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“Wall Street Vampires”: Lurking In Their Coffins, The Enemies Of Reform Can’t Withstand Sunlight

Last year the vampires of finance bought themselves a Congress. I know it’s not nice to call them that, but I have my reasons, which I’ll explain in a bit. For now, however, let’s just note that these days Wall Street, which used to split its support between the parties, overwhelmingly favors the G.O.P. And the Republicans who came to power this year are returning the favor by trying to kill Dodd-Frank, the financial reform enacted in 2010.

And why must Dodd-Frank die? Because it’s working.

This statement may surprise progressives who believe that nothing significant has been done to rein in runaway bankers. And it’s true both that reform fell well short of what we really should have done and that it hasn’t yielded obvious, measurable triumphs like the gains in insurance thanks to Obamacare.

But Wall Street hates reform for a reason, and a closer look shows why.

For one thing, the Consumer Financial Protection Bureau — the brainchild of Senator Elizabeth Warren — is, by all accounts, having a major chilling effect on abusive lending practices. And early indications are that enhanced regulation of financial derivatives — which played a major role in the 2008 crisis — is having similar effects, increasing transparency and reducing the profits of middlemen.

What about the problem of financial industry structure, sometimes oversimplified with the phrase “too big to fail”? There, too, Dodd-Frank seems to be yielding real results, in fact, more than many supporters expected.

As I’ve just suggested, too big to fail doesn’t quite get at the problem here. What was really lethal was the interaction between size and complexity. Financial institutions had become chimeras: part bank, part hedge fund, part insurance company, and so on. This complexity let them evade regulation, yet be rescued from the consequences when their bets went bad. And bankers’ ability to have it both ways helped set America up for disaster.

Dodd-Frank addressed this problem by letting regulators subject “systemically important” financial institutions to extra regulation, and seize control of such institutions at times of crisis, as opposed to simply bailing them out. And it required that financial institutions in general put up more capital, reducing both their incentive to take excessive risks and the chance that risk-taking would lead to bankruptcy.

All of this seems to be working: “Shadow banking,” which created bank-type risks while evading bank-type regulation, is in retreat. You can see this in cases like that of General Electric, a manufacturing firm that turned itself into a financial wheeler-dealer, but is now trying to return to its roots. You can also see it in the overall numbers, where conventional banking — which is to say, banking subject to relatively strong regulation — has made a comeback. Evading the rules, it seems, isn’t as appealing as it used to be.

But the vampires are fighting back.

O.K., why do I call them that? Not because they drain the economy of its lifeblood, although they do: there’s a lot of evidence that oversize, overpaid financial industries — like ours — hurt economic growth and stability. Even the International Monetary Fund agrees.

But what really makes the word apt in this context is that the enemies of reform can’t withstand sunlight. Open defenses of Wall Street’s right to go back to its old ways are hard to find. When right-wing think tanks do try to claim that regulation is a bad thing that will hurt the economy, their hearts don’t seem to be in it. For example, the latest such “study,” from the American Action Forum, runs to all of four pages, and even its author, the economist Douglas Holtz-Eakin, sounds embarrassed about his work.

What you mostly get, instead, is slavery-is-freedom claims that reform actually empowers the bad guys: for example, that regulating too-big-and-complex-to-fail institutions is somehow doing wheeler-dealers a favor, claims belied by the desperate efforts of such institutions to avoid the “systemically important” designation. The point is that almost nobody wants to be seen as a bought and paid-for servant of the financial industry, least of all those who really are exactly that.

And this in turn means that so far, at least, the vampires are getting a lot less than they expected for their money. Republicans would love to undo Dodd-Frank, but they are, rightly, afraid of the glare of publicity that defenders of reform like Senator Warren — who inspires a remarkable amount of fear in the unrighteous — would shine on their efforts.

Does this mean that all is well on the financial front? Of course not. Dodd-Frank is much better than nothing, but far from being all we need. And the vampires are still lurking in their coffins, waiting to strike again. But things could be worse.

