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July 16, 2015

Financial Reform Newsletter: Another financial crash, taking on Wall Street, and more

Asking for another catastrophic financial crash: The Wall Street Journal recently published an editorial claiming that the Financial Stability Oversight Council (FSOC) is an agency run amok, acting arbitrarily in its decisions to designate firms like MetLife as systemically important. It published another editorial  falsely claiming lacked the data to show MetLife is systemically important.

In a must-read piece for the American Banker titled Large Nonbanks Deserve FSOC Scrutiny, Better Markets President and CEO Dennis Kelleher provided critical analysis of this issue, pushed back on these false claims and highlighted what’s at stake. As he wrote in the editorial:

“If MetLife’s lawsuit succeeds and the FSOC’s critics have their way, systemically significant nonbanks could wind up as unregulated as they were before the crisis. That would be asking for more surprises, bailouts, and another catastrophic financial crash.”

The Journal and others have missed a large part of the picture: specifically, AIG and its government rescue. In 2008, deregulated, unregulated, and unpoliced high-risk finance caused the worst financial crash since The Great Crash of 1929 and the worst economy since The Great Depression of the 1930s. It is ultimately  due to tens of millions of lost jobs, homes, savings, retirements, businesses and so much more.

In the wake of the 2008 crash, there was broad-based, bipartisan, and industry support for an entity like FSOC, including from the Financial Services Forum, the American Bankers Association, the Securities Industry and Financial Markets Association, and the Investment Company Institute. But as Mr. Kelleher writes in American Banker, “systemically significant nonbanks and their supporters are turning on the organization” in the years since the financial crash that nearly brought down our entire economy. 

To prevent unforeseen risks from causing another financial crash, Congress created FSOC as part of the Dodd-Frank financial reform law to keep our financial system safe. It gave FSOC detailed instructions for how to accomplish that enormous task. The court must not allow MetLife and its allies to undo this work.

Must-watch TV: taking on Wall Street and defending financial reform:

Following the introduction of legislation in the Senate to restore the Glass-Steagall Act, Better Markets President and CEO Dennis Kelleher recently appeared on the Ed Show on MSNBC and talked about the importance of eliminating the highest-risk practices by the too-big-to-fail banks. 

The Glass-Steagall Act prohibited the same bank from engaging in both relatively low-risk traditional commercial banking and high-risk investment banking. For more than 60 years, the law kept those activities separate, and our financial system avoided the kind of financial crash we saw in 2008. Once Glass-Steagall was repealed in 1999, large financial institutions were able to acquire other financial institutions and combine their low- and high-risk activities, threatening taxpayers and our economy.  

As Mr. Kelleher said on the show, the Glass-Steagall Act and financial reform broadly make clear that banks can gamble all they want and take all the risks they want, but they just can’t do it with taxpayer money and in way that requires more bailouts. You can watch the segment here.

Fighting to regulate cross-border swaps to protect the American people: 

Better Markets continues to fight for strong regulation of cross-border transactions in the derivatives markets, which risks putting taxpayers back on the hook for future bailouts because of dangerous derivatives activities outside the United States. Remember, Lehman had its derivatives book in London and the AIG subsidiary that sold all the CDS that blew up that company and required massive bailouts was in London. More recently, JP Morgan Chase’s $1 trillion notional complex CDS derivatives bet with $350 billion in depositor’s money, some of it FDIC insured and taxpayer backed, wasn’t called the “London Whale” for nothing: it was done in London, i.e, cross border. If cross border regulation isn’t tight, then Wall Street’s biggest banks will just move their high-risk business overseas, leaving U.S. taxpayers on the hook when they need to be bailed out of bad bets and come home with their hands out. Read the comment letter we filed this week on the subject here

Don’t miss our new website and video, highlighting who pays when our biggest banks ignore the rules of the road: 

Better Markets is always working to tell the story of Wall Street and reform in an understandable and interesting way. That’s why we’ve released a new video on the newly redesigned BetterMarkets.com that highlights who pays when Wall Street’s biggest banks ignore the rules of the road:

And don’t miss Better Market’s event next week: Treasury Secretary and FSOC Chairman Jack Lew will deliver the keynote address at our event marking the fifth anniversary of the Dodd-Frank Wall Street reform law on Monday, July 20th. The event will begin at 2:30pm ET and will also feature a discussion with former Senator Chris Dodd and former Representative Barney Frank about the importance of this law and the status of financial reforms. You can watch the event live on our website at BetterMarkets.com

Better Markets in the News:

Unlikely alliance takes on Wall Street: The Ed Show 7/8/2015

Treasury ‘Flash’ Rally Report Is Released: New York Times by Peter Eavis 7/13/2015

What Hillary Clinton Didn’t Say in Her Economic Policy Speech: Bloomberg by Jennifer Epstein and Jesse Hamilton 7/14/2015 

Clinton speech react: ‘Is that it?’: POLITICO by Ben White 7/13/2015

News You Don’t Want to Miss:

Fund managers to escape ‘systemic’ label: Financial Times by Barney Jopson, Stephan Foley, and Caroline Binham 7/14/2015

NY Fed Official to Currency Traders: Adhere to Industry Best Practices: Wall Street Journal by Katy Burne 7/14/2015

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