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How Wall Street Killed Financial Reform

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This was a curious decision. If Obama really wanted to stop speculation in the oil markets, he didn't need to create a brand-new task force that would have to start from scratch to deal with a hellishly complex problem that Congress and the CFTC had already spent years studying. "An easier way to deal with excessive oil speculation," one senior Senate aide explains, "is for the president to just pick up the phone, call Gary Gensler and say, 'The Dodd-Frank Act required you to put in strong position limits by January 17th, 2011. Get off your butt and act.'"

The Oil and Gas Working Group turned out to be a complete sham. In its year of ostensible existence, the panel met only a few times, then never bothered to convene again. One source on the Hill tells me that some of the members were not even aware that they'd been named to the task force for months. It was such a Potemkin committee that when oil prices once again shot up past $100 a barrel this year, Obama was hilariously forced to announce that he was "reconstituting" the task force, even though it had never officially disbanded. "It's a joke," says Greenberger, the former regulator. "They've done absolutely nothing."

Many key sections of Dodd-Frank, in fact, are now experiencing such "unforeseen" delays. The Volcker Rule, which severely restricts the ability of banks to gamble with taxpayer-insured money, is in the midst of an impressive double delay. Regulators have been so slow to wade through the flood of 17,000 comment letters submitted on the rule, most of them from Wall Street interests, that they may not be finished­ writing the regulation by the Dodd-Frank-mandated deadline of July 21st, 2012 – two years after the bill passed.

But instead of kicking regulators in the pants, six senators, led by Republican Mike Crapo of Idaho, introduced legislation to give regulators more time to (not) finish writing the law. On April 19th, the Federal Reserve announced that it won't implement the Volcker Rule until 2014 – an extra two years that will give Wall Street plenty of time to find a way to kill the thing for good.

STEP 4: BULLY THE REGULATORS

A seldom-considered factor in Dodd-Frank is that Congress controls the funding for the federal regulators who are charged with carrying out the new law. Last year, after Republicans attempted to slash the CFTC's funding by more than 33 percent, Congress settled for freezing the agency's budget, despite the fact that under Dodd-Frank, the market that the CFTC is responsible for overseeing soared from $40 trillion to $340 trillion. That same year, Republicans tried to cut the SEC's budget by more than $25 million.

This results in a curious dynamic: When Wall Street is frustrated by regulators in the rule-making process, it can simply lobby Congress to rein them in. The regulators are then forced to strategically surrender on the rules in order to stave off budget cuts, Eugene Scalia or whatever other horror-show phenomena Congress and the financial industry might throw their way.

Take those huge Paul Ryan-led budget cuts that the House passed in April, scrapping the entire bailout portion of Dodd-Frank. The cuts may not survive in the Senate, which is still controlled by Democrats. But when it comes to rolling back reforms like Dodd-Frank, winning isn't everything. These continual whippings of the new law in the House serve a larger purpose, which is to frighten and intimidate regulators like the SEC and the CFTC, who aren't even finished writing the law's actual rules. The message is clear: If you don't write the rules in the weakest way possible, we have the juice to overturn you in Congress.

"What this is, above all else, is a play to put the House on record," says one congressional staffer familiar with the budget-cutting­battle. "It's a leverage tactic. If they have 75 percent of the Financial Services Committee that says, 'You've made mistakes,' or 'This is too gray,' that is a huge hole card."

Even the CFTC admits this pressure exists: Commissioner Bart Chilton warned in March that his regulators risk being "scared into making rules and regulations that are weak or ineffective because we are overly concerned about what we call 'litigation risk.'" According to Marcus Stanley, policy director for Americans for Financial Reform, one regulator admitted that he worries in advance about Wall Street going over his head. "If we make this rule too tough," the regulator told Stanley, "industry is just going to go to Congress and punch it full of holes."

A prime example of the crack suicide-squad preemptive-surrender strategy practiced by regulators involves the provisions of Dodd-Frank designed to curtail complex derivatives, like swaps, which caused disasters like the crash of AIG and the bankruptcy of Jefferson County, Alabama. Under the law, the SEC and the CFTC must decide which swaps dealers will be governed by new rules, requiring them to maintain more capital and collateral. Originally, the agencies were thinking of regulating any dealer who manages more than $100 million in swaps. But then Rep. Randy Hultgren, a Republican from Illinois, proposed H.R. 3727 – one of the nine GOP-sponsored bills to kill Dodd-Frank – that would raise the threshold to $3 billion in swaps. Overreacting to industry pressure, both the SEC and the CFTC then volunteered to raise the threshold to $8 billion. That means at least two-thirds of all swaps dealers in America will now be exempt from Dodd-Frank. Given the new threshold, consumer advocates calculate, you could make 1,600 swaps transactions a year, each worth $5 million, and still not have to so much as register as a swaps dealer.

