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January 16, 2014

Wall Street’s All-Out War Against Financial Regulation Continues Unabated

Only in the warped, distorted, Alice-in-Wonderland world  of Wall Street would one think “Washington went to war against big Wall Street banks” or that “Washington won [the war] in a blowout,” as said today in a Politico article entitled “How Washington beat big Wall Street banks.”  The author, Ben White, is a terrific reporter and there’s a lot interesting in and right about the article, but I disagree with the premise of it.

It may be counterintuitive, but the article reflects a fairy tale Wall Street loves to push.  Not only that they have been picked on and been under/are under enormous pressure (almost all unfair, undeserved and counterproductive) by US and global regulators, politicians and policy makers, but, hey, they’ve lost and Washington won, so, ease up.  No need to take any further action against the ginormous global too-big-to-fail banks that are bigger, more interconnected and dangerous than they were before the last crisis that they caused.  No.  Enough’s been done. 

Indeed, according to the article, the war is over.  The American people should move on to other things.  Washington should declare victory and return to its past practices of coddling the beaten Wall Street banks and cashing their campaign contribution checks.  Nothing to do or see here.

Of course, that’s ridiculous.  As I said to the author of the article, it is Wall Street that has been at and continues to be in all-out war with Washington and fighting financial regulation in every arena.  It has been unrelenting and, too often, effective, to the benefit of Wall Street and the detriment of Main Street and the American people who continue to suffer from the economic wreckage of the last crisis Wall Street caused. 

First, it fought tirelessly to defeat and then weaken the financial reform law called “Dodd-Frank.”  Yes, a financial reform law passed.  But, it wasn’t, as stated in the article, “Washington’s big victory.”  In fact, Wall Street defeated the strongest provisions like breaking up the huge too big to fail Wall Street banks or effectively prohibiting even their most indefensible lethal gambling, including a particularly pernicious device called “naked CDS.”  Also, many of the provisions that survived were weak and/or loophole-laden.  The Volcker Rule is the prime example where the ban on high risk proprietary betting ended up with a long list of “permitted activities” that diluted the so-called “ban.”  The success of that provision, as with most of the law, will depend on regulators over time being tough on the banks.  Yes, the very regulators who failed miserably in the decade leading up to the last crisis.

Second, Wall Street has thrown every lawyer and lobbyist they could purchase at the underfunded and understaffed regulatory agencies like the SEC and CFTC to bend every rule implementing the law their way.  It has been a grossly unfair fight with Wall Street winning repeatedly.  In fact, only one agency, the CFTC, has even passed most of the rules assigned to it and that took more than three years of trench warfare with Wall Street.  Although almost never mentioned by the media, this is almost entirely due to Wall Street attacks on the regulators, literally burying them with mountains of comment letters and unending requests for meetings, which have caused delay and paralysis.  The intent and effect is to weaken as many rules as possible that are supposed to implement financial reform. 

To say, as the article does, that it was “essentially impossible for the industry’s lobbyists to beat back any of the newly imposed regulations” is just wrong. 

Third, when Wall Street doesn’t get what it wants in the legislative or regulatory arena, then it runs to the courts to get the rules thrown out, as it has done repeatedly.   This strategy has worked brilliantly:

  • it delays the rules and enables Wall Street to keep doing what they are doing unregulated until the case is resolved, often years later;
  • it causes the agencies to become acutely sensitive to “litigation risk” which causes them to be very cautious and to “accommodate” Wall Street in the rulemaking process itself so as to avoid a lawsuit;
  • it forces the agencies to divert their very limited resources to court fights; and,
  • it often results in wins that kill the rules and roll back financial reform. 

Wall Street’s litigation strategy has been very, very successful for them and has limited, weakened and delayed a great deal of financial reform.

Fourth, Wall Street’s Congressional allies have harassed the regulators nonstop: frequently calling the them to testify at hearing after hearing to aggressively challenge their work on financial reform;  constantly calling them on the phone and sending them letters complaining about their attempts to put financial reform in place; filing and sometimes passing bills to gut, weaken or kill many parts of the financial reform law or the rules implementing it; and, mostly despicable, refusing to provide the agencies with the funds to implement financial reform and police Wall Street, which they just did again this week.  These actions cripple agencies like the CFTC and set them up for failure because they simply lack the funds to hire people and buy the essential technology to fulfill the responsibilities required by the law.

Fifth, Wall Street has a massive PR communications operation that daily promotes it’s skewed view of the world that they are picked on, beleaguered, and the subject of undeserving burdensome regulation (the only kind according to Wall Street and its allies).  As important, their primary story line — repeatedly proved baseless — is often nonetheless repeated uncritically:  financial reform will unduly limit Wall Street’s ability to lend, provide credit and grow small businesses and the economy, not to mention employment.  Indeed, to listen to these Wall Street guys you’d sometimes think that their only concern is employment and economic growth.  It is remarkable that they never mention that defeating and weakening financial reform helps entrench their competitive positions, disadvantages other market participants, increases their profits and, most importantly, boosts their bonuses. 

Sixth, Wall Street, its lobbyists, trade groups, front groups and other allies have contributed hundreds of millions of dollars to politicians who support them and to defeat politicians who do not.  No matter what anyone says, contributions in these obscene amounts buy access, influence and results.  The most egregious visible example was a bill filed in the House to gut a provision of financial reform that was literally written by Citigroup’s lobbyists.  Unsurprisingly, Wall Street’s Congressional allies beating the regulators and fighting financial reform just happen to be the largest recipients of Wall Street’s cash. 

Importantly, this is all still going on.  Wall Street continues to use the entire influence industry (legislative, political, regulatory, legal, PR, academics, front groups, campaign contributions, etc.) to wage its multi-battlefront war to enable it to go back to its bonus-bloated, high risk gambling that lead to the last crisis.  That requires killing, gutting or weakening financial reform that was supposed to protect the American people, yes, at the expense of Wall Street’s high risk activities and the bonuses those activities generate.

No one is saying “nothing has changed” since the crash, as one of Wall Street’s primary spokespeople, Tony Fratto, suggested in the article some people say.  A great deal has changed, as I was quoted saying in the article, but that doesn’t mean that Washington “went to war against big Wall Street banks” or that Washington “won [that war] in a blowout.”  As I also told the author, Wall Street went to war against Washington and financial reform; it has had many significant victories and, yes, some defeats; but, most importantly, Wall Street’s war continues unabated with no end in sight.  Wall Street’s too big to fail banks simply have too much money at stake, literally hundreds of billions if not trillions of dollars, to stop fighting.

I do wish Wall Street’s spokesperson, Tony Fratto, was right about one thing in the article:  that there was a “cottage industry” of many, well-funded, pro-financial reformers that oppose Wall Street’s too big to fail banks and get the results suggested by the article.  Of course, accusing your opponents of doing what you do is a time-honored tactic.  The well-known truth is that the real “cottage industry” in Washington is the vast number of legal, lobbying, PR, academic, policy, trade groups and other organizations that Wall Street has purchased and finances to continue its war on Washington, the regulators and those few who do oppose their ongoing attempts to kill, weaken, gut or roll back financial reform.    



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