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November 1, 2019

What's Been Happening with Better Markets: Nov. 1, 2019

What’s Inside?

  • Credit Quality Crashing What Crashes Next?
  • Investors and Retirees Deserve Better Than Conflicted Public Officials Delivering Wins for Private Sector Clients
  • Better Markets Supports the SEC Fight for Investors Over the Industry for the Consolidated Audit Trail (CAT)
  • Banking Regulators Should Not Give Wall Street’s Five Biggest Banks a $40 Billion Deregulatory Gift for Their Dangerous Derivatives Trading

Credit Quality Crashing What Crashes Next?

Conflicted, profit/bonus maximizing credit rating agencies failed miserably in the last crash but are now warning about the next one.  According to Moody’s Investor Services (as reported by Institutional Investor):

Given that B3 is six levels below investment grade, this has prompted “warnings from Moody’s that defaults in the next downturn may exceed the spike seen in after the 2008 financial crisis.”

The reporting continued that Moody’s “expressed concern over a potential surge in downgrades to the next ratings level, Caa, when good times end for the economy,” and that it “believe[d that] the number of Caa issuers could easily exceed the 2008-2009 recession and fuel defaults above the 14 percent default rate in the fourth quarter of 2009.”

Read the full article here.


Investors and Retirees Deserve Better Than Conflicted Public Officials Delivering Wins for Private Sector Clients

This is a perfect illustration of why people look at Washington as a rigged system greased by the revolving door and cash that benefit Wall Street’s biggest banks and insiders and hurt hardworking Main Street Americans.

Eugene Scalia, on behalf of his financial industry clients, worked overtime to weaken, gut or kill the investor protection fiduciary duty rule adopted by the Department of Labor (DOL) in 2016 and strongly supported by investor, consumer and retiree advocates (including Better Markets as detailed here).  After five years of careful consideration, that rule was going to save tens of millions of Americans tens of billions of dollars every year, which would otherwise go into industry pockets. 

Scalia, as a private lawyer, led the charge to kill that rule and he was successful in 2019, which was cheered by the industry.  As we detailed in a Special Report, this is consistent with the clients’ Scalia chose for decades to represent: large and powerful financial corporations and financial industry trade associations working to kill, gut, rollback, or weaken key financial rules intended to protect Americans from financial fraud, abuse, and recklessness.

Scalia is now President Trump’s Senate confirmed Secretary of the DOL and apparently wants to nonetheless participate in the DOL’s reconsideration and re-proposal of a new fiduciary duty rule to replace that prior rule.  The new rule is not expected to protect investors, but be highly favorable to the industry and consistent with his prior private sector representation.  Thus, Scalia, as Secretary of the Department of Labor, would appear to be advancing the positions of his former private sector clients, creating a conflict of interest that should be prohibited.

Nevertheless, the DOL’s lawyers have concluded, apparently on a technicality, that Secretary Scalia does not have to recuse himself from participating in that upcoming DOL fiduciary duty rulemaking.  Whether or not that is correct as a legal matter, it is shockingly bad policy and practice.  At the very least, it has the appearance of impropriety.  

Such actions just feed the public’s cynicism about senior government officials doing the bidding of their former (and likely future) private sector paymasters rather than prioritizing the public interest.  This will not only make Secretary Scalia look bad but also taint any fiduciary rulemaking by the DOL, forever casting a cloud over the resulting rule.  We have called on Secretary Scalia to voluntarily recuse himself from any direct or indirect involvement in any rulemaking related to a fiduciary duty.


Better Markets Supports the SEC Fight for Investors Over the Industry for the Consolidated Audit Trail (CAT)

The Consolidated Audit Trail (CAT) promises to be a revolutionary game-changer for the SEC in detecting, deterring, and punishing market manipulation and predatory behavior.  Done right, its importance for investor protection, market stability and capital formation cannot be overstated.  It will,  finally, move the SEC’s grossly inadequate and outdated market surveillance and enforcement capabilities and technology into the 21st Century, as we detailed in a comment letter here

However, the SEC’s decisions years ago to outsource the construction and operation of this mission-critical technology to the private sector – and put the very market participants it is supposed to police and punish in charge of its governance structure – were grave mistakes that embedded corrosive conflicts of interest into the very core of the CAT.  It is as if a police department contracted with lawbreakers to provide the police with a really effective computer to catch them if they engage in future illegal activities.

The SEC’s proposal to impose transparency and other accountability measures is a good step, but it must do more.  The SEC must also use its full enforcement arsenal against those who have caused the delay, further amend its rules to improve the governance of the CAT NMS and eliminate the conflicts of interest that are killing the CAT, harming investors and endangering the markets.

Getting the CAT done, however, is going to take more than the SEC.  Congress must provide rigorous oversight to ensure accountability and transparency.  A recent hearing on the CAT by the Senate Banking Committee was also a good first step, but it too must do more.  That is why we sent a letter to Committee Chairman Crapo and Ranking Member Brown, who entered our letter into the record for the hearing

We applaud SEC Chairman Clayton and the Director of Markets and Trading, in particular, for their efforts to address these failures that they inherited and get the CAT completed as quickly as possible. But they and Congress simply must do more if investors, markets and capital formation are going to be protected and promoted.


Banking Regulators Should Not Give Wall Street’s Five Biggest Banks a $40 Billion Deregulatory Gift for Their Dangerous Derivatives Trading

The five US banking regulators have proposed to eliminate initial margin requirements on interaffiliate derivatives.  This is a deregulatory gift worth more than $40 billion to Wall Street’s five largest banks who have been lobbying for this because they are also the five largest derivatives dealers, handling about 90% of all U.S. derivatives transactions.  The posting of margin is a critically important buffer against losses and the proposed elimination is shortsighted, violates the express language of the Dodd-Frank Act, and will facilitate evasion of key financial protections. 

Interaffiliate derivatives are often used to move risks into U.S. banks that have taxpayer backed customer deposits (as we detailed in a recent American Banker Op Ed).  The proposal would eliminate one of the most important derivatives reforms intended to protect U.S. depositors from the risks of foreign derivatives dealing and to ensure Wall Street’s largest derivatives dealers can manage affiliated defaults without precipitating a crisis.

The current rules—which the banking regulators now seek to abolish—also help to prevent U.S. derivatives dealers from avoiding U.S. transparency and other requirements by indirectly dealing through foreign affiliates with little more than a key stroke.  In other words, the current rules make it harder for U.S. derivatives dealers to engage in regulatory arbitrage, which will be unleashed by the proposal.

Finally, the banking regulators made inaccurate, incomplete and misleading statements when announcing the proposal, particularly regarding the potential risks to U.S. taxpayers and depositors, as Federal Reserve Board Governor Lael Brainard made painfully clear in her dissent.

We will detail our objections more fully in an upcoming comment letter in response to the proposal.



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