Archive for the ‘Financial Reform’ Category

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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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What’s most depressing about Jennifer Taub’s new book “Other People’s Houses” is her authoritative argument that the recent financial crisis did not result from isolated policy decisions and fraudulent business practices of the few years leading to 2008. Instead, our recent Wall Street crash played out already proven policy failures from the savings-and-loan crisis of the 1980s.

Even moral hazard, the surrender of discipline for banks “too big to fail” that epitomized the bailouts of 2008, Taub reminds, originated in 1984 with the bailouts of Continental Illinois National Bank and successive taxpayer rescues of American Savings and Loan, the largest S&L in the nation.

Professor Taub, a colleague and friend, teaches at Vermont Law School and previously served as associate general counsel at Fidelity Investments. With unique credentials, she can both explain the intentional complexity of Wall Street products and Washington regulation without glossing over contradiction and nuance.

Unlike the majority of crash pathologies that focus on Washington players such Timothy Geithner’s “Stress Test,”  Sheila Bair’s “Bull by the Horns,” or Andrew Ross  Sorkin’s “Too Big to Fail,” Taub’s book spends quality time outside the beltway. Her narrative follows real individuals, from rogues who pillage the banks along with their lieutenants, to regulatory chiefs often aligned with industry interests along with a few heroes who actually understand and fulfill their responsibility to protect taxpayers, and finally, victims of this morass.  And we meet the Nobelman family.

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