WASHINGTON It proved to be another chaotic day on Capitol Hill Friday as lawmakers continued to battle over a controversial swaps provision in a massive spending bill, while an extension of a key risk insurance program appeared suddenly in doubt.
Much of the focus remained on a provision in the omnibus spending bill dubbed the "cromnibus" that would repeal a provision of Dodd-Frank requiring banks to push out most of their derivatives business into affiliates.
The House passed the spending bill late Thursday but Sens. Elizabeth Warren, D-Mass., and David Vitter, R-La., launched a last-ditch effort to remove the language from the $1.1 trillion government funding package.
The two filed an amendment that would remove the language ahead of a pending Senate vote expected soon.
"Ever since the new financial regulations went into place, Wall Street has been working behind the scenes to open another loophole so they could gamble with taxpayer money and get bailed out when their risky bets threaten to blow up our financial system," Warren said in a press release. "Congress should not put taxpayers on the hook for another bailout, and this giveaway that was drafted by Citigroup lobbyists has no place in a critical government funding bill."
Citi, meanwhile, attempted to explain why the change was needed, releasing a blog post arguing that removing the Dodd-Frank language made the system safer.
"Pushing derivative activity into less-regulated markets is likely to increase, not decrease, systemic risk," wrote Ed Skyler, executive vice president for global public affairs at Citi. "The language also places additional costs on U.S. financial firms and imposes new burdens on American companies who use such transactions to manage their risk."
Skyler said the "fix" in the spending bill would limit the swaps that are pushed out "to the riskiest types, while preserving banks' ability to serve clients in the agriculture, energy and farm commodities sectors."
That was not the view shared by current and former regulators, however. Federal Deposit Insurance Corp. Vice Chairman Tom Hoenig said the existing swaps provision covers more than $14 trillion of derivatives "where the greatest risk lies uncleared credit default swaps, equity derivatives and commodity derivatives."
"This $14 trillion exposure represents about 83% of the U.S. gross domestic product," Hoenig wrote in a statement on Friday. "That total exposure is held mainly in three commercial banks."
Hoenig said that one unnamed large bank currently owns $4.6 trillion in notional CDS exposure three times the amount AIG had when it was bailed out in 2008.
He was joined by the Systemic Risk Council, a non-partisan group of former regulators led by former FDIC Chairman Sheila Bair.
Repealing the swaps push-out provision "would allow certain high risk swap transactions to be conducted inside banks which are supported with taxpayer-backed, insured deposits, as opposed to securities and derivatives affiliates which do not use taxpayer backed funding sources," the council said in a statement.
The spending bill is expected to clear the Senate soon, but critics worried about the practical and symbolic significance of including a significant Dodd-Frank reform in an appropriations measure don't appear ready to lay down arms quite yet.
"Any changes to Dodd-Frank should be considered and passed under regular order, after thorough committee consideration," the Systemic Risk Council wrote. "If the changes to Dodd-Frank cannot pass on their own merits as part of the normal legislative process, they should not be jammed through as riders to must-pass spending bills."
But the battle over swaps was not the only drama playing out on Friday.
Senate lawmakers also continue to fight over the reauthorization of Terrorism Risk Insurance Act, which expires Dec. 31, after passage faltered late this week largely due to ongoing objections by Sen. Tom Coburn, R-Okla. The program was established after the Sept. 11 attacks to provide a federal backstop for insurers and reinsurers in the case of a catastrophic attack.
Coburn, who is retiring at the end of the year, told reporters on Thursday that he would hold up the vote over concerns about an unrelated provision establishing a National Association of Registered Agents and Brokers included in the bill approved by the House earlier this week. Previous Senate legislation on TRIA that passed this summer authorized NARAB for just two years, while the House amendment would make the association permanent. The federal group would streamline insurance licensing across states, which Coburn has said violates states' rights.
"Coburn can delay the bill, but they'll just have to stick around, and it will get done eventually. The House is gone they're literally past the airport and this afternoon just extended the time the Senate has to deal with the Cromnibus so they aren't coming back. The Senate is left with no choice they have to take it or leave it," said Brandon Barford, a partner at Beacon Policy Advisors.
Sen. Chuck Schumer, D-N.Y., and other Democrats, meanwhile, have expressed frustration with the House bill for the inclusion of another unrelated provision repealing derivatives margin requirements for end-users involved in hedging, like utilities. Spokespeople for Coburn and Schumer did not respond to requests for comment on Friday.
The TRIA legislation, which would extend the program for six years and make some changes to its structure, passed the House by a sweeping 417 to 7 vote on Wednesday.
It's conceivable that the Senate could push off extending the program until next year, but that possibility remains in doubt because of the disruptions it would create in the commercial real estate and insurance industries in the interim.
"Several industries would be extremely unnerved if Congress waited until January. It would be very surprising if they did that," Barford added.