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Mutual Fund To No Longer Invest In 'Too Big To Fail' Banks

Shahien Nasiripour   |   July 8, 2010    5:30 PM ET

A top-ranked mutual fund will no longer invest in "Too Big To Fail" banks, announcing Thursday it would extend a prohibition already in place against tobacco firms and pornography distributors to banks like Citigroup and Goldman Sachs Group.

In its release Appleseed Fund, a self-described socially-responsible fund that was created in 2006, said that Too Big To Fail (TBTF) banks are also "too big to own." The TBTF firms are now treated by the fund like those that "derive substantial revenues from the tobacco, alcohol, pornography, gambling, or weapons industries," according to the fund's filings.

It is the first mutual fund to explicitly state that it will not invest in TBTF banks, the $140 million fund said in its announcement.

"The cost of bailing out Wall Street since 2008 is over $3 trillion, or more than $20,000 per taxpayer, and that cost is increasing daily," Adam Strauss, one of the fund's co-portfolio managers, said in a statement. "The financial burden of that bailout will be felt for a generation and will be paid by children, some not yet born. Instead of an industry structure where the largest banks are serving the economy by lending capital, U.S. policies and regulations favor the largest banks, which have proven themselves incapable of fiscal rectitude.

"Given the failure of regulators to prevent the previous credit crisis and the subsequent failure of legislators to break up the massive and very much interconnected banks that helped to create the crisis, it is incumbent on depositors and investors to vote with their wallets. Until the financial system is truly restructured, the Appleseed Fund will avoid investments in Too-Big-To-Fail banks, choosing instead to invest in regional banks, community banks, and credit unions which lend money to families and businesses that operate in the productive sectors of our economy," he added.

Though the fund does not own any shares in any of the five banks it identifies as Too Big To Fail, its official policy will go into effect on Jul 1. The fund invests in undervalued stocks for the long-term, making it a "value fund" that employs a similar investment strategy as famed investor Warren Buffett. According to Morningstar, a widely-watched mutual fund data provider, the fund is the top performing midcap value fund over the past three years, generating a 3.5 percent annualized return for its investors. The second-ranked fund generated a 0.4 percent return. The Standard & Poor's 500 Index returned a negative 9.8 percent over the same period.

"The banking system's current industry incentives are misaligned since employees keep a disproportionate amount of the profits while taxpayers subsidize the losses; this unhealthy imbalance is unsustainable and encourages excessive financial speculation," Strauss said.

"In the financial reform bill which recently passed the House of Representatives [and will likely soon pass the Senate], Congress failed to break up or limit the size and scope of the largest banks that have destabilized the financial system and destroyed so much value over the past five years. We were disappointed lawmakers did not stand up to the banking lobby in order to avoid future bailouts. Without meaningful reform, we fear the next crisis will be larger and more devastating than the last," he added.

Strauss said his fund has deemed five banks Too Big To Fail because they each hold derivatives contracts totaling at least $10 trillion in notional value. JPMorgan Chase, Bank of America, Goldman Sachs, Citigroup and Morgan Stanley, which dominate the derivatives market, are the only U.S. banks that fit this criteria. The next closest bank, Wells Fargo, holds $3.7 trillion.

Those five banks join the likes of Altria Group (parent company of Philip Morris USA), Anheuser-Busch InBev NV (the world's largest beer brewer and maker of Budweiser), and Lockheed Martin (one of the world's biggest weapons manufacturers) on the list of firms the fund refuses to invest in.

Strauss said the fund hasn't invested in TBTF banks since the end of 2007. It had owned shares of Citigroup, which comprised about four percent of the fund's portfolio. Citi, in fact, was one of the fund's top holdings.

But after news reports about the bank's structured investment vehicles began to surface, Strauss and his team dumped their shares. Known as SIVs, the off-balance-sheet entities enabled banks to offload hundreds of billions of dollars in loans and securities, freeing up the banks to loan out even more money. Citi's were particularly toxic, forcing the bank to bring them onto the firm's balance sheet and absorb tens of billions in losses. The full extent of Citi's SIVs had not been previously disclosed until the fall of 2007.

"When that happened, we basically stopped everything in our office and spent a week looking at Citigroup, trying to understand what was going on and really how much exposure they had," Strauss said.

They eventually dumped their Citi position at around $45 a share. It closed Thursday at $3.97.

"When we sold Citigroup we determined that it wasn't just Citigroup but it was a lot of banks that were involved with these SIVs and in the whole securitization market that were going to have capital problems and were going to have to raise capital," Strauss said. "We've stayed out since then."

However, it was the recent bonus binge at TBTF banks that solidified the fund's thinking.

"What's been remarkable to us has been the compensation that's been paid out over this last year, even while if you marked their assets to market most of these banks would be insolvent," Strauss said. "For these banks to be as unhealthy as they are, for them to be paying out the kind of compensation that they're paying, seems to us to be irresponsible. And, at the same time, there are risks they're taking with their balance sheet, and if those risks go wrong the American public is on the hook for them."

He continued:

"In retrospect, it seems clear that much of went on during the whole housing-bubble, credit-bubble era was that regulators were captured by the banks. It seems to us now that Congress is captured by the banks, which is why the bill being discussed right now doesn't include any concept of breaking up the banks or reducing them down to size.

"As a fund, we don't think [Too Big To Fail banks are] responsible, we don't think we're going to make a lot of money on them," Strauss added. "We'd rather invest in other kinds of banks."

The Appleseed Fund is managed by Pekin Singer Strauss, a 20-year-old Chicago-based investment firm. The fund's investors have received an annualized return of 5.7 percent since inception.

Echoing the view held by many former federal regulators, current regional Federal Reserve Bank presidents, top economists and leading market participants, Strauss said that Congress had a chance to enact meaningful reform when it came to ending Too Big To Fail, but failed. That's another reason why the fund enacted its recent policy.

"It seems to us that true meaningful reform is not going to occur," said Strauss. "The reason that we're out is that we don't feel comfortable that the reforms that are being implemented are going to protect depositors or investors or taxpayers. And so we just want to stay as far away as possible for investment reasons."

He added that the dearth of criminal prosecutions that should have arisen from what some have said was a fraud-induced bubble also convinced him that policymakers weren't serious about tackling Too Big To Fail.

"Think about during the last bear market all of the people who were indicted or went to jail related to fraud," Strauss said. "You had Enron, you had WorldCom -- we went after those executives.

"Where are the criminal prosecutions in this particular scenario? Where are the true reforms to make sure this doesn't occur again? We just don't see it. We appreciate that there's going to be a lot more regulation in place, but we don't feel confident that the regulators are going to avoid being captured by the Too Big To Fail banks this time any more than they were last time."

Strauss added that the fund's thinking on the pending financial reform bill, now called Dodd-Frank after its leading Democratic sponsors, Senator Christopher Dodd of Connecticut and Representative Barney Frank of Massachusetts, is consistent with Sen. Russ Feingold's views. In a June 30 statement the Wisconsin progressive said the bill "caves to Wall Street interests [and] it doesn't meet the test of preventing another financial crisis." He opposes the bill.

"As long as there are banks that are Too Big To Fail then the banking system hasn't been reformed enough," Strauss said.

Told that the Obama administration has repeatedly said that the Dodd-Frank bill ends Too Big To Fail, Strauss replied: "Honestly, we're skeptical of a lot of the things we hear."


Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; and/or become a fan and get e-mail alerts when he writes.

The Failure of Financial Reform, Itemized

John R. Talbott   |   June 30, 2010    4:37 PM ET

It is really quite incredible that of all the things that went wrong to cause the latest economic crisis, the new financial reform bill does almost nothing with regards to the following key issues. Here are the original problems and the actions being taken.

