Fighting Wall Street in the rulemaking process to protect Main Street.

Jay Owen Reforming Global Finance, SRI/ESG News


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Financial Reform Newsletter

April 3, 2014

Fighting Wall Street in the rulemaking process to protect Main Street. A funny thing happened on the way to preventing another financial crash and more wall street bailouts.  It’s called the rulemaking process, which is required to implement much of the financial reform law that was passed 3 ½ years ago.  While that process is supposed to enable “public” input, in reality it is overwhelmingly dominated by the financial industry seeking to protect profits and bonuses while killing, weakening and delaying financial reform.  It is beyond comprehension that the very industry that crashed the global financial system, required taxpayer bailouts, and caused the worst economy since the Great Depression of the 1930s, is allowed to dominate the process that is supposed to implement the law to prevent them from doing that again. 


Better Markets called attention to this in a recent New York Times article, “All Public Comments are Welcome. Then What?”  It has also fought for rules to protect the real “public” by filing more than 150 comment letters with regulators (often being the only non-industry organization to even file a comment letter) on many of the most important financial reform rules like:

  • preventing foreign banking organizations from needing bailouts,

    Past time to stop predatory high speed computer trading. It is no surprise that Michael Lewis’ new book “Flash Boys” ignited a firestorm.He shines a bright light on dark, unregulated, predatory high frequency trading (HFT). Too many manipulative and abusive practices are moving tens of billions of dollars from the pockets of investors and retirees into the pockets of hft firms, wall street banks and their enablers like the exchanges. 


    None of this is news to Better Markets, which has been pushing regulators and policy makers for years to take action to stop predatory HFT, which is not only ripping off investors and retirees, but is also destroying confidence in our markets. Better Markets has filed 15 comment letters with the SEC and CFTC focusing on or discussing HFT and has had numerous meetings urging them to take action. In addition, Better Markets’ staff has testified often before Senate and House committees on the problems caused by hft and the need for strong, clear rules to stop abuses and illegal conduct. 


    While not all HFT is bad, there is a mountain of independent evidence demonstrating that too much of it is and that HFT provides too few benefits to investors, retirees and markets.  It is past time for regulators and policy makers to stop predatory HFT and require registration, reporting and disclosure as well, as we detail in this blog post.


    The Fed is acting to prevent U.S. taxpayer bailouts of foreign banks. The Fed has just finalized a strong rule, called the foreign bank organization (FBO) rule, requiring foreign banks operating in the U.S. to have enough capital to not need bailouts from the U.S. in the next financial crash, which we fully supported in our comment letter.  This is very important because in 2008-2009, the U.S. bailed out the global financial system, including lots of foreign banks. For example, 10 of AIG’s top 16 bailed out counterparties were foreign banks and 9 of the top 20 largest users of Fed emergency lending programs were foreign banks.


    This was necessary because some of the largest banks in the U.S. in 2008 were subsidiaries of foreign banks and some of them, like Deutsche Bank’s U.S. subsidiary Taunus, had negative capital!  The result was that the U.S. government and U.S. taxpayers bailed out those U.S. operations rather than the foreign bank parent companies or their home governments. For example, Taunus was one of the largest recipients of Fed emergency funds, which should have come from its parent deutsche bank or the German government and taxpayers.


    Adding insult to injury, when the Fed proposed capital rules for U.S. based banks in 2011, Deutsche Bank and other foreign banks reorganized their U.S. operations to evade those rules.  This not only put the U.S. taxpayers on the hook again to have to bail them out in the future, but also created an unfair advantage for foreign bank operations in the U.S. relative to the U.S. operations of U.S. banks.  Thankfully, the Fed held firm against very strong and vocal objections by non-U.S. banks, regulators and governments who ferociously attacked the Fed and the FBO rule. Of course, they prefer U.S. taxpayers to bail out their banks next time just like last time, but that’s wrong and that’s what the FBO rule is really all about and why it is so important. Just prior to finalizing the rule, Federal Reserve governor Daniel Tarullo gave a terrific speech on the Fed’s ongoing commitment to regulating foreign banks operating within the U.S. and protecting U.S. taxpayers. 


    Better Markets in the News: Flash Boys Puts a Flashlight on Dark, Predatory HFT Trading (Huffington Post) … Controversy over high frequency trading is not new (Fox Business) … How the industry sees “Flash Boys” (Financial Times) … Book by high-profile author Lewis may spur high-frequency-trading reform push, success unclear(Reuters) … Wall Street responds to Michael Lewis’ ‘Flash Boys’ (CNN Money) … All Public Comments Are Welcome. Then What? (NY Times) … The best and the rest of past week (CT Post) … Maybe … Freddie and Fannie weren’t the Main Cause of the Mortgage Crisis (Daily KOS)


    Other Articles of Interest:  Hong Kong Banking Regulator Opens Inquiry Into Currency Manipulation (NY Times) … JPMorgan fails to end lawsuit over London Whale losses (Reuters) … Goldman Sachs President Says Markets ‘Ignoring’ Risks (Bloomberg) … Yellen Says Fed Is Determined to Improve the Labor Market (NY Times) …Cavanagh to Receive $39 Million in Pay for Joining Carlyle (NY Times) … Guilty Pleas of Dewey Staff Detail the Alleged Fraud (Wall Street Journal) … Morgan Stanley Nearly Doubles C.E.O. Pay to $18 Million(NY Times)

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