Financial Reform Newsletter August 28, 2014

SEC adopts new rules to protect consumers, investors and the economy from ‘toxic and worthless’ securities like those that helped crash the financial system and crater the economy in 2008: Too much in finance is confusing and complex (and too much complexity is needlessly created by Wall Street to hide profits and risk).  Securitization of asset-backed securities (ABS) is certainly one of those things.  But, an easy way to understand securitization is to think of it as Wall Street’s conveyor belt which it uses to distribute packaged securities throughout the global finance system.  This is what Wall Street used to send trillions of dollars in subprime mortgage toxic waste around the world in the years leading up to the crash of 2008.  The SEC has finally passed a rule to reform those securitization practices and markets, and it looks like it might be a significant step forward (although we won’t know for sure until the entire rule is published).  Read Better Markets’ entire statement on the SEC’s ABS securitization action here.   In a second vote, the SEC passed a rule that will be a big improvement in strengthening oversight of the credit rating agencies that slapped “Triple AAA ratings on trillions of worthless or defective securities” that Wall Street’s biggest banks peddled to unknowing investors, which led to the 2008 crash.  This is really important because most institutions and many investors will only buy Triple AAA rated securities.  If the rating agencies didn’t over-rate the worthless subprime mortgages, much if not most of the worst parts of the financial collapse might have been avoided.   These reforms are critical, as we stated in a news release here.

However, there are critically important reforms that the SEC still has to implement.  As to asset-backed securities, the SEC must adopt a strong risk retention rule to better align the incentives of issuers with the interests of investors.  And as to credit rating agencies,  it is imperative that the SEC comply with the Congressional mandate to institute an assignment system, such as the one advocated by Senator Al Franken (D-MN).  That rule would prevent issuers from selecting raters and effectively paying them for favorable ratings of their complex, structured securities. 

Bank of America is the latest gigantic Wall Street bank to escape responsibility for its role in the 2008 financial crash, which, let’s remember, will  cost the US more than $13 trillion:  Last week, BofA and the Department of Justice cut a deal regarding the bank’s illegal conduct inflating the subprime lending bubble and contributing to the financial crisis. And, while it had slightly more information than the other deals DOJ cut with Wall Street’s other too-big-to-fail banks (including the one with JPMorgan Chase which Better Markets has filed a lawsuit against DOJ for more transparency, oversight and accountability), it still failed to inform the American people of any of the key details necessary to know if this was yet another sweetheart deal or a real punishment.  For example, how many tens of billions of dollars did Bank of America’s customers, clients, investors and others lose due to years of knowing, systemic fraud?   How much did Bank of America make from its illegal actions? 

Yes, $17 billion is a lot of money, but it is probably inconsequential compared to what BofA did and got away with and, yes, yet again not one single individual banker was held accountable.  The bank was bailed out; the executives got bonuses; the American people got the bill and BofA got to use tax-deductible shareholder money to buy a “get out of jail free card.”  That’s not justice and not what the Department of Justice should be doing on behalf of the American people.  Our full statement on the settlement is here.  And, if you have 5 minutes, watch a robust, more in-depth discussion of the deficiencies of the deal by Dennis Kelleher on the PBS NewsHour here.

Too often, when someone wants to release information that they don’t want anyone to pay attention to or notice (or they are ashamed of), they wait until late on a Friday to release it, ideally late in the summer or on the Friday before a 3 day holiday; and last Friday it happened again:  The Federal Housing Finance Agency announced it had settled its lawsuit against Goldman Sachs after the Wall Street megabank agreed to buy back just some of the roughly $11 billion of subprime securitized mortgages it sold to Fannie Mae and Freddie Mac that helped plunge both corporations into bankruptcy, requiring massive taxpayer bailouts.  Of course, like all the other settlements between the federal government and Wall Street in response to the 2008 crash, neither Goldman Sachs nor any of its executives will be held accountable. And, Goldman could even make a profit on the bonds it buys back from Fannie and Freddie, as the New York Times’ Nathaniel Popper  wrote on August 22:“It is possible that Goldman could buy back the bonds and hold them until they increase in value, effectively negating the cost of the settlement.”  This is just more of the double standard carved out for Wall Street’s rich, powerful and politically connected too-big-to-fail banks: little if any accountability for them, while the rest of the country gets the book thrown at them for the smallest offenses.  That’s just wrong.

To understand how bad these sweetheart deals between the government and Wall Street’s biggest banks are, Dean Starkman’s latest report is a must read:   Wrecking the Economy Means Never Having to Say You’re Sorry.

Better Markets in the News:

Bank of America (BAC) Makes Whopping Mortgage Settlement: ABC World News 8/21/2014

Bank of America to Pay $17 Billion in Justice Department Settlement: The Wall Street Journal by Christina Rexrode and Devlin Barrett

Bank of America agrees to nearly $17B settlement: USA Today by Kevin McCoy and Kevin Johnson 8/21/2014

DoJ Individually Charging Countrywide Execs a “Good Start”: Value Walk by Mark Melin 8/20/2014

PROFILE-Oregon lawmaker will not let Fed forget to tackle commodities: Reuters by Anna Louis Sussman 8/17/2014

Riskiest subprime auto loans coming from car companies: Fed study Marketwatch (WSJ) by Greg Robb 8/14/2014

Articles of Interest:

Wall St. Prosecutors Bare Their Teeth, but Still Lack Bite: New York Times Dealbook by Jesse Eisinger 8/27/2014

How Sherrod Brown Would Guide the Senate Banking Panel: American Banker by Victoria Finkle 8/25/2014

The S.E.C’s Use of the ‘Rocket Docket’ Is Challenged: New York Times Dealbook by Peter J. Henning 8/25/2014

Four Takeaways from B of A’s Record DOJ Settlement: American Banker by Victoria Finkle and Joe Adler 8/21/2014

Europe Fears Banks Lack Cash Cushion to Cover Bad Loans: New York Times Dealbook by Landon

Et tu, Bart? Chilton defends alliance with speedy traders: Politico Pro by Zachary Warmbrodt 8/21/2014

Janet Yellen to see Jackson Hole return to wonky roots: Financial Times by Robin Harding and Tom Braithwaite 8/21/2014

BofA Exorcises Ghost of Countrywide: WSJ By John Carney 8/21/2014

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