1. Bank leverage: Very little is done about this in the new bill -- banks still can do things off balance sheet (what is the business purpose of doing things off balance sheet except to deceive?) -- still using risk measurements based on historical volatility of assets, VAR, which can easily be gamed by managements rather than strict capital requirements based on actual ratios to real equity book capital. Needs to get from 35 to one before crisis to proposed 20 to one under this legislation, but really should be below 8 to one. Larry Kotlikoff of Boston University suggests one to one is the right ratio and calls the concept Limited Purpose Banking (LPB). Without bank leverage, it is hard to imagine how a small regional economic downturn in say, Houston oil markets or Silicon Valley's semiconductor industry could ever spread contagiously nationally or internationally, thus stopping most recessions and depressions before they start.

2- Interest rates too low: Even lower today.

3- Lobbying and money in politics: Even worse today having been blessed by Supreme Court that corporations can fund campaign advertising directly and financial firms have stepped up with big donations and lobbying effort to stymie the reform bill itself.

4- Too much debt everywhere: Now, more, especially on local and federal governments including Europe and Japan and global banks. Banks slow to deleverage and consumers are not spending substantially less and saving more, they are just defaulting on their debts to lessen their debt loads.

5- Depositor insurance: Disguised as a benefit to depositors, it is actually a windfall to lower funding costs of banks and encourages stupid behavior by them because of the moral hazard with regard to riskiness of assets held, businesses entered and leverage undertaken. Increased permanently from $100K to $250K per account since crisis.

6- Bank consumer fees: Much higher now. Consumers and taxpayers are basically paying for a problem they had nothing to do with in creating. This was solely a banking and government problem. To blame homebuyers for accepting a no money down, 100% home loan at 2% per year to buy a home they never in their wildest dreams thought they could afford ignores the mistakes the banks made in offering these terms. Once you offer someone 100% financing, it is no longer his problem, it is yours. Individual home owners did not buy these properties, they were actually owned by the banks and their investors who put up all the money.

7- Predatory lending: Still active. Listen to the pitch for reverse mortgages to our seniors on television and try to explain how they actually work or try to calculate how much profit spread the banks have built into those transactions for themselves, then imagine having a touch of Alzheimer's and doing it correctly.

8- Global investor diversification: No change, investors encouraged to hold thousands of assets around the world through mutual funds, index funds or well diversified institutional funds making supervision of managements impossible and encouraging the hiring of too many financial intermediaries and consultants as supposed experts.

9- Credit Default Swap (CDS) market: Was the prime reason everyone was too interconnected to fail as one domino sent them all crashing. Nothing new to report as they either need to be shut down or regulated like insurance companies because that is what they are. Should be shut down because they create too much systemic counterparty risk that can crash the entire system, but at a minimum, you should not be able to buy CDS's naked, only as a hedge against a similar asset. It makes no sense to buy a company or its debt, buy CDS default insurance equal in value to a hundred times what you paid for the company, and then drive the company into bankruptcy, regardless of its financial health. This is the equivalent of buying fire insurance on your neighbor's home and then lighting the arson yourself.

10- Criminal behavior: Banksters, realtors, appraisers, mortgage brokers, investment bankers all broke the law with their fraudulent and criminal and conspiratorial acts and many private and public funds failed to perform their fiduciary duties or required investment due diligence. The scale of the criminal enterprise is vast crossing many industries and country borders and the damages incalculable as globally we have lost over 50 million jobs, 20 million have lost their homes, $20 trillion of savings has been permanently lost to investors and more than 100 million people have been thrown back into the destitution and poverty of earning less than$2 a day. No arrests, no yellow crime scene tape around Goldman's new office building, no seizing of computers and emails and phone records of the suspected banksters and their lawyers and accountants. Certainly, many congressmen should be imprisoned for taking bribes disguised as campaign donations that encouraged them to remove or ignore important financial oversight regulations, but since they write the laws I doubt this will ever happen.

11- Board control: Still dominated by CEO and company insiders and their friends as opposed to being controlled by shareholders directly. Get the CEO and other corporate executives completely out of the boardroom which should be run exclusively by genuine shareholder representatives.

12- Securitization: Little changed, talk of issuer having to hold 5% of securities issued, but this is still subject to how final regulation is written. Securitization market is dead until they straighten out the rigged ratings game and re-instill investors trust in banks and investment banks who purposely packaged the worst trash they had on their books, gift wrapped it as a CDO and laid it off on many of their biggest and best clients.

13- Ratings agencies: Reform ignored fundamental problem with issuers paying for ratings rather than investors.

14- Fannie Mae and Freddie Mac: So far, no change, their restructuring was not included in this bill, they are still making loans of which many are going to turn out bad as they are one of only a few institutions lending into areas that are experiencing steep price declines currently and the best predictor of future default is home price declines in a region.

15- Too many financial middlemen: Because of overemphasis on diversification, investors, both individual and institutional, hold such far flung and complex investments that they become overly dependent on a long list of financial advisors and consultants and managers. At best these advisors have different motivations than the primary investor, don't care as much about protecting against losses since it isn't their money, and increases the risk of fraudulent and criminal behavior somewhere in the long and complex investment food chain.

16- Who regulates?: Very little change, same guys in congress and at the Fed, Treasury and the FDIC who got us into this mess.

17- To big to fail (TBTF): Has gotten worse as the size and power of the biggest banks has increased dramatically.

18- Bank market concentration and monopoly power: Has become more concentrated.

19- Adjustable Rate Mortgages (ARM's): Probably the biggest single cause of increased defaults as mortgage payments could jump as much as 50%, little to no change from bill.

20- Teaser rates: Still legal. Still a joke.

21- Low down payments required: Ads on radio still promoting the idea.

22- Personal bankruptcy law: Nothing done, judge needs authority to be able to adjust mortgage balance.

23- Regulating long maturity asset industries: Bank and insurance companies are long maturity asset and liability games with no short term implications to managements or their compensation from losses occurring long into the future. Needs special regulation of these markets but little has been done to address the problem.

24- Regulatory capture: The same, revolving door, industry groups and big money in politics writing our legislation and regulations, or in some cases, erasing them.

25- Managing risk: Need to separate principal investing, trading, investment banking and other risky activities within deposit taking commercial banks. No return to Glass Steagall or prohibition on these activities in the bill with the exception that foreign exchange, gold and silver trading will have to be done in a separate subsidiary or could be banned completely by banks.

26- Bankruptcy proceedings for banks and corporations: Plan addressed for FDIC banks to liquidate quickly if overseas subsidiaries do not create a problem, which they will, but still have to create an accelerated process for all corporations so debtors as well as stockholders can take a hit to their poorly invested debt capital rather than bailing all creditors out at par.

27- Hedge funds: Still no investigation of their role as counter-party and enabler to a lot of bank and derivative nonsense, still no bill to tax their managers at ordinary rates rather than capital gain rates.

28- Management incentives: Still not complete, no one has asked why if bank executives were given long vesting stock options before, why weren't the managers thinking long term and thus be better aligned with shareholder perspective. Not just a question of when executive receives bonus, must also have skin in the game. All stock and options can't be free or executives have no downside to worry about and act like pure upside option holders.

29- Complexity of mortgage and investment banking products: Banks introduced complexity to products on purpose to confuse investors, to reduce competition and increase profit spreads. This ends up reducing liquidity. Very little of the real problem has been addressed.

30- Bad bank loans: Most still on banks' books and losses have not been realized. TARP was supposed to be used for this, but then Paulson decided not to. Fed trying desperate measures to hide bank problems on its balance sheet and eventually transfer the bad loans to Fannie and Freddie where they will never be seen again but taxpayer will pay for losses.

31- Government stimulus: Saved or created zero new or imaginary jobs, just an excuse to keep public employees fully employed. If state, local and federal governments hire and promote their workers during good times, but won't lay them off during bad times, how do we ever make government smaller and more efficient. Simple math tells you that under this formulation, eventually, everyone will be working for the government, I don't know how we will be able to pay our tax bill however.

