Wall Street Reform: Moving Forward

As Zuccotti Park is Cleared, Congress Moves to Gut Financial Reform

Mary Bottari — Tue, 15 Nov 2011 13:36:22 -0500

In the dead of night last night, the movement to hold big banks accountable for their crimes took two major hits. Occupy Wall Street activists were swept from Zuccotti Park as radical members of Congress moved to gut funding for the Commodity Futures Trading Commission (CFTC) and advance a series of shocking proposals to roll back financial reform.

Midnight Madness

Mayor Bloomberg decided that a bit of dirt and grime was worth risking a riot. He arrested over 70 in Zuccotti Park, issuing a lengthy and unconvincing statement regarding the dangers of camping. So worried was the NYPD about what might happen, they forced down a CBS helicopter filming from above, according to Gawker.

On Capitol Hill, a similar rout was taking place in the dead of night. In a fast move that deals a serious blow to a key regulator in charge of Wall Street derivatives trading, Obama's budget request for CFTC was cut by more than a third by GOP legislators eager to kill any oversight of Wall Street.

According to Politico, the administration had sought $308 million for the new fiscal year, but the amount is expected to come in closer to $205 million.

Better Markets, a Wall Street watchdog group, explains the problem this way:

"The derivatives market is $600 trillion big and much of that market is controlled by just 4 Wall Street megabanks: JP Morgan Chase, Citigroup, Bank of America and Goldman Sachs. Who is the watchdog for those derivatives? The CFTC has responsibility for most of them and it is getting a budget of only $205 million. They will not be able to hire the people or buy the technology that they need to keep up with Wall Street, never mind actually keep watch over them to try to prevent another financial catastrophe."

Crippling the CFTC is, of course, part of the GOP plan. As CFTC has moved this year to bring transparency to dark markets and crack down on commodities speculation, the tiny agency has been a lightning rod for right-wingers who opposed the 2010 Dodd-Frank reforms.

Five More Pro-Wall Street Measures Up Today

Today, the House Financial Services Capital Markets subcommittee will move to advance five more bills which would roll back critical reforms.

We Love Bailouts Bill: HR 1838 (Stivers) would repeal a section of the Dodd-Frank Act that prohibits the Federal Government from bailing out big Wall Street derivatives dealers. What are they thinking? With Merrill Lynch right now attempting to transfer a total of $75 trillion in derivatives bets from its investment arm into Bank of America, its FDIC-insured parent company, why is the GOP eager to facilitate the next giant taxpayer bailout?

Dark Markets are Good for You Bill: HR 2586 (Garrett) would allow big Wall Street derivatives dealers to continue opaque bilateral trading and allow them to avoid price transparency required by the Dodd-Frank bill. Off-book gambling in the derivatives market was a key cause of the 2008 financial crisis, and Dodd-Frank made huge steps forward, requiring the vast majority of derivatives to be traded in open forums where everyone could see what is going on in this $600 trillion dollar market. Similarly, HR 2779 (Stivers) would exempt all transactions between related affiliates from derivatives regulations, creating less, not more, transparency.

Swap Till You Drop Bill for Pension Funds: HR 3045 (Canseco) would permit swaps dealers to get a blanket exemption from any duty to respect the best interests of pension funds when giving any advice on a swaps deal. Just last week, we saw the largest municipal bankruptcy in United States history, in Jefferson County, Alabama, which was caused when JP Morgan Chase bribed local officials into entering a swaps deal to refinance a sewage district. Why do we want more of this kind of thing?

Go Back to Sleep SEC Bill: HR 2308 (Garrett) would create a series of new hurdles for the Securities Exchange Commission (SEC) to jump before the institution can pass a new rule or regulation. SEC is not my favorite regulator and their fines on the big Wall Street banks have not been commensurate with the crimes, but compared to the U.S. Justice Department, SEC regulators have been veritable energizer bunnies, extracting billions in fines.

Suicidal Loyalty to Wall Street Barons

The House GOP has such a suicidal loyalty to their friends on Wall Street that they simply refuse to learn any lessons, even from very recent history. As they drink the Kool-Aid, Occupy Wall Street is winning its court fight this morning and regrouping.

The Occupy Movement cannot be stopped. The question today is, can Congress?

*****

Learn more about these bills from Americans for Financial Reform (PFD).

The Wall Street Reform Bill: How Much Did We Lose Getting to 60?

OurFuture.org Staff — Thu, 15 Jul 2010 16:20:37 -0400

Scott Brown Votes for Reform-- After Selling Out to Wall Street

Zach Carter — Thu, 15 Jul 2010 15:33:05 -0400

Wall Street reform passed Congress today, with three Republicans voting "yes," among them Scott Brown of Massachusetts. But Brown's vote came with a high price tag: he insisted on both hammering ordinary citizens with new taxes, instead of imposing them on the financial behemoths that jeopardize our economic stability. And he punched an enormous loophole in rules limiting bank gambling with taxpayer dollars. Both were explicit favors for powerful special interests in his state.

