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Financial Reform Legislation Archive

June 30, 2010

Around the Web: Volcker Rules – Not!

Filed under: Around the Web, Financial Reform Legislation, Martin Column, Paul Volcker, President Barack Obama — admin @ 10:54 pm

Until the morning of January 21, 82-year-old former Federal Reserve president Paul Volcker had been a lonely and largely ignored figure among President Obama’s economic advisers.

Volcker seemed to be the only one of Obama’s advisers not under the spell of the “too big to fail banks” and their highly touted innovations.

Volcker was especially vocal about protecting the public from the financial world’s riskier innovations. As he told a financial conference last year, “Riskier financial activities should be limited to hedge funds to whom society could say: ‘If you fail, fail. I’m not going to help you. Your stock is gone, creditors are at risk, but no one else is affected.’ ”

It was Volcker who had said that the only financial innovation to benefit consumers in the last 20 years was the ATM card.

But he wasn’t getting much traction with the president and his advisers.

Then the Democrats lost Ted Kennedy’s Senate seat.

In a lurch back toward the populism he had embraced during his campaign, President Obama hastily reached out for Volcker.

During a press conference, the president endorsed something he called the Volcker rule as an essential plank of his financial reform plan. That rule would restrict banks from risky proprietary trades with their own (borrowed) money.

Here’s what the president said:

“Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  If financial firms want to trade for profit, that’s something they’re free to do.  Indeed, doing so –- responsibly –- is a good thing for the markets and the economy.  But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”

For a more on proprietary trading and the Volcker rule, read this from Rortybomb’s Mike Konczal and the NYT. For more about why the Volcker rule was a good idea, see this from WSJ’s Dealbreaker.

Obama mentioned the Volcker Rule a couple more times, as did the man who was marshaling financial reform through the House, Rep. Barney Frank.

But neither the president nor anybody else in the Democratic leadership ever mounted a public campaign to make it an essential part of reform. In fact, within a month, the president was already backing off his support of the Volcker rule.

And now, like many other parts of the reform that would have protected consumers and inconvenienced banks, it has been largely gutted.

Bloomberg reports “lobbying by banks and congressmen sympathetic to Wall Street’s views, as well as some administration members in the banks’ defense, trampled the views of Volcker and others who favored a stronger proposal.”

The weaker provisions won’t even go into effect for as many as 12 years.

It would have been one thing for Obama and the Democrats to go down swinging on the Volcker Rule. But they didn’t even put up much of a fight.

If you’re as disappointed as I am with the president’s lack of leadership on this, after he made such a big deal about it, why not let him know?

June 29, 2010

Bombing Ants in the Sausage Factory

Filed under: Financial Reform Legislation, Martin Column, TARP — admin @ 7:39 pm

The only aspect of the financial reform legislation that’s truly strong is the level of rhetorical nonsense that both parties have unleashed around it: Democrats and the media exaggerate when they praise it as “the toughest financial overhaul since the Great Depression.”

Not to be outdone, the Republican House minority leader, John Boehner, has weighed in, describing the proposal as a nuclear weapon being used to kill an ant.

Which would make the financial crisis the ant, I guess.

On Tuesday, the nuclear bomb had to go back to the, uh, sausage factory, for some more grinding after Sen. Robert Byrd’s death and the defection of a former Republican reform supporter left the Dems with less than the 60 votes they need to overcome the wall of Republican opposition.

One of the few chinks in that wall had been Sen. Scott Brown. But Brown balked after a $20 billion tax on hedge funds and banks was inserted into the legislation to pay for the costs of modest additional regulation. The Republican senator from Massachusetts said he opposed placing a greater burden on financial institutions and he feared the costs of the tax would be passed on to consumers. So the reform proposal is headed back to the conference committee.

Let’s be clear: overheated and mangled rhetoric aside, the financial reform proposal does nothing to reduce the risk posed by our “too-big to fail” banks or to prevent another crisis. The proposal leaves much of the details to regulators subject to lobbying by the very institutions they’re supposed to oversee.

Now legislators think they’ve found a better bet to fund their reform: you!

According to the New York Times, they’re considering ending the Troubled Asset Relief Program early and diverting about $11 billion in taxpayer funds.

The Times observed this leaves legislators with a couple of awkward choices. “So,” the Times concludes, “the choice becomes a tax that might be passed along to consumers, or a charge directly to American taxpayers.”

Is this the best they can do? I’m increasingly sympathetic to Sen. Russ Feingold, the Wisconsin Democrat who is bucking his president and party, opposing reform because it doesn’t get the job done.

I would suggest that Boehner got it wrong, that the ant[s] are not the financial crisis; they’re the legislators scrambling around serving the banks’ interests when they’re supposed to be serving ours.