32- Severity of new bank regulations: The stocks of the big banks went up on news that this financial reform package was going to pass. What does that tell you?

33- Bank executive compensation: The same, if not worse as the bonuses are just as big, but now there are losses at the banks rather than profits and much of this bonus pool money is coming directly from US taxpayer.

34- Undervalued Chinese currency: Extremely slow progress.

35- Globalization: Created vast inequality as American workers were forced to compete with workers from $1 an hour wage countries. Raghuram Rajan argues that inequality contributed to the financial crisis by encouraging our government (through Fannie and Freddie) to promote home ownership aggressively to make up for lost wages and benefits of the American worker. Globalization allowed US companies to avoid taxation and regulation (environmental, banking, disclosure, workplace rules, union rules, product safety, etc.) and geographic horizons of institutional and individual investors were stretched so far as to make investment analysis and supervision of management teams completely unmanageable.

36- Bank transparency: Probably worse given their derivative positions, their off-balance sheet shenanigans continue, and the fact that all the new regulation and bank mergers means lots of restatements and footnotes and asterisks and fine print in the financial reports.

37- Externality costs and collective action problems: Very little progress, still don't know how you manage your risks and maintain market share when you as a banker are offering conventional 30 year fixed rate mortgages with a required 20% down payment to your customers and a new bank competitor opens across the street from you offering interest only, pay only if you feel like it, never repay the principal, zero down, zero closing costs, no income, no job, no problem, 2% teaser rate for five years, no prepayment penalty, no closing costs, feel free to take as much money out to buy that new car you always wanted, adjustable rate mortgages. Until long maturity industries like banking and insurance figure out this collective action problem and how to control it, they are doomed to these same crises in the future, The free market alone cannot address this unique type of problem where the dumbest makes the most and gains the most customers with losses postponed for decades.

38- Federal Reserve independence: We get a one-time partial audit and presidents of local boards no longer appointed by banks, but entire Fed continues to be dominated and controlled by banks and does their bidding rather than the people's.

39- Response times to crises: Our understanding of how to respond quickly and effectively to systemic financial crises hasn't improved. Not much learned, but we will get another chance real soon. Just look at the length of problems in this list and ask how many we really understand or believe we have solved for the future.

40- Underwater mortgage holders: No real help. Very few mortgage modifications. No mark downs of mortgage amounts. 25% of mortgages now underwater nationally where the mortgage balance is greater than the current home value and possibly as much as 50% of mortgages in California are already underwater.

41- Social Security (SS) and Medicare Impacts: Debt investor concerns on looming SS and Medicare blowup and potential insolvencies affects viability of entire financial system and the dollar. Not addressed by congress although it could be a $50 trillion problem that is a big enough number to cause the US to default on some obligations in the not too distant future.

42- The media: Corporate owned media dependent on corporate sponsored ads heavily biased on bullish buy side of market, always - Nothing's changed. CNBC never saw a stock they didn't like.

43- Insider trading and market manipulation: Policing and enforcement, especially at hedge funds, nothing to report.

44- Public reporting and transparency of publicly traded corporations: Derivative positions of $600 trillion notional amount make reading and analyzing an annual report almost meaningless as it is impossible to know the company's exposure to risky events and assets.

45- Overnight repo market: Nothing done to prevent funding of banks and investment banks with many long term obligations with overnight borrowings. Could mean the start of another possible run on the banks from their overnight lenders similar to what happened in this crisis.

46- Corruption in government: Two party system encourages collusion when investigating ethical and legal oversights, money in politics distorts all votes, and gerrymandering election districts assures us that the Democrats and Republicans that survive their primaries will be so far to the right or left as to make cooperation and governance in Washington nearly impossible. Much of this crisis could have been avoided with more effective government supervision as market economies are poorly prepared to manage systemic risk, collective action problems, externalities and ethical questions a bank corporate charter has no opinion on. Corporations were created to make profits, governments were created to solve problems that markets have difficulty understanding. We are quickly becoming a banana republic where government and the media act as paid employees of oligarchs and big banks and corporations. We invented government and the corporate form, they are virtual entities, they exist only in documents in DC and in lawyer offices' filing cabinets, and yet now we find ourselves controlled by them, a true Frankenstein horror.

47- Global banking system: In worse shape now given that Europe has sovereign debt crisis to deal with. Just like the AAA layers of Collateralized Debt Obligations (CDO's) that European banks bought during the mortgage crisis and now are experiencing default rates of 93%, now we have trillions more of what were supposed to be AAA sovereign credits being held by the same European banks but represent countries with 14% government budget deficits (Greece), 20% unemployment (Spain), countries with banks that are eight times bigger than their entire GDP (Ireland) and whose populations are aging and retiring so rapidly they will not see big real GDP growth for generations. These countries, and many others in Europe, will certainly be downgraded significantly in the near future and outright government defaults are not out of the question. The problem is exasperated by the fact that Value at Risk (VAR) accounting allowed these European banks to hold AAA assets like CDO's and sovereign debt with almost infinite leverage so they have very little equity standing behind these loans which means once again that the taxpayers throughout all the countries of Europe, and the US, will be picking up the tab when these countries do default or restructure their debt.

John R. Talbott is the bestselling author of eight books on economics and politics that have accurately detailed and predicted the causes and devastating effects of this entire financial crisis including, in 2003, The Coming Crash in the Housing Market. He is currently working on a new book that will be published in September 2010 entitled, The $200 Trillion Crisis. It will be published electronically and will be available for pre-order on Kindle and iPad starting in August 2010.

JIM KUHNHENN   |   June 30, 2010    1:00 PM ET

WASHINGTON — Nearly two years after a Wall Street meltdown left the economy reeling, the House on Wednesday passed a massive overhaul of financial regulations that would extend the government's reach from storefront thrifts to the executive suites of Manhattan.

Senate support for the far-reaching bill remained in flux, however. The Senate was forced to delay its vote to mid-July, denying President Barack Obama a victory before Independence Day. Democrats struggled to secure the votes of a handful of Republican senators even after meeting their demands and backing down on a $19 billion tax on big banks and hedge funds.

JIM KUHNHENN   |   June 29, 2010    5:01 PM ET

WASHINGTON (AP) -- Top Democratic House and Senate negotiators who worked out a deal on a sweeping overhaul of financial regulations regrouped Tuesday to eliminate a $19 billion fee on banks that had threatened to derail the legislation.

Eager to salvage one of President Barack Obama's legislative priorities, lawmakers replaced the bank fee with budget adjustments involving the $700 billion bank bailout and increased premiums on bank deposit insurance.

The bill's fate was thrown into doubt this week following the death of Sen. Robert Byrd, D-W.Va., and after Republican Sen. Scott Brown of Massachusetts vowed to abandon his support for the bill if it retained the assessment on large banks and hedge funds. The money would be used to pay for the costs of the legislation.

Uncertainty surrounding the bill raised doubts about Congress' ability to complete the bill this week - a target both the White House and Democratic leaders. The House was still expected to vote on the bill Wednesday, but the Senate likely would take up the bill in two weeks following a recess.

The legislation would rewrite financial regulations by putting new limits on bank activities, creating an independent consumer protection bureau and adding new rules for largely unregulated financial instruments.

Besides Brown, Republican Sens. Olympia Snowe and Susan Collins of Maine, both of whom also voted for the Senate bill last month, said they, too, had qualms about the bank assessment that negotiators inserted into the bill last week.

Without Byrd's vote, the support of the three Republicans would be crucial to overcome 60-vote procedural hurdles that could defeat the legislation.

