The New Democrats: The Coalition Pharma and Wall Street Lovey
Wall Street Reform
When Congress took up Wall Street legislation, the New Democrats saw their first real opening to take the lead on a major legislative effort. Voters across the ideological spectrum had come to view banks as villains, and many politicians feared a populist backlash if they were to take up the cause of the financial-services industry. This included the Blue Dogs, who were reluctant to fight as publicly for the banks as they had fought for health-insurance companies.
In many ways, the New Democrats were uniquely suited to act as emissaries between the finance industry and the Democrat-controlled Congress. Many had backgrounds in the world of finance, and several of their former staffers were lobbying for the banks and insurance conglomerates that were also among the New Democrats' steadiest donors.
The biggest asset, however, was their oversized presence on the House Financial Services Committee, which would draft the legislation. Throughout the reform process, the group held as many as 16 seats, forming the largest nonparty voting bloc on the committee. If enough of them teamed with Republicans, they could strip provisions from the bill or add carve-outs for special constituencies.
More important, they could set the boundaries of the debate behind closed doors by emphasizing the concerns of their allies in the financial-services industry.
Three days after Lehman Brothers collapsed in September 2008, the New Democrats unveiled a financial-reform working group co-chaired by Melissa Bean. The group was piloted by John Michael Gonzalez, Bean's chief of staff, who left four months later to lobby for several banks and financial-services trade groups. Gonzalez would not speak with ProPublica, but a biography posted on his lobbying firm's website says he was a "key player in founding the New Democrat Coalition's task force on regulatory modernization."
The other co-chair of the task force was newly elected Connecticut Rep. Jim Himes, who had strong ties to the financial-services industry, as did his chief of staff, Jason Cole. Himes is a former Goldman Sachs banker. Cole, once an aide to New Democrat Dennis Moore, had spent several years working alongside former Republican Sen. Gramm as a UBS lobbyist. In that position, Cole maintained his ties to the New Democrats and was listed as attending their 2007 retreat in Maryland on behalf of the Swiss bank.
As the reform effort picked up steam in 2009, the New Democrats' task force functioned as a shadow financial-services committee, holding its own hearings and drafting its own legislation, according to several congressional staffers familiar with the process. The group met with consumer advocates as well as industry representatives. But with the exception of their endorsement of the consumer financial protection agency, most of their positions reflected the concerns of the banks.
When the New Democrats released their reform principles in February 2009, the Washington lobbying offices of the law firm Blank Rome publicly touted the New Democrats’ proposals, adding that the group "may be the moderating force behind financial regulatory reform in Congress."
Steve Bartlett, a former Republican congressman from Texas and current head of the Financial Services Roundtable, an industry lobbying group, described the New Democrats as "awesome."
"They are my favorite group in Congress in the sense of doing the right things for the country," Bartlett said in an interview with ProPublica. "It's a group that is focused on the economy and on the business sector and on the for-profit sector, and I've just found them to be extraordinary and extraordinarily effective."
The New Democrats demonstrated their effectiveness in two ways. The first was in skirmishes over provisions that applied to small sets of companies or industries, similar to the BIO carve-out from the healthcare debate.
The group joined California Republican Rep. John Campbell, a former Saab salesman still collecting rent from several car dealerships, to make sure auto loans would be exempt from regulation by the new consumer protection agency. The Center for Responsible Lending and other consumer groups say car loans, which generate tens of billions a year for auto dealers, are often as risky as the home loans that fueled the financial crash and have been associated with fraud and abuse, particularly for military service members and their families.
But it was the New Democrats’ role in shaping the core components of the Wall Street legislation that really earned them the admiration of the industry and its lobbyists.
In June, the group released one of the earliest congressional proposals to deal with over-the-counter derivatives, the largely unregulated financial products at the heart of the crisis. Financial industry groups praised the legislation, but its author, New Democrat Mike McMahon, said their goal was to protect “end-users,” businesses that rely on derivatives to guard against financial instability. McMahon said he didn’t want Congress to “overreact” by placing derivatives on exchanges similar to those where stocks and commodities are traded.
