Wall Street's Big Win

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Brown won his election on January 19th; just two days later, on January 21st, President Obama pulled a 180 and announced his support for the Volcker rule. Throughout the reform process, Volcker – a legendary figure whose demands for greater responsibility and transparency have alarmed Wall Street – had been forced to take a back seat to Geithner, at one point even sharply criticizing the House bill in open testimony. For the White House to suddenly throw its weight behind Volcker took the Hill by surprise. It was a "complete change of policy – a fundamental shift," observed Simon Johnson, an MIT economist and noted financial analyst.
This was clearly the administration's ­attempt to get back on the right side of populist anger at Wall Street. So when Merkley and Levin took up the job of transforming Volcker's proposal into legislative reality, they assumed the Democratic leadership would be on their side.

It didn't work out that way. The counter­attack began in May, when the Republicans objected to Merkley-Levin and invoked the Senate's unanimous-consent rule, by which no amendment comes to the floor unless all 100 members agree to let it be voted on. That left the Volcker rule in legislative purgatory right up to the initial Senate vote on the bill. In interviews, the soft-spoken, gregarious Merkley steadfastly refuses to point the finger at the Democratic leadership for failing to break the legislative logjam. But reading between the lines, it's obvious that he and Levin were on their own – no one with any juice in the key committees lifted a finger to help them. The two senators were like underage geeks who'd been told by ­Majority Leader Harry Reid that they had to come up with their own keg if they wanted to come to the party.

But come up with a keg they did. On the week of the first Senate vote, Merkley's staffers pored over Senate procedural rules and discovered an arcane clause that allowed them to attach their proposal to an amendment by Republican Sam Brownback of Kansas designed to exempt auto dealers from regulation by the new Consumer Financial Protection Bureau. The Brownback amendment had already been approved for a vote, so once Merkley's people used the remora-fish tactic of sticking to Brownback, there was seemingly no way to prevent Merkley-Levin from going to a vote.

Or so they thought. "We were plumbing the inner rules of the Senate," ­Merkley says. One of those rules is that when you attach your amendment to another, your measure has to be "germane" to the amendment you're attaching it to. Since Merkley-Levin's ban on prop trading and Brownback's auto-dealer exemption were completely different, this was not a simple thing to accomplish. So ­Merkley and Levin personally trekked down to one of the more obscure offices in the ­congressional complex.

"Carl Levin and I went on a trip down to the parliamentarian's office, where I'd never been," Merkley says. "They briefed us on what it took, and the team set about to make it work."

From there, Merkley and Levin hit the phones to lobby other members, including Republicans. Right up to the final vote on May 20th, they thought they had a real shot. "I got the sense that we might pick up quite a few Republican votes," says Merkley. "It was starting to look pretty good."

But that very fact that the Merkley-Levin amendment had such momentum is ultimately what did it in. "What killed us," says Merkley, "was that it was looking pretty good."

What happened next was a prime example of the basic con of congressional politics. Throughout the debate over finance reform, Democrats had sold the public on the idea that it was the Republicans who were killing progressive initiatives. In reality, Republican and Democratic leaders were working together with industry insiders and deep-pocketed lobbyists to prevent rogue members like Merkley and Levin from effecting real change. In public, the parties stage a show of bitter bipartisan stalemate. But when the cameras are off, they fuck like crazed weasels in heat.

With Merkley-Levin looking like a good bet to pass, the Republicans pulled a dual-suicide maneuver. Brownback withdrew his auto-dealer exemption, which instantly killed the ban on prop trading. What Merkley and Levin didn't know was that Brownback had worked out an agreement with the Democratic leadership to surreptitiously restore his auto-dealer exemption later on, when the final bill was reconciled with the House version. In other words, Democratic leaders had teamed up with Republicans behind closed doors to double-­cross Merkley and Levin.

