Ever since he was named last week as the sponsor of a controversial measure rolling back a significant financial reform, U.S. Rep. Kevin Yoder has been trying to have it both ways.
The Republican from Kansas wants constituents to think his motives were all about helping out community banks and farmers. But the biggest beneficiaries are Wall Street banks, which already have rewarded Yoder handsomely and will continue to do so.
Yoder sponsored an amendment that will encourage big banks to take greater risks in the derivatives market, a behavior that played a role in the last financial crisis.
The amendment has been long in the making. Lobbyists from Citigroup worked with key Republicans on its language, and Yoder carried it through a committee process in June. It likely would not have survived a robust debate in both chambers of Congress, so House leaders last week inserted it into the massive spending bill required to keep government running.
Yoder’s amendment reverses Section 716 of the 2010 Dodd-Frank financial reform, which requires banks under the umbrella of the Federal Deposit Insurance Corp. to move their riskiest transactions into separate entities that aren’t protected by federal insurance. The idea is to reduce the “moral hazard” factor that encourages institutions to act more recklessly if they know there is a backstop against losses.
The affected transactions are certain types of derivatives, which in the broadest terms are deals between two parties that allow one to limit the risk of outside events.
More than 90 percent of the derivative activity in the U.S. is conducted by the four big banks — Citigroup, Goldman Sachs, Bank of America and JPMorgan Chase. Those banks, by the way, have given a total of $29,000 to Yoder’s campaign since the start of 2013, according to the nonpartisan research organization Maplight. He’s not a top 10 recipient, but he’s close.
Yoder is persisting with the implausible explanation that he only wants to keep lending costs low so community banks can better serve their customers.
“Without this change, small regional banks would be in danger of being unable to serve the lending needs of their customers,” he said in a newsletter. “Ultimately, farmers, manufacturers, and other Main Street businesses would be harmed the most.”
Yoder told a reporter from The Star he was encountering an “avalanche of criticism from the far left.”
But it’s not just liberal politicians who are worried.
“Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks,” Thomas Hoenig of Kansas City, vice chairman of the FDIC, said in a statement. He called its repeal “illogical.”
In a telephone interview, Hoenig said the Dodd-Frank provision was much more likely to affect big Wall Street banks and very large regional banks than local banks. Only about 5 percent of all derivatives — the riskiest types — were covered by the provision.
While Yoder framed his amendment as consumer friendly, Hoenig’s take is somewhat different. While protecting high-risk transactions with insured deposits lowers the cost of business for the banks, the savings don’t necessarily flow to customers, he said. In fact, it may result in a less competitive market and higher costs for the public.
It’s also not necessarily the case that transactions are safer if conducted inside FDIC-insured banks, Hoenig said.
“If the market is more exposed it may exert better discipline,” he said.
Hoenig is a former president of the Federal Reserve Bank of Kansas City. He and Yoder are practically neighbors. Too bad they didn’t get together. Hoenig might have persuaded the congressman that dismantling a provision designed to rein in the biggest banks would not benefit the customers of small banks.
But probably not. This was always about the big banks, and their siren song is sweet.