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April 11, 2014

Financial Reform Newsletter – April 11, 2014

Financial Reform Newsletter
April 11, 2014

Smoking Gun Catches the SEC in a Lie: It’s Time for the SEC to Disclose its Secret Settlement Collusion with Wall Street. Two separate reports this week have scratched the surface of what could soon be a full-blown scandal at the SEC. First, a recently retired senior SEC enforcement official criticized his former agency for failing to bring real enforcement actions against Wall Street banks and, very importantly, senior Wall Street bankers, the individuals who, after all, committed the crimes. As reported by Bloomberg, he made two explosive statements:

  1. The SEC is an “agency that polices the broken windows on the street level and rarely goes to the penthouse floors.”
  2. “For the powerful, we [the SEC] are at most a tollbooth on the bankster turnpike.  We are a cost, not a serious expense. . . . The system is broken.”

Better Markets has made this point repeatedly over the last three years, including here and here: failure to enforce the law on Wall Street is not only wrong, but also rewards past crimes and, thereby, incentivizes more future crime. 


The other story was an equally explosive (and related) report by The American Lawyer that shows the SEC intentionally lying to the American public about its settlement with Goldman Sachs over the infamous Abacus collateralized debt obligations (CDOs) that cost investors billions. (The Senate PSI Committee has all the details on that dirty derivatives deal here.)


Better Markets has said repeatedly that the revolving door at the SEC, its lack of enforcement and too-cozy relationships with Wall Street’s biggest banks and powerful executives have resulted in nothing less than a dereliction of its duty to protect investors, markets and Main Street. Well, if one was looking for proof that those problems and more exist – here it is. As we said in a statement issued after the American Lawyer report came out, the SEC needs to tell the American people the truth about the Goldman settlement and the other possible secret deals it had with big, wealthy, powerful and well-connected Wall Street banks it has bragged about punishing with supposedly tough settlements.


This is also why Better Markets went to court to stop the sweetheart sellout settlement between the SEC and Citigroup way back in 2012. That case highlights how the SEC inexplicably and indefensibly works with Wall Street’s biggest banks, rather than enforcing the law and protecting the American people from Wall Street’s criminality. As the headlines prove every day, that is why Wall Street has been on — and continues on — a crime spree: not only are the regulators and prosecutors not stopping them, they are actually helping, aiding and abetting Wall Street’s lawlessness.


It has been obvious for a long time that the SEC has utterly failed to protect the American investors who lost billions and billions of dollars on subprime mortgage CDOs and other derivatives that the biggest Wall Street banks were peddling to investors across our country. It is time for the secrecy and lies to end. After suffering so much, the American people deserve the truth.


Three Cheers for the Banking Regulators. While we are often referred to as a Wall Street watchdog, we are also a government watchdog. As has been clear over the last three years, we don’t hesitate to push the regulators and policy makers to reject Wall Street’s too-big-to-fail banks’ endless attempts to get loopholes into the rules that are necessary to protect Main Street and criticize them when they fall short. But, we also believe that the right to criticize comes with the duty to praise when they do the right thing (even if it is not the perfect thing), as happened twice this week. First, regulators rejected unjustified industry demands for an expansive loophole and announced a narrow tweak to the Volcker Rule, giving the few banks affected a two year extension for their holdings of collateralized loan obligations (CLOs). As with the TruPSs issue last month, this was a sensible, narrowly targeted fix of a very small problem that affected very few banks (and, remarkably, mostly just three of Wall Street’s largest banks). Second, the banking regulators finalized the leverage ratio rule this week which will require the eight largest banks in the U.S. to have more capital and less leverage. This is overwhelmingly important for the biggest too-big-to-fail banks to withstand another financial crisis and to prevent more taxpayer bailouts in the future


House Agriculture Committee Protects Wall Street, Hurts Main Street. This past week the House Agriculture Committee passed a reauthorization bill for the Commodity Futures Trading Commission. After the 2008-2009 financial crash, the CFTC was given the responsibility and duty to police the $650 trillion derivatives markets, which were previously dark and unregulated. These markets are where the last crisis was invisibly incubated and derivatives acted as a conveyor belt, spreading the crisis throughout the globe. Put another way, the CFTC has been given one of the most important jobs of fixing the failures that led to the last crisis and, unless done thoroughly, will assuredly be a primary cause of the next crisis. 


