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[image: This Week in Washington: How to Tax the
WealthyFinancial Shorts: The Stock Act; Volcker Rule at DavosPolitical
Shorts: Payroll Tax Cut; GOP Recess Appointment Battle]


*Washington Update– January 31, 2012*
[image: This Week in Washington: How to Tax the WealthyFinancial
Shorts: The Stock Act; Volcker Rule at DavosPolitical Shorts: Payroll Tax
Cut; GOP Recess Appointment Battle] [image: This Week in
Washington: How to Tax the WealthyFinancial Shorts: The Stock Act; Volcker
Rule at DavosPolitical Shorts: Payroll Tax Cut; GOP Recess Appointment
Battle] [image: 1. This Week in Washington: How to Tax the
WealthyPresident Barack Obama laid down the battle lines for the
Presidential election as he promised a “fairer” tax regime on the same
day that Mitt Romney, the leading Republican contender, revealed that he
paid federal income taxes at an effective rate of just 13.9 percent in
2010. The comparatively low rate reflects the fact that most of Romney’s
income is taxed as capital gains, an issue that President Obama tackled
head-on in his State of the Union address last week. To Democrats, Romney
is benefiting from an unfair tax code. In his State of the Union address,
President Obama said those earning more than $1 million a year can afford
to pay more and should be taxed at 30 percent. To Republicans, Romney is an
exemplar of the Capitalist system, a wealthy man who propels the economy
through successful investments. The ideological divide has shaped the
parties’ competing visions for how to heal the wounded economy. Romney’s
tax returns put a face on the competing proposals, offering a real-life
example of their consequences. At 15 percent, Romney would pay a smaller
share of his income in federal taxes than most high earners. In 2009, the
top 1 percent of earners paid an average of 24 percent of adjusted gross
income in federal taxes, according to Internal Revenue Service data.
Romney’s rate is lower because virtually all of his income is from profits
on investments, rather than earned wages.Democrats have promised that this
time their calls for serious tax changes for the wealthiest tax payers are
serious. For two years, when their party controlled both houses of Congress
and the White House, Democratic leaders failed to change the rules on
“carried interest” to ensure that private equity managers and venture
capitalists pay more than a 15 percent tax rate on fees reaped from their
investor clients. Democrats hardly mentioned raising the 15 percent tax
rates on dividends and capital gains, the largest reason the wealthiest
earners pay less of their income in taxes than many middle-class
families.Democratic Senators announced yesterday that they would introduce
legislation this week codifying President Obama’s principle that the
highest earners should pay at least the tax rate of middle-class workers.
But the tax agenda President Obama outlined in his State of the Union
address could divide Democrats since many of them are more anxious to talk
about “tax fairness” and Medicare in an election year than to try to raise
taxes. Senator Sheldon Whitehouse (D-RI) is the author of the so-called
Buffet Rule bill. He has indicated that he intends to press his legislation
as a stand-alone bill or seek to attach it to other legislation. Members of
both parties say changes to the tax code will likely have to wait until
after the November election when there may be more of a consensus for
comprehensive tax reform. Both parties are using these positions on taxes
as a way to claim mandate for the changes they advocate once the election
offers more clarity as to what the American people want.After the election,
changes will be coming, regardless of the occupant of the White House. If
nothing is done, the tax code put in place by Congress and President George
W. Bush through successive tax cuts in 2001 and 2003 expires January 1. At
that point, the capital gains tax rate would rise to 20 percent from 15
percent. Dividends would once again be taxed as ordinary income; meaning
for the wealthier tax payers, rates on dividends would jump to 39.6 percent
from 15 percent. Adding another wrinkle, under the 2010 health care law, a
new 3.8 percent tax on passive income — dividends, capital gains, interest
and other unearned income sources — goes into effect for high earners in
2013. That would raise total capital gains rates to nearly 24 percent for
households earning more than $250,000.President Obama’s call for “tax
fairness” and Mitt Romney’s tax returns have catapulted the debate over tax
