The omnibus appropriations bill recently passed by Congress contained a provision that has caused a big controversy in Washington. The bill rolled backed a key regulation from the Dodd-Frank bank reform legislation that prevented banks from using funds guaranteed by the federal government in risky investments. Essentially, the likelihood of further bailouts of big Wall Street banks just increased.
The types of investments that were barred from using taxpayer backed money included derivatives and credit default swaps. These are the types of investment tools that led to the Great Recession.
The passing of this provision has led to a big split in the Democratic Party. Progressives were outraged by its inclusion, and refused to support the entire spending bill as a result. The White House also disagreed with including the provision, but ultimately backed the overall spending bill.
The White House has argued that they prevented further attacks on Dodd-Frank by agreeing to let this provision slide. With Republicans taking control of Congress next year, it remains to be seen just how safe Dodd-Frank will be.
Senator Elizabeth Warren took to the Senate floor to blast the provision on Friday evening. She noted that both Democrats and Republicans claim to hate government bailouts, and this provision would provide more of them. Warren pointed out the huge influence Citigroup had in crafting the legislation, and how many former Citigroup employees could be found in the US government. She agreed with the banking industry that Dodd-Frank was not perfect, but she felt it didn’t go far enough, and that the “to big to fail” banks should have been broken up.
Make no mistake, this provision is a huge win for banks. They can now invest in instruments that offer enormous profits, while the US taxpayer assumes the risk. With the security of the FDIC backing them, expect riskier and riskier behavior from Wall Street. Expect more government bailouts in the future as well.