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Apr. 19 2010 - 7:31 am | 4,522 views | 5 recommendations | 35 comments

What’s Wrong with the Financial Reform Bill

Senate Banking Committee Chairman Christopher Dodd’s financial “reform” proposal (Barney Frank’s wasn’t much better) won’t change the nature of anything Wall Street does. Dodd’s needless watering down of a proposal to create a new Consumer Financial Protection Agency has been well-documented, so here is a list of 10 other problems Dodd’s bill will not fix:

via Speculating Banks Still Rule — Ten Ways Dems and Dodd Are Failing on Financial Reform | Economy | AlterNet.

Friend Nomi Prins, who in a former life worked for Goldman, this weekend sent along a link to an article in which she outlines the gaps in the current version of the financial regulatory reform bill. Given that the bill is sometimes being pitched as the answer to some of the problems underlined by the Goldman case, it’s a very sobering read.

My favorite is the halting, incomplete attempt at a rollback of the Gramm-Leach-Bliley Act, i.e. the pseudo-restoration of the Glass-Steagall Act known as the Volcker rule. Nomi writes:

2) It won’t reduce the economic danger from rampant, overleveraged trading activities. The bill would restrict certain banks from having proprietary trading operations (trading with their own capital) under the “Volcker rule,” but it’s full of problematic exemptions:

a) Banks that claim they trade on behalf of their customers (which they all say they do) escape the rule.

b) Banks that trade for “market-making” purposes (i.e. Goldman Sachs betting against its own clients) are home-free.

c) Banks aren’t required to itemize their trading operations to regulators, so they get to decide what they consider trading for their customers and what they consider proprietary. I wonder how that will work out.

Then of course there’s the treatment of hedge funds, also relevant given the business with John Paulson:

5) It won’t contain the risk to the shadow banking system from hedge funds, private equity firms and venture capital funds. Venture capital and private equity advisers still won’t have to register or report to the SEC, though hedge funds with over $100 million in assets will. There’s also no statutory definition of what actually constitutes a hedge fund, and the bill doesn’t close the tax loophole that allows fund managers to be taxed at the lower capital-gains tax rate of 15 percent, rather than the higher income tax rate of 34 percent. If it sounds crazy to you that the richest people in America are being taxed at the lowest rates, it is: the loophole cost taxpayers about $5 billion this year alone.

There is some good stuff in the bill, but it is riddled with loopholes. Far more important than the actual bill is the effort to actually enforce existing laws. While it is true that the near-complete absence of a regulatory structure to oversee derivatives trading is problematic, there is a lot the government could have done still, if it had wanted to, to prevent catastrophes like AIG and Lehman Brothers. The decision to take a whack at Goldman for this Paulson business is therefore the best news there’s been on this front…


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  1. collapse expand

    Matt, a few weeks ago you wrote semi-optimistically about the possibility that in passing health care reform, the Democrats would finally repeal the insurance industry’s unfathomable antitrust exemption.

    I commented: “I’ll believe it when it happens.”

    It didn’t.

    I find the possibility of thorough reform in the financial markets, the kind that closes loopholes and restores necessary regulations, to be about as credible as repeal of the antitrust exemption.

    I’ll believe it when it happens.

    Thanks for the links and info. here, though, and for your continuing and heroic rant against the “great vampire squid.”

  2. collapse expand

    Admittedly, I have worked in the corporate world far too long but it seems to me this purported Reform Bill is exactly the reaction that I would see in the corporate world.

    Stressful event happens to company and company managers react to events by some “feel good” critical analysis by distant corporate officials that skim the surface of the real causes of the events and therefore the real fixes.

    If you are given 2 months and a budget to do something, do you really think that you’re going to conclude that everything’s fine and that all you needed to do was enforce existing rules?

    No, of course, not. You need to justify how you just spent the last 2 months so you come up with a million and one solutions put it together into a nice PowerPoint with cute clip art and you show management that you know what the hell you’re talking about.

    In effect, this is what Dodd & Frank are doing.

    It is so clear that many of our problems were caused by the failure of anyone (and I mean anyone) to effectively enforce existing laws and rules. Of course, it would have really helped if they didn’t repeal Glass Steagall or enact the Commodities Futures Act but nevertheless, seventy percent of the damage should have been covered by existing regulation.

