The Battle for Wall Street Reform Continues

— Op-Ed by Elizabeth Warren | The Boston Globe

Since the great financial crisis of 2008, big bank CEOs and their lobbyists have led the charge to block efforts to regulate Wall Street. Their message has been clear: leave it to us — the big Wall Street banks — to regulate ourselves because we’re the only ones who understand how the world really works.

When JP Morgan CEO Jamie Dimon announced a $2 billion loss from trades he called “stupid,” “sloppy” and “poorly monitored” last week, he didn’t change his mind about who he thinks should call the shots. Dimon said he would clean this mess up himself and indicated that it would be business-as-usual in no time at all. “We will learn from it, we will fix it, and we will move on.” The message to those who think there should be more oversight of the biggest banks was clear: stay out.

After the crash of 2008, the country called for greater oversight of the biggest financial institutions to prevent another crash. But even after billions in taxpayer-funded bailouts, Wall Street resisted change. When the battle for financial reform took place in 2010, thundering herds of lobbyists filled the halls of Congress trying to undermine meaningful changes.

Reforms got pushed in different directions. Oversight of community banks and credit unions was in many cases ramped up, even though they were not the ones who brought down the economy. Meanwhile, the biggest banks fought off many key regulations that might reduce their size or cut into their profitability. While many new rules made it through, too many others were stopped cold.

Even after Dodd-Frank became law, the fight wasn’t over. Open public debate turned into guerrilla warfare over rules to put the law to work. For two years now, Wall Street bankers and their lobbyists have pushed regulators to water down those rules and have pushed for loopholes for their lawyers to wiggle through.

They have also urged Congress to gut the funding for enforcement at the regulatory agencies and to chip away at the independence of the new Consumer Financial Protection Bureau. And they have continued to bankroll candidates for public office and pour funds into their lobbying, hoping they can pull the strings without anyone noticing.

According to the Center for Responsive Politics, in 2011 alone, the financial industry spent more than $161 million on lobbying efforts. Jamie Dimon and JP Morgan, for example, spent more than $7.6 million lobbying in 2011 and almost $2 million more as of this April. Perhaps most prominently, JP Morgan has forcefully opposed the Volcker Rule, which restricts certain kinds of speculative trades that increase risk in the banking system.

The specific laws are technical and complex, and already there are a number of commentators who point out that even the Volcker Rule might not have prevented the particular problem that led JP Morgan to lose $2 billion in a matter of weeks. Others note that JP Morgan has enough money that it can afford a $2 billion loss.

But these comments miss the basic point: too often, Wall Street banks act like they alone should decide if they have taken on too much risk. If the big bank CEOs ran different kinds of companies, ones that weren’t big enough to take down the entire economy when they get it wrong, then oversight would be less critical. But reckless gambling by the big banks can affect the jobs, the pensions and the tax bills of every American — and that means that those company’s actions should be subject to careful oversight.

That’s what government does: it passes laws to keep markets honest, and it puts a smart cop on the beat to enforce those laws. It is hard, but it isn’t brain surgery. And it starts only if we have a Congress that has the guts to stand up to the big banks and their armies of lobbyists.

Elizabeth Warren is a Democratic candidate for US Senate.

SEC Proposes Ban on Magnetar-Like Deals

by Lois Beckett
ProPublica, Sept. 20, 2011, 12:42 p.m.

The Securities and Exchange Commission yesterday unveiled proposed rules to ban hedge funds and banks from assembling risky securities, marketing them to investors and then immediately betting against their own creations, reaping profits when they fail. The rule would also ban firms from setting up risky securities for the benefit of an undisclosed third party.

As we detailed last year, exactly those kinds of questionable deals helped fuel the financial crisis and resulted in huge losses for investors.

Goldman Sachs and JPMorgan Chase  have already paid millions of dollars—a relatively small sum for both banks—to settle SEC charges that they misled investors. Several other banks, including Citigroup and Mizuho of Japan, are being investigated by the SEC for similar deals.

“It was as if a car dealer sold a car with bad brakes, then bought insurance that paid off when the car crashed” Sen. Carl Levin, chairman of a Senate committee that investigated such deals, said in a statement yesterday.

The SEC’s new rule is designed to target two potential conflicts of interest:

For instance, a firm might package an asset-backed security, sell that security to an investor and then short the security to potentially profit as the investor incurs a loss.

Or a firm might allow a third party to help assemble an asset-backed security in a way that creates an opportunity for the third party to short the security and reap a profit.

The rule would ban any party who participates in the creation of a security from betting against the security. The ban would remain in effect for one year and would also apply to the affiliates or subsidiaries of the participants.

As we reported last year, the hedge fund Magnetar often pushed for riskier assets to be included in deals and placed bets against many of the same investments. Its deals helped create more than $40 billion in the securities known as collateralized debt obligations, or CDOs, and pumped more hot air into the housing bubble. When the housing market finally collapsed, nearly all of those securities became worthless, but Magnetar’s bets against them reaped handsome profits.

Magnetar was involved in the Merrill Lynch and Mizuho deals that the SEC is now investigating, as well as the deal that cost JPMorgan Chase $154 million in a settlement with the SEC. (Magnetar has always maintained that it did not have a strategy to bet against the housing market. The hedge fund has not been accused of wrongdoing as part of the SEC probes.)

Anticipating criticism, including from one of its own commissioners, that its new rules could stifle the free flow of capita, the SEC noted in a press release that the rule “is not intended to prohibit traditional securitization practices.”  SEC Chairman Mary Shapiro said the rule “would provide exceptions for risk-mitigating hedging activities, as well as activity consistent with liquidity commitments and bona fide market-making.”

The rule was created to fulfill the demands of the Dodd-Frank Reform Act and will be finalized after a 90-day period for public comment.

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