cancel2 2022
Canceled
By Ilan Moscovitz and Matt Koppenheffer
May 24, 2010
After watching our economy get rocked by the recent financial crisis, we Fools are not the only ones that are eager to see strong, comprehensive financial reform.
So how did the Senate do? There's a lot of confusion out there about that, but we've been following this issue from the start. Here's our Foolish summary of the most important parts of the recently approved Senate bill.
THE GOOD
Shareholder Bill of Rights
In the lead-up to the financial crisis, executives paid themselves hundreds of millions of dollars for record profits fueled by record risk-taking. When their companies exploded, they walked away with still more money in severance. Boards of directors that were supposed to represent shareholders failed in their responsibility to oversee management and monitor risk. The Shareholder Bill of Rights seeks to make boards more accountable to shareholders and less beholden to management.
If ever there was functional alchemy, it came when investment bankers were able to take laughably ill-advised mortgage loans and package them into AAA-rated securities. While some of it may have involved sleight-of-hand by the bankers, the cartel of major rating agencies -- which includes Moody's (NYSE: MCO), Standard & Poor's, and Fitch -- didn't have much incentive to get tough on these screwy concoctions, after all, the banks were the ones that signed the rating agencies' checks.
Late-breaking amendments to the Senate's bill would go a long way toward fixing this problem.
Currently, the five largest derivatives dealers -- Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) -- control 97% of the industry's notional derivatives exposure and are able to conduct very lucrative business behind closed doors.
This privileged banking bloc also isn't necessarily required to post collateral on these positions. That potentially allows them to bite off way more than they can chew -- AIG anyone?
Volcker Rule
Here's a truly no-brainer idea: banks that have access to taxpayer support through the Federal Reserve and FDIC insurance shouldn't be allowed to engage in risky proprietary trading. Named for former Fed Chairman Paul Volcker, the "Volcker rule" would drastically ratchet down risk in the banking system.
Overlapping bureaucratic agencies are a great way to maximize regulatory fumbles. By creating a single watchdog for financial products, the financial reform bill hopes to prevent consumers from getting caught up in predatory, ill-advised, or just plain crazy mortgages or other financial products in the future.
Allowing financial firms to lever themselves to 30-to-1 is asking for trouble. In 2004, regulators granted a special exemption to Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs so they could pile up more debt to help them juice their returns. Without hard capital requirements written into law, regulators could have the ability to issue similar wacky loopholes and exemptions in the future.
Too Big to Fail
Does anyone still want to argue that Bank of America, Citigroup, JPMorgan, Goldman Sachs, Morgan Stanley, and Well Fargo (NYSE: WFC) aren't too big to fail? Heck, a few of these behemoths have gotten even larger through acquisitions during the crisis. All together, these six companies now control assets worth 63% of the entire economic output of the United States. It would seem that making sure that banks are no longer big enough to be considered too big to fail would be a crucial piece of financial reform. It isn't.
That's an anonymous veteran investment banker quoted in The New York Times yesterday. Despite contributing to a crisis that cost our country over 10 million jobs and doubled our national debt, Wall Street banks are getting off pretty darn easy with this reform bill.
Wall Street lobbyists, their friends in Congress, and the Treasury Department are all working overtime to kill or weaken key sections of the bill, most notably derivatives and capital requirements. Unfortunately we Fools won't be able to stand over the House-Senate committee negotiations that decide what goes into the final legislation and make sure that they do the right thing. However, we can make sure that they hear from us ahead of time and know that their constituents will be mad as hell if they wuss out.
If you want to make your voice heard, call one of the people below to let them know that we need strong reform that includes loophole free exchange and clearinghouse rules and Section 716, a clear implementation of the Volcker rule, and the Collins provision on capital requirements. Leave a comment in the comments area saying who you called.
Rep. Barney Frank, (202) 225-5931
Sen. Chris Dodd, (202) 224-2823
Sen. Blanche Lincoln, (202) 224-4843
Sen. Harry Reid, (202) 224-3542
Rep. Nancy Pelosi, (202) 225-4965
Sen. Richard Shelby, (202) 224-5744
Rep. Spencer Bachus, (202) 225-4921
Sen. Saxby Chambliss, (202) 224-3521
May 24, 2010
After watching our economy get rocked by the recent financial crisis, we Fools are not the only ones that are eager to see strong, comprehensive financial reform.
So how did the Senate do? There's a lot of confusion out there about that, but we've been following this issue from the start. Here's our Foolish summary of the most important parts of the recently approved Senate bill.
THE GOOD
Shareholder Bill of Rights
In the lead-up to the financial crisis, executives paid themselves hundreds of millions of dollars for record profits fueled by record risk-taking. When their companies exploded, they walked away with still more money in severance. Boards of directors that were supposed to represent shareholders failed in their responsibility to oversee management and monitor risk. The Shareholder Bill of Rights seeks to make boards more accountable to shareholders and less beholden to management.
- The Senate bill incorporates a version of The Shareholder Bill of Rights that we wrote about last October, and again in our testimony before a House Financial Services Subcommittee last month.
- A few of the provisions include providing shareholders a non-binding say on executive pay, introducing clawbacks for executive pay if management violates securities laws, and giving shareholders the right to run their own candidates for the board against management's candidates (cough, lackeys, cough).
