Friday, January 9, 2015

The Financial Services Industry Takes Formal Control of Congress

The Financial Services Industry Takes Formal Control of Congress

On January 6th the 114th U.S. Congress was sworn in.  You probably thought that the re-election of Speaker Boehner and Majority Leader McConnell describe the power structure on Capital Hill.  The real power structure was revealed the next day when the House attempted to push through the “Promoting Job Creation and Reducing Small Business Burdens” Act.   Wall Street has long had undue influence in Washington, but the consideration of this bill demonstrates that the financial services industry is now formally in charge of the legislative process.  Since investment bank and hedge fund executives are now permitted (required) to contribute well over a million per election cycle to Congressional efforts, not including super PAC donations, they feel entitled to run Congress.

Within 24 hours, Wall Street pushed its first piece of legislation to the floor of the House.  H.R. 37 sounds like a worthy subject for Congressional action.  Who would be against job promotion or easing the burdens on small business?  That’s not what this bill is about.  It is really a series of gifts to the mighty and tiny of the financial services industry.  Congress was so eager to please its financial patrons that the bill bypassed the normal committee process and proceeded to the House floor without debate.  As a result, the bill required a two-thirds majority.  Republicans thought enough Democrats would support this measure to assure passage.  They miscalculated.  While the bill failed, there is no doubt that it will pass because the vote was 276-146 in favor of the measure. 

This bill is chock-full of bad stuff.  For example, it orders regulators to postpone until 2019 rules that would require the big banks to remove collateralized loan obligations (special investment vehicles uses to package up bank debt) from their balance sheets.  Congress had already pressured the regulators to postpone the rule until 2017.  Why is this so urgent?  The large banks have tens of billions of dollars of CLOs on their balance sheet, a great deal of it derived from loans to energy companies.  I suspect they are sitting on losses that would have to be realized if this paper had to come off their balance sheets. 

Another section of the bill would exempt advisors to private M&A transactions from the SEC’s broker registration requirements.  This provision is aimed at protecting private equity firms who have been getting paid to advise on such transactions without being properly registered.

Yet other provisions would severely limit the amount of historic financial information available to investors in small companies (known as emerging growth companies).   It would also allow such companies to keep this special status for a full year after they no longer meet the definition.  One particularly egregious section would allow small public companies to issue additional stock to the public without making any prior public disclosures.

I realize that these provisions are technical and pretty boring, so I’ll stop describing the bill.  However, this legislation is going to wind up on the President’s desk and it represents an assault on Dodd-Frank, the SEC, and most importantly the average citizen.    This time Wall Street was a bit to eager to exercise its newfound power. Next time they won’t make a mistake.

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