Last week, Congress decided it would not confront Too Big To Fail, the single gravest threat to our collective financial security. But there are still several key Wall Street reforms worth fighting for -- reforms that must be enacted before the next crisis hits, with or without a big bank break-up. And fortunately, key Senators have authored amendments dealing with each one.
Blanche Lincoln's Derivatives Bill
The most important fight from here on out is protecting the surviving elements of the derivatives bill crafted by Sen. Blanche Lincoln (D-Ark). The key reform in Lincoln's bill would force big banks who deal derivatives to spin off those operations into separate companies. Derivatives are a breeding ground for straightforward gambling. For every $1 in legitimate risk-hedging in the derivatives market, there is $78 in speculative betting. That speculation is being backed by taxpayer perks -- FDIC-insured deposits and Federal Reserve loans -- that are supposed to support safe and productive lending, not reckless gambling. Lincoln would ban all federal backstops for this insanity, making the derivatives market less profitable, and therefore smaller, in the process.
This element of Lincoln's bill is already in the Senate legislation, but Sen. Judd Gregg, R-N.H., is pushing an amendment to gut this plan. Don't let him get away with it. A vote for Gregg's amendment is a vote for more -- and more expensive -- bank bailouts.
The Volcker Rule
The Volcker Rule has a similar aim to Blanche Lincoln's derivatives plan. Economically essential banks shouldn't be speculating with taxpayer money. The Volcker Rule would ban banks who receive Federal Reserve loans from conducting risky securities trades for their own accounts. Gambling with taxpayer money doesn't help the economy in any way, it just produces short-term profits for banks while subjecting our tax dollars to long-term bailout risk. Whether the trades take the form of securities or derivatives, if they're speculative, they shouldn't be connected to the commercial banking system.
Sens. Carl Levin, D-Mich., and Jeff Merkeley, D-Ore., have authored an amendment that would require regulators to implement the Volcker Rule banning proprietary securities trading at commercial banks.
Audit The Fed
The Federal Reserve is the chief bailout engine for the U.S. banking system, and it operates under conditions of almost complete secrecy. Since the crisis broke out, the central bank has pumped nearly $4.3 trillion into the nation's banks, but the taxpayers on the hook for these loans know almost nothing about them. We don't know who the Fed extended loans to, the terms of the loans, or what Fed officials signed off on them.
This is a disgrace to democracy. Nowhere else in American government can public officials spend public money without detailed disclosure. Sen. Bernie Sanders, I-Vt., has authored a bill that would subject the central bank's bailout operations to a thorough and public audit. A more comprehensive audit authored by Reps. Alan Grayson, D-Fla., and Ron Paul, R-Texas, passed the House late last year. Both are worth supporting. If the Sanders amendment cleared the Senate, the audit could be widened in a conference with the House. But any effort to hold the Fed accountable is better than none.
When President Barack Obama first put forward his Wall Street reform proposals in June 2009, the strongest provision was a plan to create an independent Consumer Financial Protection Agency (CFPA), whose sole charge was cracking down on abusive bank lending. Our current crop of regulators totally failed to perform this job over the past decade, as millions of foreclosure victims can attest to. Today's bank regulators are charged with ensuring both bank profitability (a type of regulation known as "safety and soundness") and that consumers are treated fairly. In practice, that has meant regulators ignore bank rip-offs, provided they create short-term profits.
Unfortunately, Obama's strong CFPA bill has been watered down over the course of nearly a year of negotiations. Instead of an independent agency, the current Senate bill would house the consumer regulator at the Federal Reserve, a regulator which had the authority to crack down on mortgage market abuses throughout the crisis, but failed to exercise it. What's worse, the current Senate bill limits the scope of the new consumer regulator's rule-writing authority, gives the existing, failed regulators veto power over those rules, and restricts the new regulator's ability to enforce its rules.
There was no good economic reason for the Senate to make any of these changes -- they were all simply concessions to deep-pocketed bank lobbyists, nothing more, nothing less. Sen. Jack Reed, D-R.I., has an excellent amendment that would restore Obama's original CFPA language, and provide real protection for consumers.
Banks amplify their bets by borrowing loads of money, a phenomenon called leverage. As the crisis unfolded in 2008, some banks found themselves with $40 or even $60 in borrowed money for every $1 of their own cash. That meant big profits while markets were moving up, but epic losses when markets started falling. The Senate must impose a hard cap on leverage to complement the 12-to-1 cap included in the Wall Street reform bill that cleared the House last year. The Brown-Kaufman amendment would have limited bank borrowing to $16.67 for every $1 of their own money. Brown-Kaufman also would have broken up the six largest U.S. banks, and was rejected in the Senate last week. The Senate should vote on the leverage cap as a stand-alone amendment.