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The lawmakers were at an impasse.

More than two hours into a meeting of the House Financial Services Committee last month, the members were bickering over two versions of a bill designed to ease a new regulation that affected banks, part of the sweeping 2010 overhaul of financial laws known as the Dodd-Frank Act.

The dispute? Whether to give the banks everything they asked for, or whether to give them even more.




Rep. Scott Garrett, a Republican from New Jersey, asked to postpone a final vote so he could contact “stakeholders,” code for the bankers who wanted the change. Then Texas Republican Rep. Jeb Hensarling, the committee’s ambitious chairman, attempted to retake the discussion with what passes for a joke in the wood-paneled hearing room in the Rayburn House Office Building on Capitol Hill.

“Occasionally we have been accused of trying to undermine aspects of Dodd-Frank,” Hensarling said with a chuckle. “I hope we’re guilty of it.”

Hensarling was being modest. With a 29-person committee staff, dozens of congressional colleagues, and legions of lobbyists lined up to beat back any attempt to impose new discipline on the industry, the 56-year-old from Dallas is well on his way to achieving that goal.

Bankers’ best friends




Every business sector has its friends in Washington. Financial companies—from the biggest megabanks to small payday lenders—have some of the best.

Less than six years after a massive financial crisis drove the U.S. banking system to the edge of collapse, leading to a $700 billion government bailout and a recession that destroyed as much as $34 trillion in wealth, bankers and lawmakers are working in concert to undermine Dodd-Frank, an 849-page law designed to prevent another failure.

There are more than 2,000 lobbyists for financial firms and trade groups, and many are spreading money around Washington, enlisting like-minded members of Congress to write letters, propose legislation, hold hearings, and threaten agency budgets as they pressure regulators to ease up on banks.

Regulators say they try to treat input from lawmakers like that from anyone else. However, “there are all these other factors, like the budget, like the fact that they can call you up to testify, and they can make your life pretty miserable,” said the former head of one regulatory agency who asked not to be identified, as did many of those contacted for this story.




The campaign is working. While Hensarling’s committee can’t move legislation on its own—the Senate Banking Committee supports Dodd-Frank—the House panel can work its will in other ways. And it has. Almost four years after Dodd-Frank became law, community banks face lower capital standards than originally proposed and are therefore more likely to fail; fewer derivatives traders have to register with regulators, and they face lower hurdles in booking trades than they otherwise would have, partly undermining the law’s aim to make this corner of the financial system more transparent; and big banks may soon have a green light to keep investing in potentially risky securities that regulators tried to limit.

The only question was whether to give the banks everything they asked for, or whether to give them even more.

In the current election cycle, employees and political action committees of financial companies have donated nearly $149 million to congressional candidates, more than any other industry, according to data compiled by the Center for Responsive Politics. That’s more than two-and-a-half times the $57 million donated by the health care sector, the second most generous industry.

“It’s an exceedingly rich industry with a lot at stake,” said Brad Miller, a member of the House financial committee from 2003 to 2013 and currently a lawyer with the firm Grais & Ellsworth. With lawmakers under constant pressure to raise money, Miller said, deep-pocketed lobbyists “don’t have to worry about having access to members, because all you have to do is wait for the phone to ring—and you don’t have to wait very long.”

The banking caucus




The Center for Public Integrity reviewed political finance records, members’ voting records, public statements, and correspondence between Congress and financial regulators to identify the House’s unofficial banking caucus—the financial industry’s go-to lawmakers on the Financial Services Committee.

In addition to Hensarling and Garrett, the banking caucus includes Reps. Shelley Moore Capito of West Virginia, Sean Duffy of Wisconsin, Jim Himes of Connecticut, Blaine Luetkemeyer of Missouri, Gregory Meeks of New York, Ed Royce of California, David Scott of Georgia, Steve Stivers of Ohio, and Ann Wagner of Missouri.

