Financial Reform, the SEC and Better Markets Winning in the Courts. Wall Street’s too-dangerous-to-fail banks and their many allies have been trying to kill, gut or weaken financial reform by filing numerous lawsuits claiming that every rule must be subjected to what they call “cost-benefit analysis.” While this sounds reasonable, they really mean “industry cost-only analysis,” which not only fails to properly weight the public interest, but also prioritizes industry costs over everything else, including the public interest. In addition to being one-sided on the wrong side, it is also costly, time-consuming, onerous and ultimately a fool’s errand because so many of the costs and benefits to the public simply cannot be quantified, as the court pointedly stated:
“Even if one could estimate how many lives are saved or rapes prevented as a direct result of the final rule, doing so would be pointless because the costs of the rule – measured in dollars – would create an apples-to-bricks comparison.”
The same is true for more straightforward financial reform rules: a stable market less likely to crash and cause bailouts, transparency in the derivatives markets, investor confidence, deterring fraud and criminal market behavior, are all unquantifiable, as is the pain and suffering inflicted on American families from historically high unemployment, foreclosures, lost health care and from the rest of the economic wreckage caused by the financial crash. Yet, in Wall Street’s upside-down Alice-in-Wonderland world, no financial reform rule can be adopted to protect the American people from Wall Street recklessly crashing the global financial system again unless the rule doesn’t cost that very same industry too much. Because it ignores the massive costs of the last crisis to the American people and the even larger benefits to them of avoiding the next crisis, that’s just nuts and, for the second time, the D.C. Circuit Court of Appeals agreed with us.
While the case was primarily about the “conflict minerals” rule, the Court in NAM v. SEC, rejected industry arguments that the Securities and Exchange Commission (SEC) must conduct what they call “cost-benefit analysis.” This follows the holding of the Court last summer in Investment Company Institute v. CFTC, which similarly recognized that the Commodity Futures Trading Commission (CFTC) need not conduct a rigorous, quantitative cost-benefit analysis when it adopts derivatives rules under the Commodity Exchange Act. Each of these decisions reflects arguments that Better Markets made in the amicus briefs it filed in those cases (here and here): the law does not require the SEC or the CFTC to do a cost-benefit analysis, only limited specified economic analysis; it would require agencies to second-guess Congress’ decision to protect the American people over industry profits; it needlessly delays the rulemaking process; and, it undervalues the many benefits of regulation, which often cannot be framed in dollars and cents. This is a major victory, not only for the SEC and financial reform, but for the American people who deserve to be protected from Wall Street’s recklessness and more bailouts. (Better Markets’ lengthy report on this issue can be found here and more information on the legislative, regulatory and legal fight can be found here.)
Predatory HFT, Michael Lewis’ New Book “Flash Boys,” & Lots of Developments. It is difficult to keep up with the avalanche of materials precipitated by the launch of Michael Lewis’ new book Flash Boys. The debate on high-frequency trading (HFT) has, if anything, actually been increasing. Our view is that it will continue because the issues of ripping off investors, the lack of confidence in our markets and the virtual inevitability of another “flash crash” or worse aren’t going away and, now, no one can claim they didn’t know or were surprised when the next disaster strikes. A few highlights/lowlights:
- First, and maybe most importantly, some of the big buy side firms may be entering the battle over predatory hft and pushing the SEC to take action, as reported by the Wall Street Journal. Even more encouraging, it reported that Jeff Sprecher, Chief Executive of the IntercontinentalExchange Group (ICE), which now owns the New York Stock Exchange, has also recently met with the SEC to push for some sensible curbs on predatory HFT, as SEC Commissioner Aguilar suggested in a recent speech.
- Second, the EU just passed “landmark reforms” to banking and markets laws, including directly “imposing the world’s toughest curbs on HFT” in a “crackdown” on predatory trading, but that’s just “the start of a complex process” to make those reforms become a reality.
- Third, the SEC itself is considering taking action, targeting predatory hft by changing the “maker-taker” fee plans as well as considering a “trade-at” rule, among other things.
- Fourth, a group of traders have filed suit against CME Group Inc., the operator of the world’s largest derivatives exchange, alleging CME provided high-frequency traders with special access to information on futures and interest rate contracts.
- Fifth, those developments and many more may be positive, but the HFT industry is already fighting back hard, having set up a new multi-million dollar lobby group months ago to immediately criticize Lewis’ book and anyone else daring to criticize predatory HFT and now they are on a DC lobbyist hiring spree – reform won’t come easy and the industry fog machine confusing the issues will be working nonstop to prevent any reforms.
- Sixth, an excellent example of the industry’s fog machine is former SEC Chairman (now Goldman Advisor) Arthur Levitt who asserts that “we’re all high frequency traders now,” which is irresponsibly and laughably false as Themis Trading’s devastating blog post demonstrated.
INET’s (the Institute for New Economic Thinking) annual conference. Titled “Human After All: Innovation, Disruption, Society,” it was a blend of interesting speakers and interesting topics. You should visit their website, check out the program and watch some of the videos of the panels and speakers. You won’t be disappointed.
And the Pulitzer goes to… Congratulations to Stephen Henderson of the Detroit Free Press for winning the Pulitzer Prize for distinguished commentary on the financial crisis facing his city. Henderson’s incisive commentary on Detroit’s struggles over the years has served as a revealing exploration of one of the hardest hit regions in the U.S. after the 2008 financial crisis. From his coverage of the streetlights going dark to Detroit’s filing for bankruptcy, Henderson has portrayed the plight of the people of Detroit left suffering from the worst economy since the Great Depression.
Better Markets in the News: SEC’s Mary Jo White Defies Political Meddling in Year One (Bloomberg) … Advocates fear sabotage of Wall St. rules (The Hill) … Court overturns 1 SEC Conflict Minerals Provision (Associated Press)
Other Articles of Interest: Sacrificing Sense for Speed in Markets (NY Times) … Banks urged to act over ‘Heartbleed’ bug (Financial Times) … Judge Approves SAC Plea, Closing a Painful Chapter (NY Times) … SEC eyes test that may lead to shift away from ‘dark pools’ (Reuters) … American subprime lending is back on the road (Financial Times) … Citigroup Quarterly Profit Rises 4%, Despite Regulatory Woes (NY Times) … Bank of American Swings to Quarterly Loss on Legal Costs (NY Times) … NY financial services regulator deepens probe into Credit Suisse (Financial Times)