Perry, a candidate for the Republican presidential nomination, also jumped into an emerging disagreement over proposed legislation to ease lending limits that the federal government applies to credit unions. In return, these non-profit institutions don’t have to pay federal income taxes, which is a break their for-profit competitors – banks – don’t enjoy.

Gov. Rick Perry, candidate for the GOP presidential nomination, speaks at the Iowa Credit Union Convention in Des Moines, Sept. 16. (Photo: Emily Hoerner/IowaWatch)

During his 30-minute appearance at the convention, Perry focused on the legislation, the Small Business Lending Enhancement Act. It would raise the credit union member business lending cap from 12.25 percent of assets to 27.5 percent.

But some experts see parallels between the desire to loosen federal regulations, like credit union lending limits, and the anti-regulatory environment preceding the Great Recession.

Credit unions were created primarily to serve small savers and borrowers. Increasing the lending limit raises fears that credit unions are getting away from their mission and creeping into the market preserve of small community banks and larger commercial banks, both of which have to pay federal taxes.

By some estimates, the increase could create over 2,000 jobs in Iowa and help pump up an economy still feeling effects from the Great Recession, which started in late 2007. Potentially, raising the cap could dump more money into small business loans and into the economy.

Raising credit limits not a “no brainer”

“At first pass, it sounds like a no brainer,” said William C. Hunter, the dean and finance professor at the University of Iowa’s business college. But job and loan numbers are “just the tip of the iceberg.”

“Look at what happened to the housing market, Fannie and Freddie” Hunter said, referring to the housing market crash of 2007 and the two federally sponsored and supported mortgage financing institutions. “The laws grew more lax, the institutions drifted away from their original mission and the whole thing collapsed.”

While Hunter said he could not guarantee the same would happen if the lending cap were raised, he equated regulation change to a “slippery slope” that could lead to future repeals.

“If you go to 27, why not 50?” he asked. If legislators keep increasing the percentage, they need to take away the subsidies or private banks will be priced out of competition, he said.

The lending cap increase highlighted the anti-regulatory focus of Perry’s speech. The legislation boiled down to ending what he called the “nanny state” and taking a hatchet to federal regulations in an effort to create jobs and revenue.

“[If] you allow me to be the president of the United States, I will go to work every day to try to make Washington, D.C. , as inconsequential in your life as I can,” the governor said.

Perry takes aim at law to stop bailouts of out ‘too-big-to-fail’ companies.

The most direct reminder of the past regulatory laxity came sharply into focus when Perry also vowed to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. A major part of that law seeks to protect taxpayers from again having to finance huge bailouts of mismanaged financial institutions, which economists said had grown so big the economy could not afford their collapse.

In his critique of the 12-percent cap, Perry said the regulation was aimed at Wall Street but was damaging “Main Street” credit unions. This is not entirely true, because the cap is specifically directed at credit unions, which are, by definition, smaller institutions. According to the Credit Union National Association, banks hold nearly $13.4 trillion in assets, while credit unions hold a mere $885 billion.

When credit unions were created by the Federal Credit Union Act in 1934, they were intentionally limited.

“Credit unions were created for a certain niche, to create easy access to credit for small savers and borrowers,” said Hunter, the University of Iowa business college dean. “Today, credit unions have drifted away from that initial mission.”

But Perry praised this drift as a sign of economic growth. He said he planned to work closely with credit unions to limit regulations, hoping to create jobs by providing more loans to more people.

In Iowa, raising the cap could result in an additional 2,400 jobs and an influx of roughly $229,000, according data from the credit union association.

However, some financial experts, including Hunter, are wary of attaching such certainty to a change in regulation, primarily because of the impact it could have on private, commercial banks.

Because credit unions are non-profit organizations and tax exempt, they can offer loans at lower rates. It also means the federal government does not receive increased tax revenue from credit unions as they grow and lend more money.

Don Hole, the CEO and executive director of Community Bankers of Iowa, which represents for-profit small, independent bankers, opposed raising the cap. He cited revenue losses from waived income taxes, saying the lending cap would be an “unnecessary, additional burden on the taxpayer.”

But federal taxes are not the only way to oil economic wheels. Perry lauded the idea of giving loans to small businesses as a way of stimulating jobs.

In a stalled economy, small business loans are one of the few loans with an increasing demand. And studies show private banks are not granting many.

“Credit unions specialize in those smaller loans,” Perry said. “We need to consider alternatives, such as freeing up lending credit unions to help revive Main Street.”

The credit union association says credit unions have increased the number of small business loans by approximately 4.4 percent, while banks have increased by half that amount, 2.2 percent.

Looked at from another perspective, however, the numbers change.

According to figures from the Federal Reserve Bank of Chicago, credit unions loaned out $37 billion in small business loans in 2010. Community banks loaned out $300 billion and large banks loaned $270 billion.

Hole contended that community banks are willing to lend more, but the demand isn’t there. With the current economy, businesses are simply unwilling to borrow, he said. There is no evidence of eligible businesses being turned down.

