Inside the legislative sausage factory, banking committee edition

By Felix Salmon
December 29, 2009
Ryan Grim and Arthur Delaney have the must-read story of the day, on the politics of the House financial services committee. It's long -- 6,500 words, spread over three pages -- and it took five journalists in all to piece it all together: don't say that HuffPo doesn't do original reporting!

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Ryan Grim and Arthur Delaney have the must-read story of the day, on the politics of the House financial services committee. It’s long — 6,500 words, spread over three pages — and it took five journalists in all to piece it all together: don’t say that HuffPo doesn’t do original reporting!

Do read the whole thing, but in a nutshell, the problem is that the committee is far too big, weighing in with 71 members: when was the last time that you ever saw a 71-member committee which ever got anything done. To make matters worse, a large proportion of those 71 members are conservative Democrats in marginal seats facing Republican opponents. They want to be on the committee because it’s an easy way to monster campaign donations, with freshmen representatives raising over $1 million apiece if they sit on the committee. That’s twice as much as if they don’t. And once they’re on the committee, they tend to be pretty friendly to Wall Street and its lobbyists.

And with so many members, you can imagine the number of revolving doors there are:

Just as the lure of money leads inexperienced new members to join the committee, it prompts experienced staffers to bolt for larger paydays in the private sector. “You have this phenomenon where if you have a staffer who’s very experienced on a certain issue and is dealing with the financial sector for any number of months or years, all of a sudden they become a real acquisition target for Wall Street,” says Lynch.

According to a HuffPost analysis of the 243 people who’ve worked on the committee — including clerical and technology staff — since 2000, almost half of the 126 people who have left registered as lobbyists, mostly for the financial services industry…

And the revolving door turns in both directions. Sixteen of the committee’s 86 current staffers — including a good chunk of the senior staff — worked as lobbyists before coming to the committee. (And it’s not just Republicans; 12 of the 16 are Democrats.)

The only real hope for the committee is Barney Frank himself:

Ultimately, though, Democrats are essentially relying on a “great man” strategy, figuring they can dump as many bank-friendly Democrats on the committee as they want and Frank will generally keep them in line. “We have a lot of faith in Barney. He can handle it,” says a senior Democratic aide when asked about the phenomenon. Frank’s senior staffers, say several current and former committee aides, similarly outmatch their counterparts. The chairman, they say, is able to use the knowledge gap at both the member and the staff level to his advantage.

The problem, of course, is that there are limits to Frank’s power, and that if there are good political reasons to vote one way, then no amount of detail-mastery among Frank’s staffers is likely to change your mind.

Meanwhile, there’s strong empirical evidence that the sheer force of any given financial institution’s lobbying power is directly related to the riskiness of its lending operations. The IMF’s Deniz Igan, Prachi Mishra, and Thierry Tressel report:

Our findings indicate that lobbying is associated ex-ante with more risk-taking and ex-post with worse performance. They are consistent with a moral hazard interpretation whereby lenders engage in risky lending strategies because they expect preferential treatment associated with lobbying. Such preferential treatment could be a higher probability of being bailed out, potentially under less stringent conditions, in the event of a financial crisis.

There’s no way to fix this broken system before financial regulatory reform has come and gone as an issue before Congress. Which is one more reason to be pessimistic about the likelihood of necessary root-and-branch changes ever happening.

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