Photo by Ilya S. Savenok/Getty Images for the Chess Club and Scholastic Center of Saint Louis

The center of this alliance is Hensarling, a sharp-tongued Texan who learned his trade as a staffer for former Sen. Phil Gramm. Hensarling has thick gray-brown hair and eyes that slant down at the corners, giving the impression that he’s on the verge of breaking into a boyish smile. Because of his ties to the House leadership, Hensarling leapfrogged senior members to become committee chair last year when Rep. Spencer Bachus stepped down because of term limits set by House Republicans.

Operating with a strict, top-down style, Hensarling’s staff, with the help of lobbyists, orchestrates hearings and decides which proposals by regulators merit a letter from Congress and who should sign that letter, according to former committee staffers who have worked with him.




One subcommittee, for example, has spent months crafting a broad “indictment” of the Dodd-Frank Act. The chair of another drafted a letter to regulators and sent it directly to the American Bankers Association so the industry group could pressure other lawmakers to sign on.

Several members of the banking caucus have close ties to the financial industry predating their arrival in Congress, making them especially reliable in corralling cosponsors for a bill or signatures for a letter to regulators. Stivers, for instance, was the top lobbyist until 2002 for Bank One, where Jamie Dimon became CEO in 2000. (JPMorgan Chase & Co. bought BankOne in 2004 and made Dimon president; he became CEO of the world’s biggest bank a year later.)

Courtesy of the office of Steve Stivers

Luetkemeyer’s family owns a community bank. He has a decades-old relationship with Camden Fine, the top lobbyist for small banks, and is sponsoring a package of rule changes sought by Fine’s organization. “Luetkemeyer is positioned and ready to fight for our industry,” a magazine published by the Independent Community Bankers of America proclaimed in 2011.

Capito, who chairs the subcommittee that oversees consumer lending and finance companies, is married to a banker who has worked for Wells Fargo and Citigroup. Himes spent 12 years at Goldman Sachs Group Inc. before joining a nonprofit housing group in 2002. He represents the tony New York City suburb of Greenwich, Conn., which is home to some of the world’s largest hedge funds.




Others align with single industries. Royce, for example, has developed a near-symbiotic relationship with the credit union industry in the 21 years since he took office. He has raised more than twice as much from credit unions as any other lawmaker and has sponsored at least 11 bills seeking to relax rules that frustrate the industry. Several sought to loosen limits on commercial lending by credit unions, a fight he pledged to continue in a Feb. 25 speech before 4,400 credit union employees and advocates at the Credit Union National Association’s annual conference in Washington. He filed the latest version of the bill on March 13.

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And several former staffers with ties to Hensarling or the committee are now working directly for the financial industry. Just as Hensarling rose to become committee chair, his chief of staff of eight years, Dee Buchanan, decamped to Ogilvy Government Relations where he lobbies for the American Bankers Association, insurers, and a private equity firm. Former committee chief of staff Larry Lavender now lobbies at the firm Jones Walker for JPMorgan Chase & Co. and payday lending giant Cash America International.

Fundraising platform

The financial services committee is a crucial fundraising tool for both parties because companies with interests in its work generally have money to spend. In the mid-1990s, leaders began packing the panel to help their members bring in campaign cash, and membership swelled from 50 members in 1995 to 71 in 2009. Membership has since been trimmed to 61, but it’s still second in size only to the Armed Services Committee, which has 62 members.

Panel members raise more money for their election campaigns, on average, than those on any other House panel. In the two years that ended in 2012, members raised an average of $2.6 million, according to data from the Center for Responsive Politics, edging out the powerful Ways and Means Committee.

“Members are encouraged by both Democrats and Republicans to spend every waking moment being on the phone asking for money, and the people you ask for money if you're on the Financial Services Committee are lobbyists for financial interests,” said Miller, the former member.