A 2011 study by the New York Federal Reserve Bank supports Hole’s statement. It says businesses were hit harder by decreasing sales than denied loans.

Hunter cautioned against altering regulations until studies proved banks “rationed” loans.

“The market is an equilibrium. Changing it can mess things up,” he said, citing “the law of unintended consequences.”

Credit unions are intended to give small borrowers access to credit, Hunter said. Regulators should carefully examine any changes to make sure the institutions continue aiding this population instead of devoting too much capital to business loans and damaging community banks in the process.

“I like credit unions,” Hunter said. “They do give favorable rates to members. There’s nothing wrong with that as long as they don’t start doing what a bank does.”

Perry’s speech, unique in its focus on pending legislation, gives voters insight into his governing style: a limited government, invisible-hand-of-the-market approach. He promised to remove regulation from credit unions and other institutions.

One member of the audience, Eric Schurr of TMG Financial Services, said there was a “grain of truth” to the candidate’s statements.

“I think that the regulatory environment was too lax for a while,” Schurr said. “Now, the pendulum has swung too far in the other direction.”

But he cautioned against broadly excising all regulatory powers out the government.

“It is more important that a candidate have a realistic perspective of where the economy is, which is what will drive future solutions,” Schurr said.

This story was produced by IowaWatch.org, the non-profit, non-partisan news website of the Iowa Center for Public Affairs Journalism.

Check out the video after the jump:

Sen. Claire McCaskill (D-Mo.) said that if Republicans take a unified partisan stance against Wall Street reform, which Democrats had thought would be a slam dunk, it may not make sense to spend weeks trying to muster 60 votes for a controversial climate change proposal.

“If Republicans continue to play pure politics with financial reform, they would probably come close to shutting it down,” McCaskill said of the impact of Republican opposition on bipartisan talks on climate change.

“That’s a bad sign of how productive we’ll be,” she said.

Regardless of the outcome of financial reform, a climate bill could be a tough political proposition in advance of November’s midterm elections. If financial reform succeeds and wins popular support, Democrats would likely prefer to ride that wave into the midterms than to tackle divisive climate legislation. And if a Wall Street bill falls prey to nasty partisan bickering, then as McCaskill says, it’ll be tougher to get the necessary Republican support to beat back a climate bill filibuster.

But if all that’s the climate bill’s Scylla, its Charybdis is the inevitability that the Democratic majorities in Congress will be much smaller come January than they are currently, so for comprehensive climate legislation, it’s likely now or never.

Democrats need one Republican crossover to break a filibuster and move forward to an up-or-down vote on financial regulation. Right now, it is unclear who that crossover will be, with all 41 Republicans signed on to a letter of opposition written by Minority Leader Mitch McConnell (Ky.). Sen. Susan Collins (R-Maine) was the last signer of the letter, and Treasury Secretary Timothy Geithner, a strong proponent of the bill, is due to meet with her this afternoon.

Dodd, the chair of the Senate Banking Committee, predicted that Republicans would not stick together to filibuster the bill. “I don’t really believe Republican members want to be with their leaders when they’re talking about filibustering a bill that would allow us to address [regulatory reform],” he said. Still, Republican leadership has repeatedly indicated that it plans to filibuster to force substantive changes to the legislation.

(As an aside — I doubt that the Senate would move the bill to the floor by Wednesday, given that Obama plans to make his banner speech on the subject at Cooper Union on Thursday.)

Still, yesterday, Senate Minority Leader Mitch McConnell (Ky.) made the “bailout fund” the centerpiece of his argument against financial regulation reform on CNN’s State of the Union with Candy Crowley.

Of course, the “bailout fund” is no “bailout fund.” The idea is that banks would fund a $50 billion pool; were any to get into trouble, regulators would fire every member of management, wipe out shareholders, split the company up and sell the pieces, and tap the $50 billion fund to pay for the process and ensure the orderly dissolution of the firm. Companies like Citigroup were given bailouts during the crisis. This would be an execution (or, as Sen. Mark Warner (D-Va.) likes to say, a “death panel“).

Still, McConnell has made the fund a central talking point. The political calculation is clear: At least for now, Republicans believe that they are better off arguing the bill is not good enough rather than voting for reform, no matter how cynical and hypocritical it might seem.

Dealers: The five biggest derivatives dealers — all big financial firms, like Goldman Sachs — made a whopping $28 billion in fees off of derivatives trading last year. These firms weren’t making bets, but were processing over-the-counter (that is, not exchange-traded) derivatives for their clients. Under regulations proposed by Lincoln and due to be unveiled later today, not only would dealers see those fees go down — they would be forced to wall off derivatives operations from the rest of their businesses.