    But no one will admit that.

    Indeed, the Washington Brain trust act just like company insiders and suggests that the solution is to give them more individual power and a new group with a nice budget and everything will be okay. But this is just people being people and trying to create little empires within – it is not meaningful reform.

    Rather, it is the opposite; it is continuation of the exact same action that did not work.

    • collapse expand

      BTW — I am not saying that we don’t need new regulations; rather, we need reforms that actually address the issues and work. For example, the SEC’s civil complaint against GS would have been a far more effective deterrent if it had occurred in real time, not 2 years after the fact.

      In response to another comment. See in context »
  3. collapse expand

    Aren’t you s’posed to say “This is a start. It’s better than anything the obstructionist Republicans have come up with.” Where are your political loyalties? If you don’t support this legislation, you will be giving aid and comfort to the republicans, you giant-sized pain-in-the-ass!

    • collapse expand

      No Leon, he’s not.

      If I am reading Matt correctly, what he is saying boils down to this:

      1) We had a byzantine system of crap laws that no lay person understood well.

      2) We had an enforcement structure populated by people who can blame TurboTax for their faulty returns and still get cabinet-level positions.

      3) When you are bleeding out of a five-inch gash above your kidney, putting Buzz Lightyear Band-Aids over your nipples and wearing a condom might make it look like you’re doing something productive, but it’s even worse than nothing because outsiders will assume something real was done.

      So, in essence, the “obstructionist Republicans” are indeed less dangerous, because nobody will ever confuse them with having solved the problem (and allowing new ones to fester).

      In response to another comment. See in context »
  4. collapse expand

    What’s wrong with it:

    For starters Barney Frank and Chris Dodd are crooks….Frank almost single handily created the housing criss

    Secondly, they just gave us the job killing , economy killing health bill

    Thirdly, to steal a phrase from Ross Perot: you couldn’t trust frank, obama, or Dodd to clean the sink out at Mcdonald’s after everyone went home

    We have shit bumms running the government

    All these laws you quoted are meaningless, Matt, because the bumms in congress have loaded them down with loop holes for themselves and their buddies on that cesspool of humanity, wall street….

    Nomi is fine, she is the one who revealed the multi multi trillion givaway of the peoples’ money from the government thugs to the wall street thugs…..and obama frank dodd giethner are 3 and 1/2 of those thugs(geithner is 1/2 thug 1/2 tax cheat)

  5. collapse expand

    The 15% tax rate on so-called ‘carried interest’ (it’s manifestly not carried interest — the managers are not risking their own capital — and would more accurately be described as bonuses or commissions, or even simply salary) has always stuck in my craw. I expected that loophole to be repealed on day one of the Obama administration; that it was not is troubling.

  6. collapse expand

    On his way out of Congress, the disgraced Eric Massa told a perplexed Glen Beck that the only way to fix Washington is to get the money out of politics. “Nothing else matters,” he said. From the mouths of, well, in this case a moron. But nonetheless, he is right. The reason the laws aren’t enforced is because people are being paid not to enforce them. The reason there are loop holes in bills is because someone paid people to put them there. (John Paulson spent a ton of money greasing both sides of the isle the last election.) The fact that we allowed Congress to become a halfway house for those who cash in on political connections (hello, Tom Daschle) is but another example of a system corrupted by political payoffs. All that said, if we can pass something that would make a few of the crooks on Wall Street think twice before ripping us off again, that would be an improvement.

    • collapse expand

      Congress (and federal government on the whole) has become a Market of Influence.

      The more powerful it becomes, the more money/influence/attention/resources are spent to guide and direct it.

      You can’t get the money out of the process without attacking the core of the problem. Where there is power, money will flow to bend power to its will.

      In response to another comment. See in context »
    • collapse expand

      Tom Daschle! He’s the worst. And to think Obama was going to make him his point man on health care reform. Ugh.
      Oh wait…Timothy Geithner, Robert Rubin, Larry Summers…

      In response to another comment. See in context »
    • collapse expand

      That is defeatism (which enables those in power). No reform is better than an lousy fig leaf that will allow the rape to continue longer thus delaying any chance for real corrective action. Goldman allegedly broke the law 2 years ago and the SEC whorehouse is just now getting around to saying something and that is just political Kabuki theater in and of itself. This a-little-sip-is-better-than-nothing thinking is what keeps the career political whores in Washington.

