Archive for the ‘Financial Reform’ Category

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Bankers pulled over for speeding can depend on certain government officials to try to get their tickets cleared: a set of Republicans on the House Financial Services Committee. Bankers whose business model depends on unfair, deceptive and abusive practices have found rhetorical comfort, if not actual relief, from repeated efforts by the committee to disable the Consumer Financial Protection Bureau (the hallmark creation of the Dodd-Frank reform law).

Now, another creation of this Dodd-Frank law meant to check unsafe banking has come under fire from these same Republicans: the Financial Stability Oversight Council (FSOC). On September 17, the panel’s Subcommittee on Oversight and Investigations will engage in a ritual grilling. This ritual will then likely serve to buttress legislation the House will approve on largely partisan lines to disable the FSOC. (There are some Democrats who want bankers to think they’ll try to fix their traffic tickets as well.)

What is FSOC? Why should Americans and responsible members of Congress care?

The Council is a collaboration of top financial regulators with 10 voting members, made up of the:

  1. Secretary of the Treasury (chairs the Council),
  2. Chair of the Federal Reserve,
  3. Comptroller of the Currency,
  4. Director of the Consumer Financial Protection Bureau,
  5. Chair of the U.S. Securities and Exchange Commission,
  6. Chair of the Federal Deposit Insurance Corporation,
  7. Chair of the Commodity Futures Trading Commission,
  8. Director of the Federal Housing Finance Agency,
  9. Chairman of the National Credit Union Administration Board, and
  10. an independent member (with insurance expertise) appointed by the President

These regulators meet to discuss emerging problems and recommend actions that would be taken by specific regulators.

Here are some of the benefits of FSOC:

  • Addressing fragmented supervision: There are state banks and national banks, with 50 separate regulators for the former, and a different regulator for the latter. If a bank is owned by a bank holding company, that’s under the purview of still another regulator. If the bank holding company owns a broker/dealer such as Merrill Lynch, that’s overseen by another regulator. And another regulator oversees firms that engage in commodity futures. Credit unions, of course, have their own regulator. The FSOC attempts to take a holistic view.
  • Helps address gaps: Current regulators are responsible for parts of the financial industry. But the 2008 crash demonstrated that contagion spread from one sector to another. For example, when AIG’s financial products division, supervised by the Office of Thrift Supervision, found itself unable to pay claims on credit default swaps, the problem harmed many banks and broker/dealers making those claims, which were supervised by other regulators. In conceiving the Council, the President explained that it would ‘‘bring together regulators across markets to coordinate and share information, to identify gaps in regulation, and to tackle issues that don’t fit neatly into an organizational chart.’’
  • Early warning: The FSOC must identify emerging problems. Its annual report serves as a warning discipline. In the midst of the booming market during the inflation of the house bubble, regulators were either complacent or loath to publicize potential problems. The annual report must contain areas that the Council considers concerning.
  • Helps with inter-regulator information: Financial deregulation allowed firms to engage in multiple activities that were once prohibited at a single firm. Yet the regulatory system did not change. As a consequence, one regulator might examine one business at a firm and another regulator might examine another business with little coordination or information sharing. FSOC can help address problems that arise from such parallel oversight.
  • Help combat regulatory arbitrage: Financial firms must structure their products to secure supervision from regulators believed to be less rigorous. Such arbitrage played out during the savings-and-loan crisis when developers found that the regulator relaxed standards for lending. The FSOC can recommend better regulations for certain agencies.
  • Help press regulators to reform markets? If a regulator is perceived as lax, the FSOC can make recommendations. Already, under direction from the FSOC, the Securities and Exchange Commission finalized rules to strengthen money market funds, where investor runs during the 2008 crisis led to seizure in short-term funding for business provided by these funds.
  • FSOC can break up the mega-banks: The Council plays a significant role in determining whether action should be taken to break up those firms that pose a “grave threat” to the financial stability of the United States.
  • FSOC can designate non-banks for special supervision: Some firms that fall outside of traditional banking may nevertheless contribute to financial contagion and should be subject to special supervision. Already, the FSOC has designated General Electric Capital Corp., AIG, and Prudential Financial, Inc. The Council may soon designate MetLife, Inc. The Council’s determinations follow a lengthy process involving hearings and the opportunity for a firm to appeal in court.
  • Transparency. Many of the FSOC meetings are open to the public. FSOC officials must also appear before Congress. FSOC’s explanations for designating a non-bank as systemically significant are also published.

