WASHINGTON -- The U.S. House of Representatives passed a slate of bills Wednesday intended to roll back recent financial reforms and deregulate derivatives, the complex financial products at the heart of the 2008 financial crisis.
The legislation aimed at the 2010 overhaul of financial regulation known as Dodd-Frank cleared with broad bipartisan backing. One bill passed despite strenuous objections from the White House, leading regulators and senior lawmakers such as Maxine Waters (D-Calif), the top Democrat on the House Financial Services Committee. Nearly two-thirds of House Democrats opposed that measure, which aims to curb U.S. supervision of overseas activities by U.S. banks, even though nearly two-thirds of Democrats on the banking committee voted for it last month.
The measures are unlikely to advance in the Senate or be signed into law by President Barack Obama. Still, House approval increases the odds. It also puts further pressure on regulators, such as the Commodity Futures Trading Commission, that rely on Congress for funding.
The most significant derivatives measure approved by the House has been derisively referred to on Capitol Hill as the "London Whale Loophole Act" -- a reference to the $6 billion trading loss on wrong-way derivatives bets placed by a group of London-based traders at JPMorgan Chase, the largest U.S. bank by assets. The bill targets swaps, a type of derivative, and it effectively exempts overseas activities by U.S. financial groups from U.S. oversight.
The measure would place roadblocks in front of the Commodity Futures Trading Commission and the Securities and Exchange Commission if they tried to supervise overseas swaps trading by U.S. institutions, activities they are trying to regulate on the belief that U.S.-based financial institutions -- and possibly taxpayers -- ultimately would be on the hook if swaps trading led to massive losses. Instead, it would allow for overseas activities to be regulated by foreign jurisdictions.
Some nations with major financial centers are working to finalize their own reforms of the swaps market, including the European Union. The U.S. is considered to be far ahead in implementing its proposals. U.S. rules also are considered to be the strictest.
The biggest U.S. and foreign financial groups enthusiastically support the deregulation measures, in part because swaps trading is among the most lucrative on Wall Street. Swaps are used to hedge risk or speculate on movements in financial markets, such as in interest rates and creditworthiness. The financial groups that dominate the market record more than $30 billion in annual profit, estimated Oliver Wyman, a consultancy.
Dodd-Frank's swaps reforms "will collectively strengthen the weak and outdated regulatory regime that played a significant role in the crisis that caused devastating damage to the U.S. economy and the financial well-being of American families.," the White House said this week. The London Whale Act would be "disruptive" and would "slow the implementation of these vital reforms."
Rep. Michael Capuano (D-Mass.) said: "This bill is not about American jobs. This bill is all about foreign swaps. If they're going to create jobs, they're going to be in foreign countries."
Some Democrats said that the measure creates incentives for U.S. banks to move their swaps activities overseas in order to escape stringent new U.S. rules. Last month, Treasury Secretary Jack Lew warned House Democrats against voting for swaps measures intended to weaken Dodd-Frank.
Last week, Gary Gensler, CFTC chairman, warned that the U.S. government’s efforts to reform the swaps market “could be undone” if U.S. banks’ foreign affiliates and branches whose activities are guaranteed by their U.S. parent companies “are allowed to operate outside of these important requirements.”
Other CFTC officials, including Scott O'Malia, one of five CFTC commissioners, have argued that overseas units of U.S. financial groups must be allowed to comply with foreign rules if they are comparable to U.S. measures, rather than imposing U.S. rules on overseas activities that may conflict with foreign regulators' rules.
House Financial Services Committee Chairman Jeb Hensarling (R-Texas) said Wednesday's overseas proposal would prevent the government from regulating away the ability of hardworking Americans to "go down to the 7-Eleven and buy a six-pack" after a hard day's work. Many derivatives are tied to the prices of commodities, including grain and metals.
Finance watchdogs said they fear the legislation's bipartisan support may ultimately lead to political support for passage in the Senate -- the same fate that befell the deregulatory JOBS Act in 2012.
"I hope this bill passes with a large majority that cannot be ignored by the Senate," Rep. Michael Grimm (R-N.Y.) said on the House floor Wednesday, referring to a separate bill exempting some non-banks companies that enter into swaps contracts from banks from stumping up collateral to prove they can make good on the deal. Grimm's bill was opposed by the Obama administration, and just a dozen lawmakers voted against its overwhelming passage.
The CFTC already is implementing the measures that Grimm's bill hopes to achieve. The proposed legislation would remove the agency's ability to reverse course, something regulators acknowledge is highly unlikely to ever occur.
Less than a handful of Republicans voted against the derivatives bills. One of the bills, which attempts to ease the transfer of data between U.S. and overseas authorities and has the backing of regulators, received just two votes against it.
Taken together, the votes underscore a deepening tension between different traditionally progressive factions of the Democratic Party over the Dodd-Frank Act, which Democrats like to call "Wall Street Reform."
Leaders of the Congressional Progressive Caucus, including co-Chair Keith Ellison (D-Minn.) have been outspoken opponents of legislation intended to roll back parts of Dodd-Frank, voting against proposals at the committee level and publicly blasting them.
"Dodd-Frank said that if you're an American company that has a swap business, you'll be regulated by the United States. [H.R. 1256] says if you're an American company, you can send your swap business overseas to wherever there's a lighter regulatory regime," Ellison said.
Other liberal stalwarts, including Rep. Alan Grayson (D-Fla.), who chairs the Congressional Progressive Caucus Political Action Committee, have been more blunt.
"The road to hell is paved with these bills," Grayson said in March, referring to a slate of financial deregulatory legislation that included the bills approved by the House on Wednesday.
By contrast, the Congressional Black Caucus, a typically robust nexus of progressive strength in the House, has urged its members to back a weakening of Dodd-Frank's derivatives measures. Some cosponsors of such legislation, including Reps. Gwen Moore (D-Wis.) and David Scott (D-Ga.), are members of the caucus, and the group's chair, Rep. Marcia Fudge (D-Ohio), has penned a separate bill deregulating other aspects of the derivatives market. Her bill wasn't voted on Wednesday. The group urged its members to vote for three of the four bills considered Wednesday, though it did not take a position on the overseas measure.
The Congressional Black Caucus is one of only a handful of organizations on Capitol Hill that can exert significant political influence without corporate backing. Not taking a position on legislation gives its members a green light to vote, for example, in favor of corporate subsidies -- a signal many politicians are eager to accept.
Fudge declined to comment. When asked about the disparity between the Progressive Caucus and the Black Caucus, Ellison -- a member of both -- demurred.
"I can't speak to it," Ellison said. "You're asking me a tough question. I will freely admit I have no answer for that. All I will say is, I respect my colleagues in the CBC, but the ones who are voting for this, I disagree with them."
Fudge and Moore also are members of both groups. Prior to Wednesday's vote, 13 Democratic lawmakers including senior members of the Congressional Black Caucus urged their colleagues to vote against the overseas legislation.
Two other bills deregulating derivatives markets that opponents claim would weaken Dodd-Frank have been voted out of their respective committees, and are expected to be voted on by the full House in the coming weeks.
CORRECTION: A previous version of this article incorrectly referred to Rep. Capuano as representing New York. He represents Massachusetts.