      In response to another comment. See in context »
      • collapse expand

        leonkelly,

        I’m curious, a recent poll said that 80% of Americans do not trust the government.

        If you have a party that wants to shrink government, which means to shrink the influence of government, as in lackluster and incompetent regulatory agencies; so we have a FDA that is beholden to big pharma, we have a SEC that can’t recognize a ponzi scheme and a FEMA that doesn’t understand its mission, a Department of Defense that can’t get life saving material to its troops while private contractors get whatever they need…doesn’t one create the reality of distrust?

        The very idea of small government, the hatred and propaganda against what good the government could do, destroys our nation because we the people are the government.

        I will not dispute your claim of political whores…but only the government can rein in the the big banks since they have influenced Congress to make their thievery legal. So we can not fight against the very means of our salvation.

        In response to another comment. See in context »
        • collapse expand

          “The very idea of small government, the hatred and propaganda against what good the government could do, destroys our nation because we the people are the government.”

          Exactly. Why should we trust individuals who see government as some “other” rather than as us. I think what you said gets to the very heart of the matter of what is wrong in this country.

          In response to another comment. See in context »
        • collapse expand

          Making agencies bigger does not make them more effective. We need people to do what is right. All the resource allocation you can come up with won’t do a damn thing (it will actually make matters worse) if the path of righteous service to the public good is not trod. Liberals and conservatives are both being taken to the cleaners. This is not a ideological debate. It’s an ass pounding.

          In response to another comment. See in context »
          • collapse expand

            leon,

            I agree.

            I do not think agencies need to be bigger, they need to be staffed with people who know the job they are supposed to do. Often these agencies are stuffed with political appointees who job it is to see how things work so they can apply it to some lobbying group. Any agency that is charged with public safety like making sure our food is safe and our drugs will not make us drive naked to a casino should be staffed with professionals and have independence to do their jobs. Bank regulators who do not know what a ponzi scheme looks like??? How the fuck does that happen. Every agency needs a big broom cleaning.

            In response to another comment. See in context »
    • collapse expand

      I think it simply cannot be stated often and loudly enough that money is literally the root of all evil in the cultural funeral march occuring in the US right now.

      Almost every single thing you can name that is worse now that it was 50 years ago, every thing that is ‘wrong’ with society and politics in the US; they are all exacerbated by (and often only exist because of) the amount of money at stake in national corporate politicking.

      The decline of the media, lack of ‘real journalism’, the ubiquitous ‘false equivalence’ that accompanies every story? All down to money. The money that is made by attracting the best advertisers… the money that can be made on books authored by sycophantic white-house ‘insider’ journalists… the money being paid by the Pentagon to people masquerading as neutral pundits… the money paid to the Frank Luntzes to extract attractive soundbites from people unaware they are being groomed…

      Poverty growing? Well there’s a ton of money to be made by keeping the poor poor and hoovering up all the tax-funded welfare they receive.

      Even more money to be made by reducing wages every year while the cost of living goes up.

      Overseas wars we can never win that never end? Well I don’t think anyone needs reminding of the obscene wealth of individuals like Erik Prince or Rumsfeld or Cheney. All a direct result of wars that make no sense in any legal or moral framework.

      What about the complete disappearance of intelligent debate between politicians? The complete absence of morals in 99% of public servants? The lobbying system? All a result of the money that pours into politics as gigantic companies discover that it’s cheaper and more effective to buy legislation that protects their monopoly rather than actually try to outperform competitors.

      Health care? Money is responsible for every single thing wrong with that area and the recent reform bill only injects more money into it by mandating coverage for everyone.

      The rise of right-wing crazies – Tea Partiers, militias, 2nd Amendment nuts, etc, etc, etc? All astroturfed by RNC-connected lawyers and their immensely profitable PACs that funnel fees back to their firms in wheelbarrows.

      I could go on and on (global warming deniers? What reason do they have except for the cost of caring?) and the tune always stays the same. It’s all about money, money, money.

