“Keeping Regulation At Bay”: One More Step Toward The Next Meltdown
The delaying tactics we told you about nearly two years ago have worked beautifully. The bailout worked (if not for homeowners, at least for the banks). It worked so well that the underlying problems that led to the financial crisis have remained largely ignored.
The regulations that have been written (and continue to languish during their extended comment period) are on their way to being eliminated or weakened yet again by Congress. The House helped out this week by passing a bill (HR 4413) that ensures that if any regulations do get approved, they will be difficult to enforce.
As we reported back in 2012, JPMorgan Chase in London managed to avoid examination and enforcement by the Commodities Futures Trading Commission simply by labeling their massive speculation in credit default swaps as “portfolio hedging.” It was a loophole big enough for a whale to swim through.
Another loophole made enormous by HR 4413 is the cutoff separating “end users” from “swap dealers.” In the CFTC draft regulations written after Dodd-Frank initiated oversight on the swap business, any market player with more than $100 million in swaps per year was considered a dealer, and subject to stricter oversight and capital requirements.
After the industry complained, the CFTC agreed to delay that stronger oversight for two years and put in a temporary $8 billion cap that was due to drop to $100 million later this year. The bill that passed the House makes that $8 billion cap permanent. Now any firm that wants to do $100 billion in business without regulation has the option to create 13 separate companies.
From the point of view of the people who profit from the lack of regulation, streamlining the lack of oversight is financially sound. After all, real estate values in waterfront Greenwich estates, the Hamptons, and even Park Avenue will likely suffer if bankers and hedge fund managers make less money.
For those who trade in opaque markets, profits are maximized when some participants have information that their customers and competitors don’t have. An open market with published prices and capital reserves would limit profits and return on equity. Complying with regulations and keeping records available for supervisory review costs money. It all cuts into profits.
And if profits get squeezed by an overbearing, overregulating government, how can a valuable part of our capital markets survive? It’s not cheap, after all, to employ the people needed to execute this business that virtually no one understands and that the government doesn’t want to regulate.
Remember when AIG Financial Products blew up? Even though there were traders, accountants, clerks, lawyers and others from Lehman who found themselves jobless, the Treasury Department decided to pay more than a million dollars in bonus payments to each of the valuable AIG employees that had bet so big, and so badly.
Thankfully, the lobbyists hired by the industry have figured out how to keep the business profitable, and how to turn the task of complying with new regulations into a potential new profit center. They helped incorporate a brilliant strategy into HR 4413, and got 265 members of the House to vote for it.
The CFTC will be required to create and publish cost-benefit studies prior to adopting new compliance policies, and those studies will be subject to judicial review. That will take some time. After the CFTC rules go into effect, market participants will be free to argue that the cost estimates were inaccurate. Because the studies are subject to judicial review, the companies being regulated can theoretically get the government to pay them for any additional costs they incur when complying. With a little creative accounting, maybe the swap dealers will turn a profit on compliance departments.
While the delaying tactics written into the bill keep regulation at bay, trading in credit default swaps will continue as it has, with the risks it has, here and abroad. Over half of the hundreds of trillions of dollars in swaps on the books of our banks belong to foreign subsidiaries. A condition of the new bill requires the CFTC and the SEC to certify that derivatives regulations are not already in place in those foreign jurisdictions before they become subject to the new “regulations.” All a bank or hedge fund needs to do is dispute the nature of existing derivatives regulations in their legal places of business overseas, and any oversight can come to a grinding halt while they all work it out. In the meantime, they can enter into lots of credit default swap contracts.
Perhaps the most brilliant part of HR 4413 is hidden in the budget. The congressionally mandated increased workload has no accompanying increase in the commission’s budget. It won’t be easy to run thousands of legal and economic analyses without the people to do it or the money to hire them.
Speaking of people, the bill passed in the House also peculiarly reinvents the org chart. Key regulatory and enforcement personnel currently report directly to the commissioner of the CFTC, but under the new law, those people would instead report to five different members of the commission. Hiring, firing, and departmental budgeting will be decided by all five members together.
Have you ever reported to five bosses at the same time? I did, for about a year, and it’s nearly impossible to get anything done.
By the way, in case you thought our government didn’t have a sense of humor, Congress tells us we can call HR 4413 the “Customer Protection and End User Relief Act.”
Correction: The “hundreds of trillions of dollars” figure cited in the 12th paragraph refers to all swaps, not just credit default swaps as this post originally stated.
By: Howard Hill, Former Investment Banker, The National Memo, June 27, 2014
“GOP Chases Fake IRS Scandal, But Makes The Real One Worse”: Republicans Need Look No Further Than Their Own Budget Proposals
With the exception of the 2012 Benghazi attacks, no Obama-era controversy has animated Republican imaginations quite like the one surrounding the Internal Revenue Service.
