WASHINGTON -- Progressive Democrats balked at a deal Monday night that would provide taxpayer backing for risky Wall Street trading, roiling negotiations to stave off a government shutdown just days before the deadline.
Bank lobbyists have been pushing the provision for several days, earning the ire of bank-reform-minded Democrats including Sen. Sherrod Brown (Ohio) and Rep. Maxine Waters (Calif.), the top Democrat on the House Financial Services Committee.
Those objections hit critical mass late Monday, as word spread on Capitol Hill that Democratic negotiators had agreed to a bid from House Appropriations Committee Chairman Hal Rogers (R-Ky.) that would effectively subsidize much of the derivatives business. In exchange, Senate Appropriations Committee Chairwoman Barbara Mikulski (D-Md.) secured additional funding for the Commodity Futures Trading Commission, the agency tasked with overseeing derivatives, the complex financial contracts at the heart of the 2008 meltdown.
Democrats on the Senate Banking Committee were livid about the deal, after fighting similar proposals for years. Committee members Brown and Sen. Jeff Merkley (D-Ore.) penned a letter with Sens. Carl Levin (D-Mich.) and Tom Harkin (D-Iowa) on Friday, urging Mikulski and Senate Majority Leader Harry Reid (D-Nev.) not to accept any deal reinstating subsidies for derivatives.
"We urge you to oppose inclusion of provisions modifying or repealing this reform in any funding legislation," the letter reads.
Sen. Elizabeth Warren (D-Mass.) blasted the proposal in a written statement provided to HuffPost.
"Rolling back derivatives rules in Dodd-Frank would be reckless," Warren said. "Middle class families are still paying a heavy price for the decisions to weaken the financial cops, leaving Wall Street free to load up on risk. Congress should not chip away at important reforms that protect taxpayers and make our economy safer."
Rep. Alan Grayson (D-Fla.) told HuffPost the proposal is "a good example of capitalism's death wish."
The uproar is an early test of the significance of a new leadership post Democrats created after the November elections for Warren, a staunch bank reform advocate.
At issue is a rider that would allow Wall Street banks to trade certain financial derivatives from subsidiaries that are insured by the Federal Deposit Insurance Corp. -- potentially putting taxpayers on the hook for losses caused by the risky contracts. Big banks traded derivatives from these FDIC-backed units in the years leading up to the 2008 crash, but the 2010 Dodd-Frank financial reform law required them to move many of the transactions to other subsidiaries that are not insured by taxpayers. Banks receive higher credit ratings for derivatives they sell from taxpayer-backed units, which in turn makes them more profitable.
The office of House Minority Leader Nancy Pelosi (D-Calif.) told HuffPost she is strongly opposed to repealing the Dodd-Frank provision and has been alerting Democrats to its presence in the deal in an effort to build opposition to it. But bank watchdogs argue Pelosi is effectively waving the plan through.
"She's the House leader," said Marcus Stanley, policy director at Americans for Financial Reform. "The idea that she can't do anything about it is silly."
"At the end of the day, Boehner needs Democrats in the House to push this to get it through, and Pelosi holds the strings to getting Democrats to vote for the bill," said one Democratic staffer. Many House Republicans are refusing to back any package to avoid a shutdown that does not defund President Barack Obama over his recent executive action to shield up to 5 million undocumented immigrants from deportation. Obama would almost certainly veto such a plan.
Other Democrats blamed Mikulski, saying she had been granted wide leeway and misunderstood the significance of the Rogers bid. Mikulski typically supports Wall Street reform, and is one of nine co-sponsors to Warren's long-shot legislation to reinstate Glass-Steagall, the Depression-era law which banned banks that offer traditional loans from engaging in risky securities trading.
"The problem is, it's the eleventh hour, and it's hard to walk back Mikulski's deal without risking a shutdown," said one Senate staffer.
Mikulski's office, meanwhile, pointed to Pelosi and Reid.
"You should speak with leadership," Vincent Morris, spokesman for Appropriations Committee Democrats, said in an email, adding "All 4 corners" -- a reference to the top Democrat and Republican in each chamber of Congress.
If the Wall Street rider survives, it would be particularly bitter for Pelosi. The plan resuscitates a bill originally introduced by Rep. Jim Himes (D-Conn.) that was written by a Citigroup lobbyist. Pelosi recently passed over Himes -- a prolific fundraiser -- for a leadership spot at the Democratic Congressional Campaign Committee, a post Himes believes he lost over his close ties to financial elites. House Democrats voted 119-70 against the Himes bill in October 2013, and Reid has prevented it from coming to the Senate floor. The White House opposed the legislation.
Other banking riders had been on the table over the weekend. Some Democrats had been open to effectively gutting a long-dormant Department of Labor rule that would require retirement plan managers to act in the best interests of their clients, preventing it from being implemented. That rider has been dropped, following talks between Pelosi and Labor Secretary Thomas Perez.
The high finance drama is complicated by parallel negotiations to renew a post-9/11 terrorism insurance program. The Terrorism Risk Insurance Act provides government subsidies to companies that offer terrorism insurance, and has been a steady source of controversy in the House, where conservatives including House Financial Services Committee Chairman Jeb Hensarling (R-Texas) have objected to the government backstop. In exchange for renewing the bill, Hensarling is pushing Sen. Chuck Schumer (D-N.Y.) to agree to repeal other derivatives reforms imposed by Dodd-Frank. Schumer has thus far resisted.
Negotiators had hoped to present a bill by 11:59 p.m. Monday night, but now do not expect to present a package until late on Tuesday. If lawmakers do not pass a funding bill by Thursday night, the government will shut down.
This article has been updated with statements from Warren and Grayson.