These were the first truly significant legislative maneuvers Brown has made since taking office, and they stand in stark contrast to the image he painted of himself while campaigning as a Tea Party favorite. The reform package comes with a $19 billion price tag. Traditionally, the cost of regulating an industry is covered by the industry being regulated. But of course those industries don't like those taxes, in part because they create up-front costs that limit profits, but also because a smaller profit-base results in a smaller bonus pool.

Brown led the charge in demanding that Wall Street bonuses not be hampered by these regulatory costs. He successfully pushed to restructure the tax burden to hit ordinary citizens and shield major Massachusetts hedge funds and banks. The taxed-enough-already Tea Party's man-of-the-people pushed to protect big financier bonuses, while imposing new taxes on the rest of us. Thanks for the new tax bill, Tea Partiers.

But this was the second time Brown dealt out major damage to reform in just a few weeks. In order to get the Wall Street overhaul through the conference committee, Brown demanded that the Volcker Rule—a ban on risky proprietary trading by banks—be watered down. Proprietary trading doesn't serve any client or help any business, it's just a naked bet, and when those bets are made through the commercial banking system, they're subsidized by taxpayer perks (those perks are designed to boost economically productive lending).

One of the biggest banks in Massachusetts is State Street Bank. It's a pretty boring institution—except for its prop trading operations. Throughout the crisis, it made decent money, and generally didn't run into any trouble—except from its prop trading operations. State Street's gambling operations backfired big-time, forcing taxpayers to step in with billions of dollars in bailouts.

What did Brown learn from this episode? Why, that State Street deserves to keep gambling with taxpayer dollars! Prior to Brown's efforts, the Volcker Rule would have banned any proprietary trading at major banks. After Brown's efforts, banks can put up to 3 percent of their capital into a proprietary hedge fund. That dealt a tremendous blow to the substance of the reform. When banks sponsor proprietary hedge funds, they collect lots of money from outside investors. If those hedge funds go under, the bank's reputation is immediately on the line, and it faces a tremendous amount of pressure to bail out other investors in the hedge fund. If they don't stand behind the hedge fund, investors wonder why, and it can spark a run on the bank.

So even if only a small amount is initially invested in the fund, banks often end up paying out several times their original investment to cover losses (Bear Stearns put about $40 million into a hedge fund and had to pay $3.2 billion when it went under). There are some provisions in the reform bill limiting the degree to which big banks can bail out their hedge funds, but they will be extremely difficult to enforce.

In sum, Brown actively weakened U.S. financial stability and hit taxpayers with unnecessary fees, and did it all for the express benefit of a handful of special interests.

Not all votes come at the price of weaker reform. Sen. Maria Cantwell, D-Wash., threatened to vote against the bill if it was not strengthened, and secured stronger reforms as a result. Not even all Republicans insisted on a weaker bill. Sen. Susan Collins, R-Maine, refused to vote for the bill unless it was substantively strengthened. Collins insisted on imposing higher capital requirements on major banks—effectively reducing the degree to which banks can make bets with other peoples' money. It's not the most important section of the legislation, but it is a real reform.

Brown didn't do any of this. He simply created specific giveaways for special interests. If that's the Tea Party's plan for reforming Washington, then they're doing just fine. But if they want responsible public policy, maybe it's time to put down the assault rifles and start courting serious reformers.

Wall Street Reform Clears Final Filibuster

Zach Carter — Thu, 15 Jul 2010 13:36:31 -0400

Good news: The Senate just secured 60 votes to proceed on Wall Street reform, clearing the way for the legislation's final passage today or Saturday.

The legislation garnered the votes of every Democrat except Sen. Russ Feingold, D-Wis., who argued that the bill was too weak to support. Every Republican opposed the bill, except Sens. Susan Collins, R-Maine, Olympia Snowe, R-Maine, and Scott Brown, R-Mass. Brown's influence over the bill was particularly pernicious, which I'll elaborate more on later.

As I've argued previously, the bill is far from perfect, but is still a step in the right direction. After thirty years of deregulation, Congress is finally moving back to actually regulating Big Finance. The bill won't end too-big-to-fail, but it will create a powerful new regulator to protect consumers from banker abuses, and it will establish some useful financial infrastructure that can be expanded by future legislation.

Wall Street reform is going to pass. That fact is worthy of celebration, but citizens and activists must maintain the pressure on Congress and the administration to pass more significant reforms in the coming months and years. A brief list of what's left to do: breaking up the megabanks, imposing a tax on financial speculation and barring banks from backing risky derivatives operations with taxpayer funds.

Wall Street Reform: A Good First Step

Zach Carter — Fri, 25 Jun 2010 13:27:23 -0400

Members of Congress finished ironing out their differences on Wall Street reform last night, and the resulting bill deserves unequivocal support from progressives and conservatives alike. But while the final package is a necessary first step to overhauling the nation's out-of-control financial sector, it will do very little to change the destructive status quo on Wall Street. The bill is a good first step. The public deserves too see stronger reforms from Congress next year.