But that would give ants a bad name.

June 25, 2010

Around the Web: Landmark or Pit Stop?

Filed under: Around the Web, Executive Pay, Financial Reform Legislation, Martin Column — admin @ 8:43 pm

I understand why people feel the need to tout the historical significance of the financial reform package that passed the conference committee. The president needs it politically and those who support him want to give him credit for getting anything at all in the face of the onslaught of bank lobbyists. Lots of folks worked very hard against tremendous odds to get something passed.

But I think a more sober analysis shows that what’s been achieved is pretty modest. It hands over many crucial details to the same regulators who oversaw our financial debacle.

Summing up, Bloomberg reports: “Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.”

Zach Carter characterizes it as a good first step. The Roosevelt Institute’s Robert Johnson writes: “This first round was not the whole fight. It was the wake-up call and the beginning of the fight. Rest up and get ready. There is so much more to do.”

The question is when we’ll get the chance to take the additional steps that are needed. The public is skeptical that the new rules will prevent another crisis, according to this AP poll. The Big Picture’s Barry Ritholtz grades the various aspects of the reform effort. Overall grade? C-. Top marks go to the new minimum mortgage underwriting standards. But legislators get failing grades for leaving four critical issues on the table: “to big to fail banks,” bank leverage, credit rating agencies and corporate pay.

Ritholtz saves some of his harshest evaluation for the proposal to house the new consumer protection agency inside the Federal Reserve, which he finds “beyond idiotic.”

June 22, 2010

Soldiers Lose Out to Yo-Yos

Filed under: Consumer Financial Protection Agency, Financial Reform Legislation, Martin Column — admin @ 9:24 pm

Here’s a snapshot that puts into sharp focus where we are politically this summer:

In a showdown between the U.S. military and the nation’s car dealers over protecting soldiers from predatory lending, the car dealers won.

Even though the commander-in-chief said he wanted the fighting men and women to be shielded by the proposed new consumer protection agency when they went to get a car loan, congressional Democrats Tuesday sided with the car dealers, who would prefer not to face any additional regulation, thank you very much.

After all, they argue, we didn’t cause the financial meltdown, so leave us alone.  But according to the Better Business Bureau, new car dealers rank fifth in complaints about lending practices.  Used car dealers do a little better; they rank seventh.

The military says its soldiers, focused as they should be on other matters, are particularly vulnerable to predatory lending.

Rosemary Shahan, president of a Sacramento-based nonprofit, Consumers For Auto Reliability and Safety, told the Chicago Tribune that auto dealers pack financing contracts with costly items such as extended warranties and insurance to cover loan payments if the vehicle is wrecked.

One of the more obnoxious forms of predatory lending is something called a yoyo loan. The buyer is told they can drive the car off the lot with a deal they can’t refuse – subject to loan approval. Then the dealer calls back and tells the buyer the initial loan wasn’t approved but they can have the vehicle at a higher interest rate.

The car dealers argue that they’re already subject to other forms of regulation. But they also have other means of persuasion: the National Association of Auto Dealers is among the elite top 20 campaign contributors since 1989, according to the Center For Responsive Politics, with more than $25 million in contributions. During 2009 and the first quarter of 2010, the National Automobile Dealers Association and another group that represents foreign-car franchises, the American International Automobile Dealers Association spent almost $3.5 million to lobby on financial reform and other issues, the Center For Public Integrity reported.

Call President Obama and let him know we need him on the front lines in the battle against predatory lending.

June 2, 2010

Consumer Protection, Fed Style

Filed under: Action, Federal Reserve, Financial Reform Legislation, Martin Column — admin @ 5:53 pm

One of the big unsettled issues for the congressional conference committee considering financial reform is whether to create an independent financial consumer protection agency.

That’s what the House bill does. The argument for an independent agency is that consumers need a strong advocate in the financial marketplace.

The Senate decided that an independent consumer financial watchdog wasn’t needed, and that the consumer financial protector should live in, of all places, the Federal Reserve. After all, the Fed already has responsibilities to “implement major laws concerning consumer credit.” We all know how well that worked out.

The problem is that the Fed has functioned as a protector of the big banks, never more so than since the big bank bailout and in the battle over financial reform.

Despite promises for greater transparency, the Fed has repeatedly resisted attempts to get it to disclose all the favors it’s done for financial institutions since the bailout. If the Fed had put up half the fight against bank secrecy that it’s waged on behalf of bank secrets, consumers would never have been subjected to all those lousy subprime loans.

It is telling that no actual consumers or consumer organizations actually think that housing consumer protection inside the Fed is a good idea. Who does? The big banks and the Fed.

