Financial Reform End Game

[ProSense]

Financial Reform End Game

Time for Congressional Leaders to Protect Consumers

By Pat Garofalo | June 1, 2010

The end game of financial reform begins this week in Congress, with the stakes as high for American families as they are for Wall Street’s financial titans. More than a year and a half ago, the financial crisis that spawned the Great Recession began in earnest. The failure of the investment bank Lehman Brothers Co. and the near collapse of the insurance giant American International Group Inc. required the Federal Reserve to engineer multiple rescue packages, but now Wall Street is back to reaping billions of dollars in profits while most Americans are still struggling to recover from the Great Recession.

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While full and complete independence for the new consumer protection regulator is preferable, both bills match the four criteria that Elizabeth Warren, chairperson of the congressional oversight panel reviewing the government’s rescue of financial firms, has said are critical to the regulator’s success:

■ An independent director

■ Independent source of funding

■ Rule-making authority

■ Enforcement powers

The conferees should fight any attempt to add carve-outs or exemptions for special interest groups or niche financial products (like payday loans).

Derivatives

The Senate’s legislation on derivatives—the complex financial instruments that played a large role in the collapse of many large financial firms, most notably AIG—was authored by Agriculture Committee Chairwoman Blanche Lincoln (D-AR). It mandates that all standardized derivatives be traded on public exchanges (just like stocks are traded currently), and that all customized derivatives go through clearinghouses, which ensure that both parties in a trade have adequate collateral backing it up. There is an exemption from the requirements for nonfinancial companies, but it is not extensive. The controversial Section 716 of the Senate bill would require federally insured commercial banks to spin off their derivatives trading desks, placing them under an independently capitalized subsidiary.

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Ban on proprietary trading

The Senate’s version of the “Volcker rule,” named after former Federal Reserve Board chairman and current Obama administration financial advisor Paul Volcker, instructs regulators to study whether or not a proprietary trading ban would work in practice and if it would undermine the stability of financial firms, and then design and implement a ban based on the findings. An amendment from Sens. Jeff Merkley (D-OR) and Carl Levin (D-MI) that would have institutionalized the ban never came up for a vote and is therefore not on the conference committee’s agenda, but they are still pushing for it to be included in the conference committee.

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[NJmaverick]

1. This is better than just a set of rules, that the industry can figure out how to beat

you have people in charge that can adjust to changing conditions.

[ProSense]

2. Robert Reich: Want real financial reform for Wall Street? Do this.

Want real financial reform for Wall Street? Do this.

Senator Lincoln wants to stop big banks' risky derivative trades from being subsidized by taxpayers. Here's how to keep her measure in the financial reform bill.

By Robert Reich

The most important remaining battle to rein in Wall Street is over Senator Blanche Lincoln’s measure to stop the big banks from being subsidized by taxpayers for their risky derivative trades. Miraculously, it’s still in the bill but it’s on life support. The bill has now gone to the conference committee where differences between the House and Senate bills are to be ironed out.

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Big, big money is at stake. Wall Street’s five largest banks have a corner on the trade, raking in about in about $30 billion in over-the-counter derivatives last year. It’s the single largest reason they’re too big to fail. So they’re spending like mad on Washington lobbyists and campaign donations in order to keep the subsidy in place. (Lincoln’s provision doesn’t force them to give up derivative trading, by the way; it only forces them to do it in a separate entity that doesn’t get subsidized by deposit insurance or the Fed’s discount window).

All the guns are aimed at this measure. But it’s still possible that the people can prevail, if we’re organized and active. Here’s a list of all the Dems on the Senate Banking and House Finance Committee, as well as Republican conferees. All conferees are indicated by ->.

Organize and mobilize your friends and acquaintances, especially those who live in these states or districts, to call their members and make their voices heard. Tell them you want Lincoln’s measure (Section 716 of the Senate bill) to remain in the final bill. Say you’ll hold them responsible if it goes.

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