Congressional Republicans’ version of the scandal originally went like this: President Obama ordered the IRS to target right-wing organizations applying for tax-exempt status as non-political “social welfare” groups, leading the agency to harass those on the president’s Nixonian enemies list.
It turns out that none of that ever happened; the IRS targeted liberal groups as well as conservative ones, not a single Tea Party group was denied tax-exempt status (despite overwhelming evidence that many of them were engaged in political activity), and no evidence ever emerged that the White House was involved in any of it. Still, that hasn’t stopped Republicans from escalating the “scandal” in increasingly ridiculous ways.
The current outrage centers around the IRS’ claim that thousands of former IRS official Lois Lerner’s emails were lost when her computer crashed in 2011. Although evidence and logic suggest that this was not part of a massive cover-up, Senator Ted Cruz (R-TX) is threatening to impeach Attorney General Eric Holder unless he appoints a special prosecutor to investigate it, and Reps. Louie Gohmert (R-TX) and Bill Flores (R-TX) have introduced a bill promising a $1 million bounty to anyone who can restore the lost emails, while threatening to cut the salaries of IRS employees by 20 percent unless the emails are recovered.
As it happens, Republicans have already hammered IRS employees with cuts since they took control of the House of Representatives in 2011 — and they didn’t even need a “Nixonian” “scandal” to do so.
In a report released Wednesday, the Center on Budget and Policy Priorities illustrates just how badly Congress has constrained the IRS’ ability to do its job. Due to a combination of discretionary budget cuts and sequestration, the IRS has been left with an $11.3 billion budget for 2014. That’s $840 million lower than it was in 2010, amounting to a 14 percent cut when accounting for inflation.
As a result of the cuts, the IRS has been forced to reduce its workforce by 11 percent since 2010, even as the agency’s workload has substantially increased (for example, in addition to the IRS’ new campaign finance responsibilities, CBPP notes that the number of individual tax returns has grown by 1.5 million annually over the past decade).
Furthermore, even as the IRS’ remaining workers have been forced to take on more responsibility, the agency’s training budget has been slashed by an astonishing 87 percent between 2010 and 2013, the most recent year with available data. If Congress wants to know why the IRS struggled so badly at sorting out the glut of groups that applied for tax exemption, there is your answer.
President Obama’s 2015 budget would reverse the rapid slide in the IRS’ funding; it would increase the agency’s budget by $1.2 billion from this year’s level, returning it to roughly its 2010 level (before adjusting for inflation).
The House appropriations subcommittee wants to go further in the other direction, however; it has proposed cutting IRS funding by yet another $340 billion. This is especially illogical considering the GOP majority’s supposed desire to limit the budget deficit. According to the Treasury Department, each $1 spent on the IRS budget yields $4 of revenue.
“Policymakers should give the IRS sufficient resources to carry out its mission,” the CBPP paper concludes. “In particular, policymakers who profess to be concerned or even alarmed about the nation’s current or future fiscal course should provide the IRS with the funding it needs to administer the nation’s tax laws and collect taxes due under the laws of the land.”
CBPP is not the first to sound the alarm over the IRS’ lack of funding; The National Memo’s David Cay Johnston made a similar argument in 2013, at the height of the “targeting” controversy.
Republicans are clearly desperate to uncover a real scandal at the IRS. But if they really want to improve things at the much-maligned agency, they need look no further than their own budget proposals.
By: Henry Decker, The National memo, June 27, 2014
“The Fight To Protect Voting Rights, One Year Later”: The Key Barrier Is Finding Republican Support
As of yesterday, it’s been exactly a year since conservatives on the Supreme Court, in a 5-4 ruling, gutted the Voting Rights Act. The ruling, however, was open-ended in a way – the Republican-appointed justices didn’t say which part of the Constitution the VRA violated, and it invited Congress to “fix” the law (though the justices didn’t say how).
With this in mind, a bipartisan and bicameral group of lawmakers got to work, and in January they unveiled the Voting Rights Amendment Act, a reform bill intended to address the Supreme Court’s concerns. Zachary Roth reported yesterday that proponents haven’t given up the fight.
Civil rights advocates pressed lawmakers Wednesday at a contentious Senate hearing to advance a bill that would strengthen the Voting Rights Act, saying a failure to do so would represent a historic betrayal of African-American aspirations for political equality. But Republicans appeared unmoved.
“If the Voting Rights Act is not modernized, then you are effectively ending the second Reconstruction of the United States,” Rev. Francys Johnson, the president of the Georgia NAACP, told members of the Senate Judiciary Committee.
At this point, the key barrier is finding Republican support. When Congress last considered the VRA, support for the law was nearly unanimous – and in the Senate, it was literally unanimous – but in the wake of the high court ruling, GOP support has evaporated. Indeed, as Roth’s report noted, at yesterday’s hearing, the Republican senators and the conservatives witnesses “acknowledged that race bias in voting still exists”; they just don’t intend to support any new measures to prevent voting discrimination.
