Subject: [SocialistWorker.org] A "get out of jail free" card for Wall Street
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Analysis: Petrino DiLeo
======== A "GET OUT OF JAIL FREE" CARD FOR WALL STREET =======================
Petrino DiLeo analyzes the financial reform legislation taking shape on
June 24, 2010
AS MEMBERS of the House of Representatives and Senate patch together a final
version of financial reform legislation, it's increasingly clear that Wall
Street and its army of lobbyists have won the battle to keep the bill from
making any real changes in how America's biggest banks do business.
That means there will be nothing to prevent banks from taking the kinds of
risks that could lead to another 2008-style financial flameout. And if that
happens, there will be no alternative to the federal government conducting
another taxpayer-funded bailout of the Wall Street fat cats. "[A]t the end of
the day, essentially nothing in the entire legislation will reduce the
potential for massive system risk as we head into the next credit cycle,"
wrote Simon Johnson in a recent blog post .
Different versions of financial reform legislation passed the House and
Senate earlier this year. Both were incredibly weak compared to what was
expected after the 2008 Wall Street crash pushed the economy into a
But now, with lawmakers from both houses working through the "conference"
process that resolves differences between the two bills, already feeble
legislation is being further gutted, with lobbyists from the banking industry
pushing members of both parties to remove every provision they find
At this point, it appears that the final bill will do nothing to limit the
size of "too big to fail" banks. It won't regulate credit default swaps--the
form of financial insurance on investments going bad that was at the heart of
the 2008 crisis. It will have only modest measures to make more transparent
the trading of Wall Street's massively complicated investments known as
The legislation will do nothing to change Wall Street's bonus culture. It
won't force a re-separation of commercial and investment banking that existed
under the Glass-Steagall Act passed after the 1929 Wall Street crash. The law
won't stop predatory lending and doesn't provide for mortgage reform.
And if the lobbyists get their way, it's possible that whatever regulations
do end up in the final version may not even be enacted for another /seven/
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EVEN THE most discussed provisions of the legislation are withering away to
For example, the so-called Volcker rule--a proposal made by former Federal
Reserve Chair Paul Volcker to bar banks from making investments not on behalf
of customers and from sponsoring or participating in hedge funds and private
equity funds--appears to be on the way out as negotiations continue.
Incredibly, the legislation may end up giving banks more leeway to operate
hedge funds than they had before. As the bill stands now, banks would be
allowed to invest up to 2 percent of core capital, composed of common stock
and financial reserves, in hedge funds and private equity funds. The big
banks might have to divest some holdings to get below that threshold, but
they won't have to get out of the hedge fund business entirely.
As a sign that the rule will actually expand the banks' ability to speculate,
Goldman Sachs, Citigroup and JPMorgan Chase are all rapidly trying to line up
deals to acquire additional hedge funds in anticipation of the bill's
passage. JPMorgan is reportedly working on buying the Brazilian asset
management firm Gávea Investments, and Citigroup is about to raise $3
billion to expand its hedge fund and private equity units.
The much-hyped consumer protection agency is expected to make it into the
final bill. The agency is supposed to help protect borrowers from predatory
products. But it will be overseen by the Federal Reserve--which answers
directly to the banks.
Moreover, according to reports, language in the legislation will make 8,000
of the nation's 8,200 banks exempt from agency oversight. Also at issue in
the negotiations is whether to exempt auto dealers from regulation.
Ultimately, the agency will have no real power.
In addition, the banks and their lobbyists were able to remove the proposal
for a bailout fund. At one point, there was a plan to create a $150 billion
fund--paid for by large financial institutions--that would be available if
another rescue of the financial system was necessary.
But that provision was jettisoned this week. Instead, the bill will require
"regulators to certify they have a plan to pay for liquidations after the
fact," reported the /Los Angeles Times/. That's a meaningless rule--and it
means that when the financial system crashes again, taxpayers will be on the
The legislation also won't force banks to maintain higher capital reserves.
Late Wednesday, Senate and House lawmakers said the final bill would limit
banks to a debt-to-equity ratio of 15-to-1--meaning that for every $1 in
capital held by a bank, it could have $15 in debt.
