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April 13, 2016

Financial Reform Newsletter: April 13, 2016

A big win for the American people:  With all of the power, money, lobbyists, and connections of Wall Street, it’s easy to be cynical and think that no progress can be made. But, it’s not true. Progress can be made, and Wall Street’s special interests can be defeated by the public interest. It happened last December when Congress rejected Wall Street’s anti-reform policy riders in the annual funding billand it just happened again: the Department of Labor (DOL) finalized its best interest fiduciary duty rule last week. 
 
Yes, it took years. And, yes, the industry engaged in an all-out war to stop it, but the many public servants at the DOL, with the full support of the President, his administration, and many Democratic members of Congress, not to mention Better Markets, AARP, AFL CIO, the Consumer Federal of American, and others, finalized a very strong rule that requires anyone giving retirement investment advice to put their client’s best interests first. 
 
Make no mistake about it: the DOL’s action is historic and will help tens of millions of hardworking Americans trying to save for retirement. As a direct result, Americans will no longer lose tens of billions of dollars every year to high fees and poor returns. While many advisors do act in their clients’ best interest already, far too many do not, and the law allowed them to put their own economic interests above their clients’. That has now been changed. Rather than paying for brokers’ bonuses and fancy trips, that money will now help Americans retire with dignity and security.
 
As is virtually always the case, this unfortunately is not the end of the fight. Many in the industry have threatened to sue to try to get the courts to overturn the rule. We are ready for them and will fight them in Court as we have in the past (and have won in the past!). But even if they don’t sue, everyone must remain vigilant as the industry tries to find and exploit unintended loopholes in the rule’s language and argues for inappropriate interpretations as the rule is implemented over the coming years. 
 
Better Markets will stay on the front lines fighting to protect the best interest rule and even extend it so that everyone who takes your money has to act in your best interest – a common sense, sensible requirement everywhere except in Washington and on Wall Street. (If you want to help us help you, support us here.)
 
Another DOJ settlement charade, as Goldman Sachs wins again: The latest and likely the last major Department of Justice settlement with one of Wall Street’s too-big-to-fail banks was announced this week. DOJ and state regulators bragged that Goldman will be paying more than $5 billion to settle claims relating to its years of illegal actions in fraudulently inflating the subprime bubble that lead to the 2008 financial collapse. 
 
The problem is that the settlement itself is a fraud on the public meant to make DOJ look like it’s being tough on Wall Street and make Goldman look like it’s really paying for its illegal conduct. Except, as Nathanial Popper made clear in his front page story in the New York Times,“Goldman’s Settlement on Mortgages Is Less Than Meets the Eye,”Goldman won’t be paying anywhere near $5 billion. This is just more of the same non-punishment and non-accountability that has characterized DOJ’s prior settlements with Wall Street’s biggest, most powerful and well connected too-big-to-fail banks. 
 
This settlement is really a victory for Goldman that rewards past crime and will thereby incentivize future crime:
 
  • First, Goldman got to keep all the ill-gotten gains for the last nine years since its illegal actions and gets to buy its get-out-of-jail free card today with shareholders’ money.
  • Second, $5 billion is meaningless unless it is publicly disclosed how much money Goldman made from its illegal conduct and the total amount of investor losses from its illegal conduct.  
  • Third, DOJ helped Goldman cover up its illegal actions by carefully crafting a Swiss cheese “statement of facts” designed more to conceal than reveal Goldman’s illegal actions. This prevents not only accountability of what Goldman actually did but also scrutiny of what DOJ did or did not do, frustrating public accountability of it as well. (This is presumably also one of the reasons that DOJ refuses to seek court approval of these settlements: no pesky independent judges scrutinizing their actions and no public disclosure of what was or wasn’t done and why.)
  • Fourth, by allowing Goldman to merely “acknowledge” the so-called “statement of facts” rather than requiring Goldman to admit them, DOJ prevents injured investors from using the settlement to try to recover their losses from Goldman’s illegal conduct.
  • Fifth, the settlement covers Goldman’s illegal conduct in 2005-2007 when it’s net revenue in just one of those years (2006) was $37.7 billion and its net earnings were $9.5 billion. 
  • Sixth, every single individual at Goldman who received a bonus from this illegal conduct not only keeps the entire bonus but suffers no penalty at all. Once again, individual accountability is entirely absent from this settlement. 
  • Seventh, more than half of the $5 billion appears likely to be tax deductible, meaning U.S. taxpayers once again end up on the hook.
 
That is not justice. The American people deserve better from their Department of Justice. Adding insult to injury, the only people fooled by this are members of the public. Goldman and Wall Street are in on the charade and know exactly what’s going on here. 
 
Worst of all, everyone knows that crime unpunished is crime undeterred, especially when it is unpunished after being caught! After all, if individuals can break the law, get away with it, and keep their bonuses and jobs, why wouldn’t they do it again? 
 
