Neither Mitt Romney and the Republicans nor President Obama and many Democrats favor breaking up the big banks, the best way to prevent another taxpayer bailout after a financial crisis.
In last Wednesday’s presidential debate, Governor Romney said the Dodd-Frank Act is “the biggest kiss that’s been given to New York banks I’ve ever seen,” claiming the Act enshrines the idea of “systemically significant” institutions (SIFIs) as too-big-to-fail. Since then, Democrats have responded that Dodd-Frank empowered regulators to define and enforce higher capital and prudential standards for SIFIs, as wells as “living wills” and orderly liquidation authority to dismantle failing SIFIs, hardly a kiss those SIFIs enjoy. Yet in the Spring of 2010, other Democratic Senators, lead by Sherrod Brown (D-OH) and Ted Kaufman (D-DE), argued vociferously that we shouldn’t count on bank regulators (who had failed in the lead-up to the crisis) to use these Dodd bill provisions to end “too big to fail,” that the Republicans had no plan at all, and that the only way to prevent another financial crisis is to statutorily limit the size of (and leverage used by) the largest banks and non-banks.
In this excerpt from THE PAYOFF: Why Wall Street Always Wins, Senator Kaufman’s chief of staff, Jeff Connaughton, explains how then Senator Chris Dodd (D-CT), the Republican Caucus, and the Obama administration worked together to defeat the Brown-Kaufman amendment to break up the biggest banks.
Still Too Big To Fail
In more than twenty years in Washington, I’d never followed a major bill through Congress as closely as I did the Dodd-Frank Act. In that time, I’d never fully grasped the almost absolute power to steer the bill wielded by committee chairs, especially when the leadership delegates all responsibility to them, as Harry Reid did to Chris Dodd. Almost nothing could happen on the Senate floor or get in the bill without Dodd’s approval. That was particularly true in this case because Dodd and the Treasury Department wanted a squishy bill, and the Republicans were willing to work with Dodd to weaken it. (In the Senate, it takes unanimous consent for an amendment to come to the floor for a vote. So Dodd and Shelby had a vice grip on what amendments would be considered. They only accepted amendments they both liked.) On this bill, Shelby had never negotiated in good faith with Dodd. Indeed, Shelby had publicly and repeatedly said that he preferred no bill at all. Yet Shelby and the Republicans would cooperate by granting unanimous consent to Dodd’s floor strategy, because they trusted that Dodd wanted to pass the weakest possible bill. And then the Republicans would still try to filibuster it.
Early in the Senate’s consideration of the bill, I went to one of Harry Reid’s staff, making the case that Brown-Kaufman deserved a debate and vote. He said, “Reid will only be for amendments that help Democrats up for reelection.” And when other Democratic senators went to Reid about their amendments, Reid repeatedly said, “Work with Dodd.” That’s why the Senate first considered an amendment authored by Senator Barbara Boxer (D-CA); it consisted of precatory language stating that Congress would never again bail out failing banks (that is, until the next time Congress is forced to change its mind in a bail-out-or-go-into-a-Depression scenario). It was meaningless, but it helped Boxer in her Senate campaign for it to be a Boxer amendment.
Days dragged on with little Senate debate and few votes on amendments. Before long, almost two weeks had gone by. Dodd would dawdle and stall, blaming the Republicans for refusing to grant unanimous consent when Democrats wanted to offer amendments with teeth. I knew at some point Reid would come to the floor and say, “We’ve now been on this bill for three weeks, we need to file cloture and have a vote so we can move on to other pressing business.” I began telling reporters the Senate was having a “fake” debate.
Ted was trying his best to convince Republican senators to break up the largest banks. He ran into Senator Tom Coburn (R-OK), who is very conservative. Coburn told Ted that he’d been reading about his speeches and would like to help. Later that day on MSNBC, Coburn said he was working with Senator Kaufman on an amendment. On May 1, at a dinner in Wilmington, the Republican Party state chairman came up to Ted and said he supported everything Ted was doing on financial reform. Ted talked to Republican Senators Isakson (R-GA), Barrasso (R-WY), and Johanns (R-NE), reminding them that they represent southern or western states, which from our country’s founding have been opposed to the power of big banks. “It would be good for you politically if the front page of your hometown newspaper said ‘Senator Votes to Break Up Big Wall Street Banks.’” They agreed with Ted on the politics, but said no. Senators McConnell and Shelby were working the Republican caucus very hard, demanding unity.
We pushed hard to get a vote on Brown-Kaufman. Then, suddenly, when it was clear to Dodd’s vote counters that our amendment would fail (and before a weekend when the Greek debt crisis threatened to get worse, raising the specter of bank bailouts in Europe), Reid and Dodd scheduled a vote for that very night. Some have called it a “flash vote” because it was scheduled preemptively before we could gain any further momentum. Earlier that day, the flash crash had hit the stock market, vindicating Ted’s months-long HFT [high-frequency trading] campaign and enhancing his credibility with many of his Senate colleagues.
