Warren gains upper hand in Dodd-Frank debate

WASHINGTON - The financial industry is finding that winning in Washington comes at a cost.

Wall Street lobbied aggressively and succeeded late last year in persuading lawmakers to roll back rules for the $700 trillion derivatives market. Instead of generating momentum for further changes to the Dodd-Frank Act, the victory sparked a populist uprising among Democrats that's had wide-ranging consequences, including stymieing less controversial requests from regional banks like Capital One Financial Corp.

"A short while ago there was bipartisan agreement on a number of common sense improvements," said Rob Nichols, president of the Financial Services Forum that represents the chief executives of Wall Street's biggest banks. "Unfortunately, that bipartisan agreement is gone."

Financial companies and their employees spent $169 million on the November elections and had expectations that their bid to loosen regulations would get easier with Republicans in control of both the House and Senate. Now, there is second-guessing that banks overplayed their hand, according to lobbyists. The December win on swaps rules has become a rallying cry for Sen. Elizabeth Warren, a frequent critic of Wall Street, and spurred repeated White House vows to defend Dodd-Frank.

The fallout has frustrated banks, which hope it's temporary. Democrats who previously said they wanted to revise the law now won't even discuss it. Republicans are altering their strategy for attacking Dodd-Frank. And lobbyists have been hindered in their efforts to persuade Senate Democrats to champion changes to financial rules.

A sign of the political headwinds has been regional banks' difficulty winning bipartisan support for a bill that would free them from stringent oversight imposed on lenders with at least $50 billion of assets.

Capital One considers getting the threshold increased a top legislative goal this year, according to people with knowledge of the matter.

The company's inability to persuade Democrats to lead the charge in the Senate, particularly home state Sen. Mark Warner of Virginia, has reverberated through the ranks of financial lobbyists, according to two people involved in the talks. The message is clear that Warren's attacks on the industry have made even moderate Democrats skittish to stand up for banks, the people said.

Capital One's discussions with Warner aren't unique, said company spokeswoman Tatiana Stead. "We have had identical and multiple discussions with his Senate colleagues and other elected officials," she said.

If legislation is proposed that helps banks lend "responsibly" to small businesses and homeowners, Warner will consider it, said his spokesman Kevin Hall.

Banks are responding to the blowback by taking a pause from public campaigning. Lenders have also urged Capitol Hill allies to refrain from proposing minor bills that bring attention to Dodd-Frank and stand little chance of getting through the politically-divided Senate.

The industry's lobbying hasn't stopped in more private settings, according to interviews with congressional aides, trade associations and representatives of large and small banks. For now, it's more focused on urging regulators to scale back rules, said the people, who asked not to be named because they weren't authorized to speak publicly.

Banks were never going to have an easy time rolling back Dodd-Frank. Because bills require 60 yes votes in the Senate to overcome political hurdles, Republicans need at least six other votes to pass legislation. President Barack Obama also can veto measures he doesn't like.

Changes to Dodd-Frank that Congress has approved so far were wrapped into unrelated bills that had broad political support, like funding the federal government.

The banking industry's predicament became even harder in January when House Republicans tried to tweak financial rules during the first week of the new Congress, a move that Warren and Representative Maxine Waters jumped on to push the theme that Dodd-Frank was under attack.

Democrats lined up against the bill and Treasury Secretary Jack Lew called House Minority Leader Nancy Pelosi the day of the vote to emphasize Obama would veto the legislation if it ever passed Congress, according to a Treasury official with knowledge of the discussion.

The bill failed to get the two-thirds support of House members that it needed to pass, necessitating a second vote.

Soon after, Wall Street lobbyists called the office of House Majority Leader Kevin McCarthy urging the Republican lawmaker to drop it, according to three people with knowledge of the talks. The lobbyists told his staff the legislation wasn't a high priority to big banks and not worth the public backlash being stirred up by Warren, Pelosi and Waters, a California Democrat, the people said.

Republicans proceeded anyway. The bill passed a week later with the support of only 29 of the House's 188 Democrats. It hasn't been taken up by the Senate.

Even though they lost the House vote, Warren, Pelosi and Waters cemented Democratic opposition to further changes to Dodd-Frank in the process. They built on support gained in the December debate on derivatives, when during a week of TV interviews and news conferences they portrayed Wall Street as putting taxpayers at risk so soon after the financial crisis.

The vocal opposition has affected some Democrats, including Rep. Jim Himes, a former Goldman Sachs executive whose Connecticut district is home to major hedge funds.

Himes was an early advocate of repealing the derivatives measure, a change that lets JPMorgan Chase, Citigroup, Bank of America and other banks keep trading swaps in divisions with government backstops.

Now, Himes is staying away from Dodd-Frank. He told a group of banking lobbyists earlier this month that he won't be backing any revisions to the law, given the current political climate, according to three people who attended the meeting.

"I'm going to hold off on commenting on Dodd-Frank," Himes said last week during a brief interview. "I'd rather not weigh into something as controversial as this."

Himes' office later issued a statement in which the lawmaker said "this is an environment in which proposed changes to Dodd-Frank, meritorious or otherwise, are a lot less likely to get a dispassionate hearing."

Rep. K. Michael Conaway, the Texas Republican who leads a committee that overseas the main U.S. derivatives regulator, said Dodd-Frank has become a "lightning rod."

At a January conference in Miami, he told a group of commodity traders that he plans to propose legislation this year that would change some derivative rules. Conaway said he will couch the effort not as altering Dodd-Frank, but as part of a routine review of legislation that governs the Commodity Futures Trading Commission's regulatory powers.

"You just mention it, and they just close up, shut up," Conaway said of lawmakers and Dodd-Frank.

• Reported with assistance from Robert Schmidt in Washington.