As of this afternoon, the Voting Rights Amendment Act has zero Republican co-sponsors.
All of which leads us to a gentleman by the name of Thad Cochran.
Cochran, of course, is the senior senator from Mississippi, and just this week, he survived a very competitive Republican primary thanks in large part to support from African-American Democrats who saw the incumbent’s challenger as vastly more offensive.
I suggested yesterday that Cochran, as a gesture of goodwill and gratitude, can repay the favor by – you guessed it – throwing his support to the new Voting Rights Act. He’d already voted for the old one so it’s really a fairly modest request.
I’m hardly the only one who thought of this.
In an interview with HuffPost Live, Derrick Johnson, president of the Mississippi NAACP, said that Cochran could thank black voters by supporting efforts to re-establish protections in the Voting Rights Act that the Supreme Court struck down last year.
“Our advocacy towards his office is to support amending the Voting Rights Act, free of any conditions such as voter ID,” Johnson said. “I think this is an opportunity for him to show some reciprocity for African-Americans providing a strong level of support for him.”
The editorial board of the New York Times is on board, too.
The prospect of electing an intemperate Tea Party candidate who was openly nostalgic for Confederate days was so repellent to many black voters in Mississippi that they did a remarkable thing on Tuesday, crossing party lines to help give the Republican Senate nomination to Thad Cochran, in office for 36 years. Now it’s time for Mr. Cochran to return the favor by supporting a stronger Voting Rights Act and actively working to reduce his party’s extreme antigovernment policies.
Not to put too fine a point on this, but Cochran is positioned to keep his job because black voters showed up to save his skin. Why not return the favor by showing some leadership on voting rights?
In practical terms, Cochran’s support wouldn’t necessary help get the bill passed into law – House Republicans will almost certainly kill the Voting Rights Amendment Act anyway – so there’s no real harm in the senator doing the right thing.
By: Steve Benen, The Maddow Blog, June 26, 2014
“A Galloping Conservative Radicalism”: If Republicans Want Respect, They Need To Stop Using The Budget As A Weapon
One of the central provisions of the Dodd-Frank financial reform package was the creation of the Consumer Financial Protection Bureau, which is charged with preventing banks and other financial institutions from preying on vulnerable consumers. Republicans hate the CFPB, and have taken to complaining about its funding stream, which comes from the Federal Reserve rather than the normal budgeting process.
They have a point, but they have only themselves to blame, since the GOP has all but relinquished its claim to responsible oversight by using the budget to cripple laws it doesn’t like.
This steaming Washington Examiner editorial lambasting Reps. Maxine Waters (D-Calif.) and Al Green (D-Texas) is a helpful distillation of the GOP position:
Simply put, Waters and Green view the congressional appropriations process as an obstacle to doing things they judge to be good, rather than as a tool by which the American people make sure the executive branch properly enforces the laws they instructed Congress to approve. This is how a democratic republic functions. Do Waters and Green think other agencies — say, the IRS, NSA, the Department of Homeland Security or perhaps the FBI — should be similarly unaccountable to the people’s representatives?
And what will they do when, having freed the bureaucrats of congressional shackles, they find a Republican president using the CFPB in nefarious ways, with Congress powerless to intervene? [Washington Examiner]
I have some sympathy with this perspective. Putting the CFPB outside the normal budget does reduce its democratic accountability. And the agency hasn’t been covering itself with glory of late; a recent report from American Banker found systematic discrimination in hiring and promotion. It’s plausible that more oversight could have prevented that.
But the problem is that conservatives obviously aren’t concerned about whether taxpayers are getting a good deal. They want to cut the bejesus out of the agency’s funding, even if it means inviting another financial crisis. The GOP budget from earlier this year zeroed out CFPB funding after 2016. Republicans claimed they wouldn’t get rid of it altogether, but given the GOP’s animosity toward pro-consumer regulations, or any programs that benefit the non-rich, it’s easy to suspect that they are trying to quietly axe the agency.
The truth is that the strongest possible oversight authority over the CFPB — the power of life and death — is still firmly in Congress’ hands. The legislature created the agency, and it may destroy it. The trouble is that Republicans don’t have enough votes to destroy the CFPB. They don’t even have a majority in the Senate, never mind enough votes to override a guaranteed veto from President Obama.
By dividing government, the Constitution forces parties into compromise. For a normal partisan with a basic commitment to the norms of American democracy, the idea is to hammer out compromises with the other side until you are in a position to enact a suite of policies. You can’t get everything, but you can get half a loaf here and there. Then, when you get the rare chance at controlling both Congress and the presidency, you pass a big policy suite, and hope people like it enough that it sticks.