At the peak of the boom years, some Wall Street banks had leverage ratios of
30- or 40-to-1. But the 15-to-1 cap is hardly tough. On the day it filed for
bankruptcy, the former investment bank Lehman Brothers was leveraged
somewhere between 8-to-1 and 10-to-1.
When it comes to the complex financial gambles that Wall Street calls
derivatives, the House and Senate are still debating final language, but it's
likely that the stringent idea of requiring all derivatives to be traded on
regulated exchanges and forcing banks to shed their derivatives
businesses--which was included in the final Senate version of the
legislation--will be dropped.
From all indications, the bill will be so watered down that it will have
almost no effect on how Wall Street functions. "Wall Street has always been
very skilled at getting around rules, and this law will be no exception,"
Frank Partnoy, a law professor at the University of San Diego and former
trader at Morgan Stanley, told the /New York Times/ . "Once you open up
the door just a crack, Wall Street shoves the door open and runs right
Congress is racing to get the legislation ready before this weekend's G-20
summit in Canada. The Obama administration wants to use the bill as a talking
point when world leaders discuss the world economy and the measures that
governments will take in the coming months.
But Washington's weak reform will be a warning to other nations not to enact
any strict reforms themselves. If they do, international banks will recognize
just how generous conditions in the U.S. remain.
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HOW DID it come to this? How could Wall Street end up emerging from the worst
financial crisis since the Great Depression on stronger footing?
Firstly, the Obama administration clearly waited too long to push for
financial reforms. The time to enact changes would have been right after
Obama took office in 2009. Wall Street was on life support and owed its
survival to the government's bailout--it couldn't have fought off changes at
By waiting--and by nursing banks back to profitability with more than $14
trillion in loans, guarantees and direct infusions of cash--the government
gave Wall Street time to consolidate and prepare to defeat tougher reform
That delay begs the question of whether the Obama administration really
wanted to reform Wall Street in the first place.
Secondly, the incestuous relationship between Wall Street and Washington
meant that Congress had no interest in bringing the hammer down on the
financial sector. As Sen. Dick Durbin said last April, "[T]he banks--hard to
believe in a time when we're facing a banking crisis that many of the banks
created--are still the most powerful lobby on Capitol Hill. And they frankly
own the place."
So it should be no surprise that Congress is bending to the immense lobbying
effort that the banks have undertaken.
On top of that, there's the revolving-door culture between Wall Street and
Washington. This is true at the highest levels, where the post of Treasury
Secretary is often filled by former Wall Street executives. But it's true
lower down as well--at least 56 industry lobbyists have served on the
personal staffs of the 43 Senate and House members shaping the legislation in
the conference committee negotiations, according to Public Citizen.
Moreover, the members of the conference committee have received more than
$112 million over the past 20 years from political action committees or
employees of industries affected by the legislation. These 43 lawmakers are
just 8 percent of Congress, but have received 16 percent of Wall Street's
donations, according to the Center for Responsive Politics.
Overall, since 1989, the finance, insurance and real estate sector has poured
$695 million into the campaign committees and political action committees of
current members of Congress.
For its part, the Obama administration offered a lot of empty rhetoric in the
lead-up to the final bill's unveiling. The president has talked up "strong
oversight of derivatives" even while White House and Treasury officials
argued behind the scenes to gut the provisions that made it this far. As
Simon Johnson wrote:
>Simply claiming that the president is "tough" on big banks simply will not
>wash. There are too many facts, too much accumulated evidence, pointing
>exactly the other way. The president signed off on the most generous and
>least conditional bailout in world financial history. This is now widely
>understood. The administration has scrambled to create some political cover
>in terms of "reform"--but the lack of substance here is already clear to
>people who follow it closely, and public perceptions will shift quickly.
In the end, no matter how obvious it is that the big banks bear
responsibility for the financial system's crash, Wall
Street--predictably--wasn't willing to give up its profits or powers without
That's a fight we can't trust Barack Obama and the Democrats to take up. Only
by building a grassroots movement for economic justice can we pressure
Washington to act--and put a leash on Wall Street.
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