Seeing nearly a year of work crumbling, Senate Banking Committee Chairman Chris Dodd, D-Conn., proposed Tuesday to replace the bank fee and pay for the bill with $11 billion that would be freed by ending the government's authority to use the $700 billion bank bailout fund.

Under that plan, the balance of the cost could be covered by increasing premium rates paid by commercial banks to the Federal Deposit Insurance Corp. to insure bank deposits. The additional FDIC premium would be paid by banks with assets greater than $10 billion.

The bailout fund, known as the Troubled Asset Relief Program or TARP, was scheduled to expire in October. The new proposal would end TARP when the bill is enacted, essentially cutting Congress' spending authority from $700 billion to $475 billion. That creates an accounting adjustment that would help cover the bill's costs.

Senate Republicans on the House-Senate conference committee angrily denounced Dodd's proposal as "smoke and mirrors" that violated Congress' intent to devote TARP repayments to reducing the deficit.

"The American taxpayer should be affronted by this little bit of sleight of hand and gamesmanship," said Sen. Judd Gregg, R-N.H. "What a piece of misleading, misdirected financial management this is."

The House Financial Services Committee chairman, Rep. Barney Frank, D-Mass., who said the new proposal was worked out with Brown, Collins and Snowe, said he preferred the bank fee, which would be assessed on banks with assets greater than $50 billion and hedge funds of more than $10 billion.

"I'm getting caught in the middle of an intra-Republican debate here," he said. "The criticism by the Republican senators was aimed at a provision aimed at satisfying Sens. Snowe, Collins and Brown."

He added: "Why anyone would think that the large financial institutions should not pay the administrative costs, I don't know, but apparently you couldn't get 60 senators."

Press One to Save Your Home and Family

Janis Bowdler   |   June 29, 2010   12:05 PM ET

Below is the third installment of a five-part series, Too Little to Save, in which the National Council of La Raza (NCLR) highlights a family and describes their struggle with foreclosure.

Mr. and Mrs. Navarro live with their 34-year-old daughter, a 16-year-old grandson, and an eight-year-old granddaughter. Family members worked together at a small business for ten years before it became a casualty of the market crisis. The Navarros took work where they could find it in an effort to try to keep the home, but when their interest rate adjusted they could no longer keep up with the payments. Mr. and Mrs. Navarro explain:

So [business] started getting slower and I had to look for a job. [I was] making $8.00 an hour, compared to what we were making...The thing is that we work together from home. So the company went [into] bankruptcy and then there was no work.

The honeymoon was over and now it's divorce time. Why? Because the interest rate that we had wasn't true. Because after two years the fixed interest was over and the owner, the [lender], could set the interest that they wanted.

Even after the family paid their lender $2,500 to save their home, they ultimately ended up in foreclosure. Mrs. Navarro recounts the events:

We talked and we [were coming] to an agreement. But [the lender] asked us for $2,500 and we gave it. It was a big sacrifice; we paid it because we didn't want to lose the house. But then we fell behind another month because again my husband was unemployed for about a month. So we called again, telling them that we didn't have work. Wait a little bit, we are going to pay. They didn't want to give us another chance.

The family moved to a new house that was too small to fit all the family members. Mr. and Mrs. Navarro describe how crowded quarters raised tensions:

The change was really bad. As a matter of fact, we are still not used to the new house. It's way too small for us because the children were used to each of them having their own bedroom. So right now my daughter sleeps with the girl, the other boy we sent to the basement, and my other daughter who is there now--we're fixing another bedroom downstairs. We are all over the place...Because right now the house is really small, my husband can't sleep because we made a bedroom out of a living room; we closed it and all that.

Financial anxiety continues to disrupt the family's relationship. Mrs. Navarro describes her eight-year-old granddaughter's difficulty understanding the family's situation:

The girl cried a lot. One night, when her mother left and my husband was gone, she started, "Grandma, why did we leave the house? Let's go back," and she was crying and crying and we can't get her to stop...And now she doesn't say anything but she's like, "Grandma, I want my room again. Why do I have to sleep with my mother?" That's what she asks me.

The Navarros were frustrated with their bank and felt they were not given a fair deal with their mortgage or efforts to avoid foreclosure:

Honestly, I think that the banks are not fair in certain situations, because it's not only us, there are a lot of people who are facing this same situation. I mean, if it was that we went on a trip and we spent the money--but we weren't [paying our mortgage] because there's no work. So the bank doesn't want to negotiate and if we ask for a loan, it's going to be the same thing. If you have any kind of difficulty, the bank is not going to give you a chance on anything.

A new report released by the Center for Responsible Lending estimates that before the end of the crisis, Hispanic homeownership will decrease by 17%. The Navarro family is just one of the many who will lose their homes. While lenders were eager to dole out home loans that would reset after a short period of time, they have exhibited a strong unwillingness to help families once mortgages spike. By resisting immediate solutions, lenders add to the long-term consequences that will sweep away a generation of wealth and compromise family ties.

Has your life been affected by the risk of foreclosure? If so, please share your experience. Contributing to this project will help decision-makers better understand the depth of this continued foreclosure crisis and take better steps to address it. Your personal story could affect their decisions!

Click here for the previous installment of Too Little to Save.

Dodd: Wall Street Reform Conference Committee Will Be Reopened

Ryan Grim   |   June 29, 2010   11:30 AM ET

UPDATE - 4:19 p.m. - The conference committee will meet at 5:00 Tuesday afternoon to make final changes to Wall Street reform. Ahead of the gathering, Rep. Barney Frank (D-Mass.) told reporters that he had been informed that Sen. Maria Cantwell (D-Washington) would now be voting for the final bill, though he added that he had not spoken to her. A Cantwell spokesman didn't immediately respond a call, but earlier in the day, Cantwell told HuffPost that she was reviewing the legislation to determine whether changes she had sought in the derivatives section could be made during the rule-writing process by the Commodity Futures Trading Commission. He had also been told, he said, that Sens. Olympia Snowe (R-Maine) and Susan Collins (R-Maine) were on board.

* * * * *

UPDATE - 2:53 p.m. - Sen. Chris Dodd (D-Conn.) told reporters that he plans to re-open conference committee negotiations Tuesday afternoon in an effort to win the GOP votes needed to overcome a filibuster. Sens. Scott Brown (R-Mass.), Olympia Snowe (R-Maine) and Susan Collins (R-Maine) objected to a fee imposed on major banks. Collins told reporters she met with Dodd for an hour Tuesday morning to outline her concerns.

Without the fee, the bill would increase the deficit by some $20 billion. Dodd proposed raising roughly 90 percent of that by ending the TARP program early and by increasing FDIC fees on all banks.

* * * * *

Negotiators have yet to file the Wall Street reform conference report on the House floor, meaning that Democrats can still reopen bicameral conference committee negotiations over the shape of the final bill. House leaders are waiting to file until they have a signal from the Senate that Democrats in the upper chamber have the 60 votes needed to overcome a GOP filibuster, a spokesman for Rep. Barney Frank (D-Mass.) told HuffPost.

"We have a pay-for problem," he said.

Democrats are having difficulty finding the 60 votes because Republicans who previously voted for financial reform are now objecting to fees and assessments the final bill levies on major banks in order to pay for the resolution of failing institutions.

The fees assessed to the big banks are modeled after the Federal Deposit Insurance Corporation's system for seizing and liquidating failed banks. Banks pay into the insurance fund and when one bank goes bad, the FDIC comes in on a Friday, protects depositors, sells off parts of the bank and re-opens it under new ownership. The system is designed to build confidence and prevent bank runs.

Democrats initially proposed a $50 billion fund that would be used to wind down failing megabanks. But Republicans, led by Sen. Mitch McConnell (R-Ky.), repeatedly referred to the set-aside money as a "permanent taxpayer bailout." The fund was stripped and replaced by fees on major banks that would amount to roughly $3 to $4 billion per year until the fund's coffers are filled with roughly $20 billion. If the money hasn't been used within 25 years, it goes toward deficit reduction.

