

CBO also estimates that, assuming appropriation of the necessary amounts, implementing the bill would cost $77 million over the 2018-27 period. Like the tax bill, this act will kick the bill to the grandkids of today’s new voters.

What Happened With Cloture? And Next Steps

This morning the Senate cloture motion to proceed with debate on S.2155 passed 67-32. The 13 Democratic/Independent cosponsors were joined by four other Democrats:

  • Senator Debbie Stabenow (MI)
  • Senator Jeanne Shaheen (NH)
  • Senator Maggie Hassan (NH)
  • Senator Bill Nelson (FL)

All in all, 17 Democrats voted in support of the cloture motion. We turn now to Senate Majority Leader Mitch McConnell for a signal on if he will allow an open amendment process to take place. Few expect an open process as it may force some difficult votes onto moderate Democrats. While this is happening, lobbyists are outspending progressives hundreds of dollars to one every day in defense of this bill.

Minority Leader Schumer and the Democratic caucus may be better off with a full tree and a closed amendment process. The next big ticket item to look out for would be the manager’s amendment sponsored by the architect of this bill, Sen. Crapo (R-ID).

Trump’s Financial Regulators: One Year in and Changing the Game Already (Feb. 28)

Update 252 — Trump’s Financial Regulators: One Year in and Changing the Game Already

From consumer protection to regulation of firms, the financial regulatory landscape has changed markedly in some areas and is stillborn in others. Trump regulators have made a variety of decisions that has escaped broader notice.

We take a tour of the financial agencies and review major policy and rule making decisions as well as the resulting overall impact of the Trump administration on the financial regulatory world, providing some context for the debate coming up on S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act, now slated for Senate floor action next week.

Best,

Dana

FSOC Shedding Designations

During the Obama years, Financial Stability Oversight Council (FSOC) designated four companies as systemically important non-financial institutions in addition to the large banks that are statutorily designated. These included American International Group (AIG), General Electric Capital Corporation (GE Capital), Prudential Financial, Inc., and MetLife, Inc. These designations were short lived. GE Capital was delisted in June, 2016 after it was spun off from its parent company and deemed no longer interconnected enough to warrant SIFI regulation.

Since President Trump has assumed office, FSOC has moved assertively to delist the insurance companies that were at the heart of the 2008 financial Crisis.

Last September, the Council delisted AIG from its list of systemically important non-financial institutions. While the move won the vote of Janet Yellen, many commenters raised concern for the deregulation of a company that was at the heart of the financial crisis. MetLife challenged it’s SIFI status in court, and had its designation rescinded by District Court Judge Rosemary Collyer in March of 2016. Last month, MetLife and FSOC filed a joint motion to dismiss the federal government’s appeal of that decision.

All indications are that Prudential, the last nonfinancial SIFI, may soon find regulatory relief as well. Last week, FSOC made good on its promise to reexamine Prudential’s designation status. While a final decision on the matter is not expected until later in 2018, the company is lobby hard that its designation is unwarranted. Given the deregulatory zeal of Trump’s FSOC, don’t be surprised to see the nonbank SIFI list at zero before the year is out.

 

 

Fed Makes Regulatory Accommodations

  • Living Will Deadline Extension

At the end of September, the Fed issued an accommodating rule on living will submissions, allowing eight of the biggest banks to wait until July, 2019 to submit remediated living will plans to fix weaknesses in earlier submissions. Resolution planning is a key Dodd-Frank Act systemic protection, requiring the largest banks to plan their own failure so the financial system does not plunge into crisis if one banks fails. The groups of banks that benefit from the ruling include the nation’s largest: Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs Group, JP Morgan Chase, Morgan Stanley, State Street Corporation, and Wells Fargo.

