Too Big to Lobby?

Your humble blogger has been fascinated by how and whether the financial sector has faced any kind of constraints in its lobbying efforts after, you know, almost plunging the global economy into a second Great Depression. Dodd-Frank and Basel III suggested there were some limits on Big Finance in the wake of the crisis. Still, I’ve also seen a lot of commentators point out that with each passing year, the financial sector has regained more of its political influence. They have successfully stalled on the implementation of Dodd-Frank, Basel III, and so forth.

I bring this all up because of two stories today that suggest that maybe this narrative isn’t so simple. The first, from Dealbook‘s Peter Eavis, is that the banks’ very profitability is undercutting their political argument to be left alone:

The nation’s six largest banks reported $23 billion in profits in the second quarter, but they could end up victims of their own success.

In recent weeks, the Treasury Department, senior regulators and members of Congress have stepped up efforts intended to make the largest banks safer. The banks have warned that more regulation could undermine their ability to compete and curtail the amount of money they have to lend, but the strong earnings that came out over the last week could undercut their argument.

The most pressing concern for banks is a relatively tough new rule that regulators proposed last week that could force banks to build up more capital, the financial buffer they maintain to absorb losses. But the banks did not demonstrate any difficulty in meeting the proposed rules, and the banks now appear to have fewer allies in Washington than at any time since the financial crisis.

Meanwhile, the Financial Times’ Vanessa Houlder also reports that the OECD is moving to crack down on corporate tax avoidance:

Plans for a global crackdown on tax arbitrage marking “a turning point in the history of international co-operation on taxation” were unveiled on Friday at the meeting of G20 finance ministers in Moscow.… Pascal Saint-Amans, the top tax official at the OECD, said the initiative would force up tax rates for multinationals that organise their affairs so they paid little tax. He said: “They know the golden age of ‘we don’t pay taxes anywhere’ is over.”

The effort to reshape the international tax rules was a chance to avert “global tax chaos”, according to the OECD, which said a failure to act could result in governments taking unilateral action. Countries outside the OECD such as India and China will be invited to take part in the revamp of the rules on an equal footing, in what experts said might be the last opportunity for the OECD to exert sufficient influence on the international tax system to reach a global accord.

The plan sets out more than a dozen proposals to block gaps between national tax systems and tackle practices that artificially separate taxable income from the activity that generates it. It includes proposals to tackle abuses of tax treaties, to prevent tax avoidance by shifting intangibles between group companies and to neutralise the impact of “hybrid” structures used to minimise billions of dollars of tax.

While the OECD initiative seems targeted more at tech companies like Apple, Google, and Amazon, I think it’s safe to presume that Big Finance would be affected.

Now, a closer look at these stories suggests that the populists in the crowd will be disappointed again. As Eavis observes:

[S]ome analysts remain skeptical that the Fed and the Treasury would really lend their weight to the sort of aggressive measures some lawmakers are contemplating. The recent comments may be an attempt to gain some political benefit from looking tough on the banks. And the remarks may be aimed at reducing any momentum that the more draconian pieces of bank legislation are gaining in the Senate.

“I wonder how much of this is a serious policy change and how much is positioning by the administration to take on a more populist mode going into 2014,” Nolan McCarty, a professor of politics and public affairs at Princeton University, said. “It’s a little bit surprising that, three years after Dodd-Frank and five years after the financial crisis, people are concerned not enough has been done.”

Similarly, as someone who worked on OECD tax initiatives a long time ago in another life, I’m dubious that those efforts will reach fruition in the manner.

So, in the end, I suspect that there will be lots of compromises — which means that there will be more regulation of Too Big to Fail institutions, but nothing that undercuts Basel III or drives a stake into their existence. This will be followed by lots of populist anguish about the power of these corporate lobbies.

Still, stories like these are useful. They point out that contrary to the simple regulatory capture argument that’s so gosh-darn popular among academics and pundits, these corporations still face very strong political headwinds. And, paradoxically, the more profitable these firms become, the less likely they’ll be able to effectively lobby Congress.

Developing…