Finally, why say “Goldman wins again”? Because its much publicized 2010 settlement with the SEC over the infamous Abacus CDO with hedge fund manager John Paulson apparently was another PR-driven, puny, slap-on-the-wrist settlement. The SEC stated that it was settling the single Abacus CDO for $550 million, but internal SEC documents and discussions seem pretty clearly to show that the SEC was actually ending its investigations into all Goldman’s other CDO deals. 
 
As a result, this one settlement with the SEC and one payment was likely an unacknowledged de facto settlement of all of Goldman’s liabilities. But that would have looked bad as then-SEC Enforcement Director Robert Khuzami subsequently said: “… we didn’t want [Goldman] out there saying, you know, they settled 12 CDO investigations for an average of $30 million each, and, you know, didn’t [Goldman] get a great deal.” So Goldman knew it, and therefore all of Wall Street knew it, but let’s not let the public ever know. Like in this week’s settlement, the government was pretending to be tough on Wall Street while Wall Street pretends to be seriously punished.
 
This was all detailed in a couple of terrific articles by Susan Beck in the American Lawyer: “The SEC’s Internal Battles over the Goldman Sachs Probe.” They are behind the American Lawyer paywall, but available to those who have access to LexisNexis.  
 
The Court’s doubly dangerous opinion in the MetLife lawsuit against FSOC:Last week, we wrote about the watershed ruling in Metlife v. FSOC, where U.S. District Judge Rosemary Collyer — in a sealed order — rescinded FSOC’s designation of MetLife as a systemically important financial institution subject to heightened regulatory oversight. The court has now unsealed the opinion, which is now publicly available.
 
The decision is doubly dangerous and incorporates onerous new burdens on agencies that will cripple financial reform. Remarkably, this decision prioritizes MetLife’s interests far above the public interest and will make future financial crashes and bailouts much more likely.
 
It second-guesses years of investigation and analysis by dozens of financial experts and FSOC itself, which is a council of all the country’s top financial regulators. The court seeks to hold FSOC to an impossible standard: quantifying precisely how future financial distress at a systemically significant nonbank will happen and how it will affect the entire financial system. That clairvoyant quantification duty would require FSOC to have a crystal ball. It is foisting on FSOC a standard that is not in the law and one that cannot be met. For example, if FSOC existed in 2007 and were required to meet the standard set by this court, it is highly doubtful that FSOC would have or could have designated Bear Stearns, Lehman Brothers, AIG, Goldman Sachs, Morgan Stanley, or any of the other nonbanks that collapsed in 2008 and caused the financial crash as systemically important.
 
The court also decided to impose a cost-benefit requirement on FSOC when none is imposed by statute or under ample precedent in the D.C. Circuit. The lack of a pre-existing requirement of cost-benefit analysis is sensible: Not only are these determinations highly judgmental, but the benefits to the public from financial reform rules are enormous yet very difficult to quantify, while companies routinely produce mountains of supposed costs. Regarding financial rules and actions by financial regulators like FSOC, cost-benefit analysis really becomes “industry-cost-only analysis” where the costs to the public are grossly understated.
 
The good news is that, after a careful and thorough review, FSOC has decided to appeal the decision. Better Markets will be closely following this case. 
 
Another win for the American public: The MetLife lawsuit against FSOC is enormously important to the American people. It may profoundly affect how — and whether — the financial regulators can protect the American people from systemically important nonbanks and activities. Given that nonbanks played a key role in causing the 2008 financial crash, which will cost the US more than $20 trillion dollars, all Americans have a huge interest in this litigation.  
 
Yet MetLife filed more than 2/3rds of the record before the District Court under seal so the public has no idea what is in the record. That’s why, on November 19, 2015, Better Markets filed a Motion to Intervene in the lawsuit, seeking to require MetLife to particularize any claim of confidentiality and for the court to independently scrutinized and rule on all such claims. We argued that the parties cannot be sole judge of what the public knows and has access to in such a consequential case and that the court must ensure that the maximum amount of information be made available to the public. 
 
Without ruling on that Motion, the court then issued its opinion under seal to the parties only, asking them to tell the court what the court should keep under seal and nonpublic. Given that this conflicted with the public’s right to know and the presumptive right of access to the courts and their proceedings, Better Market immediately updated its Motion, seeking also to have the opinion itself publicly disclosed. 
 
Remarkably, after unilaterally putting more than 2/3rds of the record under seal, MetLife did not ask the court to keep any of its opinion secret. In addition, MetLife informed the court that the parties intend to confer to determine whether any information made public by the release of the Sealed Opinion may likewise be un-redacted from the parties’ briefs and the administrative record.  We can only assume that our Motion’s breathing down their neck had something to do with their change of heart. But we will continue to press our Motion and insist that the public’s right to know must be paramount.
 
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