  • CCAR Transparency

The word “transparency” has been used frequently in conversations about new approaches to financial regulation. Fed Chair Jay Powell has repeatedly floated the concept as imperative in his reevaluation systemic risk rules. In December, the Fed solicited public comment on its proposals to increase transparency of its CCAR stress testing. These proposals include disclosing the Fed’s modeled range of loss rates for loans held by banks subject to CCAR, portfolios of loans used under stress testing scenarios, and an in-depth description of the Fed’s models, including equations used and variables that influence the outcome of the models.

Just this month, the Fed moved forward to release its scenarios for both CCAR and DFAST stress testing. This year the severely adverse scenario, the most stressful condition tested, will simulate a global recession during which the unemployment rate increases from 4 percent to 10 percent and interest rates on treasuries increase substantially. Now that the banks subject to CCAR have these conditions, they can prepare their balance sheet for the test.

  • Fed Restricts Wells Fargo

In a surprise move, the Fed at the beginning of February that Wells Fargo not be permitted to grow beyond its asset size at the conclusion of 2017. This after a lengthy public revelation about consumer abuses and compliance failures. Most notably, the nearly $2 trillion bank created more than 1.5 million fake checking and savings accounts, as well as 500,000 credit cards that were unauthorized. The edict was Chair Yellen’s final act.

 

 

Leadership Change at the OCC and FDIC

  • Undoing Obama Era Safeguards

Trump has filled key financial industry regulators positions at a glacial pace since assuming office. It wasn’t until November 27th that Joseph Otting was sworn in as Comptroller at the OCC. However, the agency has since taking up the charge against the Volcker rule on Wall Street’s behalf. The OCC has also begun the process of weakening its enforcement of the Community Reinvestment Act and softening its position against leveraged lending.

Trump’s appointee to run the FDIC, Jelena McWilliams, was cleared by the Senate Banking Committee with only Elizabeth Warren expressing concerns over the former Fifth Third Bank executive taking charge of the agency. McWilliams has spent time on the Hill as chief council for the same committee that approved her nomination, and at the Fed. While she has been guarded about her regulatory views she has expressed interest in relieving regulatory burden from “community banks” and will play a significant role in the rumored rewrite of the Volcker Rule.

The news has not been all bad at the OCC. Just last month, the bureau levied a $70 million fine on Citibank for failure to adhere to a 2012 directive regarding money laundering. On top of that, the most recent round of indictments from Mueller’s team should draw the attention of the OCC to “Lender B”, which appears to have ventured beyond the law in it’s issuance of loans to Paul Manafort.

 

 

The SEC: 180 Degree Turn

Securities and Exchange Commission (SEC) Chair Jay Clayton has pursued fewer penalties under the Trump Administration.  Chair Clayton has expressed that the penalties hurt shareholders and not just the individuals who have been responsible for wrongdoing.

Under Chair Clayton, the SEC has done what Michael Piwowar, a Republican appointee, calls “a full 180” in regulatory enforcement. Between the Obama and Trump Administrations there has been a stark contrast in enforcement. From January to September 2016, the Obama administration issued several regulatory punishments worth $702 million, where the Trump administration only issued around $100 million in punishments from January to September 2017.

 

 

CFTC Pullback from DFA Enforcement

Like the SEC under Chair Jay Clayton, the Commodities and Futures Trade Commission (CFTC) under Chair J. Chris Giancarlo has pursued a broad agenda aimed at deregulation and fewer enforcement actions in the derivatives markets.

  • Pullback from Dodd-Frank

Giancarlo’s plan to roll-back Dodd-Frank regulations entitled “Reg Reform 2.0,” features the intent to roll-back Title VII protections. At a Senate Agriculture Committee hearing earlier in February, Sen. Tina Smith (D-MN) questioned Chair Giancarlo about this roll back could increase the risk of a financial crisis. Giancarlo replied that while Title VII is being implemented by the CFTC, many of the reforms are not working and that the Commissioners will look at every section to either strike or significantly reduce regulations.

