The Limits of Congressional Gridlock…and Reform?

It seems that all we have heard of late is about the sharp partisan battles in Congress that have placed it in a gridlock and prevented it from working in a bipartisan fashion to “do the nation’s business.” Yes, the “do nothing Congress.”

But there are exceptions to this description.  Given the depth and severity of the financial collapse, it is good to see bipartisanship in addressing the issue of financial regulation, or more correctly, providing exemptions when there are mutually beneficial exchanges to be made.

As John Bresnahan reports, the prospects look good for a “one sentence bill worth $300 million to a bank owned by a politically connected family that has doled out hundreds of thousands of dollars in campaign donations.”

The bill would allow Emigrant Bank to avoid meeting the requirements for Tier 1 capital by allowing it to base capital requirements on what its assets were on March 31, 2010, before it broke the Dodd-Frank threshold of $15 billion. Of course, the argument is that the bank only broke the $15 billion mark for a brief period of time. By tweaking Dodd-Frank, Congress could allow the bank to free up funds, thereby allowing it to make additional loans, largely in New York.

Although the bill was sponsored by a Republican (Rep. Michael Grimm, R-NY), it has strong bipartisan support from members of the Financial Services Committee (success in the Senate remains uncertain). Why the support? Howard Milstein, owner of Emigrant Bank, was “a bundler for President Barack Obama’s 2008 campaign.”  Bresnahan provides some additional details on Milstein:

He is a force in New York state politics. Aside from his fundraising for Obama four years ago, Milstein has been a prominent financial backer of Gov. Andrew Cuomo. The Democrat tapped Milstein last year to head the New York State Thruway Authority despite complaints by watchdog groups that having a real estate mogul run the agency would be a conflict of interest.

Even Diana Cantor, wife of House Majority Leader Eric Cantor (R-Va.), worked for a Milstein-owned trust that catered to the needs of high-income customers.

The Milsteins, along with business associates and other family members, have donated hundreds of thousands of dollars to both GOP and Democratic lawmakers over the past decade. Along with Grimm, New York Democratic Reps. Carolyn Maloney, Carolyn McCarthy and Gregory Meeks — all co-sponsors of the bill — have received $11,500 in donations from the Milsteins this cycle.

According to a statement by Emigrant Bank, “H.R. 3128 is all about credit availability in underserved communities throughout New York City.” Perhaps. But one might also note that so many of the poor decisions leading up to the recent collapse (e.g., regarding relaxed underwriting standards, securitization, and the GSEs pumping liquidity into the low and moderate income segments of the market) were given the same justification, often by members of the House Financial Services Committee.

There is a powerful public choice argument regarding some of the factors that contributed to the financial collapse. In the election cycles leading up to the financial collapse, the securities and investment industry and real estate industry contributed tens of millions of dollars to the campaign chests of the Financial Services Committee and its Senate counterpart. Regardless of the party in control, the committee members prevented and/or gamed any attempts to impose regulatory reforms that might have had lessened the severity of the impending financial collapse. Certainly Congress responded in the aftermath of the collapse, albeit it ways that were far from sufficient.

But now that attention has turned elsewhere, normal practices appear to have resumed. The days of reform have run their course and Congress appears ready to return to its standard mud farming, imposing new regulations only to relax when a mutually advantageous deal can be struck.

At least we know that in 2012, gridlock has its limits and bipartisanship is still a possibility.

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