Republicans say they will have trouble voting for Wall Street reform if it includes any taxes on Wall Street. "I was surprised and extremely disappointed to hear that nearly $20 billion in new assessments and fees were added in the wee hours of the morning by the conference committee," said Brown on Friday. "I've said repeatedly that I cannot support any bill that raises taxes."

Sen. Susan Collins (R-Maine), who voted for the bill the last time around, told reporters Monday she is "not happy with the $19 billion new fee, or tax, that would be imposed that did not have consideration in the Senate."

Her Maine Republican colleague, Sen. Olympia Snowe, said that "obviously I'm concerned, anytime you're placing taxes in the legislation that was not in the Senate bill."

Sen. Russ Feingold (D-Wisc.) plans to join Republicans in filibustering the bill, he said on Monday, arguing that the bill doesn't end the policy that deems some banks implicitly too big to fail. Sen. Maria Cantwell (D-Wash.), meanwhile, opposed the bill before conference and has yet to say how she'll vote this time. Without Cantwell or a replacement for Sen. Bob Byrd (D-W.Va.), who passed away Monday, Democrats need all four Republicans who voted for the underlying Senate bill to agree to approve the conference report.

Ryan McCarthy   |   June 29, 2010    7:59 AM ET

With supporters and opponents of the much-debated financial reform bill emphasizing the urgency of the moment, one crucial component of the legislation may be delayed for years.

Bloomberg News reports this morning that banks could be given until 2022 to implement the so-called Volcker Rule, which would force the nation's largest banks to reduce their investments in private equity and hedge funds.

Proposed by former Federal Reserve Chairman Paul Volcker, the rules were originally intended to stop banks from using taxpayer-backed cash to speculate in the financial markets. The measures were softened in the conference committee process. As HuffPost's Shahien Nasiripour pointed out, the final language allows banks to invest up to 3 percent of their Tier 1 capital in private equity and hedge funds. JPMorgan Chase, for example, could use $4 billion of its cash to speculate in the markets.

The rules wouldn't take effect until 15 months after passage, Bloomberg News reports, but with particularly hard-to-sell securities like real estate holdings, banks could be granted extensions until 2022.

As Goldman Sachs Group analyst Richard Ramsden put it, "While this may lead to further surprises down the line, we see this as important, as financial institutions have time to adapt their business models."

The changes in the final Volcker Rule language were backed by a last-minute change of heart by the Treasury Department, TPM reports. The loophole, pushed by Sen. Scott Brown (R-Mass.), whose support was seen as crucial in the vote-counting process, allows banks to invest in outside hedge funds.

Scott Brown Will Oppose Wall Street Reform If Wall Street Is Taxed

Ryan Grim   |   June 28, 2010    1:24 PM ET

UPDATE - Tuesday - 12:15 p.m. - Sen. Scott Brown (R-Mass.), after securing a loophole in the final Wall Street reform bill, announced Tuesday that he would vote against it if it included a fee on Wall Street banks to pay for their own winding down. "I am writing you to express my strong opposition to the $19 billion bank tax that was included in the financial reform bill during the conference committee. This tax was not in the Senate version of the bill, which I supported. If the final version of this bill contains these higher taxes, I will not support it," Brown wrote to the lead conferees, Sen. Chris Dodd (D-Conn.) and Rep. Barney Frank (D-Mass.).

Negotiators may have to re-open the conference committee.

* * * * *

Scott Brown is trying to have it every which way. The Massachusetts Republican won a Senate special election earlier this year railing against "backroom deals" such as the Cornhusker Kickback and Louisiana Purchase. Now he's got his very own Bay State Buy-Off, having secured key exemptions for banks and insurance companies in Massachusetts.

His backroom deal secure, Brown is now threatening to vote against the final Wall Street reform bill on the floor. His spokesman said he may have a statement out later today, but until then, his Friday statement expressing skepticism stands.

Brown argues that fees and assessments that the bill requires banks to pay amount to a tax and that he has vowed never to vote for a tax increase. But without the fees, the bill would increase the deficit. "Here you have a person who ran on the teabag line -- the Tea Party line -- more than willing to increase the deficit and debt of the United States rather than paying for the bill," said a House Democratic aide involved in the crafting of the bill, noting that the bill's red ink was created because the GOP insisted on removing an ex-ante fund that it deemed a "permanent taxpayer bailout."

The fees Brown objects to would amount to three to four billion dollars a year, according to the Congressional Budget Office, far less than the annual bonus pools at the largest banks. The fees would be collected until the fund held roughly $20 billion. After 25 years, in a concession to Republicans, the fund would go toward reducing the deficit if it had not yet been used. "I've said repeatedly that I cannot support any bill that raises taxes," said Brown on Friday.

When senators seek carve-outs for specific home state firms, they generally speak about the provision they're seeking in general terms. Brown, however, has repeatedly told Capitol Hill reporters that he is looking out for Fidelity Investments, State Street and MassMutual, among other Bay State-based financial institutions.

Brown sought exemptions that would benefit those companies, as well as a loophole in the Volcker Rule that would allow firms to trade for profit three percent of their taxpayer-backed capital, which amounts to billions.

The importance of Brown's vote increased with the passing of Sen. Robert Byrd early Monday morning, temporarily depriving Democrats of a vote for reform.

Brown's vote had been needed earlier because Democrats Russ Feingold (D-Wisc.) and Maria Cantwell (D-Wash.) opposed the bill for not going far enough.

Feingold objected that the bill did not end the implicit policy that some banks are too big to fail. He has had scant involvement in negotiations over the past several weeks and Senate leaders have had little discussion with Feingold about whether his vote is still in play.

On Thursday, as the two biggest parts of reform still left to be debated -- the Volcker Rule and Blanche Lincoln's derivatives restrictions -- were being hammered out, Feingold was not involved in the talks, which led Democratic negotiators to bring in Brown instead, who demanded concessions.

HuffPost asked the second, third and fourth ranking Senate Democrats on Thursday what conversations they'd had with Feingold about his Wall Street reform vote.

"I haven't talked to him. I will. I just don't know" why he is still opposed, Senate Majority Whip Dick Durbin (D-Ill.) said. "I wanna talk to Russ. He's a very thoughtful person. I just don't know his reasoning."

"I have not spoken to him," said Sen. Chuck Schumer of New York, the third-ranking Democrat.

"I have not talked to him," said Washington's Patty Murray, the Senate's number four. "I've been in committee hearings all day, so I haven't had a chance."

Durbin said Cantwell was more engaged. "We're talking to. We are talking to her, although I don't know that she's made up her mind," he said.

Cantwell opposed the final bill because a specific change she requested was never made. While the bill called for nearly all derivatives trades that can be cleared to be cleared, there was no penalty for not clearing it and the trade would still be valid. For Cantwell, that meant derivatives reform amounted to little more than a polite suggestion. "Senator Cantwell and her staff have been very engaged on this. I'm not going to make a comparison of one or the other," said Heather Booth, head of Americans for Financial Reform of the opposition of Cantwell and Feingold. "She's very engaged and been very clear about what she wants."

Feingold, however, wanted more dramatic, general changes made. Booth argued that the smartest move for Feingold would have been to engage in the debate to try to make the Volcker Rule and Lincoln's reform as tough as possible, rather than forcing Democrats to compromise with Brown.

"We believe -- if the battle is going on today, with Merkley-Levin [a measure based on the Volcker Rule] and the Volcker Rule -- there are several provisions that provide an institutional impact on the structure riskiness and the size of the banks. Merkley-Levin is one, with Volcker, which'd mean that they can't spend money on risky trading," said Booth. A 716 proposal, even as Lincoln has clarified it, that the swap desks would be spun off into an adequately capitalized subsidiary, is a structural reform that effects size, riskiness and interconnectedness. There are also leverage requirements. All of this is in play right now."

