WASHINGTON – It seemed like a good idea at the time: Democrats from Republican states facing daunting re-election prospects would join forces with Republicans to radically roll back provisions regulating banks, demonstrating a willingness to work with President Donald Trump and going against many in his party.
That unlikely coalition voted in 2018 to reverse sections of a sweeping 2010 law designed to prevent a financial crisis in the future. But those changes are now being blamed for contributing to the recent collapse of Silicon Valley Bank and Signature Bank, which resulted in federal intervention and has whipped up nervousness that there is going to be more widespread contagion in banking.
The reversal was achieved through a lobbying campaign costing tens of millions of dollars, which involved an army of hundreds of lobbyists and was fueled by an extensive campaign of contributions.
The episode offers a fresh reminder of the power wielded by bankers in Washington, where the industry spends hand over fist to fight regulation and often hires former members of Congress and their staffs to argue that their banks are not a source of risk to the economy.
“The bottom line is that these banks would have faced a much tougher supervisory framework under the original … law, but Congress and Trump’s regulators axed it,” said Carter Dougherty, a spokesman for Americans for Financial Reform, a left-leaning financial sector watchdog group. “We can draw a direct line between the Trump-era deregulation pushed by bank lobbyists and the chaos of the past few weeks.”
President Joe Biden has asked Congress for the authority to impose tougher sanctions on failed banks. The Justice Department and the Securities and Exchange Commission have launched investigations. And Democrats in Congress are calling for new restrictions on financial institutions.
But so far there is no indication that another bipartisan coalition will be formed in Congress to re-implement stricter regulations, revealing the continued influence of the banking industry.
That influence was clearly exposed after bank lobbyists worked for two years to water down aspects of the 2010 Dodd-Frank law, which had imposed heavy-handed regulations on banks to reduce risk to consumers and force institutions to adopt safer lending and investment practices.
Republicans had long wanted to mitigate the impact of Dodd-Frank. But instead of pushing for broad deregulation, Republican Sen. Mike Crapo, who headed the Senate banking committee, was hopeful that a narrower approach could attract enough support from moderate Democrats to overcome the upper chamber’s 60-vote filibuster threshold.
Crapo broached the idea with Democratic Senators Jon Tester, Joe Donnelly and Heidi Heitkamp – all of whom are on the 2018 ballot – and Mark Warner. By the fall of that year, the bipartisan group was meeting frequently, according to a copy of Tester’s office agenda posted on his Senate website.
A lobbying strategy also emerged, whereby companies and trade groups specifically mentioning Crapo’s bill spent more than $400 million between 2017 and 2018, according to an analysis by The Associated Press of public lobbying disclosures.
The bill was touted to the public as a sort of regulatory relief for overwhelmed community banks, which provided services to farmers and small businesses. Community bankers from across the United States flew to Washington to meet numerous times with legislators, including Tester, who held 32 meetings with Montana banking officials. Local banking executives lobbied members of his legislative delegation after they returned home.
But the measure also included provisions requested by midsize banks that reduced oversight dramatically as Trump’s Federal Reserve finalized new regulations required for the bill to pass.
Specifically, the bill removed the threshold for banks facing a strict supervisory regime, which included mandatory financial stress tests.
That component, which effectively spared large midsize banks from stricter regulation, is under renewed scrutiny following the failure of Silicon Valley Bank and Signature Bank, whose executives lobbied for the reversal of the regulations in 2018.
“Lobbyists were everywhere. You couldn’t walk by without running into one,” Democratic Sen. Elizabeth Warren – who vehemently opposed the bill – told reporters last week.
Campaign checks were written. Ads were taken down. Advertisements were mailed.
In reward for their work, Heitkamp ($357,953), Tester ($302,770) and Donnelly ($265,349) became the biggest recipients in the Senate of money from the banking industry during the 2018 campaign, according to OpenSecrets, a nonpartisan group that tracks money in politics.
Senate Democratic Majority Leader Chuck Schumer gave members free reign to cast their votes on the bill, a move intended to shore up the electoral position of vulnerable moderates. But the strategy also led to a bitter split in the Democratic caucus, with Warren accusing moderates of doing the work of Wall Street.
In the hours before the bill passed the Senate with 17 Democratic votes, Heitkamp took to the floor of the upper chamber to rant against the “diatribe,” “hyperbole” and “exaggeration” of those who opposed the bill.
Meanwhile, Tester met privately with a group of executives from Bank of America, Citigroup, Discover and Wells Fargo, who attended on behalf of the American Bankers Association, according to his office’s publicly available agenda.
The American Bankers Association, which helped spearhead the initiative, subsequently paid $125,000 for an ad campaign to thank Tester for his role in passing the bill, records show.
Less than a month after the Senate passed the bill, Tester met with Greg Becker, CEO of the now-bankrupt Silicon Valley Bank, according to his schedule. Specifically, Becker lobbied Congress and the Federal Reserve to adopt a light regulatory approach toward banks of his size. Lobbyists from the firm Franklin Square Group, hired by Silicon Valley Bank, donated $10,800 to Tester’s campaign, records show.
Heitkamp was the only member of the group invited to the ceremony where the bill was signed, and she was smiling broadly at Trump’s side. Later, Americans for Prosperity, the grassroots conservative group founded by the billionaire Koch brothers, ran an online ad praising Heitkamp for opposing their party.
In an interview, Heitkamp rejected insinuations that the law was directly responsible for the collapse of Silicon Valley Bank. However, she acknowledged that there was an open question about whether new rules implemented by the Federal Reserve after the law was enacted might have played a role.
“I’m willing to look at the argument that this had something to do with it,” Heitkamp said, adding, “I think you will find that (the Fed) was involved in a certain level of oversight. Why didn’t that work out? That’s the question that needs to be resolved.”
In a statement he issued last week, Tester did not directly address his role in the law, but vowed to “stand up to anyone in Washington to ensure that the executives of these banks and the regulators are held accountable.”
Cam Fine, who led the Independent Community Bankers of America trade group during the effort to get the bill passed, said that overall, such a proposal was a good piece of legislation that offered much-needed relief to struggling community banks.
But like any major piece of legislation that passes through Congress, final passage depended on the support of a broad coalition of interests, including Wall Street and mid-sized banks.
“Was it a perfect legislative bill? No. But there’s an old saying in Washington: you can’t let perfection be the enemy of the good,” Fine said.
Many of the moderate Democrats who supported the measure did not fare as well.
Of the core group that drafted the bill, only Tester was re-elected. Other lawmakers from Republican states who supported it, including Claire McCaskill and Bill Nelson, lost.
Tester will be back on the ballot in 2024. Last week he went to Silicon Valley for a fundraising event.