 

By: Paul Waldman, Op-Ed Columnist, The New York Times, May 11, 2015

May 13, 2015 Posted by | Dodd-Frank, Financial Reform, Wall Street | , , , , , , | Leave a comment

“Elizabeth Warren Makes A Powerful Case”: Who Does The Government Work For?

Sen. Elizabeth Warren says she isn’t running for president. At this rate, however, she may have to.

The Massachusetts Democrat has become the brightest ideological and rhetorical light in a party whose prospects are dimmed by — to use a word Jimmy Carter never uttered — malaise. Her weekend swing through Colorado, Minnesota and Iowa to rally the faithful displayed something no other potential contender for the 2016 presidential nomination, including Hillary Clinton, seems able to present: a message.

“We can go through the list over and over, but at the end of every line is this: Republicans believe this country should work for those who are rich, those who are powerful, those who can hire armies of lobbyists and lawyers,” she said Friday in Englewood, Colo. “I will tell you we can whimper about it, we can whine about it or we can fight back. I’m here with [Sen.] Mark Udall so we can fight back.”

Warren was making her second visit to the state in two months because Udall’s reelection race against Republican Cory Gardner is what Dan Rather used to call “tight as a tick.” If Democrats are to keep their majority in the Senate, the party’s base must break with form and turn out in large numbers for a midterm election. Voters won’t do this unless somebody gives them a reason.

Warren may be that somebody. Her grand theme is economic inequality and her critique, both populist and progressive, includes a searing indictment of Wall Street. Liberals eat it up.

The game is rigged, and the Republicans rigged it,” she said Saturday at Carleton College in Northfield, Minn. The line drew a huge ovation — as did mention of legislation she has sponsored to allow students to refinance their student loans.

Later, Sen. Al Franken (Minn.) — a rare Democratic incumbent who is expected to cruise to reelection next month — gave a heartfelt, if less-than-original, assessment of Warren’s performance: “She’s a rock star.”

In these appearances, Warren talks about comprehensive immigration reform, support for same-sex marriage, the need to raise the minimum wage, abortion rights and contraception — a list of red-button issues at which she jabs and pokes with enthusiasm.

The centerpiece, though, is her progressive analysis of how bad decisions in Washington have allowed powerful interests to re-engineer the financial system so that it serves the wealthy and well-connected, not the middle class.

On Sunday, Warren was in Des Moines campaigning for Democrat Bruce Braley, who faces Republican Joni Ernst in another of those tick-tight Senate races. It may be sheer coincidence that Warren chose the first-in-the-nation nominating caucus state to deliver what the Des Moines Register called a “passion-filled liberal stemwinder.”

There once was consensus on the need for government investment in areas such as education and infrastructure that produced long-term dividends, she said. “Here’s the amazing thing: It worked. It absolutely, positively worked.”

But starting in the 1980s, she said, Republicans took the country in a different direction, beginning with the decision to “fire the cops on Wall Street.”

“They called it deregulation,” Warren said, “but what it really meant was: Have at ’em, boys. They were saying, in effect, to the biggest financial institutions, any way you can trick or trap or fool anybody into signing anything, man, you can just rake in the profits.”

She went on to say that “Republicans, man, they ought to be wearing a T-shirt. . . . The T-shirt should say, ‘I got mine. The rest of you are on your own.’ ”

The core issue in all the Senate races, she said, is this: “Who does the government work for? Does it work just for millionaires, just for the billionaires, just for those who have armies of lobbyists and lawyers, or does it work for the people?”

So far this year, Warren has published a memoir, “A Fighting Chance,” that tells of her working-class roots, her family’s economic struggles, her rise to become a Harvard Law School professor and a U.S. senator, and, yes, her distant Native American ancestry. She has emerged as her party’s go-to speaker for connecting with young voters. She has honed a stump speech with a clear and focused message, a host of applause lines and a stirring call to action.

