Federal Reserve Chairman Jerome Powell gave bank shareholders a present earlier this month, when the Fed tipped off investment banks Morgan Stanley and Goldman Sachs that they would fail the central bank’s annual stress test. According to reporting by the Wall Street Journal, bank executives were given the option of freezing their capital distribution plans at last year’s levels in exchange for receiving a “conditional non-objection” grade and the avoidance of “the black eye of failure.”
This new, wink-and-nod approach to this year’s Comprehensive Capital Analysis and Review (CCAR) process was predictably lambasted by Senate Democrats like Elizabeth Warren and Sherrod Brown during Chair Powell’s testimony Tuesday before the Banking Committee. But Warren and Brown likely know better than anyone in Washington, going to bat for the financial services industry is pretty much the only thing Democrats and Republicans can agree on these days.
Exhibit A is this year’s bank deregulation bill, which cut back Dodd-Frank regulations and raised the asset threshold at which banks will be subject to enhanced oversight from $50 billion to $250 billion. This legislation took a good idea—namely the raising of this threshold so that legitimately small, community banks could avoid paying for regulatory compliance they couldn’t afford and from which the American economy wouldn’t benefit—and ran away with it. Instead of doubling the threshold, Congress decided to quintuple it to a level that would have exempted even Countrywide Financial from additional oversight, if these regulations had been in place in 2008.
The deregulation bill received support from a diverse array of Democrats from former Vice Presidential nominee Tim Kaine of Virginia to red state Democrats in hotly contested reelection races, like Heidi Heitkamp of North Dakota. The diversity of Democratic support and opposition to the bill suggests that the decision to vote for it didn’t come down to simple red-blue politics. Sure, some red state Democratic Senators supported the measure, but it’s Sherrod Brown, the endangered Senator from the State of Ohio who has been the public face opposing financial deregulation. Brown realizes that Ohio voters like Donald Trump not because of his zeal for financial deregulation, but in spite of it.
The deciding factor for many Democrats in supporting deregulation could very well have been political donations and lobbying. According to an analysis by MapLight, supporters of the bill received $277,000 in campaign contributions from the financial services industry more than double the average amount received by opponents of the bill. Meanwhile, the only other bills with the slightest chance of passage for the remainder of the year are also those being aggressively pushed by Wall Street. Those include the Retirement Enhancement and Savings Act, which would pave the way for retirement savings tax breaks to be extended to annuities and to protect employers from lawsuits if they chose an annuity savings plan provided by insurers that later go under.
Chairman Powell defended this year’s stress test as the toughest in history, with the Fed subjecting bank’s balance sheets to a severe economic downturn in which unemployment spikes by more than 6%, with a stock market crash of 62%. But of, course, this is the whole point of a stress test: to determine how the bank would perform under circumstances widely thought to be impossible.
What he couldn’t defend was the Fed’s decision to give Morgan Stanley and Goldman a workaround that enabled the firms to distribute $5 billion more in capital that they otherwise would have. Capital requirements are the only foolproof financial regulation there is, and they are the best means financial regulators have at their disposal for preventing government bailouts. Of course, they also make banks much less profitable, and in a Washington that it is bitterly divided on nearly every issue, sagging bank stocks are perhaps the one problem Republicans and Democrats can agree needs solving.