Enough of Republican obstruction of banking regulations: Democrats to go it alone to protect consumers

Posted by AzBlueMeanie:

The government's top securities regulator called on Congress Thursday to impose new oversight on financial derivatives, warning that allowing risky instruments such as credit default swaps to continue unfettered could bring further economic damage. SEC head urges Congress to act on risky derivatives:

The chairwoman of the Securities and Exchange Commission, Mary Schapiro, said banks that deal in the swaps must be subject to rigorous requirements for holding capital. They must also conduct their business in accordance with rules, and their price information must be transparent, she said.

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Another U.S. regulator, Commodity Futures Trading Commission Chairman Gary Gensler, said Wall Street banks are seeking exemptions to the proposed regulations for derivatives that could shield more than half the trades that should be subject to disclosure.

Gensler criticized Wall Street's stance on proposed oversight for the shadowy $600 trillion market for derivatives – blamed for hastening the 2008 financial crisis.

Credit default swaps account for an estimated $60 trillion of the worldwide derivatives market.

Also on Thursday, Lehman Brothers Hid Borrowing, Examiner Says – NYTimes.com:

It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.

The report, compiled by an examiner for the bank, now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old company, it concluded, died from multiple causes. Among them were bad mortgage holdings and, less directly, demands by rivals like JPMorgan Chase and Citigroup, that the foundering bank post collateral against loans it desperately needed.

But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world.

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According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of troubled assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.

Former Goldman Sachs deal-maker and Treasury Department official Gary Gensler is now advocating banking regulations as well. Gary Gensler’s Conversion to Financial Reformer – NYTimes.com:

[Gary Gensler] is emerging as one of the nation’s archreformers, pushing to impose some of the most stringent new financial regulations in history. And as the head of the Commodity Futures Trading Commission, the leading contender to oversee the complex derivatives contracts that played a central role in the financial crisis and, in turn, the Great Recession, he is in a position to influence the outcome.

It may seem an unlikely conversion, but it is one that has won the approval of Brooksley E. Born, of all people, a former outspoken head of the commission. She sounded alarms more than a decade ago about the dangers hiding in the poorly understood derivatives market and was silenced by the same Washington power brokers that counted Mr. Gensler as a member.

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The proposals championed by Mr. Gensler, if adopted by Congress, would substantially alter what is now a largely unregulated market in over-the-counter derivatives, financial instruments used by companies and investors to protect themselves and bet on moves in variables, like interest rates or currencies, and to speculate.

The proposals include forcing the big banks that sell derivatives to conduct their trades in the open on public exchanges and clear them through central clearinghouses, so that any investor can see the prices that dealers charge their customers. Today, those transactions are bilateral and private.

The banks and their customers might have to post collateral or guarantees to prevent the kinds of panics seen during the financial crisis, in which some investors worried that trading partners might have trouble keeping their side of the contract.

In this way, the clearinghouses would work as circuit breakers in the great web of derivatives trading encircling the globe. Shifting the products, and the risk of default, off the books of the banks and onto these middlemen would ensure that no single bank was too interconnected to fail, the rationale goes.

The banks, for their part, sense a threat to the billions of dollars in profits they earn each year from trading in these complex derivatives.

Which brings us to Congress where the Consumer Financial Services Protection Agency has emerged as a flash-point of contention in the U.S. Senate. Republicans and a handful of corporatist Democrats are trying to derail any meaningful banking regulations and allow business as usual to continue. This slow-walking obstruction of banking regulation bills led Sen. Christopher Dodd (D-CT) to say "enough is enough" on Thursday and to announce that Democrats will go it alone on a bill he will introduce on Monday. Dodd to Press Ahead on Financial Regulation Bill – NYTimes.com:

Senator Christopher J. Dodd of Connecticut, chairman of the Senate Banking Committee, said he would put forward his own bill on Monday, despite the lack of a single Republican endorsement. Democrats concluded that bipartisan talks were not making enough progress and that going their own way was the only realistic hope of getting the legislation adopted in an election year, he said.

Mr. Dodd said the bill would rewrite the rules of Wall Street, end the “too big to fail” phenomenon and protect consumers from risky or abusive financial products. The Congressional calendar meant that further delay could imperil the legislation’s chances, he said.

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“Republicans in the Senate are going to have to ask themselves why they would stand in the way of financial reform,” Mr. Obama’s press secretary, Robert Gibbs, said at a news conference.

Mr. Gibbs, who said that “lobbyists are being hired hand over fist to kill financial reform,” said of lawmakers: “I don’t believe many are going to want to go home and face voters next November not having done something.”

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Mr. Dodd said he intended for the committee to take up formal consideration of the bill during the week of March 22, with the goal of a committee vote before Congress recesses on March 26. “As time moves on, you just limit the possibility of getting something done, particularly a bill of this magnitude and this complexity,” he said.

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[Senator Bob Corker (R-TN)] said that both sides had agreed to house a new consumer financial protection agency within the Federal Reserve, with a director appointed by the president and broad ability to write rules governing mortgages, credit cards and the so-called shadow banking system of payday lenders, debt collectors, and loan originators and servicers.

Whether that agency would have independent enforcement powers has been a major point of contention. Mr. Corker said Mr. Dodd had agreed that the agency would not be able to conduct its own compliance examinations, as consumer advocates have urged. Instead, other regulators, who are already charged with ensuring the soundness of banks, would take on the responsibility for protecting consumers, too.

Wrong. The Consumer Financial Services Protection Agency must be an independent regulatory agency with the power of criminal investigation and enforcement. The Federal Reserve proved that it was a captive agency and failed entirely to protect American consumers from the voracious greed of Wall Street bankers as they engaged in reckless and irresponsible speculative investment schemes (noted above) that nearly destroyed the financial system and the world's economy. President Obama wants an independent agency and Sen. Dodd wanted an independent agency until he negotiated it away with Republicans intent on substantially weakening new banking regulations. Now that Sen. Dodd and Democrats are going it alone they should fight for the independence of the Consumer Financial Services Protection Agency and give it robust powers of investigation and enforcement.

[Another issue of contention] is the extent to which banks would be exempt from new requirements for greater transparency in the trading of derivatives. While standardized derivatives would have to be traded through clearinghouses, some banks have pushed to have transactions of some of their most complex derivatives — including the credit-default swaps that helped bring on the financial crisis — shielded from public view.

Gary G. Gensler, the chairman of the Commodity Futures Trading Commission, said on Thursday that the loophole some banks were seeking would exempt as much as 60 percent of derivatives. The banks have found allies in companies like Boeingand Caterpillar that use derivatives to hedge against risk, but such derivatives trades make up only 9 percent of the market, Mr. Gensler said.

Other areas of disagreement, Mr. Corker said, included whether shareholders should be allowed an advisory vote, by proxy, on executive compensation, and how much credit risk mortgage originators should be required to keep when they packaged and sold loans.