  • Decline of Enforcement Actions

Chair Giancarlo has also taken far fewer enforcement actions than his predecessors. Sen. Sherrod Brown called the inaction “a deliberate pullback in enforcement.” During the fiscal year that ended in September, 2017, enforcement actions totaled 49, down from 68 the previous year, and the total fines issued were just $413 million, down from $1.29 billion the previous year.

Enforcement actions may, however, be on a rebound. The CFTC announced yesterday that it is expected to file “more than 10” fraud and market-manipulation cases in the coming weeks. Perhaps Chair Giancarlo, a former Obama appointee, understands the importance of enforcement after all.

 

 

CFPB: Hostile Takeover

An obsession of conservatives since its inception, the Consumer Financial Protection Bureau (CFPB) has been under steady assault since Trump assumed office. While last month’s legal challenge to the agencies legitimacy fell short in D.C. Court of Appeals (read more in Update 247), managing director Mick Mulvaney has been doing his best to undermine the agency from the inside. Upon assuming office, Mulvaney issued a letter to regulators explaining that he would refuse to “push the line” in order to protect consumers. Three months into his tenure it appears that this means doing everything in his power to make the CFPB dysfunctional.

In December, Mulvaney directed the bureau to freeze the collection of any personally identifiable information from companies it supervises. The move ostensibly about addressing cybersecurity concerns, but Sen. Warren, one of the CFPB’s most vocal defenders, argued the freeze was more about sabotage than substance. Ending the collection of personally identifiable information could potentially slow fraud investigations and cripple the CFPB’s enforcement functions.

All indications are that Mulvaney does not plan on stopping with data freezes. Last month, he issued a Request for Information about the Bureau’s Civil Investigative Demands in order to collect suggestions on how to “improve outcomes for both consumers and covered entities.”  Given Mulvaney’s tenure thus far this strongly suggests an even greater deregulatory push to come at the CFPB.  Expect similar rollbacks at the other regulatory bodies as Trump appointees slowly but surely take over and enact the administration’s agenda at the Fed, OCC, FDIC, SEC, and CFTC.

Blockbuster Budget Deal of 2018 (Feb. 9)

Update 249 — Blockbuster Budget Deal of 2018
Leaps Tall Sequester in a Single Bound

Early this morning, President Trump signed the Bipartisan Budget Act funding the government through March 23. Negotiators agreed on a deal to end sequestration and increase defense and domestic spending levels for FY 18 and FY 19. Sequestration caps have been in place since 2013 when the Budget Control Act went into effect.

We break down top lines and baselines and look at the agreement — the the key departures from budget making practice — from the perspective of broader fiscal policy.

Good weekends, all.

Best,

Dana

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Breakdowns for top lines are as follows:

  • FY 18:
    • Defense: $700 billion in total defense funding, including $66 billion in OCO funding.
    • Non-Defense: $591 billion, including $12 billion in OCO funding.
    • This represents a $80 billion increase in defense spending caps and a $63 billion increase in non-defense spending caps for FY 18.
  • FY 19:
    • Defense: $716 in total defense funding, including $69 billion in OCO funding.
    • Non-Defense: $605 billion in total non-defense spending, including $8 billion in OCO funding
    • This represents a $85 billion increase in defense spending caps and a $68 billion increase in non-defense spending caps for FY 19.

These increases in funding will only go into effect when, and if, Congress passes the full-year omnibus appropriations bill.  Now begins a six-week scramble to figure out how to appropriate this new money across the government.