She’s not running for president apparently because everyone assumes the nomination is Clinton’s. But everyone was making that same assumption eight years ago, and we know what happened. If the choice is between inspiration and inevitability, Warren may be forced to change her plans.

 

By: Eugene Robinson, Opinion Writer, The Washington Post, October 20, 2014

October 23, 2014 Posted by | Economic Inequality, Elizabeth Warren, Financial Reform | , , , , , , | 1 Comment

“Obama’s Other Success”: Dodd-Frank Financial Reform Is Working

Although the enemies of health reform will never admit it, the Affordable Care Act is looking more and more like a big success. Costs are coming in below predictions, while the number of uninsured Americans is dropping fast, especially in states that haven’t tried to sabotage the program. Obamacare is working.

But what about the administration’s other big push, financial reform? The Dodd-Frank reform bill has, if anything, received even worse press than Obamacare, derided by the right as anti-business and by the left as hopelessly inadequate. And like Obamacare, it’s certainly not the reform you would have devised in the absence of political constraints.

But also like Obamacare, financial reform is working a lot better than anyone listening to the news media would imagine. Let’s talk, in particular, about two important pieces of Dodd-Frank: creation of an agency protecting consumers from misleading or fraudulent financial sales pitches, and efforts to end “too big to fail.”

The decision to create a Consumer Financial Protection Bureau shouldn’t have been controversial, given what happened during the housing boom. As Edward M. Gramlich, a Federal Reserve official who warned prophetically of problems in subprime lending, asked, “Why are the most risky loan products sold to the least sophisticated borrowers?” He went on, “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” The need for more protection was obvious.

Of course, that obvious need didn’t stop the U.S. Chamber of Commerce, financial industry lobbyists and conservative groups from going all out in an effort to prevent the bureau’s creation or at least stop it from doing its job, spending more than $1.3 billion in the process. Republicans in Congress dutifully served the industry’s interests, notably by trying to prevent President Obama from appointing a permanent director. And the question was whether all that opposition would hobble the new bureau and make it ineffective.

At this point, however, all accounts indicate that the bureau is in fact doing its job, and well — well enough to inspire continuing fury among bankers and their political allies. A recent case in point: The bureau is cracking down on billions in excessive overdraft fees.

Better consumer protection means fewer bad loans, and therefore a reduced risk of financial crisis. But what happens if a crisis occurs anyway?

The answer is that, as in 2008, the government will step in to keep the financial system functioning; nobody wants to take the risk of repeating the Great Depression.

But how do you rescue the banking system without rewarding bad behavior? In particular, rescues in times of crisis can give large financial players an unfair advantage: They can borrow cheaply in normal times, because everyone knows that they are “too big to fail” and will be bailed out if things go wrong.

The answer is that the government should seize troubled institutions when it bails them out, so that they can be kept running without rewarding stockholders or bondholders who don’t need rescue. In 2008 and 2009, however, it wasn’t clear that the Treasury Department had the necessary legal authority to do that. So Dodd-Frank filled that gap, giving regulators Ordinary Liquidation Authority, also known as resolution authority, so that in the next crisis we can save “systemically important” banks and other institutions without bailing out the bankers.

Bankers, of course, hate this idea; and Republican leaders like Mitch McConnell tried to help their friends with the Orwellian claim that resolution authority was actually a gift to Wall Street, a form of corporate welfare, because it would grease the skids for future bailouts.

But Wall Street knew better. As Mike Konczal of the Roosevelt Institute points out, if being labeled systemically important were actually corporate welfare, institutions would welcome the designation; in fact, they have fought it tooth and nail. And a new study from the Government Accountability Office shows that while large banks were able to borrow more cheaply than small banks before financial reform passed, that advantage has now essentially disappeared. To some extent this may reflect generally calmer markets, but the study nonetheless suggests that reform has done at least part of what it was supposed to do.