If ever there was functional alchemy, it came when investment bankers were able to take laughably ill-advised mortgage loans and package them into AAA-rated securities. While some of it may have involved sleight-of-hand by the bankers, the cartel of major rating agencies -- which includes Moody's (NYSE: MCO), Standard & Poor's, and Fitch -- didn't have much incentive to get tough on these screwy concoctions, after all, the banks were the ones that signed the rating agencies' checks.
Late-breaking amendments to the Senate's bill would go a long way toward fixing this problem.
- One amendment would remove federal regulations that require the use of rating agencies. That way when rating agencies are used, they will be used based on a market need, rather than government mandates. What a concept!
- A second amendment would create a central clearinghouse that would assign a rater to each deal. That would prevent issuers from shopping around for the lowest rating standards.
Currently, the five largest derivatives dealers -- Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), and Bank of America (NYSE: BAC) -- control 97% of the industry's notional derivatives exposure and are able to conduct very lucrative business behind closed doors.
This privileged banking bloc also isn't necessarily required to post collateral on these positions. That potentially allows them to bite off way more than they can chew -- AIG anyone?
- The Senate bill would require the vast majority of derivatives to trade on exchanges to increase competition and pricing transparency.
- It also requires parties to post collateral to a central clearinghouse, which would help prevent the next AIG-like disaster, where a dealer makes commitments it can't uphold.
- Section 716 of the bill would specifically ban federal assistance (such as the FDIC or Fed) to any swaps dealers. That would force banks to either spin off their swaps trading desks or support them with their own capital, rather than using government-subsidized capital.
Volcker Rule
Here's a truly no-brainer idea: banks that have access to taxpayer support through the Federal Reserve and FDIC insurance shouldn't be allowed to engage in risky proprietary trading. Named for former Fed Chairman Paul Volcker, the "Volcker rule" would drastically ratchet down risk in the banking system.
- An amendment introduced by Jeff Merkley and Carl Levin would have directly implemented the Volcker rule. Unfortunately, the amendment was blocked from ever even getting to a vote, despite the fact that it had enough support to pass.
- What we're left with is a study by the Comptroller General that has the option of eventually recommending that the rule be implemented. Sounds to us like they're putting the rule in a dark room where it can be killed quietly or given tons of regulatory "discretion."
Overlapping bureaucratic agencies are a great way to maximize regulatory fumbles. By creating a single watchdog for financial products, the financial reform bill hopes to prevent consumers from getting caught up in predatory, ill-advised, or just plain crazy mortgages or other financial products in the future.
- The Senate bill would create an agency with independent leadership and rule-writing and enforcement authority that will be able to look out for consumer abuses.
- However, a boneheaded provision foolishly (that's a small 'f' there) gives a council of bank-friendly regulators the power to veto things the agency does.
Allowing financial firms to lever themselves to 30-to-1 is asking for trouble. In 2004, regulators granted a special exemption to Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs so they could pile up more debt to help them juice their returns. Without hard capital requirements written into law, regulators could have the ability to issue similar wacky loopholes and exemptions in the future.
- The reform bill doesn't include any hard capital requirements for banks.
- However, an amendment by Susan Collins would require the largest banks to meet requirements at least as strong as smaller banks. But don't get too excited, Wall Street -- and the Treasury for that matter -- will be bringing out the big guns to fight this one.
Too Big to Fail
Does anyone still want to argue that Bank of America, Citigroup, JPMorgan, Goldman Sachs, Morgan Stanley, and Well Fargo (NYSE: WFC) aren't too big to fail? Heck, a few of these behemoths have gotten even larger through acquisitions during the crisis. All together, these six companies now control assets worth 63% of the entire economic output of the United States. It would seem that making sure that banks are no longer big enough to be considered too big to fail would be a crucial piece of financial reform. It isn't.
- The SAFE Banking Act amendment, which was introduced in the Senate, would have forced the largest too-big-to-fail banks to shrink from the $700 billion to $2 trillion range to the $300 to $400 billion range. That was summarily voted down.
- Other amendments, including one that would have reinstated Glass-Steagall, never even made it to a vote in the Senate.
That's an anonymous veteran investment banker quoted in The New York Times yesterday. Despite contributing to a crisis that cost our country over 10 million jobs and doubled our national debt, Wall Street banks are getting off pretty darn easy with this reform bill.
Wall Street lobbyists, their friends in Congress, and the Treasury Department are all working overtime to kill or weaken key sections of the bill, most notably derivatives and capital requirements. Unfortunately we Fools won't be able to stand over the House-Senate committee negotiations that decide what goes into the final legislation and make sure that they do the right thing. However, we can make sure that they hear from us ahead of time and know that their constituents will be mad as hell if they wuss out.
If you want to make your voice heard, call one of the people below to let them know that we need strong reform that includes loophole free exchange and clearinghouse rules and Section 716, a clear implementation of the Volcker rule, and the Collins provision on capital requirements. Leave a comment in the comments area saying who you called.
Rep. Barney Frank, (202) 225-5931
Sen. Chris Dodd, (202) 224-2823
Sen. Blanche Lincoln, (202) 224-4843
Sen. Harry Reid, (202) 224-3542
Rep. Nancy Pelosi, (202) 225-4965
Sen. Richard Shelby, (202) 224-5744
Rep. Spencer Bachus, (202) 225-4921
Sen. Saxby Chambliss, (202) 224-3521
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