Appropriators do have some constraints to work with. The budget deal includes instructions to spend $3 billion to combat the opioid crisis, $10 billion on infrastructure, $2 billion on higher education, and $2.9 billion on childcare. It also provides $90 billion for emergency disaster relief, a 10-year Children’s Health Insurance Program (CHIP) authorization, and suspends the debt ceiling until March 2019 as opposed raising the limit by a specific amount, a decades-long congressional practice.
GOP Fiscal Responsibility AWOL

The bill increases the deficit by $300 billion in FY18 and FY19, which guarantees the FY19 deficit will exceed $1 trillion for the first time since the Great Recession.  Deficit hawks in both the Senate and the House, including Sen. Rand Paul and House Freedom Caucus Chair Mark Meadows expressed concern over this.  Yesterday, Sen. Paul spoke on the Senate floor slamming colleagues for “hypocrisy,” fiscal profligacy, and the lack of a fair and open process.

In the House, members of the Freedom Caucus also withheld their votes over the $300 billion deficit increase. This increase is widely feared to a step toward a Republican effort to cut social safety net programs such as Medicare and Medicaid.

 

DACA Goes Wanting

The deal comes in the wake of last month’s three-day shutdown and featured a similar showdown over the fate of the Deferred Action Childhood Arrivals (DACA) program. DACA went unaddressed yet again this time around, but Senate Leader McConnell pledged to move a DACA bill with an open amendment process starting next week.  House Speaker Ryan pledged to address the issue, but stopped short of promising what it would look like or if amendments would be allowed.
How the Deal Came About 

SenateOn Wednesday, Minority Leader Schumer joined with McConnell to announce that the Senate had reached an unusually long two-year budget deal to avoid a shutdown. The two leaders urged their respective caucuses to support the deal. A DACA deal was not attached, per se. The Senate agreement does fund several critical programs including community health centers, a key Democratic negotiating point. The deal ends the sequestration of the military, a central goal of Republican negotiators.

Sen. McConnell’s assurance that immigration would be the next legislation taken up was enough to bring some Democrats on board. The Senate pronounced this as the best deal that they could agree on before the deadline and told the House to accept it or shutdown the government.

HouseOn Tuesday, the House passed its own short term spending deal that would have punted the CR deadline to March 23.  It passed 245-182 on a party line vote that saw few defectors.  Many on the far right were weary of another short-term spending deal that increased the deficit by $300 billion.

Inspired by Leader Pelosi’s eight hour “filibuster,” many Democrats voted against that deal because there were no assurances that the House would have a debate on DACA from Speaker Ryan.

Speaker Ryan sent his whips out to gather a count and by early Thursday morning declared that there were enough votes to pass the two-year Senate spending bill.

 

How it Passed

After the delay caused by Senator Paul, the Senate passed the bill around 2 am by a 71-28 vote.  Many of the Nay votes came from the more progressive Democrats “2020 caucus” —Sens. Booker, Gillibrand, Harris, etc as well as far right Republicans like Paul.  After a brief House Rules Committee hearing an hour later where an amendment adding DACA protections was rejected by House Republicans the full House passed the bill, 240-186, just before dawn. President Trump then signed the legislation, ending the five-hour government shutdown.

 

Next Steps

There are two critical indicators for how Democrats will come out of shortest shutdown ever. Expect progressives and immigration activists to revolt at the apparent deferral yet again of the DREAMers agenda, not forcing the issue, using their votes or acquiescence on budget as a hostage.

That fervor might be tamed by Monday when the Senate votes to invoke cloture on the immigration vehicle bill. Assuming Sen. McConnell keeps his word and holds his caucus together, he will allow a decent immigration bill to pass the Senate, and all eyes will be on Paul Ryan. House Republicans have not made any agreements to compromise on immigration and Ryan has expressed an unwillingness to violate the “Hastert Rule” without a shutdown looming. Ryan may ignore Democrats and DREAMers alike.

While appropriators scramble to pull together a spending scheme for the newly expanded budget top lines, Democrats may rip Congress apart if the promise to the DREAMers is not kept.

One 3-Week Step Forward (Jan. 22)

Update 244 — One 3-Week Step Forward:
Dreamers Live to See Another Deadline, Feb. 8

Closing one of the shortest government shutdowns in memory, the Senate voted 81-18 vote to end debate on a stopgap FY 18 funding measure expiring February 8.

