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February 5, 2015

Financial Reform Newsletter – February 04, 2015

Financial Reform Newsletter
February 05, 2015

Ignoring the priorities and concerns of voters and taxpayers again, the Republican leadership in the House of Representatives has made Wall Street’s agenda its top priority for 2015.  The House leadership has already tried three times to push two Wall Street deregulation bills through in its first two weeks and this week they are attempting a third. H.R. 50, is designed to cripple the financial stability protection agencies, who are the cops on the Wall Street beat. Letting Wall Street regulate itself will not protect Americans’ jobs, homes, or savings. This endless series of deregulatory bills is dangerous policy, since it was deregulation that set the stage for the devastating financial crisis of 2008, which still burdens millions of Americans who lost their jobs, homes, and savings.  It is also a waste of time because President Obama has threatened to veto attempts to roll back financial stability, such as H.R. 50.  House leadership should stop pretending to promote jobs and growth by de-regulating Wall Street and start protecting the American people by increasing the funding for the Wall Street cops on the beat at the SEC and CFTC.

DOJ’s big dollar settlement with the S&P rating agency is just more of the same: another grossly inadequate settlement designed to get big headlines, but not punish or deter Wall Street’s illegal conduct. This week’s settlement between DOJ and S&P is grossly inadequate.  Ironically, the claims being made about the settlement appear to be as inflated as the credit ratings were in the years before the financial crash.  After years of egregious, reckless conduct, all the DOJ got was a big dollar settlement and big headlines, but not one admission of fault; not one individual punished; and, no detailed disclosure of exactly what S&P did; who at S&P did it; how S&P profited; and, who was harmed and by how much. DOJ’s pattern of these types of settlements will not deter future wrongdoing.  Indeed, future illegal conduct is not only incentivized, but virtually guaranteed when DOJ refuses to identify, much less punish, individuals and when it fails to disclose all the facts of the fraud, including how it was done and how much the firm made.

Rating agencies are crucial professional gatekeepers, meant to stand independently and skeptically between Wall Street and investors, big and small.  There would likely have been no housing bubble inflated by home mortgages and no financial crash in 2008 if trillions in toxic securities and derivatives weren’t awarded the Triple-A gold standard by these trusted gatekeepers.  After they gave their seal of approval to these toxic securities, Wall Street packaged and sold them throughout the world to unsuspecting investors who believed the ratings and thought they were virtually riskless.  These Triple-A rated securities were the financial time bombs that exploded in 2008 and the American people have been suffering and paying the price ever since.

Wall Street cannot police itself – that was one of the many things the 2008 crash proved to the world.  The SEC and CFTC are the cops on the Wall Street beat.  Either they police Wall Street or it won’t get done, but they can’t do it without full funding, which the President has just requested in his budget.  On Monday, President Obama issued his budget proposal for fiscal year 2016.  The proposal includes substantial increases for the SEC and the CFTC. In recent years, Congress has consistently provided the SEC and CFTC with less funding than the President requested while also attaching roll-back provisions that allow Wall Street’s biggest banks to return to their pre-crash behavior. President Obama proposal is a big step towards getting these agencies the resources they desperately need to protect American families and taxpayers from another financial crisis. The SEC and the CFTC are the financial regulatory agencies on the front lines in protecting the savings and livelihoods of American families.  It is vital to the stability of our financial system and the economic security of our country and families that they receive the resources they need to do the best job possible.

A CFTC Commissioner Releases White Paper Advocating a Roll Back of crucial Derivatives Reforms. Last Thursday Christopher Giancarlo, the newly appointed Republican CFTC Commissioner, released an 89-page white paper outlining his suggestions for reforming the swaps regime crafted by the Commission in its implementation of the Dodd-Frank Act.  The paper ostensibly proposes an alternative regime that claims it “is pro-reform and better aligns with swaps market dynamics and the express provisions of Title VII of the Dodd-Frank Act.” Unfortunately, as is too often the case in today’s political environment, labels cannot be trusted and something called “pro-reform” must be carefully scrutinized because too often it is the opposite.

In reality, this so-called “pro-reform” paper is not what it claims to be.  In fact, it reads more like a compendium of the financial industry’s complaints about Swap Execution Facilities (“SEFs”), the exchange-like swaps trading platforms mandated by Dodd-Frank, which are supposed to bring transparency, greater competition, a level playing field and increased stability to the dark, unregulated, dangerous OTC (over-the-counter) markets that were breeding grounds for the 2008 crisis.  To its credit, the paper does briefly suggest additional credentialing for swaps market participants, focusing on ethics and professionalism, which is a welcome initiative that would likely enjoy support from public interest advocates.  

However, that is the only substantively pro-reform idea presented in the paper. The remainder amounts to a broad call for reverting to the old dark, decentralized, and noncompetitive system of trading that favored the handful of Wall Street’s biggest banks and led to the financial crisis.  Remember, about 95% of all derivatives trading in the US is done by just the four biggest Wall Street banks.  They do not want transparency or a level playing field.  That will cause competition and lower the profits and bonuses – that’s what this fight is all about: what’s good for the big four on Wall Street or what’s good for the country and making sure another derivatives-fueled crash and crisis don’t happen again?

One of the things Better Markets does the most is participate in the rulemaking process, often by filing letters that substantively comment on proposed rules in an attempt to ensure that the rules implementing the financial reform law as strongly and effectively as possible.  This week we submitted a comment letter to the Financial Stability Board’s (FSB) on its proposal for a common international standard on total loss-absorbing capacity (TLAC) for globally systemic banks. The comment letter highlights the urgent need for reform in the structure and operation of Crisis Management Groups, citing eight missing elements in the global recovery and resolution coordination process.  The letter also analyzes the potential global, regional, and domestic risk contagion that the current TLAC proposal may facilitate. To mitigate this risk, the letter proposes that executive compensation structures be linked to TLAC instruments. Finally, the letter argues that liquidity capacity – in addition to loss-absorption capacity – should be an integral part of the TLAC framework if TLAC is to be a credible instrument for G-SIBs recovery and resolution.

Better Markets in the News

Wall Street reform groups blast House reg bills: The Hill by Peter Schroeder 2/4/2015

Critics blast Justice Department’s S&P settlement: USA Today by Kaja Whitehouse 2/3/2015

Road to S&P settlement began with Jerry Brown chat, novel legal strategy: LA Times by E. Scott Reckard and Dean Starkman 2/3/2015

Government settles with S&P for $1.4 billion in financial crisis case: Politico by Jon Prior and Patrick Temple-West 2/3/2015

North Carolina receiving $21.5M in settlement with S&P over crisis-era ratings: Charlotte Observer by Deon Roberts 2/4/2015

Coverage: S&P settles with government: TBN Talking Biz News by Liz Hester 2/4/2015

White House Aims to Add Staff to Financial Watchdogs: The Morning Consult by Will Dobbs-Allsopp 2/3/2015

Critics Rip Standard & Poor’s Settlement: Corporate Crime Reporter by Editor 2/3/2015

Articles of Interest

Wall Street Pays Bankers to Work in Government And It Doesn’t Want Anyone to Know: The New Republic by David Dayen 2/4/2015

Wall Street’s threat to the American middle class: Baltimore Sun by Robert B. Reich 2/4/2015

TARP Watchdog Isn’t Ready to Pack It Up: WSJ by Ryan Tracy 2/3/2015

Budget sharpens focus on regulating Wall Street: The Hill by Peter Schroeder 2/2/2015

Wall Street for President?: Project Syndicate by Simon Johnson 1/30/2015



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