Last week, I wrote a piece in this space lamenting the fact that so many Democrats had voted for a budget package that gutted a key provision of the Dodd-Frank Act.
The so called swaps push-out provision, now repealed, required banks to separate their speculative business in derivatives from depository banking covered by government insurance and further protected by the Federal Reserve.
The broader budget deal, technically a continuing resolution to keep the government funded through next September, also cut a lot of needed public spending and added several odious riders, including one that raises the ceiling on individual campaign contributions to party committees about tenfold.
Had Democrats resolutely opposed the deal, I argued, it would have revealed Republicans as friends of Wall Street and enemies of Main Street -- a useful party differentiation between now and 2016. As it happened, the bill narrowly passed the House, over the strenuous objections of Democratic Leader Nancy Pelosi and most of the Democratic Caucus. But 57 House Democrats voted for the deal, blurring party differences.
In passing, I referred to New York Democratic Senator Chuck Schumer, the chair of the Senate Democratic Policy and Communications Committee (DPCC), as an "enabler" of the broader budget deal. Schumer, as the number-three person in the Senate leadership, supported the deal, and, I later learned, refused entreaties to use his influence to rid the measure of the gutting of a key provision of Dodd-Frank.
I soon received an outraged phone message and email from Matt House, demanding that I issue a correction. House, the Communications Director for Schumer on the staff of the DPCC, dictated the Correction he requested me to run:
"A spokesman for Sen. Chuck Schumer (D., N.Y.) says the senator played no role in promoting the change in financial derivatives regulation as part of the omnibus budget legislation."
I refused to retract my story, and suggested that House send the Huffington Post editors a statement, which was duly published not as a correction but as an assertion from Schumer.
What set my journalistic antennae twitching was the fact that I had not claimed Schumer was behind the derivatives deal; only that he had been an "enabler" of the budget package as a whole. But clearly Schumer and his staff are extremely sensitive to any implication that he had anything to do with the derivatives part of the deal. It seemed to me that House was protesting a little too much, so I decided to do some further digging.
What was especially curious about the aggressive complaint that I got from Schumer's office was the claim that not only did Schumer have nothing to do with getting the derivatives rider into the appropriations package, but that he took no position on it and was essentially indifferent to it. As House insisted, "He did not engage at all on this provision."
This strains credulity, to say the least. Can we imagine that the senior senator from New York, a long time defender of the financial industry as a linchpin of the New York City economy, did not care one way or another whether the top legislative priority of Citigroup was included in the bill? According to one close observer of the process who regularly interacts with Schumer, "If Schumer really didn't have a view on this rider, that would be gross incompetence and political malpractice."
Schumer has long been the New York financial industry's principal go-to guy in Washington. When he served as chair of the Democratic Senate Campaign Committee, from 2005 to 2009, Wall Street's contributions to Senate Democrats increased 50 percent, according to a 2010 profile in the New Yorker magazine.
Schumer was a key sponsor of 2006 legislation prohibiting regulatory agencies from supervising credit rating companies -- the same companies that bestowed the triple-A ratings on sub-prime securities that were a major cause of the 2008 financial collapse.
After the collapse, the political formula that had worked so well for Schumer -- promote financial deregulation, reap campaign contributions -- suddenly turned toxic. Schumer became a born-again reformer, supporting the Dodd-Frank Act, but prudently keeping his distance from the details of the legislative process despite his status as a member of the Senate Banking Committee and its financial institutions subcommittee.
Getting too closely engaged was a lose-lose proposition for Schumer, normally an intensely hands-on legislator. Work to strengthen the bill and you offend the banks; work to weaken it and you reinforce your image as the senator from Wall Street.
Ever since then, Schumer has performed a delicate balancing act, continuing to serve as a friend of the financial industry in Washington, but taking care not to have his name associated with any special interest legislation that could prove a broader political embarrassment. This has become doubly tricky, since Schumer is said to hope to become Democratic leader when Harry Reid, now 75, retires.
Last week, Schumer passed up the chance to become the ranking Democrat on the Senate Banking Committee. This role would have smoked out more of his views. When Schumer declined, the next in line was Sherrod Brown of Ohio, the first real progressive to hold the job since the era of Sen. Paul Sarbanes, who retired in 2006. Wall Street insiders could not have been happy that Schumer ceded the job to the populist Brown; that Schumer did so underscores the exquisiteness of his dilemma.