End Users: End users are non-financial firms that buy derivatives contracts. (For instance, if you were a shipping company, you might want to purchase an option to buy gasoline at a set price in the future, if you thought petroleum prices were on the rise.) Under the Senate bill, companies using derivatives to speculate need to put up collateral. But end users using certain kinds of derivatives to hedge do not. Non-financial firms are concerned that the regulations will be too restrictive — possibly out of concern that financial companies will squeeze through the end user loophole – and they will end up posting collateral, increasing the cost of derivatives.

It is understandable that financial firms do not want to see their derivatives-trading profits disappear — but there is no way legislators will leave this multitrillion-dollar market unregulated just because lucrative companies do not want to see the end of one easy profit stream. (Besides, big Wall Street banks invest in derivatives exchanges and stand to profit from them.) And Lincoln, Sen. Chris Dodd (D-Conn.) and other negotiators do not seem likely to change the end user language.

Over at Grist, Jonathan Hiskes points out three key ways in which the departure of the Court’s liberal leader could affect the environmental agenda. First and foremost, of course, is the fact that Stevens has been an “environmental rock star”:

He consistently upheld the ability of federal agencies to regulate pollution, as Dan Farber details on Legal Planet. In the influential Chevron v. NRDC (1984), he wrote the majority opinion defending government agencies’ ability to interpret ambiguous legislation, which enabled the EPA to set effective clean-air standards.

His crowning environmental achievement was writing the majority opinion in Massachusetts v. EPA (2007), which ruled that heat-trapping pollutants endanger public health and the EPA has an obligation to regulate them. (The Obama EPA is working on it.)

That latter ruling could well be the subject of contention again, as some lawmakers have insisted that any major climate legislation preempt the EPA from regulating carbon emissions under the Clean Air Act. Which brings Hiskes to his second point: that this isn’t just any year for climate battles, and several major climate controversies could make their way to the Supreme Court in the immediate future:

The state of Texas has already sued the EPA for seeking to limit CO2 emissions. The National Association of Manufacturers, the American Petroleum Institute, and other manufacturing groups say they will do the same. Any climate action the EPA undertakes will face a torrent of litigation. Same for any climate/energy legislation, should it ever pass out of Congress. You can expect at least some of these key cases to eventually be argued in front of the highest court in the land.

And finally, there are the ramifications of an extended confirmation battle for the Senate agenda. The upper chamber has already demonstrated its utter inability to do more than one thing at a time, and with financial regulation likely next on its list and Supreme Court confirmation hearings looming, it truly might not get around to climate legislation this year — after which, assuming a Democratic loss of a few Senate seats and possibly even control of the House, the uphill road to climate action will get that much steeper.

The report shows how one hedge fund, Magnetar, originated mortgage-based investment instruments, backed them with the riskiest possible assets and then made massive bets against its own products. Every part of it was perfectly legal, and very little of it came under regulatory oversight.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

The whole thing is worth a read.

Prince opened his remarks with regrets. “I’m sorry,” he said. “I’m sorry the financial crisis has had such a devastating impact for our country. I’m sorry about the millions of people, average Americans, who lost their homes. And I’m sorry that our management team, starting with me, like so many others could not see the unprecedented market collapse that lay before us.” (The apologia deviated from Prince’s prepared statement, which read: “I can only say that I am deeply sorry that our management, starting with me, was not more prescient and that we did not foresee what lay before us.”)

Such candor was unexpected and, at least judging the faces of the commissioners, welcome. But hours of rationalization, blame shifting, and evasion followed during questioning that at times became heated. Indeed, while Rubin and Prince expressed regret in general, they refused to classify their own or any of Citigroup’s actions as anything other than mistakes made in the run-up to an unforeseeable bust.

The commissioners’ questions focused on mortgage-backed securities, the housing bubble, derivatives regulation, Citigroup’s losses and the problem of too big to fail. “I personally do not think Citi was too big to manage,” Prince said, a sentiment Rubin echoed. Prince said the “broad, multifaceted and diversified nature” of Citigroup’s investments and liabilities did not “materially contribut[e] to our losses.”

That statement jarred with Rubin’s testimony; he cited the interconnectedness of financial firms and financial products, which undercut diversification, as particularly destructive during the financial crisis. Asked why he did not recognize the extent of Citigroup’s liabilities until too late, the former Treasury Secretary defensively noted that Citigroup managed “trillions” of dollars every day and the best risk management the company could perform was to put the “right people” in place. He also called Citigroup’s risk management “robust and proactive.”

FCIC Chair Phil Angelides later pointedly asked Rubin, “Do you bear central responsibility for the near-collapse, but for the government, of Citigroup?” He replied that Citigroup’s board, which he led, was not “a substantive part of the decision-making process” at the firm. “All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”

With the health care debate now (more or less) behind us, lawmakers and the public are turning their attention to financial regulation and job creation. Annie’s sharp journalistic instincts and firm grasp of the workings of this city we call home will serve her well as she tackles these and other issues.

Officially, her first day at TWI is tomorrow, but she couldn’t quite wait that long to get started — be sure to read her post on Goldman Sachs from this morning.

And join me in welcoming Annie to TWI!