Even as the health insurance companies draw down on health care reform, another showdown is just beginning in Washington. On Wednesday, the House Financial Services Committee will begin marking up the first legislation to try to curb Wall Street's casino. And if you think the health insurance companies are packing heat, wait till you see the firepower the banks will unleash to frustrate reform.
The Committee will focus on two core reform measures. The first, the regulation of derivatives, goes to the heart of the current collapse. Derivatives are the exotic instruments that Warren Buffett warned were "weapons of financial mass destruction." Derivatives have been traded with little regulation, over the counter, in private deals. This allowed companies like AIG essentially to open a casino on top of an insurance company, and take bets without the prudence required of a Las Vegas bookie. When AIG went belly up and threatened to bring down the entire financial house of cards, taxpayers ended up with a bill totaling over $180 billion and counting.
The reforms call for standardizing derivatives, trading them on a public exchange, with transparency, so prices can be compared and holdings regulated. Common sense, one would think. (for a good summary, see the estimable Harold Meyerson's piece)
But the five largest American banks -- in rough order of declining solvency: Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America and Citigroup -- hold fully 95% of derivatives -- with a notional value of over $290 trillion. In the first six months of the year, they made about $15 billion trading in these things. Not surprisingly, they have leveled their guns at the very notion of a public exchange. They enlisted companies that use derivatives to hedge against foreign exchange risks and the like, arguing that the reforms would raise costs all around. They have largely succeeded in the congressional cloakrooms.
So the bill that the House will consider on Wednesday creates a clearinghouse, not a publicly managed exchange. It also allows banks to decide that a deal is so unique that it needn't be posted on the clearinghouse. The best experts in the field -- like Michael Greenberger of the University of Maryland -- warn that the legislation might end up WEAKENING current law. That is no small achievement, because, as we saw in the collapse of AIG, current law is toothless.
The second basic reform to be considered is a Consumer Protection Finance Agency to protect consumers from getting gouged or defrauded by lenders on the whole range of consumer loans -- mortgages, car loans, payday lending, credit cards. The regulators who currently have some police power failed to use it before the crash -- as exemplified by the systematic fraud practiced in peddling complex subprime mortgages to people who could not hope to pay them back. And after claiming to be born again cops on the beat, the same regulators have failed to do much since the crash -- as exemplified by the record fees banks are exacting from depositors, or by hiking interest rates on credit card holders. The reasons for their failure are both ideological -- the abiding conservative belief that markets are self-regulating and regulation is costly, and institutional -- the regulators' first duty is to insure the health of the banks. If the banks are getting healthy by gouging their customers, the regulators turn their heads.
So the CPFA is designed to create an independent cop on the beat to protect consumers and police the banks and credit card companies. Needless to say, the banks don't like this idea. Already they've succeeded in delaying and diluting the administration's proposal. The current draft strips out the mandate that banks offer customers "plain vanilla" alternatives -- a clean 30 year, fixed rate mortgage, for example, when peddling exotic ARMS with balloon payments. Worse, it now suggests vesting enforcement power in a council of the very same regulators that have failed so miserably in the past and present.
But that's not all. The banking lobby is nothing if not shameless. They hope to use the reforms to WEAKEN current law. They are pushing to make the federal standard the ceiling on reform, stripping the power of states to have higher standards. Basically, they are hoping to find a way to shut down the independent investigations of state attorneys general like New York's Eliot Spitzer and Andrew Cuomo or Illinois' Lisa Madigan. (for a good summary of this see Dave Johnson's blog here)
How do the banks fend off needed reform? Follow the money. A recent report by Paul Blumenthal of the Sunlight Foundation shows that the 27 members of the House Financial Services Committee have received over one-fourth of their contributions from the FIRE (Finance, insurance and real estate sector). Ranking Republican Spencer Baucus from Alabama opposes the CFPA, arguing that we don't need "more regulation," we just need "smart regulation." He received a staggering 71% of his contributions from the finance sector over the first six months of this year (and 45% of his total contributions over his career). Democrat Melissa Bean who leads the effort to gut state regulatory authority over the banks has received fully 42% of her contributions for the first six months from the banking sector. Not surprisingly, the champions of reform like Rep. Alan Grayson, Maxine Waters, Keith Ellison, Adam Putman, and Carolyn McCarthy all pull in the lowest percentage from the sector.