Hensarling’s fundraising nearly doubled in 2012, after he became the highest-ranking Republican on the committee. He hosted a fundraising ski trip in February at the St. Regis Deer Valley resort in Park City, Utah, that boasts uniformed “ski valets,” a “private ski beach,” and a “split-level infinity pool.” His political action committee, the Jobs, Economy and Budget Fund, took in $87,100 that month, including $5,000 each from the Consumer Bankers Association, the Capital One Financial PAC, and the National Pawnbrokers Association PAC.

Financial interests recently hosted Scott at Johnny’s Half Shell and Himes at Sonoma, both Capitol Hill dining spots, according to copies of the invitations posted by the Sunlight Foundation. Meeks enjoys fundraising trips to Las Vegas and throws an annual Super Bowl party for big-ticket donors, according to the New York Post.

The Sunlight Foundation database includes invitations to fundraisers held on behalf of Garrett, Luetkemeyer, Meeks, and Scott at the townhouse of Tim Rupli, a well-known lobbyist whose clients have included payday lenders and prepaid debit card companies.

Himes’ spokeswoman, Elizabeth Kerr, said her boss is not advocating for the investment industry. “The congressman doesn’t advocate for or against an industry. He advocates for the right law or regulation,” she said.

The financial sector spent $484.7 million in 2013 lobbying Congress, according to CRP. That includes about $3.6 million spent by groups representing consumer interests. Financial industry lobbyists outnumber those for consumer groups by at least 20 to 1, according to a report by The Nation.

Photo by T.J. Kirkpatrick/Getty Images

“I used to have 100 meetings with people from the financial sector to every three or four from consumer groups,” said Bart Chilton, who until last month was a commissioner at the Commodity Futures Trading Commission, which regulates derivatives.

When Congress and trade groups work together, the united front can overwhelm regulators, who depend on Congress for budget approval and can face embarrassing public excoriation if they defy lawmakers, according to a senior staffer for a financial regulator who has spent years working with Congress.

How it works

It was late on a Thursday afternoon in December when Cam Fine opened an email and saw the message: “We may have a problem with Volcker.”

Fine is the powerful top lobbyist for community banks, and his regulation experts were warning him about an unexpected threat from the Volcker rule, a provision of Dodd-Frank designed to prevent banks from investing, and risking, money for their own profit. The rule was aimed squarely at banking giants engaged in so-called proprietary trading, the practice of buying and selling of securities for their own profit, unrelated to client business.

To Fine’s surprise, the Volcker rule laid out by regulators was about to roil his little-bank world. “We were, like, gobsmacked!” he said. The proposed rule would require community banks to get rid of investments known as trust-preferred collateralized debt obligations. The issue was a technical one, but it would slash the profits of hundreds of community banks and threaten the very survival of a handful.

Fine went to work. He called his bankers, he called the regulators, he called his counterparts at other banking trade groups, he said.

The community banking lobby, by many accounts, is the most powerful in the industry. What the banks lack in size, they make up for in numbers—more than 6,000, at least one in each congressional district. Fine keeps a map on his office wall showing each of his members in every congressional district, a reminder that he can activate locally influential bankers to further his group’s message with any congressional office.

Fine and his member bankers started calling up their friends on Capitol Hill, including Capito and Hensarling, who have raised more money from commercial banks than any other House member, including House Speaker John Boehner.

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After talking to the bankers and lobbyists, Capito and Hensarling fired off a letter telling a slew of regulators that the rule was supposed to “limit certain activities at large, complex financial institutions,” yet this provision would harm “Main Street financial institutions … critical to our economic recovery.”

They followed up three weeks later with a proposed legislative change dubbed the “Fairness for Community Job Creators Act.”

The five regulatory agencies involved in the rule fell in line. The Federal Reserve, Federal Deposit Insurance Corp., CFTC, Securities and Exchange Commission, and the Office of the Comptroller of the Currency all agreed to allow community banks to keep their CDOs. They made the announcement before Jan. 15, when most banks would have to report their quarterly profits.

