[corp-focus] A Little Bit of Wall Street Reform

[Robert Weissman]

A Little Bit of Wall Street Reform=20
By Robert Weissman=20
December 11, 2009

Four hundred forty-two days after Lehman Brothers declared bankruptcy, the =
U.S. House of Representatives has finally passed financial reform =
legislation.

The long delay between the onset of the financial crisis -- a direct =
consequence of a quarter century of deregulation -- and the passage of =
Wall Street Reform and Consumer Protection Act of 2009 did not well serve =
the cause of reform.

As time passed, public anger over the Wall Street bailout became more =
diffuse. And Wall Street relentlessly continued its campaign to undermine =
meaningful efforts at reform.

The bill passed today contains some positive measures, but it does not do =
nearly enough to rein in the Wall Street banksters. It is wholly incommensu=
rate with the devastation Wall Street has wreaked across the land and =
planet.

Most importantly on the positive side, the bill creates a powerful =
financial consumer watchdog agency. Had the Consumer Financial Protection =
Agency existed during the go-go years earlier this decade, it could have =
prevented millions of consumers from being ripped off -- and protected the =
banks from themselves. The financial crisis would have been significantly =
less severe.=20

The bill also contains some modestly beneficial provisions establishing =
liability for credit ratings firms, regulating derivatives and imposing =
leverage limits on the largest institutions. And it includes an important =
measure for a comprehensive public auditing of the Federal Reserve.=20

But there are huge holes in the legislation. Wall Street successfully =
maneuvered to keep most of the important big picture reforms off the =
table.=20

* The bill does very little to address industry structure. Wall Street and =
the big banks engaged in reckless betting under the belief that they were =
too big to fail -- that they were protected by a federal backstop. The =
biggest banks are now even bigger than they were before the crisis. The =
solution to the too-big-to-fail problem is to break up the big banks, so =
that the system can absorb their failure. The bill fails to impose limits =
on bank size.=20

Many news accounts misleadingly highlight that the bill gives regulators =
the authority to break up big financial institutions. The bill does confer =
that authority -- but only upon a finding of a "grave threat to the =
financial stability or economy of the United States." It is extraordinarily=
 unlikely that regulators will ever reach such a finding.

* A related problem is the intermixing of commercial and investment =
banking in single firms and resultant excessive risk taking by federal =
insurance-backed commercial banks. The bill fails to separate commercial =
and investment banking, as the Glass Steagall law did before repeal in =
1999, or otherwise address this problem.=20

* Financial derivatives and other exotic instruments -- labeled by Warren =
Buffett as weapons of financial mass destruction -- fueled the crisis. The =
bill contains very modest regulations over financial derivatives but =
leaves more than a quarter of the market free from regulation and contains =
loopholes to enable another substantial chunk to escape regulatory =
control. Even for derivatives covered by the bill, the new rules are very =
limited. The bill does not establish a regulated exchange for derivatives =
trades. It does not ban financial instruments that do little more than =
enable high-stakes gambling. And it does not require the purveyors of =
derivative instruments to prove that the benefits of their new products =
outweigh the costs and risks to the financial system.=20

* The bill also fails to tackle seriously the problem of executive and =
high-level pay. Wall Street mocks the Congress -- and the American people =
-- by preparing to pay tens of billions of dollars in bonuses, in the =
shadow of a vote on financial regulation and while the financial sector =
continues to benefit from trillions of dollars of public supports.=20

At a minimum, there should be binding rules mandating that bonus pay be =
tied to long-term performance. For 2009, there should also be a windfall =
tax imposed on Wall Street profits and bonuses.

It=92s no mystery why this legislation is not stronger. Wall Street spent =
$5 billion in political investments in the decade before the financial =
crisis to obtain deregulation and nonenforcement of existing rules. =
Despite Wall Street having crashed the economy, nothing has changed on =
Capitol Hill. Wall Street continues to invest heavily in politics and =
wield enormous influence. More than 900 former federal employees, =
including 70 former members of Congress, are working as lobbyists for the =
financial services sector this year. Wall Street has spent more than $40 =
million on campaign contributions since November 2008.=20

But Wall Street was not wholly able to get its way. Leading Wall Street =
lobbyists announced at the outset of the legislative process that they =
intended to =93kill=94 the Consumer Financial Protection Agency, and they =
failed. Now, as the bill heads to the Senate, there is still an opportunity=
 for a populist upsurge to demand far-reaching controls on Wall Street.=20

 Robert Weissman is president of Public Citizen, <www.citizen.org>.

(c) Robert Weissman

This article is posted at:  <http://lists.essential.org/pipermail/corp-focu=
s/2009/000327.html>.

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