Wall Street’s strategy for killing financial reform and protecting their business lines, profits and bonuses is to weaken each rule as much as possible, even if it’s just a little bit. Rule by rule, that strategy will weaken the entire new derivatives structure, putting cracks in the foundation of financial reform. The cumulative effect will be to create a new marketplace where rules are filled with ambiguities and loopholes that benefit Wall Street, hurt its competitors and make the next financial crisis much more likely. The rules finalized on May 16, 2013 by the CFTC are only the latest example of how Wall Street’s strategy works.
While the those rules have some important reforms, they were also needlessly weakened in key areas. For example, the requests for quotes (RFQs) are similar to the old pre-crisis high risk OTC market where a few Wall Street too-big-to-fail banks cut private deals. The same is true for block trades, which are also off-market deals. Wall Street and its allies fought to get as few RFQs as possible and to allow as many block trades as possible in the final rules. Wall Street did this to prevent a level playing field, competition and transparency, which will break their stranglehold on these dangerous, high risk markets and reduce profits.
The financial crisis arose from massive derivatives bets by Wall Street’s too-big-to-fail banks in the almost $700 trillion unregulated over-the-counter (OTC) market that had no transparency and very little competition. Financial reform was supposed to end that and make another collapse unlikely and more bailouts unnecessary. The rules the CFTC is adopting today are essential for making that a reality because they are supposed to require pre-trade transparency, exchange trading and a more level playing field that enables competition. That would be good for financial stability, for the markets and for derivatives customers, who should pay less due to competition.
Unfortunately, these rules are not as strong as they should be or as they could have been. Wall Street — again — got what it wanted: a few loopholes, a few weaknesses and a few ambiguities inserted here and there. Standing alone, they may not look grave or threatening and they all come with a soothing cover story. But, over time, Wall Street and its many lawyers, lobbyists and other allies will exploit these and all of the other weaknesses in the many other rules, at first, just expanding the cracks they put into the foundation of financial reform, but ultimately bringing on the next financial collapse.
This is how Wall Street is defeating financial reform. Not by a frontal assault. Not in one big attack. Not in a headline grabbing event. But, by consistently and methodically getting strong rules weakened bit-by-bit, often behind closed doors, in ways big and small, that will add up to a disaster for the American people.