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December 17, 2015

Financial Reform Newsletter – December 17, 2015

The details of the omnibus spending bill were released Tuesday night, and they made clear that the American people have a lot to be thankful for this holiday season. President Obama, his administration, and many members of Congress stood up to Wall Street’s money, power, and might, and thanks to them, the annual funding bill does not include Wall Street’s deregulation special interest wish list that it fought long and hard for.
 
That means no unrelated policy riders were added to the funding bill in the dead of night that would have killed the best interest fiduciary duty rule, prevented the Federal Reserve from regulating the most dangerous banks, weakened the Financial Stability Oversight Council’s ability to rein in high-risk nonbanks, and handcuffed the Consumer Financial Protection Bureau.
 
Killing the Department of Labor’s best interest fiduciary duty rule was a top priority of many in the financial industry, and they spent tens of millions of dollars trying to do that. Better Markets President and CEO Dennis Kelleher discussed the importance of this rule on NPR here and on PBS NewsHour Tuesday, hours before the details of the omnibus were announced:
 

 
But, despite the relentless efforts of Wall Street and its army of lobbyists, President Obama, DOL Secretary Perez, Leader Reid, Leader Pelosi, and others never wavered in protecting America’s retirement savers. This is a major victory for tens of millions of Americans who deserve unbiased advice so that they can retire with dignity and security. The DOL must now quickly finalize its rule, close outdated loopholes, and require Wall Street brokers and other financial advisers to act in the best interests of their clients saving for retirement.
 
Unfortunately, the funding bill is an imperfect compromise. For example, Wall Street and its Congressional allies continue to grossly underfund the CFTC financial cops on the Wall Street beat. Outrageously, this bill flat funds the CFTC at a mere $250 million, when they are responsible for policing a $400 trillion derivatives market. This is almost 25 percent below their bare bones budget request of $322 million. The American people will never be protected from recklessness, irresponsibility, and criminality in the financial industry until the CFTC is fully funded.
 
Still, Wall Street wasted tens of millions of dollars on lobbying and a massive disinformation campaign in an attempt to hijack the funding bill and load it up with special interests. Thanks to the work of many financial reform champions, it’s clear that the American people have a lot to celebrate with this compromise.
 
CFTC finalizes weak margin rules, endangering a foundation of systematic stability: Margin, like the down payment on a house purchase, is the most basic risk management tool, a best practice and a foundation for systemic stability. Recognizing that, the CFTC proposed a very strong initial margin rule for uncleared swaps in September 2014. However, yesterday it finalized a much weaker rule that eliminates initial margin entirely for such swaps among affiliates. This is unwarranted and dangerous.
 
Just like subprime mortgages with no down payments, the lack of initial margin in uncleared swaps creates a ticking time bomb. As is too often the case, the mistakes and poor judgment reflected in today’s rule won’t be visible for years until we’re in the middle of the next financial crisis. No initial margin means insufficient shock-absorbers and that means that taxpayers are once again being put at grave risk of having to again bailout the financial industry.
 
 

Some in the financial industry have lobbied hard for years to eliminate or reduce margin as much as possible. They incorrectly characterize margin as a “cost” to swaps trading, and have made headwaywith regulators in categorizing inter-affiliate trades as a place costs can be cut. However, margin is not an additional cost, in the same way that a down payment on a house is not an additional “cost” to your mortgage. It is a critical buffer designed to protect both parties to the transaction as well as the financial system.

 
Margin should not be seen as a feature that can be stripped away or waived in the name of cutting costs. It should be an ever-present requirement to reduce risk and increase systemic stability.
 
It is also disappointing that the CFTC didn’t follow the lead and logic of Commissioner Sharon Bowen. Her dissent is a must-read for anyone who wants to understand these issues and why they are so important. Her dissent can be read here.
 
“How the SEC let Wall Street run wild”: In a must-read Politico editorial this week, Mr. Kelleher wrote about the failures of the SEC, including the Equity Market Structure Advisory Committee created earlier this year with the goal of bringing together experts to examine our equity markets and the extent to which they’re functioning effectively for the American people. As Mr. Kelleher wrote:
 
“As the American people’s cop on the Wall Street beat, the Securities and Exchange Commission should prioritize market integrity and investor protection. But unfortunately, the SEC has largely been missing in action just seven years after the financial crisis that cost our economy trillions and hurt many American families who lost their homes, jobs, savings and more. Today, the SEC is failing to enforce the law and write regulations to deal with the profound flaws in our markets that create dangerous instability and harm everyday investors…[T]he SEC’s newly established Equity Market Structure Advisory Committee is a particularly unfortunate and vivid manifestation of the many issues plaguing the agency.”
 
You can read the editorial here.
 
 

SEC, PCAOB, the revolving door and industry influence in DC’s policy making process: Most people have never heard of the PCAOB (the Public Company Accounting Oversight Board), but almost everyone has heard of Enron, Worldcom and the many other egregious corporate frauds in the early 2000s. Those companies went bankrupt, executives went to jail and too many people lost their jobs and savings, all because of massive undetected fraud, which happened right under the nose of accountants and accounting firms who certified their financial statements.

 
In the wake of those scandals, the PCAOB was created to police the almost entirely unregulated (and very poorly regulated) accounting profession to reduce the likelihood that would ever happen again. It is a very important organization to every investor in the country and to our capital markets. However, as a Reuters investigation by Charles Levinson reveals, the industry, with the help of the SEC and the revolving door, has laid siege to the PCAOB, preventing it from being an effective policeman of the accounting profession and undermining its mission to protect investors. It’s a little long, but it’s a must-read investigation: “Accounting industry and SEC Hobble America’s audit watchdog.” 

Better Markets in the News:

Hillary Clinton Denounces Corporate Crime While Accepting Cash from Blackstone, Firm Sanctioned By SEC: International Business Times by David Sirota and Andrew Perez 12/16/2015

Can You Trust Your Financial Adviser? Labor Department Wants New Rules: PBS Newshour with Gwen Ifill 12/15/2015

How the SEC Let Wall Street Run Wild: Politico by Dennis Kelleher 12-14-2015

Letters to the Editor: Hillary Clinton’s Plan to Curb Wall Street: The New York Times by Dennis Kelleher 12/10/2015

CFPB blowback: Politico Morning Money by Ben White 12/11/2015

Articles You Don’t Want to Miss:

Accounting Industry and SEC Hobble America’s Audit Watchdog: Reuters by Charles Levinson 12/16/2015

Omnibus Does Not Delay Contentious Investment Rule: The Hill by Peter Schroeder 12/16/2015

Congress Reaches Year-End Deal on Taxes and Spending: Washington Post by Kelsey Snell and Mike Debonis 12/15/2015

The Document You Should Insist That Your Adviser Sign: Wall Street Journal by Micah Hauptman 12/15/2015

Regulators To Wall Street Banks: Rescue Yourselves Next Time: Bloomberg by Jesse Hamilton 12/14/2015

Banks Would Have To Show Stress Survival Plans Under OCC Proposal: Wall Street Journal by Ryan Tracy 12/14/2015

Preet Bharara, U.S. Attorney, Sees Lessons In Albany Corruption Trials: New York Times by Benjamin Weiser, Susanne Craig, and William K. Rashbaum 12-13-2015

Hensarling Crafting Bill to Repeal ‘Huge Swaths’ Of Dodd-Frank: The Hill by Vicki Needham 12/10/2015

 
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