Scott Brown Votes for Reform– After Selling Out to Wall Street

July 15, 2010               

Wall Street reform passed Congress today, with three Republicans voting “yes,” among them Scott Brown of Massachusetts. But Brown’s vote came with a high price tag: he insisted on both hammering ordinary citizens with new taxes, instead of imposing them on the financial behemoths that jeopardize our economic stability. And he punched an enormous loophole in rules limiting bank gambling with taxpayer dollars. Both were explicit favors for powerful special interests in his state.

These were the first truly significant legislative maneuvers Brown has made since taking office, and they stand in stark contrast to the image he pained of himself while campaigning as a Tea Party favorite. The reform package comes with a $19 billion price tag. Traditionally, the cost of regulating an industry is covered by the industry being regulated. But of course those industries don’t like those taxes, in part because they create up-front costs that limit profits, but also because a smaller profit-base results in a smaller bonus pool.

Brown led the charge in demanding that Wall Street bonuses not be hampered by these regulatory costs. He successfully pushed to restructure the tax burden to hit ordinary citizens and shield major Massachusetts hedge funds and banks. The taxed-enough-already Tea Party’s man-of-the-people pushed to protect big financier bonuses, while imposing new taxes on the rest of us. Thanks for the new tax bill, Tea Partiers.

But this was the second time Brown dealt out major damage to reform in just a few weeks. In order to get the Wall Street overhaul through the conference committee, Brown demanded that the Volcker Rule—a ban on risky proprietary trading by banks—be watered down. Proprietary trading doesn’t serve any client or help any business, it’s just a naked bet, and when those bets are made through the commercial banking system, they’re subsidized by taxpayer perks (those perks are designed to boost economically productive lending).

One of the biggest banks in Massachusetts is State Street Bank. It’s a pretty boring institution—except for its prop trading operations. Throughout the crisis, it made decent money, and generally didn’t run into any trouble—except from its prop trading operations. State Street’s gambling operations backfired big-time, forcing taxpayers to step in with billions of dollars in bailouts.

What did Brown learn from this episode? Why, that State Street deserves to keep gambling with taxpayer dollars! Prior to Brown’s efforts, the Volcker Rule would have banned any proprietary trading at major banks. After Brown’s efforts, banks can put up to 3 percent of their capital into a proprietary hedge fund. That dealt a tremendous blow to the substance of the reform. When banks sponsor proprietary hedge funds, they collect lots of money from outside investors. If those hedge funds go under, the bank’s reputation is immediately on the line, and it faces a tremendous amount of pressure to bailout other investors in the hedge fund. If they don’t stand behind the hedge fund, investors wonder why, and it can spark a run on the bank.

So even if only a small amount is initially invested in the fund, banks often end up paying out several times their original investment to cover losses (Bear Stearns put about $40 million into a hedge fund and had to pay $3.2 billion when it went under). There are some provisions in the reform bill limiting the degree to which big banks can bailout their hedge funds, but they will be extremely difficult to enforce.

In sum, Brown actively weakened U.S. financial stability, and hit taxpayers with unnecessary fees, and did it all for the express benefit of a handful of special interests.

Not all votes come at the price of weaker reform. Sen. Maria Cantwell, D-Wash., threatened to vote against the bill if it was not strengthened, and secured stronger reforms as a result. Not even all Republicans insisted on a weaker bill. Sen. Susan Collins, R-Maine, refused to vote for the bill unless it was substantively strengthened. Collins insisted on imposing higher capital requirements on major banks—effectively reducing the degree to which banks can make bets with other peoples’ money. It’s not the most important section of the legislation, but it is a real reform.

Brown didn’t do any of this. He simply created specific giveaways for special interests. If that’s the Tea Party’s plan for reforming Washington, then they’re doing just fine. But if they want responsible public policy, maybe it’s time to put down the assault rifles and start courting serious reformers.