That’s a reasonably fair description of how Democrats behaved from 2006 to 2010.
But Republicans have abandoned this set of norms in favor of an enraged constitutional hardball. Under this model, when you don’t have enough votes to pass your agenda, you use every procedural tactic at your disposal to force the other side to embrace it. At the extreme, this includes threatening grievous damage to the nation, by deliberately defaulting on the debt or shutting down the government. Additionally, since what passes for Republican policy is simply repealing laws or privatizing huge swathes of the government, starving agencies for funds is a nice way to accomplish that goal on the sly.
Republicans have eased up on the government-by-hostage-crisis of late, but this behavior is what inspires Democrats to do an end-run around the budget process. Since they can’t trust Republicans to not use the budget process as part of the policy proxy war, there’s a constant search for ways to protect critical agencies from procedural extremism.
It’s not a great situation. But because our poorly designed institutions have collided with a galloping conservative radicalism, it is going to be a more common one.
By: Ryan Cooper, National Correspondent at TheWeek.com, June 24, 2014
“Still Looking For Attention”: Darrell Issa’s Flailing Search For His White Whale
Congressional oversight of any administration is important and worthwhile. Indeed, it’s a critical part of the American system to have institutional checks and balances. Lawmakers have a duty to watch the White House and ask tough questions when potential controversies arise.
That said, this was just embarrassing.
Representative Darrell Issa of California, the Republican who is leading one of the investigations into the Internal Revenue Service’s scrutiny of Tea Party groups, accused the I.R.S. commissioner on Monday of lying, an allegation that only deepened the partisan mistrust about the motivations behind the numerous congressional inquiries into the matter.
The hearing on Monday night, before the House Oversight Committee, was the second time in four days in which the commissioner, John Koskinen, was called to Capitol Hill to explain what had happened with the emails.
These questions have already been asked and answered, and there’s simply no evidence of wrongdoing. The IRS won’t apologize for the incident because, in this case, agency officials really haven’t done anything wrong – a fact congressional Republicans seem to recognize but choose to ignore.
But what made last night’s hearing an unusually sad display was, well, just about everything.
Consider for example the fact that it was an evening hearing, which is quite unusual on Capitol Hill. Last week, the House Ways and Means Committee and its chairman, Rep. Dave Camp (R-Mich.), demanded the IRS’s John Koskinen testify on the emails. The relevant people checked calendars and picked a date: the hearing would be the morning of Tuesday, June 24 (today).
Issa, seeing the opportunity for a tantrum, literally 10 minutes later, announced he would hold a hearing with Koskinen about the emails on the evening of Monday, June 23. Why? Because Issa wanted to be first. It just made him feel better.
But Koskinen rechecked his schedule and told Ways and Means he had an opening on Friday, June 20, so they held the hearing then – leaving poor Issa to hold a redundant, evening hearing, asking the same questions of the same official about the same story, three days later.
In other words, Issa, still looking for attention and some semblance of a “scandal” that fell apart a year ago this week, is still hunting for his white whale – except he’s not doing it very well.
It’s become increasingly difficult to take the “controversy” seriously because there’s so little meat on the bones. Yes, it’s understandable to raise questions when computers crash and documents are no longer available, but there’s literally nothing to suggest the missing emails would have been remotely interesting. GOP lawmakers are on a fishing expedition, starting with an answer – there must be some wrongdoing, somewhere, from someone – and then working backwards in the hopes of justifying the agreed-upon conclusion.
Consider what we’ve seen for over a year: Republicans demand information, which the administration supplies, and which shows no conspiracy, no cover-up, and no crime. So Republicans demand different information, which the administration also supplies, and which again shows no conspiracy, no cover-up, and no crime.
Which in turn leads Republicans to ask for still more information. In this case, those materials are no longer available, leading the right and some lazy pundits to declare, “A ha!”
This is silly and no way to conduct credible oversight. In my heart of hearts, I strongly suspect Republicans know this, but just don’t care – this is about election-year tactics, mobilizing the GOP’s far-right base, creating fundraising opportunities, and giving conservative media something to talk about.
In reality, though, there’s still nothing here.
Now, John Dickerson argues that the IRS should be better at record-keeping, especially since the tax agency expects much from taxpayers. It’s a fair point. That said, it’s also unrelated to what Republicans care about – the obsession is about politics, not governance – and as Thomas Mann has explained, we’re talking about an agency that “has serious problems, many arising from vast new responsibilities (e.g. the ACA), inadequate resources, and low staff morale in the face of widespread hostility in Congress to the very idea of an Internal Revenue Service.”
If congressional Republicans want to have a mature conversation about how to improve the IRS, that’d be a worthwhile exercise. But by all appearances, the opportunities for mature conversations with GOP lawmakers are far and few between these days.
By: Steve Benen, The Madow Blog, June 24, 2014
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