Did reform go far enough? No. In particular, while banks are being forced to hold more capital, a key force for stability, they really should be holding much more. But Wall Street and its allies wouldn’t be screaming so loudly, and spending so much money in an effort to gut the law, if it weren’t an important step in the right direction. For all its limitations, financial reform is a success story.

 

By: Paul Krugman, Op-Ed Columnist, The New York Times, August 3, 2014

August 4, 2014 Posted by | Big Banks, Dodd-Frank, Financial Reform | , , , , , , | Leave a comment

“Taking On Too Big To Fail”: Financial Reform Is About To Catch A Second Wind And Elizabeth Warren Is Ready To Ride It

Financial reformers seeking new rules beyond the range of the Dodd-Frank law haven’t had much to cheer about this year. The chances of Congress passing new regulations—OK, passing anything—look bleak, and the Obama Administration wants to simply finish implementing the last set of reforms. But reformers are playing a longer game, biding their time until the conditions are ripe for a dam burst. That could happen sooner than you think. High-profile champions for reform are gradually bending regulators to their will, and a pile-up of big bank abuses have eroded Wall Street’s reputation in Washington. Most importantly, a new report detailing the extraordinary largesse granted banks during the financial crisis, and questioning whether Dodd-Frank would prevent a rerun, could set off a fresh spark.

An unlikely bipartisan duo, Senators Sherrod Brown and David Vitter, have tried all year to focus attention in Congress on ending “too big to fail,” the perception that large financial institutions will inevitably receive government bailouts if they run into trouble. This allows banks to take on outsized risks with implicit government support, and receive a de facto subsidy, with lower borrowing costs than their smaller competitors, because investors believe a backstopped institution will always pay them back. Brown and Vitter introduced legislation earlier this year to significantly raise capital requirements, which they say will reduce reliance on bailouts by forcing banks to pay for their own losses.

Brown and Vitter commissioned a study from the Government Accountability Office (GAO) to quantify the public subsidy bestowed on banks, which could give them powerful evidence to rally support for their legislation. GAO released the first part of the study last week. It mostly looks backward at the “extraordinary support” given to banks from 2007-2009 to weather the financial crisis, and whether the Dodd-Frank financial reform law ended this tendency toward bailouts. The more controversial part of the study, on how much the government subsidizes big banks considered too big to fail, isn’t due until next year.

But the report still contains some explosive material. It details how banks received trillions of dollars in capital injections, emergency lending and debt guarantees during the financial crisis, offered with more favorable terms than they could have found in the private market, and secured by junk collateral that non-government lenders would never accept. Some debt guarantees given by government agencies to banks were up to 10 percent cheaper than private alternatives, saving the banks billions of dollars. Banks with over $50 billion in assets used the crisis-era programs nearly twice as much as their smaller counterparts. Outside of the broadly available emergency programs, JPMorgan Chase received a $30 billion loan from the New York Federal Reserve (then run by Timothy Geithner) for its purchase of Bear Stearns, and both Citigroup and Bank of America received special direct assistance of $20 billion each. According to a summary released by Brown and Vitter, those three banks, the U.S.’s largest, would have been insolvent without the government support provided during the crisis. Since the biggest banks are even bigger today (the report states that the nation’s four largest banks are $2 trillion larger than they were in 2007), it’s hard to believe that similar support wouldn’t be granted if needed.

Dodd-Frank’s architects claim the law would prevent future bailouts. At least some of the market is convinced it would; the rating agency Moody’s downgraded the debt of major U.S. banks last week, after determining they would not have the advantage of future government support in a crisis (it’s worth noting that rating agencies receive the majority of their funding through the structured finance deals of these same big banks). But the GAO report concludes that Dodd-Frank “implementation is incomplete and the effectiveness of some provisions remains uncertain.”