Both, whose coalition represents unions, consumer groups and other progressive organizations, said that she and her allies have been pressing Feingold to get more engaged.

"Our belief is the concerns that Senator Feingold has raised are important concerns and we welcome him to be engaged in this battle to, even in his last week to ten days, to engage, and we need his support for the field of battle. We need the fight. We're not asking, 'Give us a vote on cloture or final passage'. We're asking him to join with us in this fight to engage, to work this through, to make this stronger. Get us a financial reform bill that adds to the security of the people of Wisconsin and the overall financial system."

Zach Lowe, a spokesman for Feingold, insisted that Feingold has been engaged in the debate by proposing solutions to the too-big-to-fail problem and supporting amendments that would have broken up the banks.

Lowe provided a statement from Feingold outlining his structural concerns. "During debate on the financial regulatory reform bill, I made it clear that I would only support a strong bill that can prevent another financial crisis. Neither the House bill nor the Senate bill pass that test. I have spoken to Senate leaders, the Obama administration, and members of the conference committee and made my concerns well known. I opposed deregulating Wall Street and eliminating the protections of the Glass-Steagall Act, a position which put me at odds with many in Washington who supported the very policies that contributed to the financial crisis, and who now support these bills that simply don't get the job done. Without including stronger reforms, we're simply whistling past the graveyard," reads the statement.

Feingold, noted Lowe, was one of four senators to oppose Riegle-Neal in 1994, which some observers say helped create the too-big-to-fail problem, and was one of eight senators to oppose the repeal of Glass-Steagall in 1999. When the next crisis comes, Feingold will be able to say he opposed the flawed reform that led to it. But that future claim will likely ignore the role his decision to oppose reform as early as he did played in driving Dems to cut a deal with Republicans, which led to the weakening that now makes the next crisis more likely.

Feingold has not commented on the final conference report, which can at this point only be tweaked to make technical changes. A spokesman for Cantwell said she is still reviewing the final report and is not ready to comment.

UPDATE: Politico's Meredith Shiner just spoke with Feingold, who told her he had been lobbied by Majority Leader Harry Reid (D-Nev.), but was disinclined to vote for cloture. "I'm not going to enable something that doesn't do the job to be passed so people can pretend it does," he told her.

UPDATE II: Feingold is now out with a statement restating his opposition. "As I have indicated for some time now, my test for the financial regulatory reform bill is whether it will prevent another crisis. The conference committee's proposal fails that test and for that reason I will not vote to advance it. During debate on the bill, I supported several efforts to break up 'too big to fail' Wall Street banks and restore the proven safeguards established after the Great Depression separating Main Street banks from big Wall Street firms, among other issues. Unfortunately, these crucial reforms were rejected. While there are some positive provisions in the final measure, the lack of strong reforms is clear confirmation that Wall Street lobbyists and their allies in Washington continue to wield significant influence on the process," he said.

If all of the proposals cosponsored by Feingold had become law, however, there would still be no guarantee that the bill would -- or any bill could -- prevent another crisis.

Wall Street Opposes Wall Street Reform

Ryan Grim   |   June 28, 2010   12:08 PM ET

Wall Street reform likely got a boost in the eyes of the public on Monday when the major trade association representing big banks came out strongly against the conference committee compromise that emerged on Friday morning.

The American Bankers Association, which represents the major banks as well as some smaller ones, sent a letter to the Hill expressing "strong opposition to the Conference Report to accompany H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act."

The bankers said that they supported the goals of reform -- much as the insurance industry supported the goals of health care reform -- but it couldn't back the final package. "Bankers have supported key reform principles since the beginning of this debate," reads the letter, which was provided to HuffPost by a congressional aide. "Creating a systemic risk council, developing a robust method for handling the failure of large institutions, ending the concept of too-big-to-fail, closing gaps in regulatory oversight, and enhancing consumer protection are all laudable goals that the industry supports."

The banks cited two specific elements of reform that were the most objectionable. First among them was swipe fee reform, legislation that reduces what banks and credit card companies can charge retailers for the use of credit card machines. "This amendment, which had nothing to do with financial regulatory restructuring, has been falsely presented as benefitting [sic] consumers. In reality, the beneficiaries of this provision are the retailers, who extract great benefits from debit cards, such as reduced personnel and fraud costs, but will no longer have to pay to support these benefits," the bankers write.

Secondly, the banks were offended at the creation of a Consumer Financial Protection Bureau, arguing that it would lead to increased litigation and decreased credit availability.

"More generally, the conference report includes provisions that add more than 30 new and expanded regulations that will limit the ability of banks, particularly smaller institutions, to extend credit," the bankers say.

Read the full letter:

June 28, 2010

To: Members of the U.S. Senate

Members of the U.S. House of Representatives

Re: Conference Report to H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act

The undersigned banking trade associations, representing banks of all sizes in every state, are writing to express strong opposition to the Conference Report to accompany H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Bankers have supported key reform principles since the beginning of this debate. Creating a systemic risk council, developing a robust method for handling the failure of large institutions, ending the concept of too-big-to-fail, closing gaps in regulatory oversight, and enhancing consumer protection are all laudable goals that the industry supports.

But these important provisions are overshadowed by a number of other provisions in the bill that run far afield from Wall Street reform and will ultimately harm Main Street. The consequences involved are very real and will have a very negative impact on traditional banks, on consumers, and on the broader economy. Above all, the capability of traditional banks to provide the credit needed to move the economy forward has been undermined in numerous ways.

For example, the conference report contains a provision that would limit the interchange fees on debit cards to the cost of the specific transactions. This amendment, which had nothing to do with financial regulatory restructuring, has been falsely presented as benefitting consumers. In reality, the beneficiaries of this provision are the retailers, who extract great benefits from debit cards, such as reduced personnel and fraud costs, but will no longer have to pay to support these benefits. The losers will be consumers and traditional banks. Low income consumers will be particularly hurt, as funds used to support basic banking accounts and other services will not be available.

As another example, the conference report would create the Consumer Financial Protection Bureau (CFPB), with unprecedented authority to impose new requirements on all banks. The conference report allows the CFPB to determine if products or practices are "unfair" or "abusive," broad terms that make if far from clear what this new standard will mean. Extensive litigation is likely, and product innovation will be limited. Even worse, certain non-bank competitors, such as auto dealers, are carved out of the CFPB's jurisdiction.

More generally, the conference report includes provisions that add more than 30 new and expanded regulations that will limit the ability of banks, particularly smaller institutions, to extend credit.

We urge you to vote against the Conference Report on regulatory restructuring.


American Bankers Association

Alabama Bankers Association

Alaska Bankers Association

Arizona Bankers Association

Arkansas Bankers Association

California Bankers Association

Colorado Bankers Association

Connecticut Bankers Association

Delaware Bankers Association

Florida Bankers Association

Georgia Bankers Association

Hawaii Bankers Association

Idaho Bankers Association

Illinois Bankers Association

Illinois League of Financial Institutions

Indiana Bankers Association

Iowa Bankers Association

Kansas Bankers Association

Kentucky Bankers Association

Louisiana Bankers Association

Maine Association of Community Banks

Maryland Bankers Association

Massachusetts Bankers Association

Michigan Bankers Association

Minnesota Bankers Association

Mississippi Bankers Association

Missouri Bankers Association

Montana Bankers Association

Nebraska Bankers Association

Nevada Bankers Association

New Hampshire Bankers Association

New Jersey Bankers Association

New Mexico Bankers Association

New York Bankers Association

North Carolina Bankers Association

North Dakota Bankers Association

Ohio Bankers League

Oklahoma Bankers Association

Oregon Bankers Association

Pennsylvania Bankers Association

Puerto Rico Bankers Association

Rhode Island Bankers Association

South Carolina Bankers Association

South Dakota Bankers Association

Tennessee Bankers Association

Texas Bankers Association

Utah Bankers Association

Vermont Bankers Association

Virginia Bankers Association

Washington Bankers Association

Washington Financial League

West Virginia Bankers Association

Wisconsin Bankers Association

Wyoming Bankers Association

By BERNARD CONDON and DANIEL WAGNER   |   June 28, 2010    8:24 AM ET

NEW YORK -- To keep taxpayers from having to bail out giant banks again, lawmakers faced two choices: design rules to try to prevent them from failing, or shrink them so that if they do fail, they won't threaten the financial system.