Minority Leader Schumer extracted a concession from GOP Leader Mitch McConnell: a legislative agreement regarding action on a DACA bill in exchange for Schumer’s support for the spending package. Once the Senate approves it, the House is expected to pass the bill in short order with the President likely signing the CR into law tonight.

How did the deal come to pass and who holds the upper hand in the next budget round?  See below.

Best,

Dana

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Specifics of the Deal

In negotiating this short-term extension, Senators continue to comply with Budget Control Act caps as toplines:

  • $549 billion for defense spending
  • $516 billion for nondefense discretionary

Both of these caps are set to increase by a combined $160 billion by 2021. Defense spending caps increase to $562 billion in 2019, $576 billion in 2020, and $591 billion in 2021. Non-defense discretionary spending caps increase to  $529 billion in 2019, $542 billion in 2020, and $555 billion in 2021.

The package is identical to the previous FY 18 CR extensions, except that it includes a CHIP funding deal.  Where a DACA package will be negotiated on its own, the stopgap spending deal includes a six year extension of the Children’s Health Insurance Program. 1.9 million children in 25 states would have lost CHIP benefits had this arrangement not been reached before Feb. 1.

Impact of the Shutdown

Past shutdowns have cost the economy billions of dollars per day when furloughed government workers and contractors were forced to stay home and miss out on paychecks. This time around, the impact was relatively limited by a shutdown that primarily spanned the weekend.  With only one work day lost, stock markets barely blinked and economic losses will be minimal.

Democrats’ Position

Democrats kept their promise to not vote for a long-term funding measure without protecting Dreamers and won six years of CHIP funding to provide vitally important children’s health coverage, giving up nothing. Sen. Schumer also secured greater leverage, forcing McConnell into a promise to address DACA relief on the floor in advance of the next funding deadline.

Sen. McConnell’s promise, on the congressional record, that he will bring an immigration bill to the floor and allow for an open amendment process, means that Schumer extracted more explicit concessions from his Republican counterpart without having to give anything up. Sen. McConnell now faces the unenviable task of having to develop an immigration solution or risk going back on his word and facing another government shutdown.

Most significantly, the deal allows Sen. Schumer to keep his caucus united while putting pressure on an already factious Republican majority.  Several prominent Democrats eyeing a 2020 presidential bid, including Sens. Harris, Gillibrand, Booker, Sanders, Murphy, and Warren voted against this bill in support of the Dreamers.

Republicans’ Position

Since Trump assumed office, the GOP has repeatedly been foiled by its own internal divisions. This weekend’s shutdown made it abundantly clear that the majority party is struggling to perform the most fundamental tasks of governing, adopting a budget. Despite Republican leadership’s attempts to paint the fiasco as “Schumer’s shutdown,” polls revealed that most of the country blames the party in control of the House, the Senate, and the White House for the shuttered government.

This weekend’s split pitted moderate Republicans who had previously expressed interest in finding a resolution to the DACA debacle against against immigration hardliners. The moderates, lead by “gang of six” Sens. Flake, Graham, and Gardner, had thrown their support behind a bipartisan DACA deal only to have it infamously blow up in the Oval Office.

Other Republicans are clearly less eager for a DACA fix. Last Friday, many Republicans were quick to frame the shutdown as an example of Democrats choosing “illegals” over children when Democrats voted down the House CR that contained six years of CHIP funding but made no mention of DACA.

Trump’s absence

President Trump had already gone to sleep by the time the shutdown occurred on Friday at midnight. Other than a Tweet calling for Republicans to “go nuclear” and change the Senate rules allowing spending bills to pass with only 50 votes, he played no real part in negotiations over the rest of the weekend.  The President did meet with Sen. Schumer on Friday at the behest of Sen. McConnell, but that conversation ended up at square one, with Trump telling Schumer to work it out with McConnell. In the end, Trump had little to to do with negotiating and drafting the bill.

