Wall Street’s unregulated recklessness, not financial reform or the Volcker Rule, is the biggest threat to job creators and economic growth. The House Financial Services Committee holds a meeting this week on the Volcker Rule’s impact on what it refers to as “job creators,” which in the Alice-in-Wonderland world of Washington DC too often means Wall Street. But, of course, Wall Street is not a job creator. It’s a job killer of historic proportion. It crashed the global financial system, caused a deep recession, threw tens of millions of Americans out of work, and caused millions of small businesses to go bankrupt. The hearing is yet another example of Wall Street’s allies airing fabricated concerns about financial reform and the Volcker Rule, which is designed to prevent reckless gambling on Wall Street like the kind that required massive taxpayer bailouts and spread economic wreckage across our country and around the globe. Congress has an important oversight role in making sure regulators do their job, but Wall Street and its Congressional allies need to back off and let financial regulators implement the rule to protect the American people from Wall Street.

 

Wall Street’s crash of the financial system and the economic wreckage it caused has made income inequality much worse. The disparity between the top U.S. earners and everyone else continues to increase, as evidenced most recently and yet again by a New York Times article on the decimation of the middle class. Meanwhile, in 2013, the six biggest U.S. banks reported the highest profits since the financial crisis and Wall Street continues to set records with bonuses and CEO pay; JP Morgan’s CEO Jamie Dimon is the poster child for this with a 74% pay raise (even after “leading” his bank into more than $20 billion of fines and settlements for illegal and criminal conduct). What is the reason for this unprecedented and massive redistribution of wealth to the richest Americans? Yes, long term trends play an important role, but always overlooked is the dramatic role the 2008 financial crash and the economic crisis it caused played in making all those trends much worse. The so-called “Great Recession” Wall Street caused has demolished middle class wealth and destroyed economic growth, inflicting deep and broad damage across our country that continues to this day. Plus, government bailouts and unlimited support for Wall Street and the financial sector from the Fed and the government more generally have poured money into the already stuffed pockets of the top 1%. This damage is made clear in the cost of the crisis, which in the U.S. will be more than $12.8 trillion, and some have calculated the cost could be as much as $120,000 for every man, woman and child in America. The costs of the crisis and the recent dramatic increase in income inequality stem directly from the ongoing failure to regulate high-risk activities on Wall Street.

 

The Office of Financial Research must focus on systemic risks posed by Wall Street. The Treasury Department’s Office of Financial Research, which is supposed to produce objective, world-class research to identify and deal with known and emerging risks in the financial system, has been called the crown jewel of the U.S. financial reform architecture – ok, we called it that, but it still counts! However, OFR has yet to target the well-known and still-unresolved systemic risks inherent in our overleveraged, undercapitalized, and too often unregulated banking system. Until those systemic risks are addressed, financial reform advocates must be concerned and vigilant about whether OFR is doing its job as required by the financial reform law and able to support financial regulators’ efforts to prevent future financial crises.

 

Financial interests fight fiduciary duty. The Department of Labor and the SEC are working on proposed fiduciary duty rules to protect investors from advice that is tainted by conflicts, where brokers mislead investors into thinking they are acting in the investors’ best interests when they are in fact acting in their own best interests. Investment advisors currently must comply with the fiduciary duty, which means that their clients receive “independent, honest, transparent and unbiased advice from advisors who live the fiduciary standard.” Simply put, the advisor must act in the best interest of the client. By contrast, brokers now are allowed to put their interests first and are in fact often incentivized to do so because they get richer by selling clients products that make the broker the most money, even if the client would be better served with other products. That’s just wrong. The regulatory proposals are under attack by Wall Street brokers, who want to preserve this conflict of interest that allows them to maximize their bonuses and fees at their clients’ expense. A fiduciary duty for broker-dealers would level the playing field and prevent further exploitation of investors, retirees and pensioners. With so many Americans retired and retiring, this is a crucial issue that everyone must be concerned about.

 

 

The Disappointing Office of Financial Research: The New York Times by Simon Johnson 1/30/2014

A Former Regulator Returns to Private Practice: The New York Times by 1/29/2014

Dodd-Frank Act, the Law that Puts the Leash on Wall Street: Pagina99

 

Friends with Benefits at the Bank of England’s Financial Policy Committee: Independent by Ben Chu 2/3/2014

Libya Says Goldman Didn’t Explain Options: The New York Times by Floyd Norris 1/30/2014

US Banks: Relief of Release: Financial Times 2/3/2014

Barclays CEO Jenkins Turns Down 2013 Bonus After Litigation: Bloomberg by Howard Mustoe and Gavin Finch 2/3/2014

How Feds’ Double Standard Enables Bad Bankers: American Banker by 2/3/2014