Kevin Yoder’s phone is ringing off the hook, and he isn’t happy.
Some constituents are equally hot.
The Kansas Republican faced furious criticism this week for his significant role in a measure allowing federally insured banks to use financial “swaps,” a tool designed to protect banks from bad loans.
Critics say that the relaxed rule — part of a bill signed into law Tuesday night by President Barack Obama — provides a potential backdoor bailout for the nation’s biggest banks, and that Yoder offered the measure as a favor for wealthy bank-related campaign donors.
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“Of course it’s not true,” the second-term congressman said Tuesday in a lengthy phone interview. “The avalanche of criticism from the far left just goes to show we have many folks in Congress who don’t want to compromise.”
Yoder’s amendment changes part of the Dodd-Frank financial regulation law, a complicated measure enacted after the 2008 bank meltdown.
A swap is often compared to insurance — or, critics say, a bet. A lender pays a premium to a third party, who must pay the lender back if a loan goes sour.
If that third party misjudges too many loans, though, and too many loans default, he loses the bet and the money runs out, leaving the lender unprotected. In 2008, many swaps designed to insure risky loans collapsed, and lending banks turned to the government for help.
Dodd-Frank barred federally insured banks from using swaps. Beginning next year, banks that wanted to use swaps could only do so through an uninsured subsidiary.
The goal was to protect the Federal Deposit Insurance Corp. from having to bail out bad swaps.
Yoder’s measure lifts the restriction. Allowing FDIC-insured banks to continue to use swaps will make it easier for businesses and farmers to get loans, he said Tuesday, while still protecting the public.
“There are enough regulations in Dodd-Frank to choke a horse,” he said. “In many cases the intentions were good, but some of the provisions — and this is one of them — end up doing more harm than good, and don’t really have a tremendous impact on whether there would be another meltdown.”
Yoder said barring insured banks from using swaps would prompt lenders to be more cautious in issuing loans, hurting the economy.
But Democrats and liberal groups have attacked that reasoning for days. Americans for Financial Reform called Yoder’s amendment an “outrageous giveaway” to big banks, by far the biggest users of swaps.
The criticism has been led by Sen. Elizabeth Warren, a Massachusetts Democrat. Last week, she said Yoder’s measure “would let derivatives traders on Wall Street gamble with taxpayer money and get bailed out by the government when their risky bets threaten to blow up our financial system.”
But potential bailouts — for any bank — would almost certainly not involve general taxpayer money, even with Yoder’s amendment.
The FDIC is funded through premiums charged to banks, not taxpayers. Additionally, FDIC insurance protects depositors. When a bank fails, FDIC money goes to account holders, not the bank.
“The Dodd-Frank Act specifically bars the federal government from spending taxpayer dollars to bail out a failed bank,” Fiscal Times columnist Rob Garver wrote Sunday.
But critics argue that Yoder’s amendment restores a general belief that banks will enjoy broad government protection if their risky swaps fail, leading eventually to government help — or another meltdown.
Taxpayer money was part of the Troubled Asset Relief Program, which bailed out banks and some nonbank financial institutions.
“A victory on the swaps issue will provide the Beltway hacks with a playbook for killing the rest of the few meaningful things in Dodd-Frank,” Rolling Stone columnist Matt Taibbi wrote this week.
The loud debate over Yoder’s measure reached a fever pitch after a somewhat tortured journey to the White House.
He originally offered the amendment last June as part of a broader write-up of a spending bill. It passed in committee by a voice vote, records show.
Democrats made no attempt to remove the provision once the full bill reached the House floor. Members did consider more than 50 other amendments to the spending bill.
It passed the House on a party-line vote in July, but never made it through the Senate. So staff members lifted Yoder’s language and inserted it into the catch-all spending bill that passed this month.
That’s where Warren and other Democrats found it, leading to this week’s explosion — and considerable public backlash, much of it aimed at Yoder.
“Sen. Warren’s positions on the Dodd-Frank nullification are to the point,” Don Haring of Overland Park said Tuesday.
Records show commercial banking interests gave Yoder $62,500 in the last election cycle out of more than $2.1 million he raised, according to the Center for Responsive Politics.
The Republican said he did not know the repeal language would be used in the recent bill, and hotly denies any pressure from banking lobbyists to insert the provision last June. Some reports claim the measure was actually drafted by banking lobbyists.
But Yoder says his language was based on a separate standalone bill that passed earlier with bipartisan support.
The measure “is a common sense, pragmatic solution to balancing between ensuring we can protect taxpayers from future liabilities,” he said, “while not putting undue burdens on farmers and ranchers and small banks across the country.”
The congressman also points out many Democrats supported the relaxed rules.
“This is a significant legislative achievement,” he added. “In Washington, if you achieve something, you’re going to have critics.”