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Main Street banks play the Wall Street lobbying game
Main Street banks play the Wall Street lobbying game

PNC, the nation’s 10th largest bank, hasn’t spent the past few years just building itself into a financial behemoth. Like many other banks, it’s built up political capital too. And last year, it spent some of that currency to help roll back a regulation intended to prevent another Wall Street bailout.

That so-called “push-out provision,” which was to go into effect later this year, was part of Congress’ 2010 Dodd-Frank financial reforms. The controversial measure, Section 716, barred banks with federally insured deposits from engaging in certain potentially high-risk financial transactions. Such deals would have to be “pushed out” to an affiliate that wasn’t federally insured, and whose losses taxpayers wouldn’t be on the hook for.

But Section 716’s ban was largely repealed in December, thanks to a provision contained within the 1,603-page “cromnibus” bill passed to avert a government shutdown.

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That generated outrage in some quarters, partly because much of the language had been drafted by banking giant Citigroup. Massachusetts Sen. Elizabeth Warren, a Democrat who has long criticized Wall Street, charged, “Enough is enough with Citigroup passing 11th-hour deregulatory provisions … that everybody comes to regret.”

Allegations of undue Wall Street influence aren’t new. But Main Street banks also played a role in the rollback, according to national media accounts that bank lobbyists confirmed for the Post-Gazette.

In a characterization echoed by outlets including the Wall Street Journal and Bloomberg News, Politico reported that “one key [to getting the repeal] was that in recent months regional banks — such as PNC, Fifth Third and SunTrust — began to be more vocal. … This gave the industry a more sympathetic face.”

In an email, PNC spokesperson Marcey Zwiebel said PNC didn’t comment on interactions with government officials. Such “interactions typically support industry-wide efforts,” she said, and are “best addressed … by groups representing the industry.”

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Industry lobbyists said Section 716 was ill-advised, and that banks like PNC played only a modest role in weakening it.

That doesn’t sway Dennis Kelleher, the president and CEO of financial-reform group Better Markets. “Shame on the regional banks,” he said. “They had an opportunity to step up and be banking statesmen. And they didn’t.”

The perils of swaps

Swaps are trades that can be used to take a gamble, or to protect yourself from one. In a practice called “hedging,” a company could buy a swap that pays off if gas prices rise, thereby offsetting higher travel costs. Or it could use the swap to wager on where gas prices are headed.

Swaps have legitimate uses, but “when things go wrong in this area, they go very very wrong,” said Marcus Stanley, policy director at watchdog group Americans for Financial Reform. As an example, critics cite the $6.2 billion loss suffered in JP Morgan Chase’s notorious 2012 “London Whale” swaps deal.

JP Morgan weathered that loss. But Mr. Stanley said, “If a bank has to turn to government for help, it can have a really negative impact on our ability to finance the things government does.”

According to the federal Office of Comptroller of Currency, more than 90 percent of swaps are held by just four banks: Citibank, JP Morgan, Goldman Sachs, and Bank of America. Banks like PNC hold miniscule portfolios by comparison, and Section 716 intended to exempt the everyday swaps they typically engage in.

For such institutions, Section 716 would affect “a sliver of a sliver” of bank business, said Mr. Kelleher.

In fact, Mr. Kelleher surmises that regional banks supported repeal largely to help big banks, in hopes those banks would return the favor someday. “It’s all a big club,” he said.

What motivated regional banks “is the idea of meeting customer needs,” countered Larry Magnesen, a Fifth Third spokesman.“Even modest-sized corporations may need to engage in hedging for raw materials.” So although swaps involve “less than 1 percent of our business,” the bank took advantage of the “opportunity to share our point of view with legislators.”

“It’s easy to say, ‘This is a Wall Street deal,’” said James Ballentine, chief lobbyist for the American Bankers Association. But PNC and Fifth Third were among many banks for whom Section 716 “became a growing concern,” partly because regulators hadn’t finalized its provisions and there was confusion over how it might be applied.

Mr. Ballentine also noted that Section 716 had critics, among them Federal Reserve Chair Ben Bernanke, who worried it might “make it more difficult for [US banks] to compete with foreign competitors” not bound by the rule.

Suspicion that banks were engaged in mutual back-scratching “sounds more like the plot of a television program,” said Mr. Ballentine. “It’s not in your best interest to take a position on issues you have no interest in.”

Mr. Ballentine, whose perspectives were echoed by another bank lobbyist who spoke on background, defended the process by which Section 716 was repealed. He noted that a standalone bill containing the repeal passed the House in 2013, with support from Republicans and 70 Democrats. But it idled in the Senate, which banking lobbyists fault for frequently derailing financial legislation.

Given that breakdown, he said, “if a cromnibus comes up, the bank industry like everyone else is going to take the opportunity to move their agenda.”

Increased spending

PNC has enhanced its own ability to do so.

In 2009 and 2010, PNC spent an average of $535,000 a year lobbying Washington, D.C.  But in 2011, after Dodd Frank passed, that number jumped to more than $1.5 million. It spent an average of $935,000 in 2012 and 2013: In 2014, it had spent $530,000 through September.

Its staff now includes lobbyists with strong D.C. connections, according to online biographies and the Center for Responsive Politics. PNC lobbyist Tara Foscato previously served as a special assistant to the Federal Reserve: Her colleague Andrew Miller was senior counsel for the House Financial Services Committee when Dodd-Frank was drafted.

PNC's campaign contributions have also mushroomed, according to campaign-finance records gathered by the Center for Responsive Politics. Two PNC-affiliated political action committees gave a total of $35,800 to federal office-seekers in the 2008 elections. By 2014, PNC contributions had grown to $416,300.

Mr. Ballentine said the entire industry increased its political activity in the wake of Dodd-Frank. “It’s probably the largest bank regulation any banker of this generation is likely to see,” he said. “If you aren’t looking at it carefully, you’re doing your bank and your customers a disservice.”

But while Mr. Ballentine maintained that “there is no one in the industry trying to repeal Dodd-Frank,” some worry that a precedent may have been established for future regulatory rollbacks. Among them is Pittsburgh congressman Mike Doyle, a Democrat who opposed repealing Section 716.

Mr. Doyle said banks never approached his office about the issue. Not that it would have helped: “There was no way I was going to support a bill with that provision,” he said.

“I’m sure Dodd-Frank isn’t perfect,” Mr. Doyle added. But “hopefully members had their eyes open when they voted for this.” After the 2008 crisis, he said, “We promised we’d make sure this couldn’t happen again. But memories now may not be quite as crisp.”

Chris Potter: cpotter@post-gazette.com or 412-263-2533.

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