The best example of this is the Federal Reserve’s Section 13(3) authority, a primary vehicle for emergency lending during the crisis. Dodd-Frank prevents the Federal Reserve from using section 13(3) to assist an individual institution, restricts even broad-based 13(3) programs from lending to insolvent firms, and adds other requirements and limitations. But the Fed has not written any 13(3) regulations yet, nor has it set any time frames for doing so. GAO recommended that the Fed establish a timeline for drafting 13(3) procedures, and the board accepted that recommendation.

The report comes at an interesting moment. Readers of this magazine may have heard of a certain Massachusetts senator named Elizabeth Warren. She has also taken on too big to fail, as an antecedent to her agenda of building an economy that works for ordinary Americans, rather than using them as giant wealth-extraction machines. And Warren has something Brown and Vitter don’t—a national platform, with the ability to shape and transform the national debate. She has already used this power to provoke incremental changes, mostly because regulators would rather be on her side than in her crosshairs. Nobody is better positioned to put this new set of facts from the GAO to use than the Warren wing of the Democratic Party.

To see this attitude change in real time, simply review the Senate Banking Committee confirmation hearings for Janet Yellen, nominated to take over the chair of the Federal Reserve. In 2009, Ben Bernanke sought confirmation for the same position, and when he was questioned about the Fed’s failures in financial regulation before the crisis, he vociferously defended the institution’s actions. Yellen, right in her opening statement, added financial regulation to the Fed’s core responsibilities, along with full employment and price stability—a huge shift. During questioning from Warren, Yellen agreed that the Board of Governors should reinstate regular principals meetings on financial supervision for the first time in 20 years, instead of relegating the decision-making to the staff level.

 

By: David Dayen, The New Republic, November 21, 2013

November 25, 2013 Posted by | Big Banks, Financial Reform | , , , , , , , | 2 Comments

“The Sentiment Is Swinging”: Unanimous Senate Vote Bolsters Movement To Break Up Big Banks

It’s nearly impossible to get 99 U.S. senators to agree on anything.

But this past weekend, 99 senators agreed to send a non-binding message that the $83 billion subsidy “too big to fail” banks get from the government needs to end. The measure was co-sponsored by senators Sherrod Brown (D-OH) and David Vitter (R-LA).

The implicit subsidy first came to light in February when a Bloomberg News report found that “recurrent bailouts of the largest financial institutions have given [big banks] a unique advantage: They get a break on their borrowing costs, because creditors expect taxpayers to support them whenever they get into trouble.”

Shortly thereafter, Attorney General Eric Holder made the shocking admission that the Justice Department exercises restraint in prosecuting big banks for fear of shocking the global financial system.

“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy,” Holder said, during testimony to the Senate Banking Committee.

Now all of the Senate’s Republicans have joined with senators Brown and Elizabeth Warren (D-MA) — who have long warned of the big banks’ continued ability to wreck havoc on the economy — to call for an end to the implicit subsidy.

“I’m glad that Republicans and Democrats can agree: ‘Too big to fail’ needs to end, and these big-bank subsidies make no sense,” Senator Warren said.

Bank lobbyists have denied that the subsidy exists. But as a Bloomberg editorial notes, they’ve rejected any steps that would prevent the government from having to serve as their backstop in case of a crisis.

“If big banks don’t get a subsidy on their debt, it’s hard to understand why they’re so adamantly opposed to measures, such as increased capital requirements, that would put a limit on their borrowing,” the editors noted. “Large banks commonly borrow $25 or more for each $1 in equity — or capital — they get from their shareholders, compared with less than 50 cents per $1 of equity for the average U.S. corporation.”

Financial reform following the financial crisis was weakened by bank lobbying. As Senator Dick Durbin (D-IL) noted at the time, the “banks own the place.” And by “the place,” he meant Congress.

This vote shows the sentiment is swinging against the banks. Whether senators are willing to vote against them when actual legislation is on the line still remains to be seen.

 

By: Jason Sattler, The National Memo, March 25, 2013

March 26, 2013 Posted by | Banks, Financial Reform | , , , , , , , | 1 Comment

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