Why Schumer Came Out On Top

DACA protections run out on March 5, now that CHIP funding has been secured and McConnell is on the record saying that he will begin a “neutral and fair” legislative process Democrats can go into the new Feb. 8 deadline resolute in their goal to protect the Dreamers.

Shutdowns often result in a blame game as motives are questioned and accusations of bad faith abound. Democrats needn’t fear that as they have made a simple demand that Republicans have acknowledged. Mitch McConnell has made and broken promises like this in the past, including the one he made to Sen. Flake in exchange for his vote on the tax bill.  If Sen. McConnell either tries to exclude Democrats from the process, pass a watered-down or poison-pill ridden bill, or renege completely Democrats will not refrain from shutting the government down again.

In Control of Gov’t but not Party (Jan. 19)

Update 243: In Control of Gov’t but not Party,

Divided GOP Majority Unable to Pass Budget

Last night, the House passed a stopgap spending bill to fund the government through February 16 on a near-party line vote, 230-197.  In exchange for extending CHIP funding until October 1, 2023, the measure delays the implementation of the Cadillac tax, the medical device tax, and excise taxes on health insurers.  It is devoid of DACA.

GOP leadership hopes that the six years of CHIP funding will force Senate Democrats into a choice between children’s health insurance and relief for DACA recipients.  Few Democrats have broken ranks.  Six Democrats voted for the House bill, and Senate Democrats are prepared to hold the line to protect the nation’s 700,000 DACA recipients.  The Senate vote on final passage will be whisker thin either way.

With five hours until government shutdown, state of play and likely outcomes discussed below.

Good weekends to all and hope no one gets furloughed.

Best,

Dana

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Eyes on the Senate

The House continuing resolution (CR) now makes its way to the Senate where its chances of survival are looking increasingly slim.  Leadership in both parties is busy counting votes.  Passage of this CR will depend on the ability of leadership to enforce party discipline.

Republican Missteps

So far, Senate Majority Leader Mitch McConnell has lost three vital Republican votes.  Sens. Graham and Paul have said they will vote against the bill because of the effect that the continual can-kicking has on the deficit and military.  Sen. Flake has decided to vote against it in favor of the Democrats shorter term version.

Republicans need 60 votes to pass the spending bill, but with Sen.McCain out receiving chemotherapy, McConnell does have the votes needed for passage, even if Democrats allowed for cloture.  Sen. Lee has expressed reservations about a CR and might well join the ranks of Republican dissenters. With the math increasingly against him, McConnell faces a choice between a shutdown or another embarrassing floor loss.

Democrats’ Gains and Endgame

Republican leadership was always going to need Democratic help to pass the CR, but all indications are that the caucus is prepared to hold the line and withhold their votes in order to force Republicans into a deal to provide DACA relief and permanent CHIP funding. Republican efforts with the House bill have focused on peeling off a number of the eight Senate Democrats who are up for reelection this year in states that Trump won in 2016. Thus far, these efforts appear futile as Democrats are prepared to hold ranks to vote down the CR.

Sen. Tester has come out against the CR. That means that 11 of the 18 Democrats who voted for the December CR have already come out against the House bill.  More Democrats are sure to be close behind them.

The two Democrats who have signaled support for the CR are Senators Joe Donnelly and Joe Manchin. Manchin’s enthusiasm appears to be waning after he expressed skepticism of Republican leadership’s efforts, alongside the President’s, to blame Democrats for a shutdown, stating “Mitch controls the agenda — he’s in the majority, so if Mitch thinks he’s going to walk from this, I don’t think that’s ever going to happen.”

Democratic Leader Schumer has proposed a shorter term extension of a few days, which has bipartisan support. The extension would fund the government into next week and would allow Senators to continue debate. Republican leaders have yet to blink, but time is running out for McConnell. Even with a unified caucus he would be unable to overcome a Democratic filibuster. At the end of the day he will need Democratic votes to avoid a shutdown that a majority of the country will blame him for– and getting Democratic votes will require DACA relief.

