That’s why a Public Citizen is helping organize a conference today about executive compensation and how it should be changed. The conference is hosted by Americans for Financial Reform, a coalition where Public Citizen leads leads the executive compensation task force. The point is to examine how the Dodd-Frank Wall Street reform law was intended to reduce the excessive earnings of senior executives and reduce the risks these pose to the economy. Proposed implementing rules meant to bar compensation schemes that incentivize excessive risk-taking are weak and have been delayed. Speakers include Richard Trumka, president of the AFL-CIO; Robert J. Jackson Jr., a former senior adviser to the Treasury Department on executive compensation and corporate governance; a number of professors and others.

Also today, one of our senior attorneys, Paul Alan Levy, is making an oral argument before the Indiana Court of Appeals in Indianapolis. The case is Miller v. Junior Achievement, and Levy is arguing as amicus curiae. The suit arose from an attempt by the former CEO of Junior Achievement and his wife to unmask online critics who commented about the company’s financial situation. Levy will argue that the Millers have not met the test needed to unmask the identity of the anonymous posters.

We have other things brewing this week. We continue to gain traction in our efforts to organize actions around the country on Jan. 21, the two-year anniversary of the U.S. Supreme Court’s ruling in Citizens United v. Federal Election Commission. That’s the decision that let corporations spend as much as they wanted to sway elections.

Public Citizen and other groups are coordinating house parties this Thursday. The parties will feature Jim Hightower, national radio commentator, writer, public speaker and author. This is a really crucial issue, especially with elections coming. It’s not too late to get involved! Sign up now to host a house party!

And watch this space for more updates this week!

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Republican lawmakers just don’t seem to understand how angry people are about how powerful Big Banks have run roughshod over them. You would think that lawmakers would be rushing to confirm Cordray so that the bureau could start to fully function – meaning that it could help stop the predatory practices of major institutions. Instead, the GOP would rather kill the new bureau altogether.

Here’s what Robert Weissman, president of Public Citizen, said after the vote:

In blocking confirmation of Richard Cordray – universally considered qualified for the job – to head the Consumer Financial Protection Bureau, the Republican caucus in the Senate today sent a clear message: They stand with Wall Street donors rather than American consumers. Now In blocking confirmation of Richard Cordray – universally considered qualified for the job – to head the Consumer Financial Protection Bureau, the Republican caucus in the Senate today sent a clear message: They stand with Wall Street donors rather than American consumers. Now it is time for President Barack Obama to end the needlessly drawn out process of installing a leader for the CFPB by making Cordray head of the agency through a recess appointment.

Perhaps you have heard that the Republicans can block a recess appointment simply by staying in session. Not so, says David Arkush, director of Public Citizen’s Congress Watch in this Huffington Post piece. He analyzed the Constitution and concluded that:

If the Senate wants to adjourn and the House won’t permit it, the President can adjourn both houses of Congress.

Mr. President? Ball’s in your court.

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But to denigrate American banks by likening them to casinos may be inaccurate and unfair—to the casinos.
Casino’s churn out money from slots geared to take in more quarters than they pay out. Even in the high stakes tables, a casino enforces limits, guarding against the possibility that one gambler could break the house. Bets themselves are capped. At a ‘high rolling” black jack table, such as at Caesar’s Palace, gamblers can place bets of no more than $50,000, the so-called table limit. Further, spotters watch from above for sharks using illegal counting techniques at black jack. In fact, the most significant “risk” factors about which Caesars warns shareholders are competition from the rival casino down the street, the economy, and its pension plan. As Jim Ensign, the former Nevada senator once said, “In Las Vegas, most people know that the odds are stacked against them. On Wall Street they manipulate the odds while you’re playing the game.”And finally,

Las Vegas casinos have never begged Americans for a bailout because some MIT geniuses figured out how to game the black jack table.

In contrast to casinos, American banks and their Washington regulators didn’t properly prepare for the the risks that savaged the financial sector and the global economy three years ago. Former Federal Reserve Chairman Alan Greenspan claimed no government agency—not even the industry—could detect the major risk of such major problems as a bubble. “History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be,” he testified before Congress. Whether or not that’s true, it seems clear neither the agencies nor the collective industry prepared.

The closest banks come to “table limits” is through the measurement of Value at Risk, a statistical model. A VaR model estimates a range of possibilities and spits out a dollar figure that it is fairly confident it won’t lose more than once in a hundred days. This proved an insufficient safeguard. As Joe Nocera of the New York Times observed, “The fact that you are not likely to lose more than a certain amount 99 percent of the time tells you absolutely nothing about what could happen the other 1 percent of the time. You could lose $51 million instead of $50 million — no big deal. That happens two or three times a year, and no one blinks an eye. You could also lose billions and go out of business. VaR has no way of measuring which it will be.”

