Congressional interrogators at a June 5 hearing will attempt to show that private consulting firms that advise institutional shareholders on proxy votes are riven with conflicts of interest. One advisory firm (gasp) is indirectly owned by a Canadian pension fund. Imagine: Canadians telling Americans how to vote in corporate elections.
The context for this ersatz hunt for justice, according to the House financial services subcommittee staff memo, was this spring’s campaign over a ballot resolution that would have required JPMorgan Chase CEO Jamie Dimon to surrender his other title as chairman of the board. The proxy advisory firms recommended that shareholders vote to split the CEO and chairman position at JPMorgan.
A cynic might dismiss this hearing as a public castigation of private firms with the temerity to challenge Jamie Dimon and to suggest improvements at JPMorgan, which is the biggest of the nation’s “too big to fail” banks, and, incidentally, one of the biggest campaign contributors to members of Congress.
Here are the real conflicts that members should address to the witnesses who were invited to testify (none of whom, by the way, work for proxy advisory firms).
1. In the JPMorgan proxy vote, the company established a “war room” and spent an estimated $5 million of the company’s money – shareholders’ money – to contest the resolution to split the CEO and chairman roles. JPMorgan’s shareholder-funded campaign was the equivalent of permitting incumbent politicians, but not challengers, to spend taxpayer money to finance their election campaigns.
Meanwhile, AFSCME, Hermes Fund Managers, New York City Pension Funds and Connecticut Retirement Plans and Trust Funds – which proposed the resolution for the independent chairman – had to spend their own money. Their expenses likely amounted to little more than paying for a flight to Tampa, a hotel room and some staff time.
Under U.S. Attorney General Eric Holder, large banks enjoy immunity from criminal prosecution. In Senate testimony on March 10, Holder essentially confessed to Congress that giant bank HSBC was too big to prosecute, despite laundering $200 trillion (no typo) for terrorists, tyrants and narco-traffickers. Financial havoc would supposedly ensue with a prosecution, according to this policy. Thus has begun the age of the too-big-to-jail bank.
The big banks brought us the financial crash of 2008 because bankers took undue risks. Policy makers deemed these banks too big to fail. Consequently, banks and their creditors were bailed out, while shareholders were mostly wiped out and taxpayers were hung out.
The newly articulated Holder policy of “too big to jail” means that moral hazard has metastasized from merely propping up mismanaged banks to blocking prosecution of criminally managed banks. Too big to fail now extends to too big to jail. We’ve written before about this moral hazard. Bankers can dismiss the meek penalties from the Department of Justice as library fines.
Help may be on the way. Known as “Brown-Vitter” for sponsoring Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.), S. 100, the Terminating the Expansion of Too-Big-To-Fail Act of 2013, increases the amount of shareholder equity required for the largest banks. Minimum shareholder equity would be raised from the current 4 percent to 15 percent. That means more shareholder money could be burned by bad management. Bankers generally oppose higher capital requirements because it reduces leverage opportunity. Any speculator would rather put down 4 percent of his own money and borrow the rest because a subsequent 4 percent increase in price means the equity investment is doubled. At 15 percent, it takes that much more in gains to double one’s money.
Note: Public Citizen submitted testimony to the House Financial Services Subcommittee on Oversight and Investigations in advance of its hearing today titled “Who is Too Big to Fail: Does Dodd-Frank Authorize the Government to Break Up Financial Institutions?” The testimony is available here.
Public Citizen commends the House Financial Services Subcommittee on Oversight and Investigations for holding today’s hearing to discuss the government’s authority to break up financial institutions under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In January 2012, Public Citizen called on the Federal Reserve and the Financial Stability Oversight Council to break up the financial behemoth Bank of America. We relied on a relatively obscure provision in the Dodd-Frank Act, Section 121, which grants financial regulators authority to mitigate the grave threat that an institution poses to U.S. financial stability. More than 30,000 people have signed our petition calling for regulators to break up the bank into pieces that are smaller, simpler and safer for market stability.
But regulators appear unwilling to use the broad authorities in their arsenal to safeguard financial stability, and the Federal Reserve Board’s three-paragraph response to our detailed petition suggests that regulators may not be taking seriously their responsibilities under Dodd-Frank.
In a knee-jerk reaction to concerns that too many people may be required to disclose personal financial data, Congress quickly and quietly approved legislation over the past 24 hours to repeal major portions of disclosure requirements designed to ensure enforcement of the nation’s new law against congressional insider trading. President Barack Obama should veto this bad bill, and lawmakers should go back to the drawing board.
Lawmakers should have taken a more reasoned approach and approved a temporary suspension of the disclosure requirement for certain executive branch personnel, rather than an outright repeal. That way Congress could take the time to scrutinize the issue carefully and decide on changes to the congressional insider trading law that would allow for both personal privacy and enough transparency to limit conflicts of interest.
After years of inaction, Congress was finally compelled by public pressure last year to apply laws to itself against insider trading in the stock markets. The “Stop Trading on Congressional Knowledge” STOCK Act made congressional insider trading illegal and imposed online disclosure of personal financial activity by Congress and the executive branch so that compliance to the law could be monitored. Without this disclosure, the law will be difficult to enforce.
The STOCK Act mandated disclosure by approximately 28,000 executive branch employees, many not even senior-level employees, and Public Citizen agrees that this level of coverage may have reached too far. In response, we have asked Congress to consider appropriate remedies to change the scope somewhat to apply to appropriate senior-level executive branch employees.
Instead of this more sensible action, lawmakers hastily repealed disclosure for all but presidential appointees and members of Congress. The repeal (S. 716) even covers congressional staff, in an action that is both extreme and crippling to the STOCK Act’s enforcement mechanism. Unlike most executive branch personnel, congressional staffers have no conflict-of-interest restrictions on stock market investments.
Gutting a popular and much-needed law is unconscionable. Obama should veto this measure, and lawmakers instead should temporarily delay implementation of the disclosure provision for executive branch personnel below presidential appointees. Such a delay would provide Congress with an opportunity to scrutinize the issue more closely and offer more appropriate remedies.
“Too big to fail” banks not only leave the country at risk of another crippling financial crisis, but also are holding the country’s political processes hostage because of the outsized power they wield.
That was the consensus among speakers at the release of Reality Check, a book by Public Citizen’s Taylor Lincoln that seeks to remind the public that deregulation caused the economic downturn and to counter the myths that have been propagated about regulations in recent years.
Watch the video (also embedded above) featuring highlights of the discussion.
Speakers included Neil Barofsky, the former inspector general of the Troubled Asset Relief Program, former Commodity Futures Trading Commission (CFTC) Chairperson Brooksley Born, and former Rep. Brad Miller (D-N.C.).
These three former public officials are among the best equipped to evaluate risks to the economy from insufficient regulation. Barofsky went toe-to-toe with the other financial regulators in pursuit of standards to prevent fraud and steps to ensure that loan restructuring programs perform their stated purpose of helping people avoid foreclosure rather than softening the blow to the banks’ balance sheets. Born warned about the risks of financial derivatives in the 1990s, a decade before they nearly brought down the financial system. Miller sought to police subprime lending abuses long before they were widely recognized and was an outspoken champion of the creation of the Consumer Financial Protection Bureau in the 2010 Dodd-Frank Wall Street reform bill.
The panelists’ discussion about the influence of too-big-to-fail banks and the force that industry wields through its ability to offer future employment to agency and congressional staffers was packed with eye-opening – and often appalling – observations.