The CFTC is the derivatives cop on the Wall Street beat. Indeed, the CFTC is the only agency standing between Wall Street’s high risk derivatives gambling causing another financial crash and Main Street, which will again get the bailout bill. 


The problem is that unregulated, dark derivatives markets are where the handful of Wall Street’s too big to fail banks made most of their money before the crisis and, importantly, where much of the bankers’ bonuses came from. It is no surprise, then, that Wall Street and its bonus-bloated bankers have furiously fought the CFTC, trying nonstop to kill, weaken or delay reform. It is also no surprise that Wall Street’s allies, including importantly, its political allies in Congress (mostly, but not only in the House) have persistently harassed and grossly underfunded the CFTC. While Wall Street and its allies often claim to attack and cripple the CFTC to help the economy, Main Street and growth, they never mention that their big profits and bonuses depend on massive cash flow from unregulated, dark derivatives trading, which is in fact the biggest danger to the economy, Main Street, growth and so much more.


Unfortunately, this reauthorization bill is just the latest salvo in Wall Street’s war on financial reform and their unending efforts to protect their profits over all else. As we said when the bill was passed, it under-funds, undercuts and undermines the critically important work the CFTC is doing. It derails future reforms and rolls back past progress in bringing transparency, oversight and accountability to the dark, unregulated derivatives markets. This is indefensible, but fits a pattern of Congress beating down these cops on the Wall Street beat, as we’ve noted before. Making matters worse, the bill also does nothing to fund the CFTC anywhere near the amounts required for them to do their job. The House Agriculture Committee should have authorized a tiny user fee on the industry so that the industry that caused the crisis pays for the cops trying to prevent them from doing it again, rather than making taxpayers pay because they always get stuck with the bill.


Better Markets in the News: 

Fed Gives Banks 2 More Years on Risky Securities: Associated Press by Marcy Gordon 4/8/2014

Fed Rejects Push for Volcker Rule Carve-Out: Politico Pro by Zachary Warmbrodt 4/7/2014

High Frequency Trading: Ban it or regulate it?: Fox Business 4/3/2014

Other Articles of Interest: 

SEC Goldman Lawyer Says Agency Too Timid on Wall Street Misdeeds: Bloomberg by Robert Schimidt 4/8/2014

Flash Boys” Fuels More Calls for a Tax on Trading: The New York Times by Nelson D. Schwartz 4/7/2014

Citigroup to Pay $1.13 Billion to Settle Securities Claims: The New York Times 4/7/2014

Bogus Private-Equity Fees Said Found at 200 Firms by SEC: Bloomberg by Alan Katz 4/7/2014

US regulators to finalise tougher bank leverage ratio rule: Financial Times by Gina Chon and Camilla Hall 4/7/2014

Holder Vows High-Speed Trading Probe to Protect Markets: Bloomberg by Del Quentin Wilber, Keri Geiger, and Patricia Hurtado 4/4/2014

The Michael Lewis factor: Politico by Zachary Warmbrodt and Dave Clarke 4/5/2014

Goldman Wins, Credit Suisse Loses in Lewis’s League Table: Bloomberg by Nick Baker 4/5/2014

Credit Suisse Is Said to Be Facing Double-Barreled Inquiries: The New York Times by Ben Protess and Alexandra Stevenson 4/6/2014

 HFT isn’t the problem-insider trading is: Op-ed: CNBC by Mercer Bullard 4/4/2014

Asset management poses mounting risk to stability, BoE warns: Financial Times by Sam Fleming and Stephen Foley 4/4/2014

U.S. futures regulator CFTC probing speed traders: Reuters by Douwe Miedema 4/3/2014

A Vacant Chair for Blythe Masters: The New York Times by Christopher Hughes 4/3/2014



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