Washington — The connection was forged a couple of years ago, said U.S. Sen. Sherrod Brown , in a hearing of the House Banking, Housing and Urban Affairs Committee on the regulation of big Wall Street banks and other financial institutions.
At the other end of the committee’s semicircular dais, where the minority Republicans sat, David Vitter took his turn to quiz the witness, a high-ranking official, on steps the federal government was taking to avoid a repeat of the 2008 financial meltdown that triggered the Great Recession.
“I started listening to his questions,” Brown said — and he liked what he heard from Vitter. So when the hearing ended, Brown recalled, “I just walked over and said, ‘We should work together on this.’ ”
So was born an unlikely partnership, between Brown, a liberal Democrat from Ohio, and Vitter, a conservative Republican from Louisiana. But when it comes to fighting the moneyed interests, that’s not the only collaboration for Vitter that goes against type.
As Congress hurtled toward approval, just before adjourning earlier this month, of the $1.1 trillion “cromnibus” package to fund most federal agencies and prevent a government shutdown, Vitter teamed with left-wing icon Elizabeth Warren, a Democrat from Massachusetts, in a failed Senate effort to save a regulation limiting trading in financial derivatives — the kind of financial instruments implicated in triggering the recession.
“I think this is subsidizing and protecting — at taxpayer expense — risky business that should not be in a commercial bank,” Vitter said of the target he and Warren aimed at: a measure inserted into the cromnibus that repealed a requirement that businesses conduct the derivatives trading outside the protection of government-backed financial insurance programs.
The joint venture with Warren put Vitter at odds with most Republicans in Congress, who have argued that the trading is used by banks of all sizes and reduces the risks of commodity price fluctuations for all kinds of businesses, including family farms and breweries. The repeal was added to the cromnibus by Republicans in the House, where they hold the majority. Ultimately, the Democratic leadership in the Senate squelched a vote on the Warren-Vitter proposal to avoid derailing the overall package.
Brown said he welcomes Vitter’s support in taking on Wall Street and doesn’t spend much time thinking about why he gets it.
“Maybe it goes back to Willie Stark; I don’t know,” he said, naming the main character in Robert Penn Warren’s roman-a-clef about Huey Long, “All the King’s Men.”
“There’s a long history of anti-Wall Street economic populism in Louisiana, and I’m glad to see it,” Brown said.
“I don’t agree with him on much of anything except on these banking rules,” Brown said. “He’s been a natural partner for me on this, although on almost every other issue we probably cancel each other’s votes.”
Vitter traces his interest in the complexities of financial regulation to the recession and to the congressional reaction to it, embodied primarily in the Dodd-Frank legislation that imposed the derivatives regulation repealed by the cromnibus.
“It’s a really important process, in terms of the economy, just on the substance — forget about how it plays out in the politics,” he said. In the immediate aftermath of the financial implosion, he said, the subject drew considerable interest at town hall meetings he attended across his home state, but that has faded with time. He acknowledges the issue is not as Louisiana-specific as energy policy or flood insurance, although his positions are not strongly at odds with his constituency, he said.
“I’ll tell you where I’m paying a price: certainly, in fundraising from megabanks, which does not exist for me,” Vitter said. “Community banks have been supportive of my efforts and my work, but they will never match what megabanks do in terms of political contributions.”
In 2013, Brown and Vitter introduced the Terminating Bailouts for Taxpayer Fairness bill, which, not by coincidence, shares initial letters with “too big to fail” — the catchphrase for those financial firms that were bailed out by the federal government in the recession because their role in the economy was regarded as so far-reaching that their collapse could wreck the whole system.
The Brown-Vitter bill was designed to make it less likely that the megabanks would fail in a future crisis and also to undercut any advantage that the TBTF institutions gain from that status in the meantime in competing with smaller banks for business. Its main technique for achieving those goals is to increase the amount of money a TBTF bank is required to keep on hand to support its lending activity, to a percentage nearly twice that required of midsized and regional banks.
By thus reducing the amount of financial leveraging the megabanks could apply to their capital, the bill limits how risky they can behave — and would lessen the impact of any one institutional failure on the economy, Brown and Vitter maintain. The sponsors also hope the legislation would help level the playing field for smaller banks battling for market share with the megabanks, which include such institutions as J.P. Morgan, Bank of America, Citi, Wells Fargo and Morgan Stanley. Because of the promise of a government bailout implicit in “too big to fail,” the megabanks are viewed as better risks by lenders and can borrow money at lower interest rates than their competitors, Vitter said.
“It didn’t get through either house — nor did we expect it to, because Wall Street was so opposed to it,” Brown said of the legislation. But both he and Vitter say their proposal changed the terms of the discussion — and late this year, the Federal Reserve Board announced a surtax on megabanks that effectively increases their capital-reserve requirements.
“I do think the concept has been gaining ground,” Vitter said. “I think it added something to the debate that led to the (Federal Reserve) action.
“It’s still not where Sherrod and I think it should be,” Vitter said.
The big banks argue that they’ve taken significant steps to add stability and safety to their operations and that additional restrictions hamper their ability to make loans.
But the fight is not over, Vitter said.
In the 2015-16 Congress, he will return to his seat on the banking committee, and Brown will serve as its top-ranking member from what will be the Democratic minority, thanks to the 2014 elections. Vitter is optimistic their too-big-to-fail ideas, as well as a renewed proposal to reinstate the Dodd-Frank derivatives requirements, will gain wider support — maybe even from his fellow Republicans.