As a matter of history, sweeping financial change takes several years to secure. It took Franklin Delano Roosevelt seven years to enact all of his New Deal banking regulations, and President Barack Obama appropriately sees the 1930s crisis as the historical analog to today's meltdown-and-reform process. Obama is correct to state that the legislation approved by Congress late last night is the most significant since the Depression—but it is a hollow truth. The U.S. government has been steadily deregulating the banking industry ever since Roosevelt, and the mere act of moving policy in the opposite direction is enough to claim the mantle of dramatic reform. Actually living up to the precedent set by Roosevelt will take several years of serious work, and major legislative action during the next electoral cycle.

As for the current bill, Congressional leaders decided late last night to gut the only two serious structural reforms still on the table. With the political wind at their backs, and the finish line clearly in sight, lawmakers decimated an effort to end outright gambling by the nation's largest banks, and sabotaged a plan to rein in rampant speculation in derivatives—the out-of-control market that brought down AIG and necessitated the bailouts of every major U.S. bank. By adopting the plan from Sen. Blanch Lincoln, D-Ark., to fix derivatives and implement a strong version of the Volcker Rule banning proprietary trading, Congress could have made significant strides toward ending the too-big-to-fail financial oligopoly that held taxpayers hostage in 2008. Instead, Congress chose to reinforce the current destructive banking regime.

But while the resulting legislation will not end too-big-to-fail, prevent future bailouts, or significantly rein in risk-taking on Wall Street, it is nevertheless worth supporting. Three important measures made it through that will make the global economy a fairer and more just marketplace. Those three reforms will not be enough to prevent future financial crises, nor will they be able to ameliorate the fallout from those crises once they occur, but they are nevertheless critical.

First, we will get a thorough audit of the Federal Reserve, an agency which has funneled $4 trillion in bailout funding to the nation's financial system without any oversight or transparency. The public will finally know how it's money is being spent, and credit is due to Rep. Alan Grayson, D-Fla., Rep. Ron Paul, R-Texas, and Sen. Bernie Sanders, I-Vt., who fought hard for the plan in the face of overwhelming Wall Street lobbying. Kudos are also due to activist journalists Mike Elk and Jane Hamsher, who cobbled together a coalition of good government supporters across the political spectrum and made the Fed audit a centerpiece of the legislative debate. The Fed's blunders on the bailout of AIG have created significant momentum for real reforms, and further information about the secretive agency's operations will help build momentum for next year's financial fights.

The legislation also includes a critical overhaul of the nation's consumer protection regime wherever banks are concerned. For the first time, the public will have a regulator dedicated to defending consumers against bank abuses, with no other conflicts. The new Consumer Financial Protection Bureau has been pilloried with unnecessary loopholes, but the resulting agency will nevertheless be able to write and enforce meaningful regulations on the financial sector. This is a major accomplishment, made all the more significant by the fact that the front-runner to head the new agency has already established herself as one of the most important voices on U.S. economic policy.

As Chair of the oversight panel for the Troubled Asset Relief Program, Elizabeth Warren has taken a position with extremely limited statutory power and converted it into the only mouthpiece for the American middle class in Washington, D.C. She has done a far better job than even the most optimistic good government activists had hoped for, and giving her free reign to crack down on consumer abuses will be a major victory for the American economy. She has not been formally nominated for the post yet, but the world will be a better place once she is.

Finally, while Lincoln's derivative overhaul was largely destroyed, she did manage to preserve tough new rules regulating both food and gas derivatives. The resulting legislation will not keep Wall Street from gambling with our future, but it will make it much more difficult for financiers to jack up the prices of basic necessities in their quest for bigger bonuses. Back in the spring and summer of 2008, prices for food went through the roof as a result of heavy speculation in market for agricultural derivatives—raw bets placed on the future price of corn, rice and other farm products. The resulting price increases forced consumers the world over to pay too much for food, and sparked outright starvation in regions that could not afford the increases.

The same thing happened with gasoline. Remember paying over $4.00 a gallon? That had nothing to do with the fundamentals of supply and demand—it was a direct result of wild speculation in the market for energy derivatives. The bill approved last night will end that abuse. As a result of Lincoln's efforts, two excesses that created real, tangible hardship for millions of people will be eliminated.

This bill is unquestionably deserving of support. It will make the global economy a fairer marketplace. But it will not end the too-big-to-fail incentives that encourage Wall Street to take wild risks and stick taxpayers with the tab, nor will it sufficiently overhaul the market that brought down AIG, nor will it end the widespread practice of bigwig bankers gambling with taxpayer money. All of those reforms could have been enacted—explicit, concrete amendments were offered on all three, and Congressional leaders rejected them in an overt effort to rake in campaign contributions from Wall Street. Republicans resort to such political calculations all the time—catering to entrenched corporate interests has been their only economic strategy since the Reagan years. But it is enormously disappointing to see significant swaths of the Democratic Party adopt the same strategy (particularly the New Democrats, who should rename themselves the Wall Street Democrats after this episode) and even more frightening to see the Democratic leadership incapable of corralling these turncoats.

So support the Wall Street reform bill: it's a good first step toward building an economy that works for all citizens, not just bankers. But demand that your elected leaders finish the job next year. Too-big-to-fail lives on, and must be defeated.