The 10 Most Wanted Lobbyist Loopholes

Loopholes are a lobbyist's best friend.

As debate on the Wall Street Reform bill returns today to the floor of the Senate, lobbyists are working overtime to insert loopholes and special provisions into the bill. Back in March, Treasury Secretary Geithner made clear to the audience at the American Enterprise Institute the threat we face at this stage of the game:

...watch this process closely, for it will be a test of our capacity as a nation to deal with complex and consequential problems. When you see amendments designed to weaken the basic protections of reform; when you see amendments to exempt certain types of financial firms or financial instruments from rules; ask why we should be protecting those private interests at the expense of the public interest.

So to kick off this week of amendments and help you follow along, please take a look at the Top Ten Most Wanted Lobbyist Loopholes:

1. Ok, Consumer Protection Rules are Fine... Just Don't Enforce Them. The current bill would apply the same rules to providers of consumer financial services or products, whether the provider is a bank or a non-bank financial provider. The bill would also allow State Attorneys General to enforce those rules. Lobbyists are pushing hard to amend the bill so that Attorneys General lose their enforcement authority. Why does that matter? Because the Bureau would only supervise larger market participants. Without state AG enforcement authority, the citizens of their states will have much less protection against illegal conduct. If you want to weaken consumer protections, that's one way to do it.
2. Letting Non-Banks Play by a Weaker Set of Rules. We know this is coming, so keep an eye out: attempts to give car dealers that make car loans and other major providers of financial services a big exemption from the consumer protection rules. Now be aware: some people try to scare small businesses by saying that the consumer financial protection bureau will regulate main street businesses like orthodontists and florists. That is not true. But if a car dealer makes loans, or if a big department store sets up a financial services center, it's doing what banks and credit unions do, and it should play by the same rules.
3. If You Can't Kill Consumer Protection Now, Starve it to Death Later. One of the keys to effective consumer protection is having a consumer financial protection bureau that is independent. And one of the keys to independence is having an independent source of funding. So be prepared for attempts to take away the bureau's source of funds. And also watch out for broader attempts to restrict the bureau's independence or chip away at its ability to establish clear rules of the road for a fair and transparent consumer financial marketplace.
4. Preventing States from Protecting Their Own Citizens. Under the current bill, the Bureau of Consumer Financial Protection would set minimum standards for the consumer finance market, but states would still be allowed to adopt additional protections. In other words, federal consumer protections would set a floor, not a ceiling. There's likely to be a fight about that provision. Citing the doctrine of "preemption," big banks will try to take away states' ability to supplement federal consumer protections. Why is this a problem? Because state officials are often the first to learn of new abuses and new problems in the marketplace, and we should not get rid of that canary in the coal mine. Federal law can overrule or "preempt" state law when a state law would significantly interfere with national banks' business of banking, but states should otherwise have the right to protect their citizens as they see fit.
5. Removing the Derivatives Trading Requirement to Protect Wall Street Profits. Under the current bill, standard derivatives would have to be traded on exchanges or other electronic trading platforms. Expect amendments to eliminate this trading requirement. Why? Because not everyone likes transparency. Today, the big derivatives dealers make big profits by charging end-users extra spreads and hidden fees, and they don't want that to change.
6. Stretching the Derivatives "End-User" Exemption into a Hedge Fund Loophole. Under the current bill, there is a narrow exemption from the derivatives clearing and trading requirement for commercial firms that are not financial companies, not major participants in the derivatives market, and that are using derivatives to hedge their real risks - not taking one-way bets like AIG. Be on the lookout for attempts to stretch this exemption into a loophole - for example, by saying that the exemption should apply hedge funds and other financial companies.
7. Creating an "AIG Loophole." Under the current bill, the Financial Services Oversight Council would have the ability to designate a very large "non-bank" financial company - like AIG, for example - for tougher supervision by the Federal Reserve. Since one of the key principles of financial reform is that firms should be regulated according to the risks they pose, not according to their corporate form, this is an important provision. But rest assured, there are large "non-banks" out there who would rather not be scrutinized quite so closely.
8. Who Needs to Know What's Happening at Insurance Companies? Insurance is regulated by the states, not the federal government - and this bill doesn't change that. But this bill would give the Treasury Department the ability to collect information from insurance companies so that it can help identify emerging risks before they blow up the financial system - like AIG. After so many insurance companies got into so much trouble that they needed government support to survive, you'd think that would be a no-brainer. But not everyone agrees. Keep an eye out for loopholes that would protect insurance companies from a number of provisions in the bill - including even basic information gathering.
9. Letting Firms Make Loans Without Skin in the Game. A key lesson of the crisis is that firms in the mortgage business should have a stake in the loans they sell or securitize. Skin in the game gives strong incentives to make good quality loans. Mortgage industry lobbyists are pushing hard to kill this idea. It's cheaper for mortgage lenders and Wall Street to be in the mortgage business if they don't have to worry about the borrower's ability to pay - but it's a lot more costly for Americans to perpetuate the same system that helped cause the housing crash.
10. Preserving "Too Big to Fail" While Pretending to Kill It. The key to preventing future bailouts is to end the problem of "Too Big to Fail." And the only way to do that is to make sure that we can shut down big financial firms in a swift, orderly way if they're on the brink of failure. Of course, not everyone wants to see "Too Big to Fail" disappear, since it lets the biggest firms borrow money at lower cost and avoid the consequences of excessive risk-taking. But no one wants to be caught defending the status quo. So defenders of the status quo are using a sleight of hand: pushing to make the resolution process so unwieldy that it can never work. By proposing amendments that look tough but that make the resolution process unworkable, opponents of reform will try to save "Too Big to Fail" while pretending to kill it.