increases on the wealthy to the top of the political agenda. But with even
some top Democrats hesitant, the prospects of a so-called Buffett-tax on
high-earning households remain uncertain, if not remote, for the immediate
future. What is left may be only politics, at least until after the
November elections.Financial ShortsStock ActIn an effort to regain public
trust, the Senate voted Monday to take up the Stop Trading on Congressional
Knowledge Act, or Stock Act, a bill that would prohibit members of Congress
from trading stocks and other securities on the basis of confidential
information they receive as lawmakers. The vote was 93 to 2. A handful of
lawmakers have tried for years to enact restrictions on stock dealing by
members of Congress. But their efforts drew little support until new
attention on the practice last year — coupled with election anxiety —
prompted a flood of backing for the idea and support from President Obama
in his State of the Union address.The bill states that members and
employees of Congress are not exempt from the federal law and regulations
that ban insider trading. Federal securities law does not explicitly exempt
members of Congress, but experts disagree on whether and when lawmakers may
be found to have violated the law. The bill is meant to eliminate any
ambiguity. It says that lawmakers have “a duty arising from a relationship
of trust and confidence” to Congress, the federal government and the
citizens of the United States — a duty they violate by trading on nonpublic
information. The bill also requires members of Congress to disclose the
purchase or sale of stocks, bonds, commodities futures and other forms of
securities within 30 days of transactions. The information would be posted
on the Web in a searchable format. From talking to other lawmakers,
executive branch officials and business executives, members of Congress
learn potentially valuable information about military contracts, economic
policy and a myriad of federal programs before the information becomes
public. In addition, they can write spending bills in ways that, for
example, benefit their own investments.Academic studies have come to
different conclusions about whether members of Congress have higher
investment returns than ordinary investors. In any case, Senators of both
parties said the bill was desperately needed at a time when the public
approval rating of Congress had sunk below 15 percent.Volcker Rule at
DavosAt last week’s annual meeting of the World Economic Forum, foreign
governments were vocal in their opposition to the Volcker Rule that says
that banks are not allowed to participate in “proprietary trading.” One
specific element of the rule was particularly disconcerting in that the
rule says that United States banks — and possibly certain foreign banks
that do business in America — would be restricted in trading foreign
government bonds. Yet the rule provides an exemption for United States
government securities. The measure, critics say, is likely to increase
borrowing costs for foreign governments, reduce liquidity and make the
market for foreign government bonds more volatile, the opponents charge. In
the end, it may fall into the category of unintended consequences of a
proposed new regulation.This latest assault on the Volcker Rule comes amid
negotiations to resolve the sovereign debt crisis in Europe. The
possibility of anything that could increase borrowing costs for countries
like Italy, Portugal or Spain has government leaders on edge. George
Osborne, the Chancellor of the Exchequer in Britain, expressed concern that
the regulations could have a significant adverse impact on sovereign debt
markets, including in the U.K. Japanese officials similarly believe the
rule “would raise the operational and transactional costs of trading” in
Japanese government bonds “and could lead to the exit from Tokyo of
Japanese subsidiaries of U.S. banks.” Canada’s five largest banks are so
anxious about the rule that they have sent a letter to the Federal Reserve
and four other agencies arguing that the rule may be illegal under
the North American Free Trade Agreement.Among these foreign ministers,
there is no question that the Volcker Rule is intended to limit banks from
taking too much risk; however, the upshot of the particular provision of
the Volcker Rule around banks trading in foreign sovereign bonds could
create more problems than it solves. And the amorphous language around what
constitutes a proprietary trade and “market making” is so confusing that
the result is that banks are going to get out of the market entirely.3.