Going for more

Community banks got their fix, as often happens, but lobbyists for the American Bankers Association, which represents the broader banking industry, are still seeking to blunt Volcker’s potential effect on big banks.

Lawmakers know their constituents think they’re on the side of the angels when they help community banks. Letting them keep their CDOs was a political win-win.

Now the bigger banks wanted a similar carve-out for another kind of investment: so-called collateralized loan obligations, bundles of junk-rated corporate loans that were the subject of competing legislation at last month’s committee meeting.

Under Volcker, CLOs—which performed well during the financial crisis—fell into the same category as the mortgage-backed securities and CDOs that roiled the industry after the housing market collapsed. Banks would have to sell off the full range of investments.

As a result, the CLO market nearly froze. Issuance of new CLOs, according to research firm S&P Capital IQ, fell to $2.55 billion in January from $7.05 billion in December, when the Volcker rule was published.

To get what they want, bank lobbyists and lawmakers are resorting, critics charge, to an old rhetorical trick: “They are trying to hide behind community banks, grossly exaggerating if not lying about the facts and claiming the need for a big loophole,” said Dennis Kelleher, CEO of Better Markets, a group that advocates stronger market oversight.

Yet the biggest holder of CLOs is JP Morgan, the biggest bank of all, which owns 41 percent of the $70 billion of CLOs held by banks, according to data compiled by Better Markets from the companies’ financial filings. Only 21 of the 6,000 community banks in the U.S. own CLOs, according to the Loan Syndication and Trading Association, a trade group. The SEC is investigating whether banks are using CLOs to unlawfully shift assets off their balance sheets, according to the Wall Street Journal.

Rep. Scott of Georgia, at a February Financial Services Committee hearing, urged regulators from five agencies to rethink the treatment of CLOs, saying the securities “provide large amounts of credit to small businesses.”

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“They are not toxic. They didn't cause the problem,” Scott continued, adding that small and regional community banks would be hurt.

A senior official with one of the regulators, who asked not to be named because he was not authorized to speak on the topic, said that Scott’s remarks were taken almost word-for-word from a list of suggested questions written by the Securities Industry and Financial Markets Association and passed around to members of the committee. SIFMA—which represents huge investment firms such as Morgan Stanley and Fidelity and spent more than $5.2 million last year on lobbying—declined to comment. Scott’s chief of staff, Michael Andel, didn’t confirm or deny the allegation. “I can’t find anything to match up to this,” he said.

None of the other elected officials in this story responded to requests for interviews or comments.

Scott’s behavior isn’t uncommon, said Miller, who also is a fellow with the Center for American Progress, a left-leaning policy think tank. Elected officials “are very willing to repeat verbatim what lobbyists suggest they say.”

The Financial Services Committee eventually approved a bill tweaking Volcker to allow banks to keep investing in most CLOs. While that bill is unlikely to become law, Federal Reserve Gov. Daniel Tarullo on Feb. 5 assured the committee that the CLO issue “is already at the top of the list” of items regulators were planning to address.

Issuance surged back. In March, $10.8 billion in CLOs hit the market.

In April, the Fed said it would give banks an additional two years to comply with the new rules.

“All too often, those in government respond to the squeaky wheel, and they try to address things that maybe ought not to be addressed,” said Chilton, the former regulator.

“You can get a letter done”

Lawmakers often write letters to agencies to amplify banks’ messages and exert pressure on regulators. A Freedom of Information Act request yielded 1,820 pages of correspondence between lawmakers and the Consumer Financial Protection Bureau, a new agency created by the Dodd-Frank law and despised by financial institutions, from October 2010 through December 2013. Similar requests yielded hundreds of letters to the Federal Reserve and the Federal Deposit Insurance Corp. The CFTC and the SEC post their letters online. The Treasury Department did not fulfill a FOIA request in time for publication.