      If I was some sort of media baron I would launch a new 24/7 cable news channel that *only* carries stories about money ruining the world. I’m no socialist, and God knows I want to have more money, more than just about anything. But human greed is so predictable and reliable that constructing legal frameworks to nullify it’s effects in political and social arenas is actually pretty straightforward.

      But it can’t be done when the supreme court itself favors corporate interests over the greater good.

      In response to another comment. See in context »
  7. collapse expand

    Fake reform. Feigned anger and obstruction by the target of reform. Half the population driven insane while the other half suffers chronic nausea. The status quo machine rolls on.

  8. collapse expand

    this is so typical. The individual american is getting killed by the effects of the meltdown that we did little to cause and the big boys are still going to get around any controls so that this will not happen again. Where are the leaders with the guts to stand up and do something?

  9. collapse expand

    Financial reform is merely “busy” work for lame dick politicians like Dodd. Perhaps it should be call a job application. Financial resurrection is a more appropriate description for the solution,

    http://www.thedailybeast.com/blogs-and-stories/2009-12-16/rebuilding-the-wall/

    Nomi Prins is exactly right when she advocates the re-division of investment/consumer banking. A massive misallocation of capital (supplied by the taxpayers) is extent because of this incestuous cabal. Risk to this capital is carried by the very people who have no access to it, US, with those pesky, unpopular profits accruing to the gnomes of finance.

    FINANCIAL CRIME GNOMES BUSINESS PLAN:

    1. Find government $$$
    2. ???+=#-++%???
    3. Get rich

    PS. disavow any knowledge or responsibility for #2. Blame a universal Deity, if available.

    PPS. Close that damn G$ account. Buy yuan.

  10. collapse expand

    Let me take a wild guess, after I get my computer to search/replace “health care” with “financial” in front of the word “reform”.

    This early proposal is sadly weak.

    It’s also the most radical, effective proposal that there will ever be.

    From here on, it doesn’t get strengthened and enhanced, it gets watered down and reduced.

    The final product resembles “reform” the way a Brazilian bikini resembles a “arctic parka”.

    This is nonetheless decried as “government takeover of the entire economy” by certain politicians and as “socialist tyranny” by certain pundits.

  11. collapse expand

    I read an article by Matt Taibbi in RS that actually listed the cons used by Wall Street. I can’t find that article anywhere. Can’t remember which RS back-issue it was in and since RS wants 15 bucks for a back-issue I thought I’d try to contact Matt or find the article online- can’t seem to find a way to accomplish either of these options.
    Absolute Genius. I bought all the books I could find by Matt.
    It’s really odd that I’d never seen his books
    until now. I read constantly and that includes reviews. Have you ever been on ‘The Daily Show’ or ‘Colbert’, Matt?
    What’s wrong- why are you sick? ‘A bag of plasma’ well that sounds ominous- in fact it
    sounds downright scary.
    My email: mbzirkle@aol.com for RS back issue number or where I can find article, and
    tell me why you’re sick.
    Thanks- mb

  12. collapse expand

    Let’s face it…Goldman Sachs, the SEC, and Obama have joined forced to hoodwink the public….the SEC has a credibility rating on par with GS….they are all crooks

  13. collapse expand

    Upon entering the White House President Obama inherited a government that had been subjected to eight years of willful malfeasance and in some cases intentional gutting. Bush left a legacy of agencies staffed by people chosen for their religious belief’s rather than their competency.

    America knows what FEMA didn’t do under the Bush mis-administration but the public is largely unaware of the depth of the problem throughout the government.

    What President Obama and his cabinet inherited was a government that was in shambles. Getting the agencies of government effectively functioning again would be a task that would take months if not years.

    Enforcement is only effective when we have effective enforcers armed with the mandate, manpower and budget to do their jobs. We haven’t had that in the SEC, EPA, FTC and in many other important agencies of our government for a long time.

    The people are entitled to effective oversight and enforcement.

  14. collapse expand

    Is it just possible that the minimal “good stuff” in the bill isn’t, in the larger context, good at all? By pulling in the reins on moderately questionable practices and not addressing truly reprehensible practices, we’ll be herding the banks into the worst activities.

    The banking and insurance industries should just flat-out be nationalized. Permanently.

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