Political ShortsPayroll Tax CutThe new bipartisan House-Senate committee
charged with negotiating a final version of a yearlong payroll tax cut met
for the first time last week. They agreed that a deal had to be struck
before the end of February, when a short-term extension that passed in
December will expire. Expiration of the 2011 two-percentage-point cut to
the payroll tax would raise taxes on around 160 million workers, and 3
million could lose their jobless benefits if unemployment insurance is not
renewed as part of the deal. Congress, already at historic lows in
popularity, will take another hit if consensus cannot be reached. But
negotiators are far apart in how to cover the $160 billion it would cost to
maintain the cut, extend expiring unemployment benefits and avoid deep cuts
in fees to doctors treating Medicare patients.They also differ on what
other measures should be added to the legislation, which may be the last
major bill that moves through Congress in an election year. Republicans
said they wanted to include “job creation” measures, including one blocking
environmental regulations for commercial boilers and another forcing the
construction of an oil pipeline from Canada to the Gulf of Mexico, which
the Obama administration has blocked.The House Republican majority took a
political hit last month when the House initially refused to pass the
two-month extension that cleared the Senate with broad bipartisan support.
Amid a din of criticism even from Republicans, House leaders relented and
supported the temporary measure on the condition that a formal conference
committee convene to reach a deal on a full year extension. Now that the
committee has met, it could fall to Republican and Democratic leaders to
force their rank-and-file members to relent on provisions blocking
consensus. That process will begin February 1, when negotiators will
reconvene to take up one of the thorniest issues: whether new conditions
should be placed on unemployment benefits.GOP's recess appointment
battleThe Senate GOP is now struggling with how to respond to President
Obama’s recent recess appointments for the National Labor Relations Board
and the Consumer Financial Protection Bureau. They fear a knock-down,
drag-out fight is exactly what the White House wants — and that President
Obama would use such a battle to ratchet up his campaign against a
dysfunctional and gridlocked Congress. The internal debate highlights the
party’s challenges, with public opinion soured on Congress and Republicans
still lacking a Presidential nominee to rally behind.Several factors appear
to be limiting the Republicans. For one, Congress’s popularity is at an
all-time low, meaning blocking legislation or nominations may ultimately
backfire in the court of public opinion. Secondly, Republicans are making a
process argument over the Senate’s constitutional advise-and-consent role,
a largely inside-the-Beltway fight lost on many voters. And thirdly, even
if they were to take the battle to the courts, it’s not clear if they’d
have standing to sue. And with no nominee, Republicans lack a bully pulpit
like President Obama’s, which he used during his State of the Union
address, promising to “fight obstruction with action.”Still, litigation is
almost certain to ensue, and it seems likely that a company affected by a
CFPB or NLRB decision would file the lawsuit. Senate Republicans could file
an amicus brief in support of that effort. There’s little legal precedent
for challenging such appointments — and none during pro forma sessions, a
tactic Reid started in Bush’s second term to deny his recess appointments.