Schumer was described by insiders as quite unhappy when Reid added Elizabeth Warren to the Democratic Senate leadership. The post-2014, shrunken Democratic caucus, if anything, is to the left of the Democrats in the previous Senate. If Warren, the scourge of Wall Street, emerges as a rival to Schumer, close association with the big banks could prove even more toxic for him. Thus Schumer's reluctance to be the ranking Democrat on the Banking Committee -- and his adamant insistence that he had nothing to do with the swaps deal.
Should we believe him? There is no proof that he was a key player inserting the repeal into the budget resolution (nor did I write that he was) -- but a lot of evidence that as a senior member of the Democratic leadership he did nothing to get it removed from the package once a strong opposition emerged. House Democratic Leader Nancy Pelosi, who led the losing fight to kill the deal, told associates that she considered Schumer an obstacle to getting the offending provision out.
We know that this derivatives provision was costly to the biggest banks, and that Citigroup has been lobbying hard to get rid of it. A free-standing bill drafted by Citi's lawyers and lobbyists passed the Republican House in 2011, the so called "Swaps Regulatory Improvement Act," but was killed by the Democratic Senate.
We also know that the identical provision mysteriously appeared just before Thanksgiving in the conference agreement hammered out by Sen. Barbara Mikukski, the Democratic chair of the Appropriations Committee in the Senate and her opposite number, Rep. Hal Rogers, the Republican chair of Appropriations in the House.
Omnibus continuing resolutions such as this one are infamous for including special interest riders that have nothing to do with keeping the government funded. Nominally, the swaps push-out measure was introduced by a little-known junior Republican Congressman from Kansas, Rep. Kevin Yoder, who contended that the measure was beneficial to his farmer constituents because it would ease the cost of getting price protection in futures markets for their crops.
That storyline has been a standard part of the Wall Street litany of why we should not regulate derivatives. Bankers love using farmers to front for them. Insiders say that finding an obscure Kansan to sponsor a rider written on Wall Street was part of the strategy to get it as far away from New York's financial district as possible. A principal promoter of the deal was Republican Senate leader, Mitch McConnell. Sen. McConnell worked hand in glove with lobbyists for Citi.
The deal negotiated by senior staffers to Mikulski and Rogers was closely guarded but circulated to key legislators. It would be surprising if Schumer had not learned of it at that point, and even more surprising if he were not asked for his opinion.
Details of the measure became general knowledge Tuesday, December 9. The next day, Sen. Elizabeth Warren ignited a firestorm of protest with a blistering speech.
But the senate Democratic leadership -- of which Schumer is number three -- refused to push to have the measure removed, and so the mantle of opposition passed to House Democratic Leader Nancy Pelosi. Schumer's aide, House, told me in an email that Schumer was proud of having worked to keep out of the bill other riders weakening Dodd-Frank -- far less consequential ones. House would not respond to a direct question about whether Schumer had worked to get the derivatives provision out of the bill.
Nor would Schumer's office respond to several other direct questions that I posed, regarding when Schumer learned of the rider, whom he discussed it with, and whether he had been asked to oppose it.
Given that McConnell worked closely with Citi on the deal, it's inconceivable that Citi did not know that its pet provision made it into the budget resolution. It's also inconceivable that Citi did not alert Schumer, assuming that Schumer had not learned about it some other way, which is also wildly improbable.
Schumer went out of his way to keep his fingerprints far away from this measure. What reconciled the senator's conflicting political interests was a strategy that let others take the lead in promoting the swaps push-out rider, but to signal his Wall Street allies that he was doing nothing to oppose the measure -- and then to scream bloody murder when a journalist suggested that he might have had anything to do with it.
Nobody in the press has been able to pin down the exact process by which the push-out repeal got into the budget resolution. My story last week did not contend that Schumer did that deed, only that he was an "enabler" of the broader package.
I chose that word very carefully. The additional reporting that I have done since then convinces me that the word was an exact description.
Robert Kuttner is co-editor of The American Prospect, a visiting professor at Brandeis University's Heller School, and a senior Fellow at Demos. His latest book is Debtors' Prison: The Politics of Austerity Versus Possibility.
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