Today’s Congress might be incapable of compromise to save banking system

With federal regulators closely monitoring the financial system for more signs of crisis, lawmakers are divided about whether they could rise to the occasion if called upon to find a big compromise as they did 15 years ago.

The pessimists see a legislative branch that has grown increasingly weak even on major issues with broad public support, such as gun control and immigration.

Plus, they view the banking industry as unrivaled in its power, capable of whittling away at the sweeping laws enacted in 2008 and 2010 after Wall Street’s crisis sparked the Great Recession.

“I don’t know. I think it’s a challenge,” Sen. Sherrod Brown (D-Ohio), chairman of the Senate Banking Committee, told reporters Thursday. “The special interest influence — I’ve been doing this a long time, as you know — I’d say it’s probably greater today than it’s been in my lifetime.”

But Senate Majority Leader Charles E. Schumer (D-N.Y.) remains the leading optimist that Congress can rise to the occasion. He helped negotiate the 2008 Wall Street rescue and trillions of dollars worth of pandemic relief in 2020, during presidential election years with a divided government.

“At the end of the day, people would come together. I would hope that would be the case, and I think there’s a good chance that would happen,” Schumer said Thursday.

House Speaker Kevin McCarthy (R-Calif.) has adopted a wait-and-see approach, trying to keep calm and wanting to hold some key hearings before the House Financial Services Committee before determining whether any action is needed.

“You want to get all the facts,” he told reporters Friday in the Capitol.

Veterans of the 2008 negotiations on Capitol Hill note that today’s problems in the banking sector are nothing like that time, when the largest financial institutions had bet heavily on trades tied to risky subprime mortgages, which began to implode as the housing market contracted.

“This is not ’08,” Eric I. Cantor (Va.) said Friday. Then, Cantor was part of the House GOP leadership team, in the minority as the Bush administration negotiated with the Democratic majority on Capitol Hill.

He went on to serve as majority leader and now works for an investment bank, Moelis & Company, as a senior adviser on public policy. His biggest fear is if the “shrill politics” of the partisan fringes take hold and create the image that only the wealthy and connected are getting bailed out at the expense of everyday citizens.

Some liberal demands for new regulations go too far, too fast, Cantor contended, while conservatives blaming Silicon Valley Bank’s devolution on “woke policies” are “preposterous.”

“You’ve got to control the extremes,” he added.

Yet in a sign of today’s politics, Republican presidential candidate Nikki Haley has dubbed the federal guarantee to depositors of SVB and Signature Bank of New York the “Biden bailout,” although the Federal Reserve has assured that taxpayers will not bear any financial burden. (Banks pay insurance into a fund run by the Federal Deposit Insurance Corp., or FDIC, for such occasions.).

Still, other conservatives have jumped on this theme. Last weekend, House Republicans devoted a significant amount of time on a conference call talking about how to cast blame against Biden and Democrats. They focused on heavy pandemic-era spending that helped increase inflation, forcing the Fed to increase interest rates and upend some bank balance sheets.

This heavy emphasis on political messaging, with the next elections still almost 20 months away, casts doubt on congressional sincerity on the matter. And this House majority struggled over 4½ days, and 15 ballots, just to elect McCarthy as speaker — if something that perfunctory takes that much effort, writing complex financial laws might seem impossible.

So far, just two real legislative recommendations have emerged, with mixed chances of winning approval.

Sen. Elizabeth Warren (D-Mass.) wants to revoke a 2018 law that allowed midsize institutions, such as SVB, to undergo less scrutiny, a bipartisan move that she furiously opposed five years ago. Now that such a bank has failed, she feels vindicated.

But supporters of that 2018 provision have disputed that it played any role in the demise of these midsize banks, leaving Warren and her allies without anything close to sufficient support.

In her thinking, if Congress can’t make this small adjustment, it’s a bad indicator of how Congress would react if this turns into a full-blown crisis of confidence in banks.

“It shouldn’t be a hard lift,” Warren said Thursday.

The Biden administration on Friday threw its support behind a proposal to punish senior bank executives whose institutions enter receivership under the FDIC, as SVB did. The bank CEO sold $3.6 million worth of stock just days before it went under, the type of funds that could be “clawed back” under the proposal.

Given the rising amount of populism among staunch conservatives, Democrats see a potential opening for an unusual coalition that could get this legislation to Biden’s desk. “I think we can do the clawbacks. I think that may be bipartisan, and we may be able to do that, the clawbacks from the executives,” Brown said.

Beyond that, Brown said federal regulators, such as Treasury Secretary Janet L. Yellen and Federal Reserve Chairman Jerome H. Powell, have tools available to them, such as financial stress tests on banks, without requiring any action on Capitol Hill.

“I think they’ve done this right, and I’m very hopeful that this has been contained,” he said, suggesting that lawmakers lack those same tools. “They can do prospective things that Congress may fall short on, so my confidence in them is higher — no offense to anyone here — than any of my colleagues.”

On Friday, McCarthy declined to comment on the clawback proposal or any other federal legislative remedy, instead focusing on how “California regulators” should have done a better job overseeing SVB’s finances.

“It’s a state bank. They didn’t do their jobs. It’s a real concern to me,” he told reporters.

Warren says that, should Congress need to act in some fashion resembling the laws meant to address the 2008 crisis, it would take a major crisis felt by a huge portion of the nation to get something accomplished.

“When people start hearing from their hometown families, businesses, nonprofits, folks that are losing their jobs, the wind starts to shift in this place,” she said.

The 2008 crisis demonstrated the political courage among congressional leaders, but also the policymaking shortcomings that forced them to write and then pass the Troubled Asset Relief Program (TARP) in about two weeks.

Just after Labor Day 2008, the once-storied financial firm Lehman Brothers went bankrupt and other major institutions needed federal support, leading Bush administration officials such as Treasury Secretary Henry Paulson to plead for the $700 billion TARP deal to get approved instantly.

“We’re at Armageddon,” Paulson told Cantor.

Republicans were already bracing for losses in the House and Senate, while Democratic presidential nominee Barack Obama had a slight lead over GOP nominee John McCain. They paused their presidential campaigns to return one day to the Bush White House for a massive bipartisan negotiation, which devolved into a shouting match and ended with Paulson on his knee pleading with congressional Democrats to stay engaged in the talks.

“We didn’t really know in ’08 what Congress was capable of,” Cantor recalled.

Marathon negotiations produced a complex law, but it failed on the House floor Sept. 29, 2008, after being branded as a “Wall Street bailout” on the ideological left and right. But Senate leaders changed a few key measures and within four days, it cleared Congress and President George W. Bush signed TARP into law.

The law’s policy shortcomings included the lack of strict enough provisions on executive pay, making it deeply unpopular. Despite being an overall success in stabilizing the financial industry — the federal government actually made almost $8 billion on the program — TARP became a four-letter word in politics.

Cantor recalled glancing at his BlackBerry to see that as the first vote failed, markets suffered one of their largest single-day drops until that point.

He hopes history does not repeat itself.

“If it gets to be widespread,” Cantor said, “that’s when Congress is called to act.”