Trump’s Take

Government shutdowns do not bode well for the popularity of the party in power.  This time is no different: a Washington Post poll suggests that 48 percent would hold Trump and Congressional Republicans responsible, while just 28 percent would fault Democrats. Speaker Ryan and Sen. McConnell grasp this, but the White House may not, perhaps calculating that Trump’s popularity cannot sink below present levels.  The GOP is ready to blame a shutdown on Democrats. Democrats are ready to clobber Republicans who seem prepared to “lock out” millions of federal workers and out citizens from essential services.

Sen.McConnell indicated he wants a package that the President will support, but President Trump’s conflicting signals make it unclear what this means. On DACA, he reversed his initial support for a bipartisan deal to protect 700,000 immigrants from deportation.  On CHIP, the President chided House Republicans via twitter for including CHIP in their spending package, throwing a wrench in the works of bipartisan deal making.

After Trump’s tweet that CHIP should not be part of the 30 day extension, Republican House leaders scrambled to save the CR. Then, shortly after the President met with Speaker Ryan, the White House said the President supported the House stop-gap measure.  Trump will likely sign any deal that arrives on his desk, but the logjam in the Senate may prevent him from seeing anything before the government runs out of money at midnight.

No Deal in Sight Tonight

Sen. Schumer left his White House meeting with Trump today, a mere eight hours before the shutdown deadline, and stated no deal had been reached.  The talks revolved mostly around DACA.  Schumer reported that while the talks were productive, the two sides were still a long ways away, as they “still have a good number of disagreements”.  Trump was reported to have told Schumer to work it out between himself, McConnell and Ryan.  While the talks were “productive,” it seems that there will be no deal tonight between the parties.  More Monday.

New Year, Old Budget, New Riders (Jan. 5)

Update 240:  New Year, Old Budget, New Riders
Plus Ça Change All Over Again in FY 18
Yesterday, Senate Democrats welcomed two new members to their ranks, Doug Jones of Alabama and Tina Smith of Minnesota.  The swearings-in officially narrow the Republican Senate majority to one, 51-49.  The thin majority was assuredly on the minds of Congressional leaders from both parties as they sat down with White House officials this week to haggle over a spending bill that was due last spring and now involves a host of other issues from DACA relief to CHIP funding.

All indicators suggest that Democrats are gearing up for a fight. Will the party that was so averse to attaching riders to spending bills during the Obama era play hardball with the budget?  Or are some riders better than others?  More below.

Keep warm and have a good weekend,

Dana

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Topline FY 18 Figures

Both Democrats and Republicans agree that the first order of business will be to raise the FY 18 $549.1 billion defense and $515.7 billion non-defense Budget Control Act (BCA) caps, and to possibly pay for some of these increases with spending cuts. Each party is concerned by the BCA’s severity: last year’s FY 17 appropriations totaled $601 for defense and $614 for non-defense discretionary spending.  Republicans hope to raise caps and slash domestic spending to expand funding to the military.  Democrats insist on a spending deal which matches defense spending and non-defense domestic spending dollar for dollar.

The budget resolution passed by Congressional Republicans in the fall sets a topline FY 18 discretionary budget authority at $621.5 billion for defense and at $510.7 billion for nondefense discretionary. This is broadly in line with the Trump administration’s call for a two-year budget that would increase military spending by about $100 billion. Republicans were able to pass their own budget resolution for tax reform, but with respect to appropriations, Democrats wield more leverage to negotiate.
Still on Obama’s Budget 

The GOP may have claimed its first legislative victory with the Tax Cuts and Jobs Act, but a year into Trump’s presidency, the country is still operating with an Obama-era budget. The budget process is rife with arcana and it’s not uncommon for a new administration to take some time to get spending priorities in place. A delay this long, however, suggests an administration unprepared to pass fundamental (and legally required) legislation and, perhaps, one surprised to be in the White House at all.