The late Sen. Ted Kennedy filed a complaint in 2004 challenging the
constitutionality of Bush’s recess appointment of Judge William Pryor to
the 11th Circuit Court of Appeals. Kennedy argued that the Senate had been
adjourned for only 10 days and that the break did not constitute an
official recess, but he lost that challenge.] [image: 1. This Week in
Washington: How to Tax the WealthyPresident Barack Obama laid down the
battle lines for the Presidential election as he promised a “fairer” tax
regime on the same day that Mitt Romney, the leading Republican contender,
revealed that he paid federal income taxes at an effective rate of just
13.9 percent in 2010. The comparatively low rate reflects the fact that
most of Romney’s income is taxed as capital gains, an issue that President
Obama tackled head-on in his State of the Union address last week. To
Democrats, Romney is benefiting from an unfair tax code. In his State of
the Union address, President Obama said those earning more than $1 million
a year can afford to pay more and should be taxed at 30 percent. To
Republicans, Romney is an exemplar of the Capitalist system, a wealthy man
who propels the economy through successful investments. The ideological
divide has shaped the parties’ competing visions for how to heal the
wounded economy. Romney’s tax returns put a face on the competing
proposals, offering a real-life example of their consequences. At 15
percent, Romney would pay a smaller share of his income in federal taxes
than most high earners. In 2009, the top 1 percent of earners paid an
average of 24 percent of adjusted gross income in federal taxes, according
to Internal Revenue Service data. Romney’s rate is lower because virtually
all of his income is from profits on investments, rather than earned
wages.Democrats have promised that this time their calls for serious tax
changes for the wealthiest tax payers are serious. For two years, when
their party controlled both houses of Congress and the White House,
Democratic leaders failed to change the rules on “carried interest” to
ensure that private equity managers and venture capitalists pay more than a
15 percent tax rate on fees reaped from their investor clients. Democrats
hardly mentioned raising the 15 percent tax rates on dividends and capital
gains, the largest reason the wealthiest earners pay less of their income
in taxes than many middle-class families.Democratic Senators announced
yesterday that they would introduce legislation this week codifying
President Obama’s principle that the highest earners should pay at least
the tax rate of middle-class workers. But the tax agenda President Obama
outlined in his State of the Union address could divide Democrats since
many of them are more anxious to talk about “tax fairness” and Medicare in
an election year than to try to raise taxes. Senator Sheldon Whitehouse
(D-RI) is the author of the so-called Buffet Rule bill. He has indicated
that he intends to press his legislation as a stand-alone bill or seek to
attach it to other legislation. Members of both parties say changes to the
tax code will likely have to wait until after the November election when
there may be more of a consensus for comprehensive tax reform. Both parties
are using these positions on taxes as a way to claim mandate for the
changes they advocate once the election offers more clarity as to what the
American people want.After the election, changes will be coming, regardless
of the occupant of the White House. If nothing is done, the tax code put in
place by Congress and President George W. Bush through successive tax cuts
in 2001 and 2003 expires January 1. At that point, the capital gains tax
rate would rise to 20 percent from 15 percent. Dividends would once again
be taxed as ordinary income; meaning for the wealthier tax payers, rates on
dividends would jump to 39.6 percent from 15 percent. Adding another
wrinkle, under the 2010 health care law, a new 3.8 percent tax on passive
income — dividends, capital gains, interest and other unearned income
sources — goes into effect for high earners in 2013. That would raise total
capital gains rates to nearly 24 percent for households earning more than
$250,000.President Obama’s call for “tax fairness” and Mitt Romney’s tax
returns have catapulted the debate over tax increases on the wealthy to the
top of the political agenda. But with even some top Democrats hesitant, the
prospects of a so-called Buffett-tax on high-earning households remain
uncertain, if not remote, for the immediate future. What is left may be
only politics, at least until after the November elections.Financial
ShortsStock ActIn an effort to regain public trust, the Senate voted Monday
to take up the Stop Trading on Congressional Knowledge Act, or Stock Act, a
bill that would prohibit members of Congress from trading stocks and other
securities on the basis of confidential information they receive as
lawmakers. The vote was 93 to 2. A handful of lawmakers have tried for
years to enact restrictions on stock dealing by members of Congress. But
their efforts drew little support until new attention on the practice last
year — coupled with election anxiety — prompted a flood of backing for the