The thought provokes something verging on despair in those who have devoted themselves to fighting for real financial reform. "If I didn't have to spend my whole life in this," Stanley says sadly, "it would be funny."

STEP 5: PASS A GAZILLION LOOPHOLES

By the beginning of this year, as a result of all of these threats, delays and lawsuits, Americans could barely see Dodd-Frank's footprint in their everyday economic life. Yet Wall Street was still insufficiently convinced that key portions of Dodd-Frank were really dead. So it went over the heads of regulators and impelled Republicans in the House to create an avalanche of new laws designed to undercut the rules the CFTC and SEC were already heroically failing to write.

You might wonder how a bunch of lunkhead Republican congressmen would even know how to write a coordinated series of "technical fixes" to derivatives regulation, a universe so complicated that it has become hard to find anyone on the Hill who truly understands the subject. (One congressman who sits on the Financial Services Committee laughingly admitted that when the crash of 2008 happened, he had to look up "credit default swaps" on Wikipedia.) It turns out, they had help from the inside. Scott O'Malia, a Republican commissioner on the CFTC who formerly served as an aide to Senate Minority Leader Mitch McConnell, apparently sent a member of his staff over to the House to help the Republicans write bills to undercut the CFTC's authority. Originally a Bush appointee, O'Malia ignited a controversy when he was renominated to the CFTC by Obama because he had once been a lobbyist for Mirant, an energy company that was caught withholding power from California during blackouts. One of Mirant's subsidiaries was even fined $12.5 million for attempting to manipulate natural gas prices.

Now, Obama's own appointee is reportedly leading the charge against finance reform. "O'Malia has assigned a staffer to quarterback all of these bills," says Greenberger. "He's orchestrating a sort of under-cover-of-darkness approach to driving holes in Dodd-Frank."

The nine bills being contemplated by Congress take a variety of approaches to gutting Dodd-Frank. Two bills, H.R. 1840 and H.R. 2308, are essentially stalling tactics, requiring regulators to undertake more of those sweeping cost-benefit analy­ses that result in lengthy delays. Another bill, H.R. 3283, is more substantive: Sponsored by Connecticut Democrat and hedge-fund industry BFF Jim Himes, it exempts foreign affiliates of U.S. swaps dealers from all Dodd-Frank oversight. The rule, if implemented, would make the next AIG possible, given that AIG was undone by half a trillion dollars in derivative bets produced by such a foreign affiliate – its London-based financial products outfit, AIGFP. If passed, says Rep. Brad Miller, a Democrat from North Carolina, H.R. 3283 would leave a "massive, gaping hole" in Dodd-Frank. "It would be very easy to move those trades to whatever the most indulgent country would be," Miller explains.

The bill also exempts from oversight any swaps deals between company affiliates – meaning that Goldman Hong Kong can sell swaps to Goldman New York without having to deal with Dodd-Frank. That sounds harmless, but when you combine it with the AIG-style exemption, a bank would basically be able to get around Dodd-Frank entirely by creating its swaps products at an overseas branch, or moving them back and forth between affiliates.

An even more distressing bill, which recently raced through the committee process with a simple voice vote, is H.R. 3336, granting broad exemptions from swaps regulations to any company that offers "extensions of credit" to customers. There are some who are convinced that once the financial industry's lawyers get hold of this "extensions of credit" line, they will use it to win exemptions for banks engaged in almost any kind of lending activity – including those involved with municipal-bond offerings, one of the most dependably corrupt businesses in the American economy.

"If all of these bills pass," says Stanley, "I don't know why we wouldn't just invite the industry lobbyists in to rewrite the rules."

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Matt Taibbi

Matt Taibbi is a contributing editor for Rolling Stone. He’s the author of five books and a winner of the National Magazine Award for commentary. Please direct all media requests to taibbimedia@yahoo.com.

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