September 29, 2017

Warren, Cummings Release GAO Report Confirming 2014 Dodd Frank Rollbacks Resulted in Giant Giveaways for Big Banks

Investigation Reveals Banks Retained Over $10 Trillion in Risky Swaps Trades

A summary of the report is available here (PDF)
The full text of the report is available here (PDF)

Washington, DC - A new GAO report released today by Senator Elizabeth Warren (D-Mass.) and House Oversight and Government Reform Ranking Member Elijah E. Cummings (D-Md.) reveals that four of the nation's largest banks - JP Morgan, Citibank, Goldman Sachs, and Bank of America - have been allowed to retain an estimated $10.5 trillion worth of derivatives as a result of action by Congress in 2014 to roll back Dodd-Frank rules.  As a result, taxpayers are now potentially on the hook to bail out these institutions if these risky swaps trades go bad.  

Senator Warren and Ranking Member Cummings requested the GAO report in 2015 after their joint investigation revealed significant risks stemming from the partial repeal of Section 716 of the Dodd-Frank Act in the 2014 "Cromnibus."

Section 716 was designed to prevent taxpayer bailouts of federally-insured banks with risky swaps holdings, and it would have required these banks, had the provision not been repealed, to "push-out" these holdings into separate entities that were not funded by bank deposits.

"Today's report largely confirms our own investigative findings:  the 2014 repeal of this Dodd-Frank provision was a massive giveaway to a few big banks, letting them hold onto more than $10 trillion - that's trillion with a T - of risky assets," said Senator Warren and Ranking Member Cummings.  "And it leaves taxpayers potentially holding the bag if things go bad."

"GAO's report is a warning to everyone that rolling back other Dodd-Frank provisions will increase financial risks," said the Members of Congress. "And these risks will be compounded if banks are allowed to return to the free-wheeling abuses they engaged in before we passed the Dodd-Frank Act."
GAO's report, Perspectives on the Swaps Push-Out Rule, underscores the importance of retaining other Dodd-Frank rules to mitigate the risks of these now-legal bank swaps holdings.

"Other Dodd-Frank Act provisions mitigate risks," GAO wrote.  These "enhanced prudential and other requirements" include "capital and leverage requirements," "margin rules," "counterparty credit limits for [bank holding companies]," "liquidity requirements," "capital planning and stress testing," and the Volcker Rule.

Banks told GAO that the Dodd-Frank rule requiring swaps pushouts increased their costs and did little to reduce risks.  However, according to GAO, "it is important to note that, as illustrated by Lehman's failure, derivatives can exacerbate a firm's financial distress caused by other losses."

President Trump and Congressional Republicans are working to roll back many of the key rules put in place by Dodd-Frank and cited by GAO.  For example:

  • One of President Trump's first official acts was to issue an Executive Order directing regulators to review-and-weaken Dodd-Frank rules.
  • Treasury Secretary Steve Mnuchin proposed a plan to weaken the ability of regulators to check the soundness of federally insured depository institutions.
  • The Office of the Comptroller of the Currency has begun efforts to roll back the Volcker Rule.
  • The CHOICE Act, passed by the House of Representative goes even further, repealing the Volker Rule entirely.

"This repeal provision was risky when it passed, but if the Trump Administration achieves its goal of getting rid of other important Dodd-Frank protections, the risks will be even higher," said the Members of Congress.  "That's why we need to keep fighting efforts to weaken our financial protections."
"Republican efforts to decimate the protections in the Dodd-Frank Act threaten to take us back to the time not so long ago when banks could gamble with taxpayers' money," said Ranking Member Cummings and Senator Warren.  "The best way to protect taxpayers' hard-earned money is by ensuring the safeguards in Dodd-Frank are kept firmly in place."

The full GAO report is available here. The official summary is available here

Previous Work by Senator Warren and Ranking Member Cummings on Swaps Pushout Repeal:

  • February 2015:  Senator Warren and Ranking Member Cummings sent letters to Bank of America, JP Morgan, Chase, Citibank, and Goldman Sachs requesting information about how they planned to alter their swaps trading practices in response to the swaps pushout repeal.
  • July 2015:  Senator Warren and Ranking Member Cummings released the findings from their February 2015 information requests in a letter asking financial regulators for additional information on the risks created by the repeal of section 716.
  • November 2015:  Senator Warren and Ranking Member Cummings released a letter detailing their findings that the rollback of section 716 allowed banks to hold nearly $10 trillion in risky swaps and trades, and that regulators have not appropriately assessed or identified the risks from these trades.  They also requested the GAO report released today.
Photo Credit: Jason Kuffer, Licensed under Creative Commons.