idea and support from President Obama in his State of the Union address.The
bill states that members and employees of Congress are not exempt from the
federal law and regulations that ban insider trading. Federal securities
law does not explicitly exempt members of Congress, but experts disagree on
whether and when lawmakers may be found to have violated the law. The bill
is meant to eliminate any ambiguity. It says that lawmakers have “a duty
arising from a relationship of trust and confidence” to Congress, the
federal government and the citizens of the United States — a duty they
violate by trading on nonpublic information. The bill also requires members
of Congress to disclose the purchase or sale of stocks, bonds, commodities
futures and other forms of securities within 30 days of transactions. The
information would be posted on the Web in a searchable format. From talking
to other lawmakers, executive branch officials and business executives,
members of Congress learn potentially valuable information about military
contracts, economic policy and a myriad of federal programs before the
information becomes public. In addition, they can write spending bills in
ways that, for example, benefit their own investments.Academic studies have
come to different conclusions about whether members of Congress have higher
investment returns than ordinary investors. In any case, Senators of both
parties said the bill was desperately needed at a time when the public
approval rating of Congress had sunk below 15 percent.Volcker Rule at
DavosAt last week’s annual meeting of the World Economic Forum, foreign
governments were vocal in their opposition to the Volcker Rule that says
that banks are not allowed to participate in “proprietary trading.” One
specific element of the rule was particularly disconcerting in that the
rule says that United States banks — and possibly certain foreign banks
that do business in America — would be restricted in trading foreign
government bonds. Yet the rule provides an exemption for United States
government securities. The measure, critics say, is likely to increase
borrowing costs for foreign governments, reduce liquidity and make the
market for foreign government bonds more volatile, the opponents charge. In
the end, it may fall into the category of unintended consequences of a
proposed new regulation.This latest assault on the Volcker Rule comes amid
negotiations to resolve the sovereign debt crisis in Europe. The
possibility of anything that could increase borrowing costs for countries
like Italy, Portugal or Spain has government leaders on edge. George
Osborne, the Chancellor of the Exchequer in Britain, expressed concern that
the regulations could have a significant adverse impact on sovereign debt
markets, including in the U.K. Japanese officials similarly believe the
rule “would raise the operational and transactional costs of trading” in
Japanese government bonds “and could lead to the exit from Tokyo of
Japanese subsidiaries of U.S. banks.” Canada’s five largest banks are so
anxious about the rule that they have sent a letter to the Federal Reserve
and four other agencies arguing that the rule may be illegal under
the North American Free Trade Agreement.Among these foreign ministers,
there is no question that the Volcker Rule is intended to limit banks from
taking too much risk; however, the upshot of the particular provision of
the Volcker Rule around banks trading in foreign sovereign bonds could
create more problems than it solves. And the amorphous language around what
constitutes a proprietary trade and “market making” is so confusing that
the result is that banks are going to get out of the market entirely.3.
Political ShortsPayroll Tax CutThe new bipartisan House-Senate committee
charged with negotiating a final version of a yearlong payroll tax cut met
for the first time last week. They agreed that a deal had to be struck
before the end of February, when a short-term extension that passed in
December will expire. Expiration of the 2011 two-percentage-point cut to
the payroll tax would raise taxes on around 160 million workers, and 3
million could lose their jobless benefits if unemployment insurance is not
renewed as part of the deal. Congress, already at historic lows in
popularity, will take another hit if consensus cannot be reached. But
negotiators are far apart in how to cover the $160 billion it would cost to
maintain the cut, extend expiring unemployment benefits and avoid deep cuts
in fees to doctors treating Medicare patients.They also differ on what
other measures should be added to the legislation, which may be the last
major bill that moves through Congress in an election year. Republicans
said they wanted to include “job creation” measures, including one blocking
environmental regulations for commercial boilers and another forcing the
construction of an oil pipeline from Canada to the Gulf of Mexico, which
the Obama administration has blocked.The House Republican majority took a
political hit last month when the House initially refused to pass the
two-month extension that cleared the Senate with broad bipartisan support.
