Financial Reform: the Train That Passed Us By

June 24
Stan G. Duncan

The house and Senate have finally passed their legislation on financial reform and now the two bills are in the “reconciliation process. “ That’s where they hammer out the differences and produce a single bill that both houses will then have to pass. Some changes may be made, but we’re pretty clear by now what will be in the final bill and it isn’t pretty. All of you who were hoping that finally we had a tragedy large enough for government to act like adults and pass some meaningful reform will be disappointed.

What’s in it?

Here’s a run-through of some of the things in the new legislation:

First it calls for Banks to have more capital on hand to borrow against when making investments. It’s like when you borrow money for a house, the bank wants to know how much of your own money you have to put down. Similarly, banks should have a big stash of cash on hand when they borrow money in case the deal goes bad and they have to cover some of it with their own money. So the new bill requires that they have something in the range of 10 to 12 percent of what they are borrowing before they borrow. The good news is that they will now be required to have it. The bad news is that most economists have been recommending around twenty to thirty percent. Twelve percent collateral is what Lehman Brothers had on hand when it bellied up a couple of years ago. It’s a paltry, almost humorously small amount of collateral.

Second, it calls for stronger oversight of derivatives, especially “credit default swaps,” which have been described as essentially bets against the success of a business transaction. If two companies hook some kind of deal, other companies who are unrelated to the transaction can make bets on its success. If too many bets are made against it, it begins to look weak and investors will start pulling their money out and both the transaction and the company can go under. And all of the bystanders who made the bets on its failure get paid. Credit Default Swaps were one of the most insidious of the tools that nearly took down Wall Street and the world in 2008. So a new provision in the law, drawn up primarily by Sen. Blanche Lincoln of Arkansas is a good thing.
However, the Wall Street lobby monster has become a major player in the negotiations and at present liberals, conservatives, Republicans, and Democrats have been working very hard to “compromise” the provision down. And the Treasury and Obama Administration has shown no interest in tightening or enforcing the existing regulations against derivatives. God only knows why, but I have my suspicions.[1]

Third, the bill calls for “More transparency and disclosure.” Transparency is always good. It’s a common piece put in this kind of legislation. But it seldom does much in practice. There were clear rules for transparency put into the new regulations for corporate disclosure following the horrible Enron scandal of the early 2000s, but all it mean was that the Annual Reports disclosed the obscure, arcane, Byzantine deals and swindles in even denser language and smaller print.

What is not in it?

Missing from the bill are new anti-trust tools or strengthening of the old ones. And at this point the reconciliation conference looks likely to deny them the self-funding. The Commodity Futures Trading Commission (CFTC) and the Federal Deposit Insurance Commission (FDIC), for example, both collect a portion of their fees from the industry they should be regulating.

Another missing piece is any way for “winding down large global firms” (a line included in the bill). There is language in the bill saying this should happen, but no mechanism to make it a reality. Just how, exactly will the President or the US trade Representative go to Spain, whose Santander Bank just bought up the U.S. Sovereign Bank and say they ought to shrink the company. Actually there are ways that we could do that by capping the size of banks, splitting them up, and making smaller banks. Caps could also be placed on the size that foreign owners could expand their holdings here. That would address the “Too Big to Fail” problem. There’s something inherently unhealthy about the wealth of four or five firms on Wall Street being larger than the Gross Domestic Product of thirty or forty countries in the world. Senators Sherrod Brown and Ted Kaufman pulled yeo-person’s duty trying to get a mechanism for breaking up the behemoth banks, but the Treasury and White House pushed against them and ultimately language for the change was removed.[2]

The “BP Clause”: Finally, there’s provision the White House asked for that sounds eerily like it was designed with the BP disaster in the backs of their minds. According to economist Simon Johnson at MIT, the bill includes “principles for the financial sector to make a fair and substantial contribution towards paying for any burdens.”[3] That provision is absurd. I’m not convinced that BP will in the long run be able to make a “substantial contribution” to paying of the cataclysmic tragedy that is unfolding in the gulf. It would have been even more impossible—fundamentally impossible—for Wall Street financial institutions to have socked enough money aside to pay off the damage they have done to every country on the planet. Countries large, small, and middle stumbled; companies, families, farms, individuals everywhere were damaged. Schools, libraries, clinics, were closed in every country. Churches—who were often very precarious before—are failing now at an unprecedented rate. With their members out of work or living on reduced pay, their pledges have shrunk. In turn, they can’t make their donations to Seminaries and they are bleeding or closing. Many are merging to stay alive just a little while longer. What will all of this mean for the future of the church and theological education for our children? World Hunger organizations also, who were for generations a major recipient of donations from churches, are also closing, merging, or shrinking. Think how many people in poor countries will be damaged by the loss. The “straight up” cost of the global destruction meted out by Wall Street activities has been estimated at somewhere around twenty trillion dollars.[4] The “collateral” damage to the innocent bystanders near and far is inestimable. The planet and its culture, climate, and heritage, will never be the same. It will take generations to pull ourselves back up to the level we were just pushed down from. And that’s assuming we have sufficient renewable energy to do so.

So, just what, exactly, does the president have in mind when he says that Wall Street is going to make a “substantial contribution” toward fixing the damage done? It can’t be done. He is dreaming if he believes that.

Why is the White House so reserved about meaningful reform and why is it so deferential to the Wall Street tycoons who plundered your grandmother’s pension for their billion dollar incomes? My guess has always been that Obama made a big mistake in the early parts of his administration and populated it with economists of the right who love--or even worked in--Wall Street. People like Robert Rubin-Former Treasury Secretary (1995-1999), Gene Sperling-Former National Economic Adviser (1997-2001), Lawrence Summers-Former Treasury Secretary (1999-2001) (and fired Harvard president). And he left out well known and respected progressives like Dean Baker at the Center for Economic and Policy Research, Jared Bernstein of the Economic Policy Institute (and now economic advisor to Vise President Joe Biden), Robert Reich former labor secretary (1992-1996), now at Berkeley, Paul Krugman at Princeton, Joe Stiglitz at Columbia, or Simon Johnson at MIT, Dani Rodrik at Harvard, Robert Shiller at Yale, Edie Rasell at the UCC, and so on. There is no clear, articulate voice in his cabinet (except for Joe Biden) who speaks for Main Street and I think that that has had a major impact on policy decisions. And it may leave its impact on the nation and the globe for as long as we all will live. 

Frankly, it may be too late. The financial reform train may have left the station. The Wall Street firms that survived are stronger than ever, smug in their power, and newly armed with a Supreme Court decision saying they can spend more money than God to buy and sell politicians to do their bidding. And you and I will have to just adjust to a new diminished democracy and living standard, with an ever stronger oligarchy running our country.

Some organizations have launched campaigns to get key Senators and Representatives to stand up for the values of the American public (not to mention those of the equally damaged international community), and make major changes in the reconciled bill. One of the more significant is Public Citizen, a forty-year-old corporate watchdog group. Click here to go to their "Strengthen Wall Street Reform" page and send a letter to your representatives.
Do it now. If it doesn't happen now, it may be too late.

[1] “A.I.G., Greece, and Who’s Next?” The New York Times, March 4, 2010, p. A 26.
[2] Interview with Sen. Ted Kaufman, The American Prospect, April 30, 2010, web edition:
[4] A good survey of the costs of the destructive force of Wall Street gambling is Anup Shah’s “Global Financial Crisis” page. It’s a year or so old, but still good for background,

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