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August 11, 2016

Financial Reform Newsletter: Trump's economic vision is a nightmare for Main Street and more…

Trump’s economic vision is a nightmare for Main Street: Monday afternoon, at the Detroit Economic Club, Donald Trump outlined what he called his economic plan for the country. In addition to the incorrect facts, shoddy statistics, baseless arguments, exaggerations and misrepresentations (as detailed by so many in the media), Trump also failed to mention one of the biggest catastrophes to hit the country in almost 100 years: the 2008 financial crash, which is going to cost the United States more than $20 trillion or more than $170,000 for every living woman, man and child in the country.

Nothing since The Great Depression of the 1930s has destroyed more jobs and growth than the economic devastation caused by Wall Street’s too-big-to-fail financial firms crashing the financial system in 2008, which caused the worst economy since The Great Depression.  For example, by October 2009, just 13 months after the collapse of Lehman Brothers (and just 9 months after President George W. Bush left office), more than 27 million Americans were out of work or forced to work part time because they couldn’t find full time work.  Because many of those Americans were heads of households, that unemployment wreckage alone hit almost 50 million Americans.  On top of that, there were more than 16 million foreclosures filings, almost 33% of all homes in the U.S. were underwater, wages plummeted, students dropped out of college, retired people went back to work and millions didn’t retire at all, poverty skyrocketed, the stock market plummeted, and tens of trillions of dollars of wealth was destroyed, all resulting in the American people being robbed of their economic security, prosperity and the American Dream.

Because those historic financial and economic shocks were so deep and so broad, indeed, cataclysmic, the aftershocks continue to this day and explain why so much of the economy is still underperforming for so many Americans.  Yes, a lot of progress has been made since 2008 (and the U.S. is doing significantly better than any other country in the world), but there’s still far too many Americans suffering from a lousy economy.  However, most of the poor economic conditions Mr. Trump bemoans and claims he’ll improve are the direct result of the economic catastrophe caused by that financial and economic crash.

Not only does Trump not mention any of that, he blames President Obama and Secretary Clinton for a poor economy caused by Wall Street’s crash of the global financial system.  That may be good politics, but it is bad economics and even worse policy.  Rather than ignoring history and facts while blaming others, Mr. Trump should provide the American people with a specific, concrete and comprehensive plan on exactly how he will rein in Wall Street.  That is essential to protect and promote American jobs and growth, not to mention our financial system, economy and standard of living.

Also unmentioned by Trump in his speech:  President George W. Bush and his 8-year administration, even though the financial crash was enabled by his “markets know best” ideology and a deregulation frenzy.  Oh, and the financial crash, TARP and the other Wall Street bailouts, and two stimulus packages also happened during Bush’s administration in 2008.  The lack of Wall Street regulation and enforcement enabled the huge buildup of financial risk that exploded in 2008, after which Wall Street got bailed out and the American people got the bill. 

Thus, history proves that failing to regulate Wall Street and letting Wall Street police itself are really bad ideas and a direct threat to the well-being of all Americans.  Yet, Trump also proposed this in his speech by promising to place a moratorium on all regulations.  That would stop the financial rules and effectively take the cops off the Wall Street beat, which will include financial reform.  Wall Street would again be able to take reckless risks and gamble with other people’s money like federally insured deposits.  For Trump, who once bragged about trying to profit on the crash and who is advised by a Wall Street financier who personally pocketed $15 billion by betting on it, deregulation of Wall Street might be an opportunity to make some money, but that will come out of the pockets of and at the expense of hardworking Americans who will again be paying for the next crash in lost jobs, homes, savings and so much more. 

Because there is no statutory or factual basis for it, the SEC should terminate the misnamed Disclosure Effectiveness Initiative and focus on finishing financial reform rules: To refocus the Securities and Exchange Commission’s (SEC) attention to much more pressing and important matters – like the completion of key outstanding Dodd-Frank financial reform rules on derivatives, incentive compensation, credit rating agencies and so much more – and to ensure that investors continue benefiting from robust disclosures that companies file with the SEC, on Monday, Better Markets sent a letter to SEC Chair Mary Jo White asking her to promptly terminate the misleadingly labeled “Disclosure Effectiveness Initiative” (and the related Regulation S-K Concept Release). 
Under Chair White and SEC Director of the Division of Corporation Finance Keith Higgins, the SEC has already devoted thousands of staff hours to a project that, contrary to the Chair’s statements and testimony, lacks a legal or factual basis.  In addition to having no statutory basis, as detailed in Better Markets’ July 2, 2016 comment letter, the initiative is also purportedly based on an asserted crisis of investor “disclosure overload,” but that is a baseless myth or, more accurately, an industry talking point.  The SEC has not provided any evidence that investors are suffering from too much disclosure.  Moreover, this initiative appears to be entirely staff driven, apparently with a push from well-connected and influential industry-dominated committees of the American Bar Association (ABA).  There is no evidence that the Commission itself thoroughly considered all the facts and, in light of other more pressing priorities, determined that such a resource intensive initiative should be undertaken. 
Thus, the Commission should terminate the Disclosure Effectiveness Initiative, withdraw the Concept Release and get back to protecting investors and markets by focusing on the key rules that languish unfinished for more than six years after the Dodd Frank law was passed.