Based on market trading history leading to October 19, 1987, VaR would have placed the odds that an investor would lose more than 22 percent in an equity portfolio that day were less than one in seven trillion—more than the age of the universe. And yet it happened.

Moreover, critics assert that current VaR can be gamed. Since the magnitude of VaR determines regulatory capital requirements, or how much the firm must pledge its own money to speculate, firms may be motived to generate a low number, or to generate a number based on figures that don’t encompass the full history of the banks. While VaR means that each bank generates a single number, the model that generates that number is unique to each bank.

Even assuming no games, VaR seems to invite risk-taking. Hedge fund manager David Einhorn claims VaR can be “potentially catastrophic when its use creates a false sense of security among senior managers and watchdogs.” The odds may be miniscule for a person being killed in a car accident on any given day. But that shouldn’t relieve a responsible driver from wearing a seatbelt, observing the speed limit, and eschewing alcohol. VaR proved it was not a radar gun capable of identifying financial speeders. VaR may have been that miniscule probability that relaxed bankers from the necessary fear of loss.

Step back. George Bailey’s bank (from “It’s a Wonderful Life”) extended mortgage loans to the good folks of Bedford Falls based on their income, the value of the house, prospects for the future. The bank set aside some reserves in case a borrower fell behind in payments. Today’s banks now make short term bets with complex mathematical model based on whatever historical data that may be convenient to escape tough capital rules. What’s needed are higher capital requirements. If banks take risky positions, they should do it with their own money, or at least more of their own money—and less borrowed money the taxpayer might need to repay in the event of a bad bet. There should be table limits; and the limits should be un-gameable and not encourage excessive risk taking.
Banks should operate more like a casino.

Bartlett Naylor is Public Citizen’s financial policy advocate.

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The Alabama Republican’s letter carried a threat: The senators would block any nominee to head the agency.

At least one Republican, who wasn’t on that original list of forty-four, may have heard the protests of an America demanding reform, as embodied by the Occupy Wall Street movement. Yesterday, Sen. Scott Brown (R-Mass.) became the first Republican senator to support Richard Cordray’s nomination to head the Consumer Financial Protection Bureau.

Once a director is at the helm, this new agency will be able to start cracking down on the financial industry’s worst abuses.

Brown’s support is a reminder that this should not be a partisan issue. Americans across the political spectrum want meaningful consumer protection to police Wall Street and the big banks.

Is Brown’s endorsement of Cordray a sign that the GOP is warming up to the idea of strong consumer protections on its own?

No. It shows that activists are making a difference. Sen. Brown’s office has received thousands of messages and phone calls from his constituents. The fact that he’s being challenged in the 2012 election by Elizabeth Warren probably doesn’t hurt either.

Nevertheless, 45 Republican senators haven’t moved from opposing ANY nominee to lead the agency until it is weakened. Just last week, Sen. Dean Heller (R-Nev.) added his name to this list of obstructionists. This means Sen. Lisa Murkowski (R-Alaska) is the only Republican who has not yet made her position clear.

With Americans’ increasing outrage with Wall Street and its corporate cronies in Congress, a few of those 45 senators may rethink their obstructionist positions. Wall Street may have banked on national amnesia about the cause of 9 percent unemployment, five million foreclosures, and darkened career prospects for recent college graduates.  Sen. Shelby and his gang may have figured that disguising their obstruction in the language of regulatory reform might have obscured their roles as servants of Wall Street.  But our collective renewed attention demonstrates that we’re wide awake and know who’s hiding.

Tell your senators to side with Main Street over Wall Street. No obfuscation. No hiding.

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photo by wallyg via flickr

Next up on their Hit Parade is “Regulations from the Executive in Need of Scrutiny (REINS) Act of 2011 (H.R. 10/S. 299)” which is scheduled for mark-up in the House Judiciary Committee on Thursday. This bill would require congressional approval of all major rules – within 70 days and with no changes – by both houses of Congress for any to take effect.

Let’s set aside the ridiculous notion that Congress can agree on anything within 70 days and think about this: it already takes years for a federal agency to create the rules necessary to enforce a new law, due to existing review and analysis requirements and public comment procedures. Under “REINS” all that would come to a screeching halt.

What these lawmakers want is to undermine the ability of agencies to set the rules that would protect the public, and this bill would do the trick if it’s passed. The REINS Act would allow Big Business a free hand to pollute and skirt safety standards in its pursuit of profits.

