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May 25, 2015

Financial Reform Newsletter – May 25, 2015

 

new report out this week titled The Street, The Bull and The Crisis: A Survey of the US & UK Financial Services Industrymakes clear yet again a point that Better Markets has been making for years: that the DOJ and SEC’s settlement policy amounts to little more than a slap on the wrist and doesn’t deter crime. Just the opposite – by slapping wrongdoers on Wall Street with fines that are paid for by shareholders years later and failing to hold individuals responsible for their crimes, the DOJ and the SEC are just incentivizing more crime and leaving investors at risk. As Andrew Ross Sorkin wrote summing up the report in the New York Times:
 
“The past several years have been filled with headline-grabbing legal settlements by financial services firms – $11 billion here, $5 billion there. Most of them involved conduct that took place before the 2008 crisis. Virtually every major Wall Street firm has pledged to redouble its efforts to instill an ethical culture. And virtually all the large firms said that if there was bad behavior, it is behind them. Well, it isn’t.”

And that was before this week’s announced DOJ settlements with five global banks for criminally conspiring to rig the foreign exchange markets. Clearly this settlement policy treats too-big-to-fail firms as though the banks and bankers are too big to jail. And, it’s only going to get worse because Wall Street is getting bigger and bigger. As Neil Irwin wrote this week, Wall Street is just about as big today as it was before the 2008 financial crisis:

“Seven years after a crisis that shook Wall Street to its core, the financial sector’s economic imprint has largely recovered. The number of people working in the securities business nationally has returned to 2007 levels, as has the gap between the compensation of Wall Street workers and that of everyone else. The financial sector as a whole is reporting profits that are as large a share of the overall economy as in the early 2000s and more than double their average level over the 70 years ended in 1999.”

That matters in many ways, including that even seemingly large fines simply aren’t that big or meaningful to the big Wall Street and global banks, as the following chart shows regarding the most recent DOJ fines when compared to their revenue in just the first three months of this year:

 
 

DOJ Penalty

1st Quarter Revenue 2015

Citi

$925 million

$17 billion

JPMorgan

$550 million

$24 billion

Barclays

$710 million

$9.92 billion

RBS

$395 million

$6.66 billion

UBS

$203 million

$9.5 billion

The double standard DOJ and SEC have practiced is finally starting to get the attention it deserves. The recent ruling that found that Nomura Holdings and Royal Bank of Scotland knowingly sold Fannie and Freddie toxic securities shows a dereliction of duty by these agencies, as Better Markets outlined. They have failed again and again to enforce the law on Wall Street, as the New York Times Editorial Board asked in a must-read editorial on Sunday:

“The [housing agencies lawyer’s] victory in this case raises an interesting question: If the relatively unknown housing finance agency could prevail over foreign banks, why haven’t far more powerful regulators and prosecutors at the Department of Justice and the Securities and Exchange Commission done more to expose and redress wrongdoing by big Wall Street banks in the mortgage bubble?”

The financial crisis caused by Wall Street’s recklessness – which will cost our economy more than $12.8 trillion – hurt countless American families that lost their homes, jobs and savings. It’s beyond time for the DOJ and SEC to get back to being the cops on the Wall Street beat and holding wrongdoers accountable. The American people deserve no less. 

Anat Admati a leading voice in reshaping the financial reform debate: Anat Admati has been a leading voice in the fight to re-frame the conversation surrounding too-big-to-fail, the need for financial reform and the importance of loss-absorbing capital. As an author, member of the FDIC Systemic Resolution Advisory Committee and George G.C. Parker Professor of Finance and Economics at Stanford University’s Graduate School of Business, she sees the debate from all angles.
 

As co-author of the indispensable book The Bankers’ New Clothes with Martin Hellwig, Ms. Admati shows that in the years since the fall of Lehman Brothers, our financial system remains at risk. She outlined how, despite some important progress, Wall Street’s risk-taking continues to threaten families on Main Street. The book was released in 2013, and its message remains just as relevant today, because she highlighted regulators’ failure to implement new regulations by warning, “We must face the challenge of drawing up appropriate rules and enforcing them, or pay dearly for failing to do so.”

 

During a recent conference in Washington, DC hosted by the Institute of New Economic Thinking (INET) and an independent committee that included Ms. Admati, her remarks, titled Making Financial Regulations Work for Society, outlined how the 2008 financial crash changed her life and the impacts of research on financial issues: “What changed my life was seeing bad research and false or misleading claims, including from academics, affecting policy. Innocent people, powerless and often ignorant of the issues, are harmed by bad policies.”

Like Better Markets, Ms. Admati has made cutting through the industry spin a key priority. In addition to The Bankers’ New Clothes, she has authored many compelling journal articles and working papers connecting the dots on why we need financial reforms and how they’ll improve the lives of hardworking families. You can read her work here

As she said in a recent interview, “The truth is that we can have a safer system that serves the economy and society better. But getting there requires that better laws and regulations are implemented and enforced. The system will not correct itself.” Bravo! 

Better Markets in the News:

Big banks take big hit: MSNBC 5/20/2015

Five big banks agree to pay more than $5 billion to settle regulatory charges: The Washington Post by Steven Mufson and Jonnelle Marte 5/20/2015
 
 
 
Bank of America fined $205M for foreign-exchange practices: The Charlotte Observer by Deon Roberts 5/20/2015
 
 
 
 
NY financial watchdog Ben Lawsky leaving to start firm: New York Post by Kevin Dugan 5/20/2015
 
Elizabeth Warren’s ally on the inside: Politico by Patrick Temple-West 5/18/2015
 
Seeing red over bank affiliates’ waivers: Pensions & Investments by Hazel Bradford 5/18/2015
 
Show real remorse and the bank bashing will soften: Financial Times by Roberts Jenkins 5/18/2015
 
Employers must monitor 401(k) fees, Supreme Court rules:The Los Angeles Times by Dean Starkman and David G. Savage 5/18/2015
 
Is Shelby’s reg relief proposal a gift to big banks?: “American Banker by Mayra Rodriguez Valladares 5/15/2015
 
News You Don’t Want to Miss: 
 
 
Many on Wall Street say it remains untamed: The New York Times by Andrew Ross Sorkin 5/18/2015
 
Breaking Laws in the Mortgage Bubble: The New York Times 5/15/2015
 
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