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December 11, 2014

Financial Reform Newsletter – December 11, 2014

Financial Reform Newsletter
December 11, 2014

Yet More Evidence Of The Economic Wreckage Caused By The Financial Crash Of 2008, Showing Why Everyone Has A big Stake In Financial Reform To  Prevent This From Happening Again, Which Is What Better Markets Fights For: Using data from the Federal Reserve’s 2013 Survey of Consumer Finances, Economist Edward Wolff’s analysis of wealth in America shows a disturbing reality for too many Americans:  middle-class median net worth has dramatically fallen from a high of $115,100 in 2007 to a staggering $63,800 in 2013, levels not seen for more than 45 years. (See chart) 

What caused America’s middle class families’ net worth to collapse in just a few years? Mostly, it is the negligent, reckless, high risk, illegal and criminal activities of Wall Street’s too-big-to-fail banks, which in 2008 caused the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s.  Jordan Weissmann’s Slate article provides insightful context to Edwards Wolff’s data about how the Great Recession savaged the finances for the American middle-class and left behind deep economic and ongoing scars.  As a Better Markets study demonstrated, the cost of the financial crash in 2008 and its ongoing damage to Americans families is going to be more than $12.8 trillion.

More On Washington’s Wall Street Problem And The Nomination Of Antonio Weiss To Be The Next Under Secretary For Domestic Finance At The Treasury Department: Instead of the over-the-top commentary from individuals like New York Times reporter Andrew Ross Sorkin, who caricatured Sen. Elizabeth Warren’s actual views, the debate has thankfully turned to a discussion of the merits and substance of the nomination and the larger issues it raises.  First, Sen. Warren delivered a speech further detailing her objections.  Second, MIT Professor (and former Chief Economist for the IMF) Simon Johnson reviewed Mr. Weiss’ career and concluded that Mr. Weiss has no known relevant qualification or experience for this important position. In particular, Professor Johnson points out that Mr. Weiss’ experience over the past twenty years regarding “high profile M&A activities” is unrelated to the central task of this position: responsibly running the federal government’s finances.  Third, former FDIC chairperson, Sheila Bair, expressed similar views regarding Mr. Weiss’ qualification and background on Wall Street in an article she wrote for Fortune Magazine.  She also pointed out that his firm, Lazard, “will pay him some $20 million in stock and deferred compensation” once he assumes office and she explored the implications of this. Finally, in terms of Senators who must ultimately vote on his nomination, Senator Jeanne Shaheen (D-NH) will not vote for Weiss due to his role in corporate inversions, the practice of moving corporations overseas so they can avoid paying their fair share of taxes.  Sen. Joe Machin and Sen. Al Franken have also indicated that they are going to vote against Weiss.

Wall Street Using Government Funding Bill To Gut Financial Reform And Put Taxpayers On the Hook For More Bailouts: Congress is scheduled to vote this week on a $1.1 trillion spending plan that would fund the government and prevent a shutdown.  However, Wall Street’s too-big-to-fail banks and their allies and lobbyists have inserted a provision unrelated to funding the government into the budget agreement, which would enable those few megabanks to trade high risk derivatives from taxpayer-backed subsidiaries.  As we stated in our press release, this provision would put U.S. taxpayers back on the hook for Wall Street’s risky derivatives gambling and undo a key provision of the Dodd-Frank financial reform law that required those banks to move their high risk derivatives trading to other subsidiaries that are not backed by taxpayers.  Other indefensible changes Wall Street tried to sneak into the budget agreement were beaten back, including in particular a provision that would have prohibited the Department of Labor from proposing a rule to end undisclosed conflicts of interest and hidden fees as detailed here: Government Shutdown Talks May Gut Retirement Security Rule.  Having prevented it from being prohibited, the fight now turns to getting a strong DOL rule enacted to protect the tens of millions of hard working Americans saving for retirement.

