By Lydia Moynihan, Charles Gasparino
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Wall Street spent millions of dollars in campaign cash while enlisting some of the most powerful Republican congressmen and women in the banking industry’s latest effort to neuter a key post-financial crisis regulation, FOX Business has learned.
The rule – known as the G-SIB surcharge – is a seemingly arcane bank law that has been a thorn in the side of the big banks since it was implemented by the Federal Reserve as part of a series of regulations to protect the banking system after the 2008 financial collapse.
But a FOX Business investigation shows that the rule may be in jeopardy of being significantly watered down or possibly eliminated – a casualty of intense lobbying from the big banks, and a steady stream of campaign cash from the financial industry to bank-friendly politicians.
Leading the effort to neutralize the rule is a lobby group known as the Financial Services Forum, an organization representing the nation’s biggest banks that are directly affected by the surcharge. The Forum recently convinced 29 top Republicans to sign a letter to Fed Vice Chairman Randal Quarles demanding that the agency “recalibrate” the rule, according to senior executives at the banks the Forum represents, and a copy of the letter obtained by FOX Business.
To be sure, the Republicans who signed the letter are mostly free-market conservatives who have been critical of excessive regulation. But they may have been motivated by something else: The top signatories sit on congressional committees that have oversight responsibility for the Fed, which serves both as the country's central bank, and the top regulator of the financial industry.
And according to campaign contribution records, all but one of the signatories of the letter have received substantial campaign contributions from the banking industry in recent months.
In total, the securities and banking industry contributed $6.8 million to those lawmakers who signed on to the effort, records indicate.
A Fed spokesman declined to comment on the matter other than to say the central bank has received the letter and plans to provide an answer in writing. Press officials from the banks declined to comment.
A spokeswoman for the Financial Services Forum wouldn’t deny that the lobby group was behind the letter.
“Our members provide essential services to consumers, businesses, investors, and communities. We agree with regulators that post-crisis rules should be reviewed and we believe they should reflect the significant advancements made to resiliency and resolvability,” said spokeswoman Barbara Hagenbaugh. “A more balanced regulatory system supports lending and growth in the economy.”
Illinois Republican Randy Hultgren, the only lawmaker on the letter who chose to comment, said revamping the surcharge “is sound policy that drives jobs and growth; political support has zero impact on my support for it and the American worker.”
Lobby clout in Washington
Conspicuously absent from the letter is any mention of the lobby group behind it: the Financial Service Forum.
But in Washington, the organization’s clout is unmistakable.
Its president, Kevin Fromer, is a long-time bank lobbyist who worked both in the Treasury Department and on Capitol Hill. The Forum lists its “members” as the chiefs of the nation’s biggest and most powerful banks: Brian Moynihan of Bank of America; Jamie Dimon of JPMorgan Chase; Lloyd Blankfein, the outgoing Goldman Sachs CEO; Michael Corbat of Citigroup; James Gorman of Morgan Stanley; Joseph Hooley of State Street; Charles Scharf of BNY Mellon; and Timothy Sloan of Wells Fargo.
|BAC||BANK OF AMERICA CORP.||27.38||-0.94||-3.32%|
|JPM||JP MORGAN CHASE & CO.||106.36||-1.55||-1.44%|
|GS||GOLDMAN SACHS GROUP INC.||221.60||-5.36||-2.36%|
An internal email from a senior executive at Bank of America, one of eight big banks represented by the Forum, underscored the Forum’s role in the bank’s efforts to neutralize the regulation. The email, intended for Bank of America’s officials, cited the letter as a “good example of the work Kevin Fromer is delivering on.”
The letter is “his (Fromer’s) work” along with “others with the relationships getting it done,” the email stated, according to a copy obtained by FOX Business. (A Bank of America spokesman confirmed the authenticity of the email but declined further comment.)
It’s apparent why the big banks are willing to spend money and use lobbying muscle to eliminate or substantially reduce the surcharge. G-SIB stands for Global Systemically Important Bank and it forces eight of the biggest U.S. financial institutions to hold even more capital than already mandated by banking laws such as Dodd-Frank or international standards such as the Basel Accord.
The Fed, the banking industry’s top regulator, came up with the surcharge as a safety net for the biggest U.S. banks if things go south as they did in 2008, when the federal government spent $700 billion to prop up the financial system and prevent an economic meltdown.
According to the rule, the amount of capital needed is based largely on size: JPMorgan is mandated to hold more capital than one of the smaller systemically important banks, State Street. But what binds all these players, large and small, is the view that the surcharge is redundant and squeezes profits.
And the big banks are picking a good time for a fight. The banking industry and economy have certainly recovered from the dark days of the 2008 financial crisis. With bank-friendly Republicans in control of Congress and a GOP-appointed chairman running the Fed, the industry’s top lobbying groups, like the Forum, see an opening to reverse the regulatory agenda of the Obama years.