With the midterm elections just now appearing around the corner, Republicans have walked themselves into a corner by relying so heavily on Continuing Resolutions (CRs) — already relying on three in FY 18.  Democratic leverage over budget negotiations increases with each kick of the can. With another shutdown looming on January 19, both parties are bracing for a fight.

If Tuesday’s letter from Nancy Pelosi is any indication, she and Senate Majority Leader Schumer plan to stick with the dollar-for-dollar demand, though this will enrage Republican fiscal hawks shaking off their post-tax reform deficit amnesia which settled over the GOP during the tax fever this fall. Failure to agree could yet force a government shutdown, sending markets reeling and subjecting federal workers to a furlough.
More Than Just a Budget Fight 

The Democrats’ leverage comes primarily from the fact that, unlike with the tax bill, Republicans need Democratic votes if they are going to avoid the embarrassment of a government shutdown. A sizable number of House GOP members will likely vote against the spending bill, so GOP leadership need Democrats’ votes to pass the bill. In the Senate, the Republicans’ razor-thin 51-49 majority leaves them vulnerable to a Democratic filibuster that would require 60 votes to overcome.

Pelosi’s letter implies the Democrats are prepared  to go to the mat to fund programs which Republicans have neglected in pursuit of tax reform. These include:

  • CHIP — The Children’s Health Insurance Program ran out of funding at the end of last September. Before the holidays, Congress extended CHIP funding through the end of March, but child advocates are concerned funding could be depleted by then and are pushing for a five year extension.  Nine million American children rely on the program, particularly in families who earn too much to qualify for Medicaid, but too little to afford quality health insurance. The House passed a long-term CHIP appropriation in November that paid for the program by cutting health spending elsewhere, but Democrats rejected it as insufficient.
  • DACA — Don’t expect much action on the budget without relief for children brought illegally to the U.S. who have benefited (up until now) from the Deferred Action for Childhood Arrivals program that President Trump would end.  Many progressive Democrats were furious with leadership for passing December’s spending bill without getting relief for DACA recipients. Thousands of protesters descended on Capitol Hill in December to demand on the passage of the Dream Act.  Nearly two hundred protesters, including two members of Congress, were arrested on the Capitol steps. With several important Republicans voicing support for Dreamers, and progressive Democrats out of patience, it appears that the time has come for Democratic leadership to dig in its heals.
  • Other Democratic Priorities — While CHIP funding and DACA relief are the two most politically contentious items up for negotiation, Pelosi’s letter highlighted several other Democratic priorities. These included: new spending for veterans programs; disaster relief; National Institutes of Health; the opioid crisis; and the reinforcement for faltering state, local, and private pension plans.

While it’s unlikely that we’ll see all of these Democrat priorities addressed, it’s certainly clear the negotiation docket is full. That leaves negotiators precious little time to come to consensus before the December 21st CR expires in 15 days.
Next Steps: Long Term or CR?

All indications are that, even if a budget deal can be agreed to, Congress will have to pass another short-term spending measure to avoid a shutdown on January 19.  Rep. Tom Cole, long-time leading GOP budget-maker, was quoted as saying that he, “didn’t think you have have a choice but to think about another CR” until negotiations are concluded.  With so few session days before Jan. 19 and so many items under negotiation, this may as well be an announcement of the fourth CR in as many months. Cole expects an extension, quite likely through Presidents’ Day, February 19.

If an extension is forthcoming, Democrats will likely want to attach their preferred legislation to the CR. Democrats have long decried Republican use of poison pill riders — attachments purposely designed to make a bill unpassable. Given the Democrats’ leverage at the negotiating table, as Republicans don’t have the votes, progressive attachments are unlikely to kill any extension.