Reid said, “We all know the issues.” We couldn’t argue that Brown-Kaufman deserved a longer hearing. Since February 2010, Ted had orated tomes. Twice, Senators Brown and Kaufman had come to the floor and engaged in a dramatic colloquy, playing off the other in their earnest desire to see the country protected from another financial crisis. On May 5, Senator Durbin stopped Ted on the Senate floor and said, “Jamie Dimon [the CEO of J.P. Morgan] asked me to tell you ‘It was the small banks that failed.’” Ted went right back to the microphone and, without naming Dimon, said the Royal Bank of Scotland, which was bigger than any U.S. bank, had failed. The only reason our biggest banks like Citigroup didn’t fail was because of TARP and support from the Fed. After Brown and Kaufman finished, they walked over to Senator Dodd in the well of the Senate and jokingly asked him to accept their amendment. Dodd laughed and said no.
It was time to vote. Senators had to stand on one side or the other: Did you believe, as even Alan Greenspan belatedly had mused, “if they’re too big to fail, they’re too big”? Or did you believe, in effect, size doesn’t matter? Ted gave a brief summation. Our argument was based in prudence. Whatever you thought had caused the financial crisis, it’s clear that six megabanks have become so gigantic — and even more so after the consolidation that took place during the crisis — that they’re too big to fail. If there’s ever another crisis, these megabanks will be the recipients of a massive taxpayer bailout. The Fed has admitted that no economies of scale enable megabanks to help America better compete in a global economy — that’s a false argument that banks make to preserve their ability to borrow at lower rates (because the markets perceive them to be government-backed). Why not place a statutory limit on their size and the amount of relative borrowing they can use?
No one could confuse the issue, at least I thought. But, just before voting, Senator Dianne Feinstein (D-CA) — one of the most liberal members of the Senate — asked Durbin, the majority whip, “What’s this amendment?” According to Durbin, who later told Ted, he replied: “To break up the banks.” Giving the thumbs-down sign, Feinstein said bemusedly: “This is still America, isn’t it?”
Fifteen minutes later, the Brown-Kaufman amendment to break up the megabanks lay dead on the Senate floor, shot through by sixty-one no votes. Three Republicans — Richard Shelby (R-AL), Tom Coburn (R-OK) and John Ensign (R-NV ) — joined 30 Democrats who voted for it. Most of the same senators who’d swallowed the novel idea of a $700 billion taxpayer-funded bank bailout just couldn’t comprehend the idea of the government putting a size cap on any business. As Senator Judd Gregg (R-NH) had asked on the Senate floor: “What are we going to do next? Limit the size of McDonald’s?” Last I checked, Big Macs hadn’t collapsed, destroyed $20 trillion in housing and financial wealth, and thrown eight million Americans out of work. Under antitrust law, we stop businesses from combining if it leads to market power and consumer harm. Why can’t Congress limit bank size to prevent financial instability and massive economic harm?
All along it had felt like the Charge of the Light Brigade. For months Ted — canon to the left of him, canon to the right of him — had gone to the Senate floor to speak truth to power. Time called him “The Replacement Senator Giving Democrats Fits.” Where was the rest of the cavalry? You’d think that senators would at least come to the floor and debate what role Wall Street had played in the disaster and what needed to be done about it. For a long time, Ted was the only one. It had been exhilarating as Ted galloped down the gauntlet, opposing the President, Larry Summers and Tim Geithner, Wall Street, the Delaware banks, and, most especially, the no-plan Republicans. He threw caution to the wind, cheered on by the media, his hometown Wilmington News, and many Americans (and, best of all, Delawareans). Then we reached the canon line, vaulted it, were dismounted on landing, and lay in stunned disarray, knowing that for us and for now, the battle was over.
If it felt that way to me, imagine how it felt to Ted. He’d put his heart and soul into it, reaching deep inside for wisdom and eloquence (“stemwinders,” one reporter called his speeches; even the Guardian called them “remarkable”). Senator Bob Corker (R-TN) said on the Senate floor, “I admire the senator for his passion.” Another senator came up to him and said, “You’re a regular Demosthenes.” Ted could get quite angry, and yell, red-faced, “In the 1930s, our forebears in the Senate passed legislation that worked for three generations! We can’t just pass it back to the regulators . . . the buck stops here. In the Senate.” I had watched at my desk on C-Span more than once and said, “He’s like Biden.” It was his finest hour.
Yet it was all over for the Brown-Kaufman amendment. After several drafts of a press release, I asked Ted, just returned from the stinging Senate floor defeat: How do we start it? He slumped into his chair and dictated: “I am disappointed.” Not long afterwards, a senior Treasury official was quoted about the Brown-Kaufman amendment: “If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.”