Amid a din of criticism even from Republicans, House leaders relented and
supported the temporary measure on the condition that a formal conference
committee convene to reach a deal on a full year extension. Now that the
committee has met, it could fall to Republican and Democratic leaders to
force their rank-and-file members to relent on provisions blocking
consensus. That process will begin February 1, when negotiators will
reconvene to take up one of the thorniest issues: whether new conditions
should be placed on unemployment benefits.GOP's recess appointment
battleThe Senate GOP is now struggling with how to respond to President
Obama’s recent recess appointments for the National Labor Relations Board
and the Consumer Financial Protection Bureau. They fear a knock-down,
drag-out fight is exactly what the White House wants — and that President
Obama would use such a battle to ratchet up his campaign against a
dysfunctional and gridlocked Congress. The internal debate highlights the
party’s challenges, with public opinion soured on Congress and Republicans
still lacking a Presidential nominee to rally behind.Several factors appear
to be limiting the Republicans. For one, Congress’s popularity is at an
all-time low, meaning blocking legislation or nominations may ultimately
backfire in the court of public opinion. Secondly, Republicans are making a
process argument over the Senate’s constitutional advise-and-consent role,
a largely inside-the-Beltway fight lost on many voters. And thirdly, even
if they were to take the battle to the courts, it’s not clear if they’d
have standing to sue. And with no nominee, Republicans lack a bully pulpit
like President Obama’s, which he used during his State of the Union
address, promising to “fight obstruction with action.”Still, litigation is
almost certain to ensue, and it seems likely that a company affected by a
CFPB or NLRB decision would file the lawsuit. Senate Republicans could file
an amicus brief in support of that effort. There’s little legal precedent
for challenging such appointments — and none during pro forma sessions, a
tactic Reid started in Bush’s second term to deny his recess appointments.
The late Sen. Ted Kennedy filed a complaint in 2004 challenging the
constitutionality of Bush’s recess appointment of Judge William Pryor to
the 11th Circuit Court of Appeals. Kennedy argued that the Senate had been
adjourned for only 10 days and that the break did not constitute an
official recess, but he lost that challenge.] [image: 1. This Week in
Washington: How to Tax the WealthyPresident Barack Obama laid down the
battle lines for the Presidential election as he promised a “fairer” tax
regime on the same day that Mitt Romney, the leading Republican contender,
revealed that he paid federal income taxes at an effective rate of just
13.9 percent in 2010. The comparatively low rate reflects the fact that
most of Romney’s income is taxed as capital gains, an issue that President
Obama tackled head-on in his State of the Union address last week. To
Democrats, Romney is benefiting from an unfair tax code. In his State of
the Union address, President Obama said those earning more than $1 million
a year can afford to pay more and should be taxed at 30 percent. To
Republicans, Romney is an exemplar of the Capitalist system, a wealthy man
who propels the economy through successful investments. The ideological
divide has shaped the parties’ competing visions for how to heal the
wounded economy. Romney’s tax returns put a face on the competing
proposals, offering a real-life example of their consequences. At 15
percent, Romney would pay a smaller share of his income in federal taxes
than most high earners. In 2009, the top 1 percent of earners paid an
average of 24 percent of adjusted gross income in federal taxes, according
to Internal Revenue Service data. Romney’s rate is lower because virtually
all of his income is from profits on investments, rather than earned
wages.Democrats have promised that this time their calls for serious tax
changes for the wealthiest tax payers are serious. For two years, when
their party controlled both houses of Congress and the White House,
Democratic leaders failed to change the rules on “carried interest” to
ensure that private equity managers and venture capitalists pay more than a
15 percent tax rate on fees reaped from their investor clients. Democrats
hardly mentioned raising the 15 percent tax rates on dividends and capital
gains, the largest reason the wealthiest earners pay less of their income
in taxes than many middle-class families.Democratic Senators announced
yesterday that they would introduce legislation this week codifying
President Obama’s principle that the highest earners should pay at least
the tax rate of middle-class workers. But the tax agenda President Obama
outlined in his State of the Union address could divide Democrats since
many of them are more anxious to talk about “tax fairness” and Medicare in
an election year than to try to raise taxes. Senator Sheldon Whitehouse
(D-RI) is the author of the so-called Buffet Rule bill. He has indicated
that he intends to press his legislation as a stand-alone bill or seek to
attach it to other legislation. Members of both parties say changes to the
tax code will likely have to wait until after the November election when
there may be more of a consensus for comprehensive tax reform. Both parties
are using these positions on taxes as a way to claim mandate for the
changes they advocate once the election offers more clarity as to what the
