Kevin Yoder’s Kansas City Star big-bank-loving op-ed makes no sense
U.S. Rep. Kevin Yoder had almost a month to think about how he would respond to the avalanche of criticism he sustained when he dealt a major favor to the country’s biggest banks. And he still whiffed it.
Yoder, who represents Kansas’ 3rd District, published an “As I See It” column in Monday’s Kansas City Star, belatedly attempting to explain his motives behind repealing a key banking regulation last month. He writes that his idea to repeal Section 716 of the 2010 Dodd-Frank financial reform bill (actually, it was Citigroup’s idea, as well as Citigroup’s language, but Yoder carried the banking giant’s water), passed as part of the $1.1 trillion spending bill, struck what he called “extreme and unnecessary” regulations from federal banking law.
What Section 716 did was not extreme and was, after 2008, pretty necessary. The legislation told banks that if they wanted to carry out their riskiest derivative and credit-default-swap maneuvers, they could no longer count on protection from federally insured institutions such as the Federal Deposit Insurance Corporation or the Federal Reserve Bank. In other words, if banks wanted to bet big, they had to be ready to lose big, too. The Dodd-Frank law was passed in response to the 2008 financial crisis, in which unchecked behavior by major banks played a major role in plummeting the national economy.
Yoder’s column today couches Section 716 as a choke point that stops banks from meaningfully doing their business:
Economic growth is created through access to capital, the life-blood that allows innovators and entrepreneurs to create jobs. By recently fixing Section 716, Congress worked together to encourage banks to invest in American businesses. This fix actually makes banking safer — specifically, the commodities markets for agriculture and energy producers — while not exposing the American taxpayer to further liability.
Yes, repealing Section 716 (a move criticized by some Republicans and endorsed by some Democrats) makes banking safer — for bankers. Section 716 applied to only a sliver of the derivative universe.
Tom Hoenig, former president of the Federal Reserve Bank of Kansas City and current FDIC vice chairman, has explained it this way:
In fact, under 716, most derivatives — almost 95% — would not be pushed out of the bank. That is because interest rate swaps, foreign exchange and cleared credit derivatives can remain within the bank. In addition, derivatives that are used for hedging can remain in the bank. The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms.
There was nothing stopping banks from trading in the narrow 5 percent of derivatives that Hoenig discusses. It’s just that they had to do it in units not insured by federal institutions, where the supply of protection is ultimately limitless.
“In fact, most of these firms have broker-dealer affiliates where they can place these activities, but these affiliates are not as richly subsidized,” Hoenig said in December, “which helps explain these firms’ resistance to 716 push out.”
Yoder’s claim that the Section 716 repeal wouldn’t expose “the American taxpayer to further liability” is also worth addressing. The FDIC is funded through premiums paid by banking institutions, premiums that insure account holders for up to $250,000 if a bank goes under. But when banks fail, the FDIC protects itself by increasing premiums, which banks pass on to consumers through additional fees, deposit rates, loan rates and so on.
Furthermore, taxpayers are always on the hook when banks fail, one way or another. The savings-and-loan crisis of the late 1980s and early 1990s ended up costing taxpayers $124 billion in 1999 dollars ($175.7 billion in today’s dollars). The Troubled Asset Relief Program that followed the Great Recession amounted to $700 billion, much of it taxpayer money.
The lesson that was learned from the Great Recession — a lesson that Yoder wants Americans to unlearn today — is that banks should accept more risk for their risky behavior, not less.