“You can’t get legislation done, but you can get a letter done,” said a longtime financial lobbyist who spoke on condition of anonymity because he was afraid of retaliation by Hensarling’s staff. “Any time you can deliver the message, it’s just one more tile in the mosaic.”

New Jersey’s Garrett wrote or signed on to dozens of letters to regulators objecting to proposed Dodd-Frank rules, advocating for changes and most commonly demanding that the agencies perform exhaustive cost-benefit analyses of every new provision. In August 2011, he wrote Fed Chairman Ben Bernanke and five other agencies urging them to eliminate a proposed rule that would delay or cut the profits large banks can earn when they securitize bundles of mortgage loans.

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The letters served to amplify the messages regulators were receiving from JP Morgan, Bank of America, the American Bankers Association, and dozens of others asking them to eliminate the so-called premium capture cash reserve accounts, or PCCRAs.

The accounts were part of a proposed mortgage finance regulation to ensure that lenders hold on their books 5 percent of all the risky loans they write. Regulators believed the accounts could prevent banks from manipulating loan terms to make it look like they were holding a 5 percent stake when in fact the stake was lower, said Guy Cecala, the CEO of Inside Mortgage Finance, a newsletter that tracks the industry. The rule would have affected only a small segment of the mortgage market, loans that don’t meet the safest underwriting requirements.

“It happens to be a segment of the market that everyone wants to bring back,” Cecala said. “Nobody as a regulator wants to take the chance that they’ll kill it.”

Garrett warned that PCCRAs would reduce the availability of loans to homeowners, referring to the letters from bankers and lobbyists. “It is not surprising that the securitization community has already commented that this ill-conceived provision will greatly reduce or even eliminate the securitization market,’’ he said in the letter.

A few months later, a coalition of bankers, mortgage lenders, and securitizers referred back to, and echoed, Garrett’s correspondence in their own comments to the Fed asking for the proposal to be killed or delayed while the agencies perform a cost-benefit analysis. Then they questioned whether the bank regulators had the legal authority to mandate the cash reserve accounts, quoting directly from Garrett’s letter.

Several weeks later, in March 2012, Garrett wrote another letter reiterating their demands and citing reports by Bank of America and Moody’s Analytics that were also cited in at least three bank and trade group comment letters. The Fed and other regulators in August reproposed the rule, this time without the PCCRAs.

Sometimes letters are part of a last-ditch effort to postpone rules, after industry has exhausted every opportunity to water them down. When banks and mortgage firms wanted regulators to delay mortgage lending rules required under Dodd-Frank, they relied on Capito, who drafted a letter to the CFPB but sent it first to the American Bankers Association and Consumer Bankers Association. The ABA, in turn, distributed it to its members in state banking groups and urged them to make sure their representatives signed on. When the letter went out on Nov. 5, two weeks after ABA circulated it, 118 House members had signed. At least one state trade group publicly took credit for getting its representatives on board.

About a month later, Luetkemeyer and Wagner sent the CFPB a letter whose opening sentences were nearly identical to the language in Capito’s letter.

“We wanted as many members of Congress involved as possible … and certainly when someone with the stature of the chairwoman expresses interest, we want to help as much as we can,” said James Ballentine, ABA’s top lobbyist. Ballentine noted that ABA sent a banker from Capito’s home state of West Virginia to testify on the issue.

In this way, lawmakers help monied interests harness their networks and resources to create the perception of a popular uprising. The trade groups make it clear to regulators exactly what the industry wants, but the uproar appears to bubble up from below rather than being orchestrated from the top. In effect, Capito helped the ABA create an echo chamber, obscuring the fact that all those voices were coming from the same lobbyists.

In this case, the CFPB refused to delay the rule, noting that Congress had established its effective date in the Dodd-Frank Act. The bureau already had spent a year addressing industry’s complaints in a series of official interpretations and amendments and produced videos explaining the rules, Director Richard Cordray wrote in a two-page response to Capito.