Our political leaders chose the rules.

At more than 2,000 pages, the new financial regulatory bill takes aim at everything from megabanks straddling the globe to street-corner payday lenders. And with a bit of luck, the overhaul -- the most sweeping since the Great Depression -- will help make big bank failures less likely and less damaging if one does occur.

  |   June 26, 2010   10:05 AM ET

New York — Moody's Investors Service on Friday said the deal reached in Congress on the financial reform bill will not prompt it to immediately change its ratings on U.S. banks – but that action might come later.

The ratings agency said it must first discern the effects of the legislation on the profit banks make in the credit industry.

Latino Consumers Have Much to Celebrate in New Banking Bill

Eric Rodriguez   |   June 25, 2010    4:10 PM ET

Early this morning, lawmakers finalized the banking reform bill. The "Restoring American Financial Stability Act of 2010" is a great victory for consumers, who will now have vastly improved protections against predatory lending. The bill also contains very strong and much-needed foreclosure assistance. This is an historic piece of legislation that will change financial markets for the better.

The one unfortunate blemish was Congress caving to the will of auto dealers and exempting them from new federal oversight. In a momentary lapse back into politics as usual, lawmakers shielded a loosely regulated industry from accountability. This occurred over strenuous objections from President Obama, the Pentagon, independent community banks, civil and consumer rights organizations, Congressman Gutierrez (D-IL), and many others who know all too well how auto dealers have exploited Latinos and other consumers seeking to finance their car purchases. Communities of color are most frequently targeted by abusive lenders in the auto industry and the National Council of La Raza (NCLR) pledges to work with regulators, consumer advocates, and the industry to end discrimination and exploitation in auto dealer financing.

That said, on balance, there is much to celebrate about this legislation. We congratulate our champions on several major victories:

Consumer Financial Protection Bureau (CFPB)
The creation of a CFPB is unprecedented. This bureau will be entirely devoted to protecting families from predatory loans and other unsound financial products. It will be autonomous and have the authority to write and enforce rules. This is the cornerstone of true consumer rights.

Money Transfers
New disclosures included in the legislation will create a more transparent process for wiring money abroad. Tens of billions of U.S. dollars are sent every year by American residents to their relatives overseas. In fact, immigrants from Mexico alone sent over $17.3 billion home in 2009. These same remitters also spent an estimated $948 million in fees and other costs getting it there.
New protections championed by Congressman Gutierrez and Senator Akaka (D-HI) will create a disclosure that displays the true cost of the remittance and the value received.

Foreclosure Assistance
Two provisions stand as real boosts for those struggling with foreclosure, as experts estimate that more than 2.3 million Black and Latino households will lose their homes to foreclosure between 2009 and 2012 and approximately two million Blacks and Latinos have lost their jobs since the recession began. The first includes a bridge loan program for unemployed homeowners while they look for a job. The second is an infusion of funding for a Neighborhood Stabilization Program (NSP) that allows states to purchase and redevelop foreclosed homes. A solid NSP can also help generate employment in hard-hit areas.

Mortgage Protection
Reckless and deceptive lending has severely impacted Latinos and other communities of color. For example, Latinos are 30% more likely than Whites to receive a high-cost loan when purchasing their home. They are also more likely to receive loans with high-risk features. The bill includes comprehensive mortgage reform and antipredatory lending measures essential to combating abusive lending practices that played a key role in the economic crisis.

Financial Counseling
Funds will be infused into community-based organizations that offer financial counseling. They will help families open bank accounts, build credit, identify an affordable car loan or credit card, and recover from a foreclosure or bankruptcy. This service is critical to helping consumers recover and avoid disastrous products in the future.

Safe Bank Accounts
Low-income, minority, and underbanked families will have access to safe and affordable bank accounts. Currently, many Latino consumers rely on fringe financial products such as payday and car title loans to pay their bills and otherwise make ends meet. Approximately 19.3% of Latinos and 21.7% of Blacks are unbanked, compared to only 3.3% of Whites. The bill will provide grants to help families connect to bank accounts and provide alternatives to payday loans.

The Time Is Now

Blanche Lincoln   |   June 25, 2010   12:11 PM ET

My constituents want Washington to work for us, not the special interests like Wall Street banks.

That's why I stood up for Main Street banks, small businesses and working families in my home state by proposing the toughest reforms for Wall Street of anyone in either party, including the administration.

One of my reform proposals would make the $600 trillion over-the-counter derivatives market fully transparent where today it is completely in the dark, with no regulation, no oversight and no public disclosure.

Early this morning, the Senate-House Conference Committee on Financial Regulation passed landmark legislation that included the most important provisions of my original proposal.

When I first unveiled my plan in mid-April, it was dismissed by many as a political stunt that would never see the light of day. Well, I've been underestimated before. What matters to me, and to the retirees, small businesses and local bankers that I represent, is that we expose risky trading by the big Wall Street banks to the light of day.

Now my colleagues in the Senate and the House need to know that you stand behind this reform. I have launched a petition and I hope you'll add your voice to the growing chorus of Americans who support strong financial reform.

When my committee, the Senate Committee on Agriculture, Nutrition and Forestry, adopted my bill with bipartisan support, the big banks sent hundreds of lobbyists to Capitol Hill. Most of them promised it wouldn't be included in the overall Senate Financial Reform bill.

When Senate reform became the Dodd-Lincoln Substitute with my derivatives provision intact, there were numerous articles predicting that my provision did not have enough support to defeat amendments to strip it from the bill. However, it's most significant threat failed with only 39 votes.

When the Senate passed comprehensive financial reform with my provision unchanged, the headlines predicted that it would be removed in the conference committee of Senate and House members.

This morning, the conference committee ended an all-night session by adopting historic financial reform that offers unprecedented protections for consumers and includes the bulk of my provision. The riskiest trading practices by Wall Street banks that nearly blew up the world economy will have to be moved to an affiliate within two years.

While we are changing the way Wall Street does business, the real story is how reform will benefit Main Street by helping families save for college, protect retirees, ensure that small businesses can get loans and most importantly create new jobs.

We are not over the finish line. You may still hear opponents using the same tired claims and worn out, catch-all defenses of "unintended consequences" or "driving business overseas" in an attempt to stop our reform efforts.

But with momentum on our side, the strong reform that America's small businesses, community banks, and families need is within our grasp. It's time we proved the naysayers wrong once again and pass historic financial reform.

I hope you add your name to the petition today so that my colleagues in Washington know you want to change the financial system so families have the protections they deserve.

Banks Keep Derivatives Units, Volcker Rules Softened

Shahien Nasiripour   |   June 25, 2010    5:30 AM ET

This report was updated Friday at 10:25 a.m. ET and on Monday at 2:45 p.m. ET (see below).

After nearly 20 hours over two final days filled with backroom dealing, House and Senate negotiators struck a grand compromise to merge the two chambers' competing bills to reform the nation's financial system in a party-line vote. But the long hours of closed-door meetings also appear to have fulfilled Wall Street's greatest wish: Many of the measures that offered the greatest chances to fundamentally reshape how the Street conducts business have been struck out, weakened, or rendered irrelevant.

