Six years ago this week the collapse of Lehman Brothers ignited a series of unprecedented events that triggered the most devastating financial crisis since the stock market crash of 1929, and the biggest taxpayer-funded bailout in the history of the United States: Here is the look back on that fateful week that shook the world’s financial stability and almost caused a second Great Depression, and a look forward to today where, even though the financial system is much safer due to the landmark Dodd-Frank law that was passed in 2010, many of the problems that led to the crash have still not been fixed, including the systemic risks Wall Street’s too-big-to-fail banks continue to pose to the real economy.
Huge victory this week when a federal court in Washington, D.C. dealt a serious blow to Wall Street’s derivatives dealers’ relentless campaign to defeat financial reform: As Reuters’ Douwe Miedema reported, U.S. District Judge Paul Friedman firmly rejected Wall Street’s latest attempt to create a gaping loophole by suing the Commodity Futures Trading Commission (CFTC) to kill its cross-border guidance and rules on derivatives transactions overseas.
In a statement issued in response to the court’s action, Better Markets President and CEO, Dennis Kelleher stated: “This is a huge defeat for Wall Street’s war on financial reform and a huge win for U.S. taxpayers, who won’t have to pay the bill for unregulated risky derivatives activities overseas….The largely unregulated, wild west derivatives market played a key role in the financial and economic explosions of 2008. As the Lehman and AIG blowups almost 6 years ago to the day showed, much of that was done overseas. Today’s court action upholds Congress’s intent and the CFTC’s actions to make sure that doesn’t happen again. This is a huge step forward to protect U.S. taxpayers and ensure that Wall Street’s derivatives gamblers aren’t able to once again place the entire U.S. economy on an international roulette wheel.”
The court also referenced the Amicus brief Better Markets filed urging the court to reject the industry’s baseless claims, including the never-ending attempt to impose unjustified, onerous so-called “cost-benefit analysis,” which is really nothing more than “industry cost only analysis” that ignores the cost of the crisis to the American people .
In the upside-down, Alice in Wonderland world of Wall Street, it -– not the real economy where jobs, products, services and growth are created — is the center of the universe and, too often, that’s also the view of Washington, but those in the real economy, including most importantly, Silicon Valley, have to care about what Wall Street is doing in Washington: In an opinion piece aimed at the innovation economy and published on the Huffington Post’s popular Technology page, Better Markets’ Kelleher makes the case why the high tech industry should not only pay close attention to the debate over financial reform, but get involved as well:
“Remarkably, those with the greatest stake in the issues — innovators, entrepreneurs and business people — are almost entirely absent from the New York/Washington debates on these key financial and markets issues. Instead, the handful of self-interested too-big-to-fail Wall Street banks and their lobbyists and lawyers monopolize the political, policy, regulatory, legislative and legal debates on these issues…
“The financial system and financial markets exist to be the funding mechanism for Silicon Valley innovators and businesses at all stages and of all sizes. Markets are supposed to support the real economy that invents, builds and distributes goods and services which fuel employment, growth and standards of living — improving lives, communities, our country and the world.
“[R]eal reform will not happen until the people and companies with the most at stake in our economy get actively and consistently involved in these debates and the political process. Otherwise, Wall Street’s New York/Washington alliance will continue to monopolize the policy outcomes – producing results that favor them regardless of the threat they pose to Silicon Valley and the rest of the real economy.”
The nation’s top banking and securities regulators put on the spot at a Senate Banking Committee hearing: Both Republicans and Democrats on the panel grilled top officials from the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation and the Federal Reserve, among others during a hearing last week focused on the status of Wall Street reform. Senator Elizabeth Warren (D-Mass.), of course, got right to the point, asking the assembled witnesses how many times each agency recommended that the Department of Justice pursue criminal cases against any top bank executives for their role in the financial crisis in 2008:
Sen. Warren: In the past year, the three largest banks in this country, JPMorgan Chase, Citigroup and Bank of America have admitted to breaking the law and have settled with the government for a combined $35 billion. Now, as Judge Rakoff of the Southern District of New York has noted, the law on this is clear: No corporation can break the law unless and individual within that corporation broke the law. Yet, despite the misconduct of these banks that generated tens of billions of dollars in settlement payments by the companies, not a single senior executive at these banks has been criminally prosecuted…I know that your agencies can’t bring prosecutions directly, but you’re supposed to refer cases to the Justice Department when you think individuals should be prosecuted. So can you tell me how many senior executives at these three banks you have referred to the Justice Department for Prosecution?
