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January 9, 2015

Financial Reform Newsletter – January 09, 2015

Financial Reform Newsletter
January 09, 2015

Welcome to 2015!  Many have asked what was in the news over the holidays that they might have missed, but would want to know.  Here are some highlights:

Again, why Silicon Valley (and  all of corporate America more broadly) needs to care about what’s going on with Wall Street: While largely overlooked, the financial crash decimated public funding for almost everything as economic activity slowed, then stopped, and finally, contracted. This caused tax revenues to collapse and spending on social needs to skyrocket (which is what drove the trillion dollar deficits in the years immediately following the crash).   As we detailed previously, this drop in funding hit research and development (R&D) very hard, stunting job growth and business formation, and stalled the standard of living for tens of millions of America’s families.  Fareed Zakaria wrote recently about the intolerable drop of R&D funding in “America’s Innovation is in Trouble”:

“…the rise of IT was the fruit of many years of investment. We are eating seed corn but not laying the groundwork for the next great technological revolutions.  If you ask people in Silicon Valley what makes it work, they will talk about many things — the ability to fail, the lack of hierarchy, the culture of competition.

“One thing almost no one mentions is the government. And yet, the Valley’s origins are deeply tied to government support…. [including] government funding for research….  Federal funding for basic research and technology … has been one of the greatest investments in human history. And yet it has fallen to its lowest level as a percentage of GDP in four decades.”

Today, that funding gap for R&D (and everything else), which is hurting all Americans and the country, is in large part due to a diversion of resources away from everything else to cover the cost of the financial crash and economic wreckage it caused (and the austerity ideology it spawned).  In fact, in the post-2008 financial crash world we all live in, non-defense discretionary spending between 2010-2014 has been cut by 15%, cutting funding for scientific research, law enforcement, drug treatment, veterans programs, Head Start, fuel assistance, transportation, job training and every other priority of the country.

Thus, no matter what you care about, and especially if you care about innovation, jobs, economic growth and rising living standards, you have to care about preventing another financial crash and the economic, social and human calamity it will inevitably cause – again, which is what financial reform is all about and what Better Markets fights for every day.

What was Wall Street’s role in causing the worst financial crash since 1929 and the worst economy since the Great Depression of the 1930s?  It’s very hard to know because Wall Street’s executives, lawyers, lobbyists and political allies have worked overtime to make sure there was no thorough investigation or public disclosure of their reckless, illegal and/or criminal conduct. (And Wall Street even fights to prevent the public from finding out about what the government does when dealing with Wall Street – an uninformed public is Wall Street’s best friend.)

But, every now and then, in spite of Wall Street’s best efforts, some information gets out that suggests the depth and breadth of Wall Street’s central role in inflating the subprime bubble through fraud and illegal conduct, which was a primary accelerant of the 2008 crash.  The latest dribble of information comes from a lawsuit against Morgan Stanley, which includes this: 

“[A] trove of emails and confidential documents, filed in court, reveal the extent to which one of Wall Street’s leading banks, Morgan Stanley, actively influenced New Century’s push into riskier and more onerous mortgages, and brushed aside questions about the ability of homeowners to make the payments.”

Another similar lawsuit was filed against Bank of America for “lying” about the quality of mortgages it packaged and sold in the run up to the crisis (through its Countrywide acquisition). 

We can only hope that these suits continue and that detailed information is learned and publicly disclosed.  Based on past practice, however, Wall Street will fight the suits, prevent discovery, seal up all information and, if necessary, pay big dollars that keeps everyone quiet, plus they get all their execs off the hook.  That has been Wall Street’s MO with private litigation as well as with the SEC and DOJ.  In fact, it looks like DOJ is going to enter into another backroom, sweetheart settlement, this time with Morgan Stanley, likely again without transparency, oversight or accountability.  That’s what JP Morgan Chase did when it settled with DOJ and that’s why Better Markets sued DOJ over that settlement.

Financial regulation has not been in trade agreements and shouldn’t be included now:  Wall Street and its allies are fighting to get financial regulation into trade agreements, which are negotiated in secret, without transparency, and with extensive industry involvement and input.  Trade agreements have not included financial regulation before for many very good and important reasons, as Senator Warren and others have detailed

Are government watchdogs like the SEC and FINRA really protecting investors?  The SEC, FINRA and other government agencies are supposed to be watching out for investors and the public markets, but, as highlighted here and here, too often it seems like they are protecting wrongdoers, incumbent management and everyone but investors and the markets.

Two other good articles you might have missed:  An important discussion of economics, politics, wealth and inequality by Paul Krugman and a New York Times editorial entitled The Fed Fights Half the Battle.



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