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As America approaches the sixth anniversary of the 2008 financial crash, here’s an encouraging thought: The mega-banks can be broken up. It’s already in the law. Forty-one words of the 2,000-page Dodd Frank Wall Street Reform Act empower the regulators to take this step. To exercise this momentous power, the regulators must take some initial steps in preparation. And on August 5, 2014, the regulators did just that.

Some background: On September 15, 2008, Lehman Brothers declared bankruptcy. Normally, bankruptcy serves as an orderly means to either close a business or reorganize it. Creditors suffer a reduction if not complete loss of the funds lent to the bankrupt company. Lehman’s bankruptcy, however, triggered contagion throughout the economy. Why? Because its size and complexity touched too many creditors. When some of the same internal problems Lehman suffered became manifest at other mega-banks, Washington responded with bailouts for them rather than triggering more unmanageable contagion from bankruptcies. These banks were simply too big to fail (TBTF). What’s more, the government’s crisis managers actually made the TBTF problem worse by consolidating some of the smaller, failing firms, with the largest failing firms. To JP Morgan’s sprawling empire, for example, the government added Bear Stearns and Washington Mutual.

The Dodd-Frank Wall Street Reform Act attempted to address TBTF with numerous provisions. In Section 165, mega-banks must adopt “credible” provisional bankruptcy plans colloquially known as “living wills.” To be credible, they must prove to regulators that their failure could be handled in an orderly fashion and would not trigger financial contagion or require public funding assistance. If regulators determine they are “not credible,” regulators can order changes, including divestiture of assets — a break-up. These powers are contained in 41 words of the Dodd-Frank statute.

On August 5, the Federal Reserve and Federal Deposit Insurance Corp. declared that the “living will” plans by 11 large banks submitted in 2013 are “not credible.” The 11 banks are Bank of America, Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street, and the US units of Barclays, Credit Suisse, Deutsche Bank, and UBS.

Six years after the financial crisis demonstrated that the mega-banks are too big to fail, regulators have now officially determined that more must be done before one can fail without triggering a bailout.

Why did the banks fail to submit credible plans? Some argue that the banks’ failed intentionally. They don’t want to produce a roadmap for orderly deconstruction because, at the point of failure, they want a government bailout. FDIC Vice Chair Tom Hoenig provided some evidence for this theory when he expressed dissatisfaction that the mega-banks derivatives portfolios hadn’t be altered to make them part of the bankruptcy process. Currently, derivatives can be settled immediately with the declaration of bankruptcy even as other credit relations must wait for the court. Derivatives are the bets banks make, largely with other banks. About a third of the world’s $700 trillion in outstanding derivatives bets are held by just four American banks.

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This week the U.S. Senate Committee on Finance held a hearing entitled “The U.S. Tax Code: Love It, Leave It, or Reform It!” where the focus was on the corporate tax maneuver called inversions.

Inversions occur when corporations purposely renounce their American citizenship, usually by merging with a foreign corporation and reincorporating in a low- or no-tax country (also called a tax haven) in order to be treated as a foreign corporation and escape U.S. tax liabilities. However, in reality, the move is just on paper — these corporations can in fact be owned by up to 79 percent of the former shareholders of the U.S. company and keep their business operations here in America.