Exchanges, which would set up capital requirements and additional transparency for derivatives transactions, were also heavily opposed by the banks, which made significant sums creating customized derivatives.
“The big issue for the dealers is that they make a lot more money off private contracts, the customized ones, than they do on an exchange,” said Frank Partnoy, a former investment banker and professor of corporate law at the University of California San Diego.
The banks used end users as cover, Partnoy said, because, “you can’t go to Congress and say, ‘oh you’re going to hurt us, and we’re not going to make as much money.’ ”
In early October, Barney Frank, chairman of the Financial Services Committee, released a draft of derivatives-reform legislation. On the official committee press release, New Democrats Bean, Crowley and McMahon praised Frank’s bill and touted their involvement in crafting it. Crowley does not sit on the Financial Services Committee.
“I want to thank Chairman Frank for accepting suggestions from the New Democrat Financial Services Task Force in crafting new rules for derivatives trading,” said Michigan New Democrat Gary Peters.
Gary Gensler, the head of the Commodities Futures Trading Commission, himself a former Goldman Sachs executive, protested immediately, pointing out that the end-users exemption created a loophole that would allow risky and unregulated derivatives trading.
Frank said he would “sharpen” the language, but the version that emerged from the House was similar to McMahon’s original proposal. Some speculated that Frank gave in to McMahon in exchange for the New Democrats’ support for one of his top priorities, creating a consumer protection agency. Frank declined an interview request from ProPublica.
Ten days after the bank-friendly derivatives draft was released, Joe Crowley and several other New Democrats serving on the Financial Services Committee headed north for a two-day fact-finding and fundraising trip to Wall Street. They met with Goldman Sachs and JPMorgan executives and were given a fundraiser at a supporter’s Manhattan home.
When the group returned to the capital, they embarked on their second major priority, a roundabout way to weaken consumer protections. In their proposal, put forward by Melissa Bean, individual states wouldn’t be allowed to enact stronger consumer protections against national banks than those established by the federal government. Normally federal laws act as a baseline upon which state laws can expand, but this proposal sought the opposite result, putting conservative Democrats and Republicans in the unusual position of fighting against the rights of individual states.
Many state attorneys general strongly opposed the provision, including Lisa Madigan from Bean’s home state of Illinois. And as the bill neared a vote on the House floor, it looked like Bean and the New Democrats would lose this battle.
But Bean had one final ace in the hole — an extreme measure but one almost guaranteed to work: She threatened to use the voting power of the New Democrats to sink the entire financial reform bill if it didn’t include her proposal.
During the final four days of the reform effort in the House, at least 17 New Democrats held 20 fundraisers, according to records maintained by the Sunlight Foundation. Among these events was the December 10 Crowley fundraiser that is now the target of an ethics investigation. Also included was an “evening reception” fundraiser for Melissa Bean on December 9; the event’s invitation prominently advertised her membership on the Financial Services Committee.
Negotiations stretched late into the night on December 11, until a compromise was reached that satisfied the New Democrats. Bean led a negotiating effort that resulted in federal regulators getting the power to throw out individual state regulatory laws after reviewing them on a case-by-case basis. It was a big win that capped a string of victories demonstrating the New Democrats’ ability to get things done.
Conference Committee and Beyond
In the months that followed the passage of the House reform bill, the Senate surprised nearly everyone by producing legislation that was much tougher than expected.
This was especially true of the derivatives-reform language Arkansas Democrat Sen. Blanche Lincoln introduced. It moved transactions to central clearinghouses, which were similar to exchanges though weaker, and required banks to “spin off” their derivatives divisions. In the event of a September-2008-style collapse, a derivatives unit wouldn’t be able to sink an entire financial institution, as AIG’s derivatives office in London had nearly sunk the international insurance giant.