But Chilton, the former regulator, notes that lawmakers’ requests consume agencies’ attention even when regulators decline to comply.

“For me as a public servant, it’s an obligation to meet with people and listen to their case,” he said.

Payday for payday supporters

Even the most controversial corners of finance have their champions in the banking caucus. Take payday lenders, widely maligned companies that offer small, short-term loans with steep fees that regulators believe can trap borrowers in a cycle of indebtedness. The CFPB was created in part to oversee such lenders.

Facing such federal scrutiny for the first time, payday lenders ramped up their political giving. Donations shot up to $3.3 million in the 2012 election cycle, 11-fold what it had been a decade earlier. Most of the payday industry's top recipients are in the banking caucus identified by the Center for Public Integrity, including Meeks, Stivers, Hensarling, Luetkemeyer, and Wagner. Kansas-based QC Holdings, the biggest political donor in the payday industry this election cycle, has given $33,500 to members of the House committee, including contributions to Wagner, Hensarling, Capito, Garrett, and Stivers.

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The industry sought shelter from stricter oversight by promoting a bill that would place many payday lenders under the protective umbrella of a federal charter. States with tougher consumer laws would be unable to touch them. Members of the banking caucus have taken up the cause, introducing three versions of the bill even as its original sponsor, former Rep. Joe Baca, left Congress and became CEO of a payday lenders’ trade group.

After Luetkemeyer introduced a revised version of the bill in 2012, he praised Baca as “a dedicated leader on this subject.” When Luetkemeyer introduced the third version in April 2013, this time focused on online lenders, Meeks was the first cosponsor to sign on. Stivers joined a month later.

Wagner has pushed legislation through the House that would prevent the Labor Department from advancing a rule holding money managers more accountable to clients for the decisions they make about retirement investments. After a sustained outcry from industry, the department agreed in September 2011 to rework the rule and propose it again. It has yet to act, a delay that costs retirement investors billions of dollars a year because of brokers’ conflicts of interest, according to research by professors at Indiana University and the University of Texas.

Photo by Alex Wong/Getty Images

Wagner’s been richly rewarded; her strongest financial support has come from two industries that would face major costs because of the change: securities and investment firms and insurance companies. In the process, Wagner has distinguished herself as a fundraiser, raising more than $100,000 for her leadership PAC in her first year in office. Among the major donors: Goldman Sachs, Oppenheimer Funds, and three insurance trade groups.

The CFPB is particularly reviled by banks and other financial firms that deal with the public because it was created with a broad mandate to regulate consumer products that largely escaped oversight before the crisis. That makes it a frequent target for lawmakers.

Duffy of Wisconsin has sponsored at least eight bills to weaken the CFPB since Dodd-Frank established the new consumer agency in 2010. In February, the entire House approved a Duffy bill pushed by bankers that would have made the agency subservient to a council of financial regulators including the Federal Reserve, which historically supported industry’s aims.

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On the House floor, Duffy defended the legislation with a familiar brand of populist, anti-Wall Street rhetoric: He said it would help community banks compete.

“Big banks on Wall Street who created the crisis are given a voice to have rules from the CFPB overturned, but you have left the small banks and credit unions in my district voiceless to say: This rule is going to hurt us,” said Duffy, who is vice chairman of Capito’s consumer credit subcommittee.

Goldman Sachs has donated more to Duffy's 2014 re-election effort than any other single financial company or group.

None of those bills has become law, but dealing with the animosity has sapped a huge amount of the CFPB’s resources. The Financial Services Committee has called CFPB officials to testify 14 times in the past three years, more than any other financial regulator. Overall, agency officials have been called to testify before Congress 46 times in the past three years.

Each appearance requires hours of preparation and meetings with key officials who otherwise would be writing and enforcing rules, according to a bureau official familiar with the process. Just one more way the financial industry is able to affect the regulatory process—part of its smoothly effective, multifront war.