Providing a counterweight to the Wall Street lobby efforts at the regulatory agencies, Better Markets filed two key comment letters last week: Much of the rulemaking process is arcane, complicated and seemingly unrelated to hardworking Americans’ lives.  But, as evidenced by the tens of millions of dollars Wall Street spends lobbying the agencies for rules that favor their business activities, often including incredibly high risk activities, this is serious and important business that, directly or indirectly, affects all Americans. 
Someone needs to be in the agencies arguing just as hard for the public interest and this is what Better Markets does.  For example, we filed a comment letter with the Federal Reserve last week on the proposed rule related to so-called “qualified financial contracts” (QFCs).  QFCs are contracts like derivative contracts and repo contracts-the kinds of arrangements that helped blow up the financial system in 2008.  Unlike other kinds of contracts, QFCs are not subject to the Bankruptcy Code’s automatic stay.  If an institution declares bankruptcy, the counterparties to these contracts can immediately terminate them and grab the collateral that secures these contracts.  That can cause a panic and destabilize the entire financial system, as we saw in the aftermath of the Lehman bankruptcy filing.
To solve this problem, the Fed proposed a rule that would subject these kinds of contracts to a stay, which would prevent counterparties to these kinds of contracts from running on the bankrupt institution.  If an institution like Lehman were to fail again, the counterparties to these kinds of contracts would have to wait while regulators sorted out the claims and collateral, which would make it possible to resolve the next Lehman in an orderly way and might prevent the failure of a large financial institution from causing another global financial meltdown.  For these reasons, Better Markets strongly supported the Fed’s proposed rule.
Another comment letter Better Markets recently filed with the federal banking regulators was on the “net stable funding ratio” (NSFR).  The NSFR is a very important rule that is opposed by many in the industry:  it is intended to ensure that large financial institutions have enough liquidity to ensure they don’t fall into bankruptcy when markets conditions are bad.  In particular, the proposed rule is targeted at dangerous maturity mismatches, like funding long-term assets (30-year mortgages, for example) with short-term liabilities that can run at a moment’s notice, (like overnight wholesale funding.)  By eliminating these dangerous mismatches, the NSFR makes it less likely that large financial institutions will face the kinds of catastrophic runs in the wholesale funding markets that made the financial system vulnerable to the panic that gripped markets in the fall of 2008.  Better Markets strongly supported this proposed rule as well.
Fighting for you to get more of your retirement money: As we’ve talked about before, the Department of Labor’s (DOL) new rule requiring anyone giving retirement investment advice to put their clients’ interests first is really important.  Tens of millions of Americans will have tens of billions of dollars more every year in their retirement accounts rather than being siphoned off by needlessly high fees and poorly performing investments that enrich Wall Street firms.  Regrettably, most of the industry spent more than five years and tens of millions of dollars trying to prevent the DOL from finalizing the rule and they have now filed lots of lawsuits in multiple states to try to get a court to kill the rule now that it’s finalized. 
Better Markets fought for the DOL rule and is now fighting in court to defend the rule.  Predictably, the industry is not happy and is trying to prevent Better Markets from filing briefs demonstrating the importance of and need for the rule.  Our latest attempt to file an amicus brief has caused the industry to go over the top in making wild and legally meritless claims, but, no matter how hard they oppose us and no matter how aggressive they get, we will not stop fighting, as our latest reply brief demonstrates. 


Better Markets in the News:

Big week for econ policy Politico Morning Money by Ben White 8/8/16

UK’s four biggest banks £155bn short of safety, warn experts Independent UK by Ben Chu 8/8/16

Has Pence pushed Trump into Ryan nod? Fox News Politics by Chris Stirwait 8/5/16

Trumpenomics 101 Politico Morning Money by Ben White 8/9/16

Fight Brews in Kansas, Texas Courts Over DOL Fiduciary Rule ThinkAdvisor 8/9/16

Not buying Bayh for banking Politico Morning Money by Ben White 8/10/16



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