What would be affected? Practically everything. A vast array of new health, safety, environmental, financial and other regulatory protections would be in jeopardy.

For example, the bill would force Congress to re-legislate important new laws like the Wall Street Reform Act, the Patient Protection and Affordable Care Act, and the FDA Food Safety Modernization Act (which Congress passed with extraordinary bipartisan support). It would undermine the Clean Air Act and Clean Water Act, decades-old bipartisan laws approved by Congress to protect our children from asthma and water-borne illness and chemical contamination.

The lives of thousands of American workers employed in mines, factories and other workplaces where standards reduce on-the-job hazards would be endangered. Making Medicaid and the Children’s Health Insurance Program more vulnerable to political pressure would decrease access to health care for low-income children and families. Even the progress on years of commonsense road and vehicle standards that reduce accidents would diminish.

The REINS Act would allow a new Congress to block the implementation of legislation passed by a previous Congress – without actually having to repeal popular laws. The REINS Act would block the enforcement of health care, financial and environmental reforms that have already been enacted.

This is proposed legislation that attempts to “fix” a non-existent problem. The backers of REINS say their bill is a vital step to get elected officials involved into the regulatory process. But guess what? Most agencies’ rulemaking activities are directly tied to legislation enacted by Congress, so the argument that Congress does not have enough input is laughable.

The REINS Act is not a proposal to improve the regulatory system; it is a back-door way of gutting enforcement of existing legislation that some representatives do not support. Congress should be looking to make sure federal agencies enforce the laws designed to protect our food supply, water, air quality, financial security and much more, not throwing up roadblocks to sensible safeguards that protect the American people.

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On Oct. 11, the Federal Deposit Insurance Corporation (FDIC) released a 298-page draft of the proposed rule, requesting comment through January 13, 2012.

Public Citizen believes the proposed rule draws too few bright lines to make clear what banks can and cannot do. For example, the Volcker Rule already permits legitimate market-making, allowing banks to earn fees by matching buyers and sellers of financial instruments. Rather than clearly separating permissible market-making and prohibited proprietary trading, the regulators are proposing that they will detect the difference between various trades by fishing through complex data provided by the banks after the fact. This is an invitation for evasion. Regulators also should prohibit market-making in financial instruments so complex as to elude regulatory understanding. Esoteric financial instruments with little market demand, the type at the core of the explosions of Bear Stearns, Lehman Brothers and other failed firms, must be prohibited at banks that enjoy taxpayer-backing.

The Volcker Rule invites regulators to reconsider core values of the American economy and the proper role of banks. Our Wall Street watchdogs should think first of Main Street and ensure that banks return to serving the real economy. Moody’s claims the Volcker Rule may reduce bank profits. The real measure of a strong Volcker Rule should be the vitality of Main Street.

Public Citizen urges regulators to remove the gratuitous exemptions for practices not specifically permitted in the Volcker Rule, and to draw clearer, more readily enforceable bright lines.

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Congress created this keystone agency of the Dodd-Frank Wall Street Reform and Consumer Protection Act to combat “unfair, deceptive and abusive” banking practices. But large bank lobbyists and their supporters in Congress have fought the CFPB at every juncture, with bizarre congressional hearings questioning the zeal of chief architect Elizabeth Warren, attacks on its budget and now a refusal to permit the confirmation of its proposed agency head – for reasons having nothing to do with the nominee’ qualifications.

None of these senators raised objections to Cordray during his Sept. 6 nomination hearing. In fact, ranking member U.S. Sen. Richard Shelby (R-Ala.) called the qualifications of Cordray, a former Ohio attorney general, Marshall scholar at Oxford and clerk to U.S. Supreme Court Justice Anthony Kennedy, “good.” But Shelby has acknowledged that there’s another fight he’s waging, and blocking Cordray’s nomination will be his weapon. In the spring, Shelby organized 44 Republican senators to pledge they’d exploit Senate rules to block any nominee if President Barack Obama doesn’t eviscerate the powers of this critical new agency.

There are consequences to the Republicans’ reckless actions. The Republicans choose to make a political point at the expense of the low-income workers forced into exorbitant payday loans and other victims of predatory banking abuses that require a confirmed CFPB director to combat.

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Capital One entered mainstream banking with a series of acquisitions: Hibernia Corporation in 2005, North Fork Bancorporation in 2006, and Chevy Chase Bank in 2009. Rebranding each of these firms, Cap One’s ubiquitous advertising –what’s in your wallet—aims to convince prospective clients that it shouldn’t trust the marauding barbarians with their money. Are they referring to any of the banks above?