Historically, the banks, as Senator Dick Durbin decried in disgust, "own the place." And they've succeeded thus far in frustrating reform, even while pocketing literally hundreds of billions in support from taxpayers.
Terrific documentation made available by researchers at the Service Employees International Union (SEIU) provides the details. Citigroup received about $341 billion from taxpayers in the bailout, and dispensed $4.9 million for lobbyists in the nine months after the bailout and $5.6 million in campaign contributions in 2008. (Talk about return on investment). Bank of America got $199 billion from the bailout and paid lobbyists $3.6 million in the nine months thereafter, while making campaign contributions of $7.2 million in 2008. Goldman Sachs pocketed a nifty $63.6 billion in bailout fund while setting aside $11.4 billion for bonuses and compensation for the first six months of 2009. (Lobbying fees $1.8 million; 2008 campaign contributions $7.1 million)
But this time it could be different. Backroom deals are no longer safe. Americans have been fleeced of trillions in the value of their homes and their savings because of Wall Street's reckless excesses. Then as taxpayers, they were extorted to ante up literally trillions more to forestall economic collapse by bailing out the banking sector. Insult was added to that injury when the Federal Reserve refused to tell the Congress who got the money and on what terms.
Legislators would be well advised to understand the cozy old ways of doing business are no longer acceptable. Americans are livid and paying attention. Legislators who rely on Wall Street to finance their campaigns and then lead the effort to block or dilute reforms will discover that their constituents know what they have been up to. Organizations like my own Campaign for America's Future, the Sunlight Foundation, Americans for Financial Reform, Huffington Post bloggers will make certain the word gets out. Legislators may discover that Wall Street's money is a burden, not a blessing.
The House committee's markup is the beginning of a long process that will make health care reform look like a summer's picnic. Legislators will have to decide what side they are on. It is up to us to make certain that they understand we will hold them accountable for the choice they make.
Follow Robert L. Borosage on Twitter: www.twitter.com/borosage
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"But the five largest American banks -- in rough order of declining solvency: Goldman Sachs, Morgan Stanley, JP Morgan Chase, Bank of America and Citigroup -- hold fully 95% of derivative
Yeah, they recorded record profits. AIG purchased the crap mortgages, packaged them, sold them to banks , which "sold" the packaged loans to the big five, which then sold them to institutio
Shouldn't the institutio
The products should never have never been sold nor purchased, and certainly not insured.
Packaged products (derivativ
The current derivative market is about $600 trillion. At a maximum rate of 5% that would generate about $30 trillion to the treasury.
In Federalist Paper 12, Hamilton wrote:
"The ability of a country to pay taxes must always be proportion
Wall Streeters, conservati
But who will do this? I have read many, many posts that say Marx was wrong about his prediction that only violence would end the chattel society. So tell me, who will end this, and how?
Only the despots themselves
Given the real lack of any movement by the people to address this, why would legislator
The time for term limits is now!
The time for term limits is now!"
So typical of the unrealisti
Congress in bed with corporate America? Term limits!
Economy tanks? Abolish Fanny Mae and The Fed!
Infrastruc
Schools in a mess? Fire the teachers!
FDA can't find the poisons in our imported foodstuffs
Lousy heath care system? Do nothing! (Those who complain about it are just a bunch of socialist whiners anyway).
Let's go back to some imaginary 18th century utopia where we all clothed, fed and schooled ourselves.
www.nextre
Idaho's republican Senator, Crapo accepted millions over the almost 18 years he's been in office, claims to be well informed about health care yet has accomplish
A republican
Look up your representa
Eliminate both parties & take campaign finance, elimiate retirment of current representa
Now they are starting on Wall Street Regulation
THE AMERICAN PEOPLE OUTNUMBER THESE INSTITUTIO
And it is time to remind Congress and the President and all the CEOs in the country of that fact. Please go to my website at http://www
It is time we were heard over the rustle of dollar bills, America. Come and join me in DC on November 3rd or at any stop along the way.
hyper inflation would make debts very serviceabl
This American nightmare has been, in large part, brought to us by the "toxic" Wall Street firms, which have done everything in their power to deregulate our financial markets, buy our politicans
These "too big to fail" financial firms have inflicted more damage to the American people than any terrorists
I agree....o
This will not change until the political business model, especially campaign financing, changes, and this will not happen until voters have better continuous online access to informatio
Kamact, a capitalist who wants regulation