American people want.After the election, changes will be coming, regardless
of the occupant of the White House. If nothing is done, the tax code put in
place by Congress and President George W. Bush through successive tax cuts
in 2001 and 2003 expires January 1. At that point, the capital gains tax
rate would rise to 20 percent from 15 percent. Dividends would once again
be taxed as ordinary income; meaning for the wealthier tax payers, rates on
dividends would jump to 39.6 percent from 15 percent. Adding another
wrinkle, under the 2010 health care law, a new 3.8 percent tax on passive
income — dividends, capital gains, interest and other unearned income
sources — goes into effect for high earners in 2013. That would raise total
capital gains rates to nearly 24 percent for households earning more than
$250,000.President Obama’s call for “tax fairness” and Mitt Romney’s tax
returns have catapulted the debate over tax increases on the wealthy to the
top of the political agenda. But with even some top Democrats hesitant, the
prospects of a so-called Buffett-tax on high-earning households remain
uncertain, if not remote, for the immediate future. What is left may be
only politics, at least until after the November elections.Financial
ShortsStock ActIn an effort to regain public trust, the Senate voted Monday
to take up the Stop Trading on Congressional Knowledge Act, or Stock Act, a
bill that would prohibit members of Congress from trading stocks and other
securities on the basis of confidential information they receive as
lawmakers. The vote was 93 to 2. A handful of lawmakers have tried for
years to enact restrictions on stock dealing by members of Congress. But
their efforts drew little support until new attention on the practice last
year — coupled with election anxiety — prompted a flood of backing for the
idea and support from President Obama in his State of the Union address.The
bill states that members and employees of Congress are not exempt from the
federal law and regulations that ban insider trading. Federal securities
law does not explicitly exempt members of Congress, but experts disagree on
whether and when lawmakers may be found to have violated the law. The bill
is meant to eliminate any ambiguity. It says that lawmakers have “a duty
arising from a relationship of trust and confidence” to Congress, the
federal government and the citizens of the United States — a duty they
violate by trading on nonpublic information. The bill also requires members
of Congress to disclose the purchase or sale of stocks, bonds, commodities
futures and other forms of securities within 30 days of transactions. The
information would be posted on the Web in a searchable format. From talking
to other lawmakers, executive branch officials and business executives,
members of Congress learn potentially valuable information about military
contracts, economic policy and a myriad of federal programs before the
information becomes public. In addition, they can write spending bills in
ways that, for example, benefit their own investments.Academic studies have
come to different conclusions about whether members of Congress have higher
investment returns than ordinary investors. In any case, Senators of both
parties said the bill was desperately needed at a time when the public
approval rating of Congress had sunk below 15 percent.Volcker Rule at
DavosAt last week’s annual meeting of the World Economic Forum, foreign
governments were vocal in their opposition to the Volcker Rule that says
that banks are not allowed to participate in “proprietary trading.” One
specific element of the rule was particularly disconcerting in that the
rule says that United States banks — and possibly certain foreign banks
that do business in America — would be restricted in trading foreign
government bonds. Yet the rule provides an exemption for United States
government securities. The measure, critics say, is likely to increase
borrowing costs for foreign governments, reduce liquidity and make the
market for foreign government bonds more volatile, the opponents charge. In
the end, it may fall into the category of unintended consequences of a
proposed new regulation.This latest assault on the Volcker Rule comes amid
negotiations to resolve the sovereign debt crisis in Europe. The
possibility of anything that could increase borrowing costs for countries
like Italy, Portugal or Spain has government leaders on edge. George
Osborne, the Chancellor of the Exchequer in Britain, expressed concern that
the regulations could have a significant adverse impact on sovereign debt
markets, including in the U.K. Japanese officials similarly believe the
rule “would raise the operational and transactional costs of trading” in
Japanese government bonds “and could lead to the exit from Tokyo of
Japanese subsidiaries of U.S. banks.” Canada’s five largest banks are so
anxious about the rule that they have sent a letter to the Federal Reserve
and four other agencies arguing that the rule may be illegal under
the North American Free Trade Agreement.Among these foreign ministers,
there is no question that the Volcker Rule is intended to limit banks from
taking too much risk; however, the upshot of the particular provision of
the Volcker Rule around banks trading in foreign sovereign bonds could
create more problems than it solves. And the amorphous language around what
constitutes a proprietary trade and “market making” is so confusing that
the result is that banks are going to get out of the market entirely.3.