Should the Federal Reserve approve Cap One’s application to join the madness bracket? On Tuesday, Sept. 20, the Federal Reserve opens the first of three hearings, in Washington, D.C., to be followed by a second in Chicago, and a third in San Francisco. These hearings follow a request by Public Citizen along with the National Community Reinvestment Coalition, Rep. Barney Frank of Massachusetts and other partners for greater Fed care.

In its application to the Federal Reserve, Cap One minimizes its size, noting the far larger deposits of Bank of America and JP Morgan. Yet in an investor presentation, Cap One makes the opposite point, where it highlights, “With ING Direct we become the 5th largest U.S. Bank.” Cap One and ING will count roughly $200 billion in deposits, rivaling that of Citigroup’s $300 billion. Already, the four largest banks sit on almost half of all American deposits.

By definition of the new Dodd-Frank Wall Street Reform Act, Cap One already maintains more than $50 billion in assets and is therefore a systemically important financial institution. Given Cap One’s history of acquisitions, additional growth may be anticipated, earning Cap One a place in the category of “too big to fail.”

Federally guaranteed bankers understand that if they grow their institutional large enough, they can gamble with the bank’s fate. If they succeed, they win huge rewards from stock-based compensation. If they fail, the government will bail out their institutions. Whether or not Cap One’s current prudential practices are sound matters little once they hit that too-big-to-fail sweet spot.

Cap One’s own assessment of its risk raises questions. High on the list of eight factors Cap One describes in its filing with the Securities and Exchange Commission is the phrase: “changing economic conditions, which affect borrowers’ ability to pay and the value of any collateral.” As Cap One cannot control the nation’s “economic conditions,” this risk assessment seems problematic. And of course, it has proven to be so as well—as in the financial crisis of 2008, Cap One received $3.5 billion in taxpayer funds through TARP.

The crash of 2008 taught harsh lessons about systemic risk. A particular bank’s sound hedging strategies may be its counterparty’s foolish gamble. Capital One may transfer its risk through derivatives and other instruments to other institutions, but the Federal Reserve must weigh that system risk, not simply Capital One’s exclusive integrity. And how should we measure either Cap One’s safety, or its systemic risk implication? Good question. The Federal Reserve has yet to promulgate those metrics.

Cap One must prove that public benefits of an acquisition outweigh harms such as the obvious increase in systemic risk.

Cap One devotes only a few paragraphs to the issue of risk. Yet the firm sits on one of the largest credit card portfolios in the nation, accounting for a sizeable percent of the underlying asset of securitized credit card instruments.

Further, Cap One confines its discussion of the “public benefits of the acquisition” to 100 words in four sentences, highlighting additional ATM machines and “greater convenience” for customers. On behalf of the American taxpayer, the ultimate guarantor of Cap One, the Federal Reserve should demand a more robust justification.

Bartlett Naylor is Public Citizen’s financial reform policy analyst and advocate.

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Amy Anderson: “My mother, depending on her supposedly safe investments, entered an expensive retirement center where she and her husband would be taken care of for life, because she didn’t want to end up being a burden on her children. Thanks to the crash, they may not be able to stay there for much longer, and because they don’t actually own their apartment, may end up poor and a burden on their children after all, and none of us have enough resources to help them.”

Mara Shoner: “My sister lost her job as an environmental scientist after 20 years in the industry. She spent nearly 2 years unemployed, sold her condominium to help support her two teen boys, went through every penny of her savings and her equity from her apartment, moved in with a friend and finally got a job as a secretary about a year ago. She is 55. Not a great time to be facing an uncertain future.”

Susan Byers Paxon: “Because of Wall Street, our 401K was gutted. Because of Wall Street, my son graduated a good school into a bankrupt economy. He is teaching T-ball and waiting tables for a living — jobs for a teenager, not a college graduate. Because of Wall Street, my husband, a free-lance musician, has seen his concerts cut back and has lost students as their parents lose THEIR jobs and can no longer afford music lessons for their children. And because of Wall Street, I lost my job in December, and have still not managed to find another, 6 months later. Our health insurance is about to end, and at 57 I am looking at a future that appears awfully bleak.”

Today, Public Citizen works to reform Wall Street, which means that among other things, we are defending the Dodd-Frank Wall Street Reform and Consumer Protection Act that we helped navigate through Congress. We meet with members of Congress and their staff, with regulatory leaders and other members of the administration. We appreciate the weight of statistics and the gravity of the experiences recounted above. As we pursue economic justice, we remember.

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