Wall Street strongly opposed the new measures, but Lincoln was busy fighting off a populist primary challenger, and party leaders were doing everything they could to help her hold on to her seat, including allowing her “tough on banks” provisions to survive. Still, supporters and opponents alike assumed Lincoln’s proposal would be removed from the bill once her nomination was secure.
But Lincoln’s primary was extended by a run-off vote, and it dragged on so long that the opportunity to kill her provision came too late. As the Senate passed its version of financial reform, the New Democrats knew they would have another chance to adjust the language, when the House and Senate met to merge their versions of the legislation.
Five days after the Senate vote, the New Democrats and their lobbyist allies left Washington for their annual fundraising retreat at the Hyatt Regency Chesapeake Bay Golf Resort, Spa & Marina. As the financial-reform effort took a pause, lawmakers relaxed with drinks at the poolside bar and played late-night poker with lobbyists. Rep. Steve Driehaus, who has said his most "star-struck" moment in Congress was meeting a World Series of Poker champion, pulled in a couple hundred dollars playing opposite lobbyist Pete A. Leon, a New Democrat contributor whose clients have included oil giant Chevron, biotech firm Amgen, and the investment company once headed by confessed Ponzi schemer Bernie Madoff.
Representatives of the financial-services community were hard to miss. Gonzalez was making the rounds with Bean and Crowley, while lobbyists for JPMorgan and UBS circled the conference center hallways, coffee cups in hand, chatting up staffers and members of Congress. Also in attendance were staffers from Majority Leader Steny Hoyer’s office, the House Democratic Caucus and the White House.
Back in Washington a few days later, the House conferees for the financial-reform bill were announced. Three New Democrats — Gregory Meeks of New York, Dennis Moore of Kansas and Gary Peters of Michigan would sit on the panel while Bean and Crowley worked behind the scenes to make sure the interests of the New Democrats and their allies were represented.
The group helped preserve the carve-out for auto dealers, and Meeks worked with Iowa Democrat Sen. Tom Harkin to exempt equity-indexed annuities, controversial financial products often purchased by senior citizens from SEC oversight.
Then came the final fight over derivatives. On June 16, the opening day of negotiations, 43 New Democrats fired off a letter on coalition stationery that reiterated their concerns about how the legislation would affect end users.
Negotiations over the derivatives provision continued late into the night on June 24. Once again, Melissa Bean was a ubiquitous presence. One moment, she was meeting with Treasury Department officials, the next moment she was in closed-door talks with Lincoln or milling around the hallways, speaking with colleagues in hushed tones.
A flurry of behind-the-scenes offers and counter offers began as the final vote drew near. Around 9 p.m., as she exited the negotiation chambers, Lincoln stopped to tell Bean she would take a look at the New Democrats’ latest proposal.
What Bean didn’t know was that Lincoln was about to make a deal directly with the Obama administration, cutting the New Democrats out of the process. The final version of the derivatives section was tougher than the House version the New Democrats helped craft — but the group had helped make the overall bill more palatable to the financial industry by forcing concessions on multiple fronts.
When the House adjourned on September 29, the New Democrats headed back to their districts with the rest of their colleagues to campaign for re-election. At least a third of the 69 members face stiff challenges from their Republican opponent.
Although the group helped block or water down measures proposed by the White House and Democratic leaders, many of its members are receiving cash infusions and strong support from party institutions like the DCCC. Party leaders believe that the votes of Democrats who aren’t always reliable are better than having those seats in Republican hands.
The lobbyists and big businesses that catapulted the New Democrats from backbenchers to powerbrokers in just five years are sticking with them, too. Because even if Republicans recapture the House in November, and even if the New Democrats ranks are thinned, they will continue to be a critical ally during the contentious battles to come.
Additional Reporting by Srinivas Rao, Joe Kokenge, Dan Nguyen, Nicholas Kusnetz