Political ShortsPayroll Tax CutThe new bipartisan House-Senate committee
charged with negotiating a final version of a yearlong payroll tax cut met
for the first time last week. They agreed that a deal had to be struck
before the end of February, when a short-term extension that passed in
December will expire. Expiration of the 2011 two-percentage-point cut to
the payroll tax would raise taxes on around 160 million workers, and 3
million could lose their jobless benefits if unemployment insurance is not
renewed as part of the deal. Congress, already at historic lows in
popularity, will take another hit if consensus cannot be reached. But
negotiators are far apart in how to cover the $160 billion it would cost to
maintain the cut, extend expiring unemployment benefits and avoid deep cuts
in fees to doctors treating Medicare patients.They also differ on what
other measures should be added to the legislation, which may be the last
major bill that moves through Congress in an election year. Republicans
said they wanted to include “job creation” measures, including one blocking
environmental regulations for commercial boilers and another forcing the
construction of an oil pipeline from Canada to the Gulf of Mexico, which
the Obama administration has blocked.The House Republican majority took a
political hit last month when the House initially refused to pass the
two-month extension that cleared the Senate with broad bipartisan support.
Amid a din of criticism even from Republicans, House leaders relented and
supported the temporary measure on the condition that a formal conference
committee convene to reach a deal on a full year extension. Now that the
committee has met, it could fall to Republican and Democratic leaders to
force their rank-and-file members to relent on provisions blocking
consensus. That process will begin February 1, when negotiators will
reconvene to take up one of the thorniest issues: whether new conditions
should be placed on unemployment benefits.GOP's recess appointment
battleThe Senate GOP is now struggling with how to respond to President
Obama’s recent recess appointments for the National Labor Relations Board
and the Consumer Financial Protection Bureau. They fear a knock-down,
drag-out fight is exactly what the White House wants — and that President
Obama would use such a battle to ratchet up his campaign against a
dysfunctional and gridlocked Congress. The internal debate highlights the
party’s challenges, with public opinion soured on Congress and Republicans
still lacking a Presidential nominee to rally behind.Several factors appear
to be limiting the Republicans. For one, Congress’s popularity is at an
all-time low, meaning blocking legislation or nominations may ultimately
backfire in the court of public opinion. Secondly, Republicans are making a
process argument over the Senate’s constitutional advise-and-consent role,
a largely inside-the-Beltway fight lost on many voters. And thirdly, even
if they were to take the battle to the courts, it’s not clear if they’d
have standing to sue. And with no nominee, Republicans lack a bully pulpit
like President Obama’s, which he used during his State of the Union
address, promising to “fight obstruction with action.”Still, litigation is
almost certain to ensue, and it seems likely that a company affected by a
CFPB or NLRB decision would file the lawsuit. Senate Republicans could file
an amicus brief in support of that effort. There’s little legal precedent
for challenging such appointments — and none during pro forma sessions, a
tactic Reid started in Bush’s second term to deny his recess appointments.
The late Sen. Ted Kennedy filed a complaint in 2004 challenging the
constitutionality of Bush’s recess appointment of Judge William Pryor to
the 11th Circuit Court of Appeals. Kennedy argued that the Senate had been
adjourned for only 10 days and that the break did not constitute an
official recess, but he lost that challenge.