This article originally appeared on my site Credit Writedowns
That is the question Newsweek asked of the Democratic Congressman from Massachusetts in charge of banking reform efforts in the U.S. House of Representatives in an interview. Rather than answer the question fairly, Frank attacked the reporter and eventually ended the interview. Don't expect anything serious on financial reform from Congress.
So, we have a major, major financial crisis that almost causes the whole system to collapse. To 'save the system' taxpayers pony up $700 billion in bailout aid, another $800 billion line of credit to pay for the failure of bankrupt institutions, and tens of trillions for a plethora of government backstops. Immediately afterwards, banks go on to earn record profits and pay themselves record bonuses. And this is what we get for reform (emphasis added):
Not even critics accuse Barney Frank of being in the pocket of Wall Street. The real question is whether he and -others are being swayed by the legislative legerdemain that Wall Street lobbyists have long practiced. The story of how those loopholes got into the derivatives bill, even with Frank at the helm and the wind of public outrage at his back, shows just how powerful the Wall Street banking lobby remains--and how complex Wall Street's financial instruments have become. "I don't think he ever fully understood the legislation" in its early stages, says Greenberger. Many of the key lobbyists now are the same gang that helped get us into this mess before, and they're spending huge sums once again. In the first three quarters of 2009, financial-industry interests have spent $344 million on lobbying efforts, putting them on pace to break all records, according to the Center for Responsive Politics. That's just for lobbyists' and lawyers' salaries, junkets, and dinners, and doesn't include political donations and issue ads. Even more impressive is the lobbying strategy that money is buying. According to insiders and industry e-mails obtained by NEWSWEEK, the banks have sought to stay in the background and put their corporate customers--a who's who of American business, including Apple, Whirlpool, and John Deere--out in front of the campaign. "This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints," says a congressional staffer involved in drafting the legislation. The staffer, who would speak only on condition of anonymity, passed on to NEWSWEEK nine pages of proposed changes in the legislation intended to protect trading from open scrutiny--all of it on paper without a letterhead--that she says came from Goldman Sachs. Samuel Robinson, a spokesman for Goldman, says "it's not our document" but adds that Goldman has "an active and appropriate involvement in the process of government" and supports "sensible reform."
Folks, this is how the U.S. government now operates. You would think this steep downturn would have some effect. But the legislative reform process is broken. Industry lobbyists have too much influence on every major industry issue. Apparently, the only thing that will fix the process is a major depression that galvanizes enough popular support for draconian solutions.
Here is the problem: The legislation to regulate over-the-counter (OTC) derivatives has numerous flaws. For example, there is a major loophole in the legislation that allows 'end users' to trade in customized and expensive derivative contracts off-exchange. The strategy by big banks is to push the 'end users' forward to advocate for this because the banks' doing so would rightfully be seen as conflicted and disingenuous. But, you know and I know this allows the banks to charge higher fees due to lack of competition for their tailored solutions and it creates what I call the Gibson Greetings/Orange County problem. Here is a recent example from Detroit:
The seeds of this looming disaster were sown during the credit boom, when Wall Street targeted cities big and small with risky financial products that promised to save them money or boost returns. Investment bankers sold exotic derivatives designed to help municipalities cut borrowing costs. Banks and insurance companies constructed complicated tax deals that allowed public utilities, transit authorities, and other nonprofit organizations to extract cash immediately from their long-term assets. Private equity firms, pointing to stellar historical gains, persuaded big public pension funds to plow billions of dollars into high-cost investments at the peak of the market. Many of the transactions shared a striking similarity: provisions that protected the banks from big losses and left the customers on the hook for huge payouts.
Now, as many of those deals sour, Wall Street is ramping up its efforts to collect from Main Street. "The banks stuffed customers with [questionable investments] and then extorted money from the customers to get rid of them," says Christopher Whalen, managing director at research firm Institutional Risk Analytics. ...
The financial struggles of America's cities and towns stand in stark contrast to Wall Street, where bonuses at some firms are expected to reach record levels in 2009, less than a year after the peak of the financial crisis.
The end users may think they are getting a good deal until it blows up Procter and Gamble-style. OTC derivatives are weapons of financial mass destruction and must be traded on exchanges. Period.
How about other reform areas? Same process here too. On consumer protections against credit card usury CNN Money reports:
The House passed a bill Wednesday to move up credit card reforms scheduled to take effect in February.
In May, President Obama signed into law a credit card reform act to crack down on the way issuers raise fees and interest rates. The reforms are scheduled to roll out in three parts over 12 months.
"Just in time for the holidays, Congress can lock in a ban on interest rate hikes on existing balances, and the tricks that have kept far too many consumers trapped in a never-ending cycle of debt," said bill co-sponsor Rep. Carolyn Maloney, D-N.Y., in a statement issued late last month.
Credit card companies were using the 8 months before implementation to jack up rates. Congress was forced to accelerate the process to stop this loophole from being exploited. I could cite many other examples.
As with everything coming from Washington, any reforms are likely to be watered down with loopholes one could drive a truck through. Barney Frank may want to continue positioning himself as a champion of reform, but don't expect anything but business as usual after these bills are passed.
Why is Barney Frank So Effing Mad? - Newsweek