For those who still need convincing that a Fed-housed consumer protection agency is a bad idea, the Fed has provided a more recent example of what it means by consumer protection.

Last month it unveiled a database that’s supposed to help people choose the most appropriate credit card.

The database might be useful to professional researchers but provides little that would be of use to ordinary consumers. It presents the credit card statements by company but provides no other search functions, such as comparing credit cards by interest rates or fees.

Some of the presentation suggests that the information was dumped onto the Fed’s website without much thought. Bill Allison, who is editorial director of the Sunlight Foundation, a non-profit organization that digitizes government data and creates online tools to make it accessible to readers, said the following:

“I don’t think there’s anything wrong with posting it, but this is obviously not data you can search,” Allison told Bailout Sleuth.

He also pointed out that some of the agreements themselves aren’t particularly informative. He cited the entry for Barclays Bank Delaware, which notes that the bank may assess fees for late payments and returned checks. “The current amounts of such Account Fees are stated in the Supplement,” the agreement reads.

But that supplement is not contained in the Fed’s database. The Fed promises to go back and refine its database. But if they’re not devoting the resources to get this right now, with their ability to protect consumers under the microscope, do you really expect they’ll do better later?

An independent consumer protector is not simply some technicality to be bargained away. We’ve learned from the bubble and its aftermath that consumers need all the help they can get. Contact your congressperson and tell them you’re still paying attention to the reform fight. Check out your congressperson and see if they’re on the conference committee. If they are, your voice is especially important. While you’re at it, contact the president and remind him we won’t settle for any more watering down of financial reform.

May 20, 2010

The Top 10 Reasons Not to Call Your Senator Now

Filed under: Financial Reform Legislation, Martin Column — admin @ 5:57 pm

I’m in beautiful Glenwood Springs, Colorado with wife Stacie and dog Billie in front of the fireplace in the lobby of the historic Hotel Colorado, which Teddy Roosevelt used as his western White House. There’s the Roosevelt Suite on the second floor, leading out to the grand balcony from which he addressed the masses.  Pictures and cartoons of him line the hallways.

I wish our president was more inspired by TR. He tackled the economic powers of his day—the railroads—with tough regulation, using existing antitrust laws to bust them up. Our political leaders don’t have the stomach for tough regulations or antitrust crackdown on too-big-to-fail financial institutions, let alone insisting on accountability for those bankers and politicians whose greed and carelessness actually caused the crash.

There’s wireless Internet, in the lobby of the Hotel Colorado. Barely. It’s so slow that I imagine overworked employees at Google receiving my page request, then sifting through voluminous files to find the page, then ambling back to their desks, where they stuff it into a pneumatic tube to my Macbook.

We’ve been talking to people who are weathering the economic storm. One waitress told us tourists used to line up four-deep at local bars. They’re still at the bars, but they’re not coming in the crowds they used to. Not a biggie for her: She’s third-generation Coloradoan. People here are used to a boom-and-bust economy: There was a silver crash in 1893; nearly a hundred years later, Black Sunday, May 2, 1982, Exxon pulled out and took a big chunk of the state’s economy with it.  She says her people are ranchers and live within their means: They save, pay cash and know how to live lean, when they have to.

The battle over financial reform is hot and heavy in the U.S. Senate. Looks like the best we’re going to get out of this president and Congress is a series of baby steps—as “Baseline Scenario’s” Simon Johnson describes them—that leave the status quo in place. But even these baby steps are better than the alternative: giving the bankers and their lobbyists a complete victory.

Contact your senators. Tell them you’re paying attention to financial reform. You’re keeping track of how they vote. Tell them not to water down financial reform any more. Ask them to support the Merkley-Levin amendment, the Volcker rule and Sen. Blanche Lincoln’s derivatives reform plan.

Unless, of course, you believe the following top-ten reasons for apathy, in which case, do nothing, and things will stay exactly as they are now:

One. You like it when banks gouge you on credit card and bank fees.

Two. You think the poor banks have suffered enough.

Three. You believe the banks’ propaganda that new proposals to rein in credit card fees will cost them $5 billion and cause them to extend less credit.

Four. You believe that the Obama administration’s toothless foreclosure prevention program has been a whopping success.

Five. You’re convinced that banks do need to continue the secret high-risk trading that caused disaster for the economy.

Six. You agree with the bailed-out bankers that their bonuses are none of our business.

Seven. You agree with the Federal Reserve that their secret handouts to banks shouldn’t be any of your business.

Eight. You agree with the bankers that they can protect consumers’ interests just fine without interference from any regulators.

Nine. You agree that the bailout really did work well for Main Street as well as Wall Street.

Ten. You’re convinced Lehman Brothers and Washington Mutual did nothng wrong when they cooked their books to hide their bad loans from investors and the public.

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