At the heart of the impasse in Congress over a must-pass spending bill is a provision involving the sorts of high-risk investments that ignited the 2008 financial crisis.
The dispute occurred after Republicans inserted into the bill a provision to relax the regulation of investments known as derivatives. Democrats, led by their House leader, Nancy Pelosi, have demanded that the provision be removed. They argue that it would let big banks gamble with depositors' federally insured money and could make it likelier that banks, if undone by their risky bets, would need another taxpayer bailout.
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The provision is part of a broader Republican drive to erode the Dodd-Frank financial regulation law, which Congress enacted in 2010 to try to tighten regulation and prevent another crisis. Republicans have denounced Dodd-Frank as an excessive expansion of regulatory authority that's stifling the competitiveness of the U.S. financial industry.
And they say the restrictions on derivatives trading at issue now will hurt smaller banks that use these investments to help their small-business customers lessen their financial risks.
Pelosi's support, and the votes of her Democratic colleagues, are crucial to passing the spending measure, which would prevent a government shutdown.
As the spending bill neared a House vote, the White House said President Barack Obama would sign the measure despite concerns about the derivatives provision — which, Obama wrote, would "weaken a critical component of financial institution reform aimed at reducing taxpayer risk."
Just what are derivatives? Why do they matter? And why has government oversight of derivatives become a bargaining chip in a high-stakes political drama?
Some questions and answers:
WHAT'S THE FUSS?
Derivatives are transactions whose value derives from some underlying investment — oil, for example, or currencies, interest rates or stocks. Farmers, airlines and industrial companies use derivatives to hedge against risks. But derivatives have also been used — sometimes recklessly — by financial firms to speculate. Derivatives trading can produce steep losses or huge profits, if the value of their underlying asset sinks or soars.
Derivatives are traded in a $600 trillion global market that was secretive and unregulated before the 2008 crisis. With Dodd-Frank, Congress mandated that the reins of oversight encircle derivatives trading as part of its overhaul of financial regulation. As a result, for example, most derivatives trades now occur in clearinghouses, where member firms post collateral to back trades.
WHAT WAS DODD-FRANK SUPPOSED TO DO?
The law was a direct response to the 2008 crisis, which plunged the U.S. economy into the most severe recession since the Great Depression and necessitated a taxpayer bailout of banks, automakers and mortgage finance giants.
In looking back on that catastrophe, it was clear that derivatives had become the accelerant on the fire of the crisis once American International Group neared its demise in September 2008. The giant insurer, which had sold a form of derivatives that were guarantees on mortgage securities, had to pay out billions once the housing market went bust and the subprime mortgage bubble burst. The value of the mortgage securities plunged.
The government ended up rescuing AIG with nearly $185 billion in aid. The company has since repaid the bailout. But the episode still reverberates for policymakers and regulators.
SO DERIVATIVES NOW ARE REGULATED. WHAT WOULD THE DISPUTED PROVISION DO?
Under Dodd-Frank, banks must spin off — or "push out" — their derivatives business into a subsidiary separate from the federally insured bank. The idea is to prevent banks from borrowing against depositors' money to make outsize bets that carry enormous risks.
The provision that has riled liberal Democrats would repeal that requirement, which was to take effect last year but hasn't been finalized by regulators.
"Our entire financial system melted down. ... This is why (Congress) collectively said we must shut down the Wall Street casino," Sen. Jeff Merkley, D-Ore., told reporters.
Derivatives trades in general, Merkley said, are legitimate, "but they should not be used with a government insurer standing behind them."
The Democrats also are furious at how the provision was inserted into the 1,603-page spending bill. They have branded it a last-minute "backroom" maneuver, engineered at the behest of bank industry lobbyists.
WHAT DO SUPPORTERS OF THE PROVISION SAY?
Those who want to repeal the "push-out" requirement say they want to preserve the ability of banks to help farmers, corporations and small businesses use derivatives to hedge against risks. Many of these business customers also borrow from the banks.
If banks must move the hedging activity into subsidiaries, it would make "one-stop shopping" impossible for the businesses, they argue.
The current requirement "harms the ability of banks of all sizes to serve their customers and imposes a significant cost on the broader economy," says James Ballentine, executive vice president of congressional relations at the American Bankers Association.
And the Democrats?
Hold on, says the Republican House Speaker John Boehner: Some of the same Democrats who are objecting to the new provision supported it not long ago.
In fact, the provision is identical to one in a stand-alone bill the House passed late last year with the support of 70 Democrats. The Obama White House at the time raised concerns about the bill — but didn't issue a veto threat.
WHAT ARE THE BANKS DOING?
In a sign of just how much influence the banking industry wields in Washington, the language in the provision at issue was written mainly by lobbyists for Citigroup, one of the five mega-banks that together account for 90 percent of derivatives contracts.
The four other banks are JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley.
Indeed, lobbying for the provision has been vigorous. This is an opportunity for Wall Street banks to target a threat to its lucrative derivatives business in the framework of must-pass legislation.
"An army of high-priced lobbyists working Washington day and night," as Dennis Kelleher, president of pro-regulation group Better Markets, sees it.
WHAT HAPPENS NEXT?
The House is expected to vote on the spending bill later Thursday as lawmakers look to decamp from the capital as the year runs out. If it passes, it could still be held up in the Senate by just a lone senator.