When the agreement was announced one day before the Senate vote, Merkley couldn't even make sense of what he was hearing. "You're sitting there trying to understand what kind of deal has been struck," he says. "You know there's something there, but you're not really sure." Merkley almost objected to the deal, but unable to grasp that he had been sold out by his own party's leadership, he hesitated – a fatal mistake. The deal to reinstate Brownback went through, and Merkley's amendment to rein in Wall Street died.

That might have been the end of the Volcker rule – but soon after, Merkley and Levin made the most of their one last chance. According to Merkley, he and Levin convinced Rep. Barney Frank, who was overseeing the House bill, to reintroduce the amendment in conference talks. The Volcker rule was alive again – but it now began a journey into a new sort of hell, in which insiders from both parties chipped away at it until there was almost nothing left.

It started with Senate rookie Scott Brown, who demanded major changes to Merkley-Levin on behalf of big Massachusetts banks in exchange for his vote. But Senate sources I talked to insist that Chris Dodd, the powerful chair of the Senate Banking Committee, was just using Brown as a cover to gut the Volcker rule. "It became far more than accommodating the Massachusetts banks," says one high-­ranking Senate aide. "It became a ruse for Treasury trying to get as far as they could, with Dodd's help."

From the start, Dodd had been opposed to the ban on proprietary trading. "Hey, I would gladly dump the Volcker rule," he reportedly told industry lobbyists. "But I can't, because of the pressure I'm getting from the left." Now, with Brown pressing for concessions, Dodd agreed to let Merkley-Levin be spattered with a wave of loopholes. If you can imagine a 4,000-pound lizard pretending to cower before a Cub Scout clutching a lollipop, then you've grasped the basic dynamic of a grizzled legislative titan like Dodd caving into Brown, the cheery GOP newbie with the Pez-­dispenser face.

First, in what amounted to an open handout to the financial interests represented by Brown, insurers, mutual funds and trusts were exempted from the Merkley-Levin ban. Then, with the floodgates officially open, every financial company in America was granted a massive loophole – one that allowed them to skirt the ban on risky gambling by investing a designated percentage of their holdings in hedge funds and private-equity companies.

The common justification for this loophole, known as the de minimis exemption, was that banks need it to retain their "traditional businesses" and remain competitive against hedge funds. In other words, Congress must allow banks to act like hedge funds because otherwise they'd be unable to compete with hedge funds in the hedge-fund business. With the introduction of the de minimis exemption, Merkley-Levin went from being an absolute ban on federally insured banks engaging in high-risk speculation to a feeble, half-assed restriction that will be difficult, if not impossible, to enforce.

The driving force behind the exemption was not Scott Brown, but the Obama administration itself. By all accounts, Geithner lobbied hard on the issue. "Treasury's official position went from opposed to supportive," one aide told reporters. "They may have even overshot Brown's desires by a bit." Throughout the negotiations over the bill, in fact, Geithner acted almost like a liaison to the financial industry, pushing for Wall Street-friendly changes on everything from bailouts (his initial proposal ­allowed the White House to unilaterally fork over taxpayer money to banks in unlimited amounts) to high-risk investments (he fought to let megabanks hold on to their derivatives desks).

Geithner went all out for the de minimis exemption; one Senate aide was told flatly by "those who are in charge of counting noses" that the proposal was not subject to negotiation. This was the horse-head-in-the-bed moment of the Dodd-Frank bill – the offer that couldn't be refused. "We were told that there needed to be de minimis or there would be no bill," the aide says.

When Merkley first got the news about the exemption, he tried to keep it small. "I was hoping to limit it to one percent" of a company's tangible equity, he says. "The night before the conference, Geithner was pushing for two percent. In the end, it got even worse – it was three percent." When Merkley tried to put a specific dollar limit of $250 million on high-risk gambling, Geithner shot him down. "He didn't want the sub-cap, and we lost," Merkley says.

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Matt Taibbi

Matt Taibbi is a contributing editor for Rolling Stone. He’s the author of five books and a winner of the National Magazine Award for commentary. Please direct all media requests to taibbimedia@yahoo.com.