U.S. Senator Ron Wyden (D-Oregon), chairman of the Finance Committee, referred to tax inefficiencies and loopholes like inversions as “chronic diseases,” “infections” and “contagions” since they are eroding the U.S. tax base and allowing these multinational corporations to escape paying their fair share of government services. The exact words of Sen. Wyden were: “The inversion virus now seems to be multiplying every few days.”

There has definitely been a growing rash of attempted inversion deals. The largest inversion deal to date, the drug maker AbbVie (formerly Abbott Laboratories) recently agreed to purchase a European competitor, Shire, with the goal of reincorporating in Britain. Other health-related companies have announced plans to invert such as Medtronic, Pfizer and Mylan.

Even “America’s drugstore” – Walgreens — may soon be a Swiss company, as it is in the process of determining whether to reincorporate there. This decision is particularly virulent since Walgreens receives around a quarter of its income from taxpayer supported health programs like Medicare and Medicaid. (The full list of companies that have inverted can be found here, which is much broader than the recent spate of health-related defections.)

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Last week, we hosted an online conversation with Robert Weissman, president of Public Citizen, and Lisa Gilbert, director of Public Citizen’s Congress Watch division.

Robert and Lisa discussed the progress we’ve made together so far — and the next steps we need to take — on some of the most pressing issues facing the country.

Miss the webinar? Catch up by watching the video below:

(Note: Unfortunately because of network issues beyond our control, you can’t see Robert or Lisa for most of the presentation. But the audio is there, and the analysis and insights they provide are inspiring and thought-provoking).

Some of our highest priorities include ending corporate money’s domination of our elections, fighting for universal health care, reining in Big Bank recklessness and stopping congressional attacks on consumer protection.

Members of Congress — Democrats, Republicans and independents alike — must hear from We the People that these issues matter to us.

We’re going on the offensive this summer, and we need your help.

To make sure you’re invited to our live online discussion in July, sign up today.

Rick Claypool is the online director for Public Citizen’s Congress Watch division.

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Most people only think about bank runs around the winter holidays when “It’s a Wonderful Life” plays incessantly on television and the protagonist is trying to save his small community bank from going under. Bank runs are an old-fashioned idea, the stuff of black and white movies and not the sort of issue we tend to think of as a problem for this century.

Since the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933, our deposits are protected and we don’t need to worry about banks running out of money.

Or do we?

When banks are allowed to take bets on toxic debt or enter into complex derivatives transactions – essentially gambling with our taxpayer-insured deposits — we may be setting up our economy for another meltdown. Banks can and do lose huge sums of money on failed bets, as happened with several leading banks in the run up to the 2008 crash. These bad bets were part of what caused many financial institutions to fail; the failures set off the chain reaction of the economic crash. Instead of paying back depositors and simply allowing the banks to go under, the government chose to bail out some of them, leading to trillions in payouts under the Troubled Asset Relief Program (TARP) and other bank supports.

They say hindsight is 20-20, but our country’s leaders should have known better then to allow this gambling. For most of the last century, we had strong, clear protections against just that type of bank activity. President Franklin D. Roosevelt and Congress included a ban on riskier investment banking (read gambling) by FDIC-insured facilities when the system of federally-insured deposits went into effect in 1933. This ban between commercial and investment banking was called the Glass-Steagall Act, and it was rolled in with the Banking Act of 1933, which also created the FDIC.

This safety glass was in place for over 50 years and served the country well as we experienced overall stability in the financial industry. But banks desiring to engage in high-risk, high-profit transactions pressured Congress to break down the wall. The Glass-Steagall Act was repealed in 1999 through President Clinton’s signing of the Gramm-Leach-Bliley Act.

After Glass-Steagall’s repeal, commercial banks backed by FDIC guarantees borrowed cheap money and jumped full force into packaging debt, underwriting mortgages and growing their investment strategies. They took bigger risks than ever before, leading us straight to the crisis. Over-leveraged and under-capitalized, the banks’ gambling strategies blew up.

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