Financial Reform Newsletter August 12, 2014

Why do almost all companies finance themselves mostly with equity, but Wall Street’s too-big-to-fail banks finance themselves almost 100 percent with borrowed money (debt), making them very unstable and at high risk of failure even if they only have tiny losses?  Because those handful of gigantic banks (only 9 banks in the US have more than $250 billion in assets) are backed by U.S. taxpayers and get bailouts, mostly due to perverse incentives.  This is what the so-called capital debate is all about and Dr. Anat Admati, a professor of finance at Stanford University, has been a leading warrior fighting the Wall Street crowd on this key issue.  She wrote a terrific and accessible book (The Bankers Have No Clothes) on this subject and the New York Times ran a profile of her last weekend, which included comments from Better Markets president Dennis Kelleher, who said Ms. Admati has been “dogged from the West Coast to the East Coast to Europe and back again and over again” in her push to get the big Wall Street banks to hold much more capital so the humongous banks themselves, and not taxpayers, will be on the hook for bailing themselves out in the event of another financial crisis.

One share of Apple stock was quoted for $100,000.00 as well as for one penny all within a few minutes on May 6, 2010.  That happened to numerous stocks that day when the stock market lost almost $1 trillion in ten minutes, but snapped back like a bungee cord, regaining $1 trillion in the next ten minutes.  This has been referred to as the “Flash Crash” and no one knew why it happened, not market participants, not the stock exchanges, not regulators, no one.  It took the SEC, the primary regulator for the stock markets, four months to investigate and come to a conclusion (although even that has been hotly disputed).  One key financial reform change that would make it much easier to monitor today’s high speed markets, police predators and investigate future flash crashes in real time is a “consolidated audit trail” (CAT).  It would be a new super computer, as Bloomberg News reported that would “track every stock quote, order, and trade, including when and where transactions occur, the brokers who handle them, and the customers they represent.” Unfortunately, the SEC has picked a super-slow process for the future supercomputer, which has already been subject to two delays and won’t be fully operational until 2018 under the best of circumstances.  Better Markets’ Dennis Kelleher joined Bloomberg TV’s Pimm Fox to discuss the serious flaws with how the SEC is going about “building” this computer.

The news broke last week that Bank of America is on the verge of settling with the Department of Justice (DOJ) for roughly $17 billion for its role in inflating the subprime lending bubble and contributing to the financial crash:  Unfortunately, as we detailed in our lawsuit against DOJ for a similar settlement with JP Morgan Chase, there is a familiar and disturbing pattern emerging: “The DOJ can be counted on to brag that the settlement dollar amount with Bank of America sets yet another record and claim, again, that this shows DOJ is tough on Wall Street,” said Better Markets President and CEO Dennis Kelleher. “But, unlike other recent settlements, will DOJ provide the public with the key information on investor losses, Bank of America profits, the names of involved executives, specific laws broken and the actual systemic illegal schemes and activities?  In short, is DOJ willing to actually inform the American people about such important and grave matters?” These comments were included in many of the press reports that covered this story, including The New York Times, the Associated Press and Politico. Kelleher also discussed these issues on National Public Radio (NPR), which you can listen to here.  

Better Markets in the News:

NY Times: When she talks, banks shudder – August 9, 2014

NY Times: BofA offers U.S. biggest settlement in history over toxic mortgage loans – August 6, 2014

The Fiscal Times: Here’s how to ensure big banks don’t need another bailout – August 8, 2014

Bloomberg TV: The supercomputer set to shed light on Dark Pools – August 11, 2014

Politico: BofA, DOJ close to $17b mortgage settlement – deal already meets criticism – August 7, 2014

USAToday: BofA, Justice near $17B settlement – August 7, 2014

 Articles of Interest:

International Business News: Big connection between campaign contributions and lack of SEC prosecutions, says study – August 11, 2014

Wall Street Journal: U.S. bank profits near record levels – August 12, 2014

Wall Street Journal: Under SEC questioning, jokes and jitters – August 11, 2014

NY Times: Auditors ease blame on Ernst & Young for audits of Lehman Brothers – August 11, 2014

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