Stopping Excessive Speculation In The Commodity Markets That Run Up Prices For Consumers And Producers Of Everything From Gas To Cereal: The CFTC announced last week that it will – once again – reopen the comment period for a long awaited rule that aims to limit speculation in the commodities markets.  This is the latest, and hopefully final, episode in a more than 6-year effort to curb the disruptive effects that speculators can wield on commodities prices, like those famously seen in the dramatic swings in oil prices in 2008-2009.  The rules, first proposed in 2011 as part of Dodd-Frank, set strict limits on the amount of derivatives trading by commodity speculators – as opposed to that of producers and consumers – in an attempt to ensure prices reflect the actual supply and demand of a commodity and not the whims of gamblers looking to profit.

The reopened comment period will be open for 45 days for those who wish to make their case, and can be found here. Better Markets will be filing another comment, but you can read our most recent comment letter on this issue – and why it is so important — here.

Will the SEC finally start to hold “bad actors” on Wall Street accountable?  Commissioner Kara Stein wants to: Following up on a warning shot she issued when dissenting earlier this year, SEC Commissioner Kara Stein delivered a recent speech focusing on accountability, something that rarely happens on Wall Street.  Commissioner Stein correctly highlighted an enforcement tool that deserves more robust and thoughtful application: disqualifications of “bad actors” from engaging in certain types of businesses when they break the law.  As she said, those disqualifications “are the law, they are powerful, and they matter.” However, disqualification is almost never used and waivers are routinely granted with little if any thought.  In what was described as a policy “breakthrough,” Commissioner Stein set out three core principles that should guide the Commission’s consideration of whether or not to grant a waiver and under what conditions, if any.  She is advocating an approach that avoids the “either/or” all-or-nothing mindset that historically has led to rubber-stamped, unqualified waivers.  The conditional waiver recently granted to Bank of America in connection with its $16.7 billion settlement with the Department of Justice was a first and,  hopefully, it is an indication of many more, even tougher conditional waivers  to come or, dare one say, an actual disqualification when merited.

Facts again get in the way of bank arguments against financial reform to protect taxpayers and prevent more bailouts: Banks and their allies love to say they are “well capitalized” and can readily withstand any shocks without failure or needing taxpayer bailouts.  They want everyone to forget the crash of 2008 and just move on.  However, just because banks say something like this – no matter how loudly, repeatedly and strenuously – that doesn’t mean it’s true.  Regarding Europe, it was just reported that “many European banks remain undercapitalized, even by the feeble standards of the new Basel regime.”  The Danish Institute for International Studies has identified a capital shortfall of $80 billion – above and beyond those revealed by the recent stress tests. The findings clash with bank lobby efforts to dilute European financial reforms, using one of their key arguments: they are adequately capitalized and further requirements will stifle economic growth.  Of course, as Better Markets Senior Fellow Robert Jenkins has spelled out, we’ve heard these self-serving arguments before and they lack merit.

Better Markets In The News:

Congress could enact rollback of Dodd-Frank limits on derivatives: LA Times by Jim Puzzanghera and Lisa Mascaro 12/10/2014

Congressional budget welcomes big bank bailouts once more despite White House opposition: The Guardian by Heidi Moore 12/10/2014

Articles Of Interest:

Congress Deal to Avoid Shutdown Includes Victory for Banks: Bloomberg by Heidi Przybyla and Erik Wasson 12/10/2014

The Great Wealth Meltdown: Middle-Class Families Are Worth Less Today Than in 1969: Slate by Jordan Weissmann 12/10/2014

The Long Shadow of Robert Rubin: American Banker by Victoria Finkle 12/10/2014

Many Feel the American Dream Is Out of Reach, Poll Shows: The New York Times by Andrew Ross Sorkin and Megan Thee-Brenan 12/10/2014

Elizabeth Warren Joins Revolt Against Wall Street Deal In Government Shutdown Talks: Huffington Post by Zach Carter 12/9/2014

Will Lawmakers Sneak a Gift to Wall Street into the Spending Bill?: The New York Times by Teresa Tritch 12/9/2014

Opinion: Fed shouldn’t overreact to early signs of wage growth: Markets Watch by Michael Madowitz 12/8/2014

Antonio Weiss Is Not Qualified To Be Under Secretary For Domestic Finance: The Baseline Scenario by Simon Johnson 12/6/2014



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