Democrats unanimously supported passage; Republicans unanimously voted against it, warning that the bill doesn't accomplish its central objective: ending the perception that some financial firms are too big to fail.

The two most high-profile provisions were the last items to be considered. Neither emerged intact. One would have forced banks to stop trading financial instruments with their own capital and give up their stakes in hedge funds and private equity funds, named after its original proponent, former Federal Reserve Chairman Paul Volcker. The other would have compelled banks to raise tens of billions of dollars because they'd have to spin off their derivatives-dealing operations into separately-capitalized affiliates within the bank holding company, pushed by Senate Agriculture Committee Chairman Blanche Lincoln. As currently practiced both activities are highly lucrative, annually generating billions for the nation's megabanks.

The proposals were launched after perceived political vulnerabilities -- the Obama administration announced the "Volcker Rules" after Massachusetts Republican Scott Brown won Ted Kennedy's old Senate seat, while Lincoln announced her proposal under threat by a liberal challenger in Arkansas for her Senate seat. Both came to become litmus tests used to gauge whether policymakers were for Main Street or for Wall Street.

Ultimately, despite widespread approval among those pushing for fundamental reform in the wake of the worst financial crisis since the Great Depression, yet perhaps aided by near-unanimous revulsion among those on Wall Street, both were watered down in front of C-SPAN cameras beginning around 11 p.m. ET. Democratic lawmakers had been rushing to complete the bill by Friday morning under a self-imposed deadline. The final vote was recorded at 5:40 a.m. The conference began their final day just before 10 a.m. on Thursday.

The so-called Volcker Rules originally banned banks from using their own taxpayer-backed cash to speculate in the financial markets. The federal government stands behind bank deposits, and banks have access to cheap funds from the Federal Reserve. Volcker argued that banks shouldn't use that subsidy to speculate.

After days of leaks to the news media that the Senate was looking to ease the restrictions, on Thursday afternoon Senate conferees confirmed the rumors: banks could invest up to three percent of their tangible common equity in hedge funds and private equity firms. Tangible common equity -- considered to be the strongest form of bank capital -- is comprised of shareholder equity.

A few hours later, the Senate amended its proposal, changing the metric from tangible common equity to Tier 1 capital. Banks have more Tier 1 capital than they have tangible common equity, so changing the requirement to the weaker form of capital allows banks to invest more of their cash in hedge funds and private equity funds. The concession was confirmed by Steven Adamske, spokesman for House Financial Services Committee Chairman Barney Frank.

Using JPMorgan Chase, the nation's second-largest bank by assets with more than $2.1 trillion, as an example, the bank would be able to invest an additional 40 percent of its cash, or an extra $1.1 billion for a total of $4 billion, in the activities that Volcker wanted to prohibit banks from engaging in, according to the firm's latest annual filing with the Securities and Exchange Commission.

For Bank of America, the nation's largest bank with more than $2.3 trillion, that change allows the firm to invest more than $4.8 billion in hedge and private equity funds, an increase of 80 percent, according to the bank's 2009 annual filing with the SEC. Morgan Stanley can invest $1.4 billion, a 58 percent increase, while Goldman Sachs can invest $1.9 billion, an increase of just 10 percent, securities filings show.

Rep. Paul Kanjorski became visibly angry. The longtime Pennsylvania Congressman tried to reverse, at least partly, the Senate's watering down of its own provision, calling it a "significant change."

"Some of our friends that are in the Senate ... are annoyed with that enlargement, as I am," Kanjorski said.

Noting of the Senate's new proposal that the House conferees "only had their offer for 20 minutes," Kanjorski added that his counter-proposal was a midway point between tangible common equity and Tier 1 capital.

Also, he noted, his compromise was "for purposes of getting along, but not to be taken advantage of, quite frankly."

His measure failed.

The most immediate beneficiaries are State Street Corp., the nation's 19th-largest bank with $153 billion in assets, and BNY Mellon, the nation's 13th-largest bank with $221 billion in assets, who pushed Brown, the Massachusetts Senator, to secure the relaxation of the Volcker Rules. However, all big banks will benefit.

That loophole survived.

Senate negotiators also announced they were carving out a class of financial institutions from the restrictions, namely systemically-important nonbanks.

As for the measure's proposed ban on banks trading with their own money, also known as proprietary trading, the agreed-upon provision calls for federal financial regulators to study the measure, then issue rules implementing it considering the results of that study. It could be anything from an outright ban to a barely-there limit.

Lincoln's provision, under fierce assault by the Treasury Department, the Obama administration, and a group of Wall Street-friendly Democrats called the New Democrat Coalition, also was softened.

Lincoln's proposal would have compelled the nation's megabanks to move their swaps-dealing units, which deal and trade in a type of financial derivative product, into a separately-capitalized institution within the larger bank holding company. The affected firms collectively would have to raise tens of billions of dollars to protect their swaps desks in case their bets went bad. Or, they could have disband the activity altogether.

Along with a few foreign banks, the nation's largest domestic banks essentially control the swaps market in the U.S. By forcing them to divest their units into separate affiliates, which in turn would compel them to raise money to capitalize these affiliates, Lincoln's measure could have forced them to scale down their operations. At the least, supporters say, it would have compelled them to have enough cash on hand in case their bets begin to sour, saving taxpayers from having to step in to prop up the banks like they did in 2008 -- taxpayer support that continues today.

Though Lincoln's measure had the support of three regional Federal Reserve Bank presidents -- James Bullard of St. Louis, Richard Fisher of Dallas, and Thomas Hoenig of Kansas City -- representing the Fed and bankers in the broad middle of the country from Kentucky to Colorado, they ultimately were outmatched. The Fed's Board of Governors, led by the nation's central banker, Ben Bernanke; Federal Deposit Insurance Corporation Chairman Sheila Bair; Treasury Secretary Timothy Geithner; and the nation's largest banks were united in their opposition.

Two minutes before midnight, Collin Peterson, a Minnesota Democrat, announced that a deal over Lincoln's divisive measure had been reached.

"There's been some work done by the administration and some of the senators on a potential compromise, I guess you could call it," said Peterson, chairman of the House Agriculture Committee, in a reference to the Obama administration.

The negotiations were not public.

Rather than banks being forced to spin off their swaps desks, they'd be allowed to keep those units dealing with "the biggest part of all these derivatives," Peterson said. The rest would be pushed out to an affiliate.

Under the agreement, reached late Thursday, banks would continue to be allowed to deal interest rate and foreign exchange swaps, "credit derivatives referencing investment-grade entities that are cleared," derivatives referencing gold and silver, and the firms would be allowed to hedge "for the banks' own risk."

Banks would be forced to push out to their affiliates derivatives referencing "cleared and uncleared commodities, energies and metals (with the exception of gold and silver), agriculture, credit derivatives referencing non-investment grade entities and all equities, and any uncleared credit default swaps," Peterson said.

"Frankly, the biggest part of all these derivatives, by far, are the ones that I named that are going to be able to stay in the bank," Peterson added. "Interest rate and foreign exchange are by far the greatest part of the amount of business that's involved here."

Lincoln, while praising the overall bill, acknowledged that there was only so much she could do.

"Our financial system is complicated and integrated and our time so limited that we couldn't afford to dig in our heels, but must do something," she said.

This report was updated to reflect the impact the change in the "Volcker Rules" would have on Bank of America, Goldman Sachs and Morgan Stanley. It also was updated to clarify that State Street and BNY Mellon were not the only beneficiaries of Sen. Brown's actions -- all big banks will benefit. The story also was updated to clarify that federal regulators shall consider their study in implementing the "Volcker Rules," rather than basing that implementation on their study.