And between lobby and campaign cash, the banks are often getting their way, as the July 27 letter to Quarles from 29 key GOP congressmen and women demonstrates. Signatories include such GOP House heavyweights as Andy Barr, Patrick McHenry, Blaine Luetkemeyer and Bill Huizenga. All sit on various committees and subcommittees with the responsibility for Fed oversight, and are among the biggest recipients of cash from the banking business.
The letter demanded immediate action. “It is imperative that the Federal Reserve recalibrate the surcharge now.” The letter added that “there is great concern that the surcharge calculation, as currently constructed, is putting unwarranted capital burdens on U.S. banks.”
Fed open to revisiting surcharge as GOP, banks demand action
What the lawmakers also left out of their missive is where much of that concern about the surcharge comes from: the nation’s largest banks.
“We farmed this out to the Forum to get this rule changed,” said a senior executive at one of the banks effected by the surcharge. “It’s unnecessary given all the other rules we have to comply with.”
Fed Chairman Jerome Powell, who was appointed by President Trump and like Quarles has a key vote on whether the surcharge lives or dies, has publicly offered mixed messages about revisiting some of the post-crisis regulations.
In a recent speech, Powell said the Fed’s regulatory “expectations” for the big banks “are very high,” adding: “I’m looking for the case for some kind of evidence that – and I’m open to this – some kind of evidence, though, that regulation is holding them back. And I’m not seeing this case made at this point.”
In private, however, the Fed has a more pronounced approach to deregulation – which has given banking officials and their lobbyists hope that it will soon move to weaken the surcharge. Congress recently revamped the Dodd-Frank legislation – the biggest piece of banking crisis regulation – to make it less onerous for smaller banks, a move supported by the Fed. And at the urging of Congress and President Trump, the Fed has taken a more relaxed view of some Dodd-Frank rules, banking executives tell FOX Business.
Indeed, pressure on the Fed to further weaken post-crisis regulations seems to be building by the day. Just this week, five GOP senators have also written Powell, demanding that the surcharge be softened.
All five senators are members of the powerful Senate Banking Committee, which must approve Fed nominees and provides oversight of the agency. And all are recipients of generous amounts of campaign cash from the big banks.
Money talks as banks lobby Congress for deregulation
After the Obama administration and congressional Democrats passed a number of new financial regulations following the 2008 crisis, banking industry campaign contributions have significantly favored Republicans over Democrats, records reviewed by FOX Business show.
With the possibility of Democrats controlling one or both houses of Congress following the midterm elections, banks have recently cranked up their deregulation lobbying efforts and – according to campaign records – their money going to bank-friendly GOP congressmen and women who can get it done.
For instance, contribution filings show that nine of the top 20 recipients of money from the commercial banking business were signatories of the Quarles letter. The lead signatory, Barr, a Republican from Kentucky, sits on the House Financial Services Committee and is chairman of the Subcommittee on Monetary Policy and Trade – both of which provide significant oversight on the Fed.
Barr received $281,266 from securities firms and investment banks and another $169,978 from commercial banks during the 2018 election cycle, which includes contributions made in 2017 through this year, records show.
Other top signatories of the letter including Financial Services Committee members Luetkemeyer, a Republican from Missouri, McHenry, a Republican from North Carolina and Huizenga, a Republican from Michigan, also received large donations from investment banks and commercial banks over the past year.
Notably absent from the letter is Financial Services Committee Chairman Jeb Hensarling, a Republican from Texas. But Hensarling has announced that he will retire from Congress at the end of the year.
Luetkemeyer, McHenry and Huizenga are all considered possible replacements to chair the committee, according to the American Banker, which recently wrote about the letter.
Only one signatory of the letter, Rep. Steve Pearce, a Republican from New Mexico, didn’t receive contributions from banks and securities firms during the 2018 election cycle, records show. A spokesman didn’t return a call for comment.
Some banking experts say the GOP could be setting the stage for another financial crisis by softening regulations at the behest of Wall Street. Sheila Bair, the former head of the Federal Deposit Insurance Corp. (FDIC), and a 2006 appointee of former President George W. Bush, said economic conditions today aren’t much different than those just prior to the financial collapse with the Fed raising interest rates, setting the stage for market volatility that could impact the balance sheets of the big banks.
To withstand those shocks, banks will need a capital cushion that the surcharge provides, she said.
“They need more capital, not less at this point,” Bair told FOX Business. “The big banks just got a big tax cut, they’re facing less regulations from the Trump administration overall and they’re making money. I don’t know what getting rid of the surcharge does other than boost shareholder interests at the expense of taxpayers that these congressmen are supposed to represent.”