Congress might not be able to bail out banks today like it did in 2008


As federal regulators closely monitor the financial system for further signs of crisis, lawmakers are divided on whether they could rise to the occasion if called upon to strike a grand compromise as they have. made 15 years ago.

Pessimists see increasingly weak legislative power, even on major issues with broad public support, such as gun control and immigration.

Moreover, they view the banking industry as unrivaled in its power, capable of rolling back sweeping laws enacted in 2008 and 2010 after the Wall Street crisis triggered the Great Recession.

“I don’t know. I think that’s a challenge,” Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, told reporters Thursday. for a long time, as you know – I’d say it’s probably bigger today than it was in my lifetime.”

But Senate Majority Leader Charles E. Schumer (DN.Y.) remains the primary optimist about Congress’s ability to seize the moment. He helped broker the Wall Street bailout in 2008 and trillions of dollars in pandemic relief in 2020, during presidential election years with a divided government.

“At the end of the day, people were getting together. I wish that were the case and I think there’s a good chance of it happening,” Schumer said Thursday.

House Speaker Kevin McCarthy (R-Calif.) has taken a wait-and-see approach, trying to maintain composure and wanting to see some key hearings before the House Financial Services Committee before determining whether action is needed.

“You want to get all the facts,” he told reporters on Capitol Hill Friday.

Biden calls on Congress to impose tougher sanctions on failed bank executives

Veterans of the 2008 talks on Capitol Hill note that the banking sector’s current problems bear no resemblance to that era, when the biggest financial institutions had bet heavily on risky subprime mortgage trades, which began to implode. as the housing market contracted.

“It’s not ’08,” Eric I. Cantor said Friday. Next, Cantor was on the House GOP leadership team, outvoted as the Bush administration negotiated with the Democratic majority on Capitol Hill.

He later served as Majority Leader and now works for an investment bank, Moellis & Company, as a senior public policy adviser. His biggest fear is that the “strident politics” of partisan fringes will take hold and create the image that only the rich and connected are being bailed out at the expense of ordinary citizens.

Some liberal demands for new regulations are going too far, too fast, Cantor argued, while conservatives accusing SVB decentralization of “woke politics” are “absurd”.

“You have to control the extremes,” he added.

Yet in a sign of current politics, Republican presidential candidate Nikki Haley has dubbed the federal guarantee to depositors at SVB and Signature Bank of New York the “Biden bailout,” though the Federal Reserve has assured that the taxpayers would bear no financial burden. (Banks pay insurance into a fund managed by the Federal Deposit Insurance Corp., or FDIC, for such occasions.)

Yet other conservatives have jumped on this theme. Last weekend, House Republicans spent a lot of time on a conference call discussing how to blame Biden and the Democrats. They focused on heavy pandemic-era spending that helped drive up inflation, forcing the Fed to raise interest rates and upset some bank balance sheets.

This heavy emphasis on political messaging, with the next election still nearly 20 months away, casts doubt on the sincerity of Congress on the matter. And that House majority struggled for four and a half days and 15 ballots just to elect McCarthy as president — if something so superficial takes so much effort, writing complex financial laws can seem impossible.

So far, only two real legislative recommendations have emerged, with mixed chances of being approved.

Sen. Elizabeth Warren (D-Mass.) wants to revoke a 2018 law that allowed midsize institutions, such as Silicon Valley Bank, to face less scrutiny, a bipartisan move that Warren furiously opposed there five years ago. Now that such a bank has failed, she feels vindicated.

But supporters of that 2018 provision disputed that it played a role in the demise of these midsize banks, leaving Warren and his allies with nothing close to sufficient support.

In his thinking, if Congress can’t make that small adjustment, it’s a poor indicator of how Congress would react if this turned into a real crisis of confidence in the banks.

“It shouldn’t be a tough lift,” Warren said Thursday.

On Friday, the Biden administration backed a proposal to punish senior bank executives whose institutions are in FDIC receivership, as Silicon Valley Bank did. The bank’s CEO sold $3.6 million worth of stock just days before his bankruptcy, the type of fund that could be “recovered” under the proposal.

Given the rise of populism among staunch conservatives, Democrats see a potential opening for an unusual coalition that could bring this legislation to Biden’s office. “I think we can do the recovery. I think it can be bipartisan and maybe we can do it, the leadership recoveries,” Brown said.

Beyond that, Brown said federal regulators, such as Treasury Secretary Janet L. Yellen and Federal Reserve Chairman Jerome H. Powell, have tools, such as financial stress tests on banks, without requiring any action on Capitol Hill.

“I think they got it right, and I really hope it was contained,” he said, suggesting lawmakers don’t have those same tools. “They can do forward-looking things that Congress might miss, so my confidence in them is higher — no offense to anyone here — than any of my colleagues.”

On Friday, McCarthy declined to comment on the clawback proposal or any other federal legislative remedy, instead focusing on how “California regulators” should have better oversee SVB’s finances.

“It is a state bank. They didn’t do their job. This is a real concern for me,” he told reporters.

Warren thinks that if Congress were to act in a way resembling the 2008 law, it would take a major crisis felt by much of the nation to get anything done.

“When people start hearing about their families, businesses, nonprofits, people losing their jobs, the tide starts to turn in this place,” she said.

The 2008 crisis demonstrated the political courage of congressional leaders, but also the policy-making shortcomings that forced them to draft and then pass the Troubled Asset Relief Program in about two weeks.

Just after Labor Day 2008, the once-legendary financial firm Lehman Brothers went bankrupt and other major institutions needed federal support, leading Bush administration officials such as Treasury Secretary Henry Paulson to advocate for the $700 billion TARP deal to be approved instantly.

“We’re in Armageddon,” Paulson told Cantor.

Republicans were already bracing for losses in the House and Senate, while Democratic presidential candidate Barack Obama had a slight lead over GOP nominee John McCain. They paused their presidential campaigns to one day return to the Bush White House for a massive bipartisan negotiation, which turned into a shouting match and ended with Paulson on his knees begging congressional Democrats to stay engaged in the talks.

“We didn’t really know in 2008 what Congress was capable of,” Cantor recalls.

The marathon negotiations produced complex legislation, but it failed in the House on September 29, 2008, after being called a “bailout of Wall Street” by the ideological left and right. But Senate leaders changed a few key measures and within four days Congress was cleared and President Bush signed the TARP.

The law’s policy shortcomings included the lack of sufficiently stringent provisions on executive compensation, which made it deeply unpopular. While an overall success in stabilizing the financial sector — the federal government actually earned nearly $8 billion from the program — TARP has become a four-letter word in politics.

TIMELINE: 2008 Wall Street Crisis

Cantor recalled glancing at his BlackBerry to see that with the first vote failing, markets suffered one of their biggest single-day declines.

He hopes that history will not repeat itself.

“If this becomes widespread,” Cantor said, “that’s when Congress is called upon to act.”


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