The answer by the assembled regulators: None. Not one.
Warren went on to note that during the much smaller savings and loan crisis of the 1980’s, “the government brought over 1,000 criminal prosecutions and got over 800 convictions. The FBI opened nearly 5,500 criminal investigations because of referrals from banking investigators and regulators.”
The Fed gets serious about reducing the risk of the nation’s handful of too-big-to-fail banks by requiring them to assume the costs of the their high risk activities, rather than letting them continue to shift those costs to the taxpayers: During the same Senate Banking Committee hearing, Federal Reserve Governor, Daniel Tarullo outlined a series of stepsthe central bank plans to take to protect the taxpayer and the economy from the systemic risk the biggest Wall Street banks pose to the economy. The main proposal discussed by Tarullo was stricter capital requirements for the few biggest banks, requiring them to have more equity and less debt to be able to survive another crisis without having to be bailed out by taxpayers. The Associated Press’ Marcy Gordon asked Better Markets President Dennis Kelleher for this thoughts on the Fed’s new action: “The Fed is signaling to Wall Street … that it is dead serious about making these banks assume the cost of their high-risk activities,” said Kelleher.
U.S. and international finance expert, Ms. Irina Leonova, joins Better Markets staff as its Banking Specialist: Prior to joining Better Markets, Ms. Leonova was a member of the Secretariat at the Financial Stability Board (FSB), based in Basel, Switzerland. At the FSB, she specialized in regulatory and financial policy design and implementation relating to, among other areas, financial data infrastructures including financial benchmarks (interest rate and FX), financial and commodity derivatives markets and the provision of long-term investment finance.
Prior to assuming her position with the FSB in January 2012, Ms. Leonova held a number of positions in the U.S. federal government, including at the U.S. Department of Treasury, Office of Financial Research; U.S. Commodity Futures Trading Commission; and, the U.S. Department of Commerce, Bureau of Economic Analysis.
“Irina’s deep knowledge and experience working in the banking and financial regulatory arena in both the U.S. and Europe will help Better Markets promote the public interest in the domestic and global financial markets,” said Dennis Kelleher in a statement.
Better Markets in the News:
Wall Street Attack Fails on CFTC Cross-Border Swaps Rule: Bloomberg News by Silla Brush 9/16/2014
Banking industry donates heavily to U.S. Rep. Andy Barr as he champions deregulation bills: McClatchy News by John Cheves 9/14/2014
Fed Ramps Pressure for Biggest US Banks to Shrink: ABC News (AP) by Marcy Gordon 9/9/2014
DOL ‘On Precipice’ Of Tough Erisa Fiduciary Rule, Says Consumer Advocate: Financial Advisor by Ted Knutson 9/4/2014
Roper Urges SEC Chief to Move on Fiduciary With Split Vote: Thinkadvisor.com by Melanie Waddell 9/5/2014
Elizabeth Warren Hits Eric Cantor for Selling Out to Wall Street: Blue Nation Review by Jill Bond 9/5/2014
Will the Revolving Door hit Cantor in the Butt?: Politicalirony.com by Andy Borowitz 9/5/2014
Articles of Interest:
Has the White House Missed Its Chance on Fed Nominations?: American Banker by Victoria Finkle 9/12/2014
Fed Chief Yellen Seeks Interest-Rate Consensus: Wall Street Journal by Jon Hilsenrath 9/14/2014
Recognizing Bubbles, but Still Cautious on Deflating Them New York Times by Jesse Eisinger 9/10/2014
Fed Proposes New Rule, and Wall St. Banks Feel the Pressure: New York Times Dealbook by Nathaniel Popper 9/9/2014
Takeaways from the Senate Banking hearing: Politico Pro by Kate Davidson and Zachary Warmbrodt 9/9/2014
Chairman White’s political will may determine fiduciary-duty outcome: Investment News by Mark Schoeff Jr. 9/5/2014
Stock Market ‘Riddled With Conflicts of Interest,’ Consumer Group Warns: The Wall Street Journal by Scott Patterson 9/9/2014
Banks Pressure Senate to Act on Reg Relief: American Banker by Victoria Finkle 9/8/2014
Federal Reserve Signals Intent to Pressure Largest Banks to Slim Down: New York Times Dealbook by Peter Eavis 9/8/2014