Quietly going easy on banks

Since the Dodd-Frank financial reform law passed in 2010, banks and their legislative backers have done their best to dismantle what they thought was over-regulation of the financial industry.

That’s a tricky thing for legislators, because the American public remembers well the financial recklessness that led to the 2008 economic meltdown. Few lawmakers want to be seen casting votes that would clear a path for the same kind of behavior.

Yet that’s what happened, for the second year in a row, when the U.S. House passed a $1.1 trillion spending bill last week. The bill included a rider that repeals a key Dodd-Frank provision forbidding banks from speculating in risky derivatives and other activities with taxpayer-backed money. (A year ago, the appropriations bill cut money for financial regulators, making it harder to enforce Dodd-Frank.)

This year’s spending bill faced fierce House opposition before passing narrowly. More opposition is expected in the Senate, led by Massachusetts Sen. Elizabeth Warren, who warned last week that “a vote for this bill is a vote for taxpayer bailouts of Wall Street.”

She’s right. The Dodd-Frank provision in danger is Section 716, which orders banks to move activities such as trading in derivatives, commodities and many default swaps to outside entities that are not insured by the taxpayer-backed FDIC.

The provision essentially tells banks that if they want to make these speculative investments, they will assume the risk, not taxpayers. Doing so brings at least a couple of benefits. First, banks are discouraged from taking as many of these risks. Also, taxpayers aren’t responsible for billions in losses if the investments go bad again.

Those risky investments, of course, were a key contributor to the financial sector meltdown and the recession that followed. That’s why Americans have consistently called for stricter regulation of banks, not a lighter hand. And it’s also why lawmakers went after Dodd-Frank under cover of a spending bill last week instead of introducing a separate bill that wouldn’t have survived on its own.

That’s not the only major policy change tucked into the spending bill. Lawmakers also included a rider allowing for a huge increase in donations that individuals can make to political parties. It’s an inappropriate way to legislate – especially when legislators are forced to choose between bad policy and a government shutdown, which might arrive if the spending bill fails.

Killing Section 716 won’t eliminate regulation of derivatives trading, but it moves the wrong way on financial reform. With Republicans set to take control of both houses next month, additional regulations could be threatened. For now, banks are about to get a green light for more risky behavior. And once again, taxpayers will be on the hook.