Two stories caught my eye today, both related to our financial markets. One was about the merger of a European and US derivatives exchange that may require SEC approval. The other was a story about the Obama administration requesting additional funding for the SEC. For a very long time, I’ve been saying that blaming the FED for the melt-down of the financial markets was silly, unless the SEC shared in the blame. The Fed is primarily charged with regulating some commercial banks in order to keep inflation in check and the financial system healthy. Their mission became a little fuzzy when investment banks and commercial banks started looking a lot alike. So, it is no surprise that journalists started simplifying their writing to use the generic term “bank” regardless of its traditional business lines. On the other hand, the SEC is charged with protecting investors and making sure that public financial markets are sound. For years the SEC has been under staffed and underfunded. The budget submitted by President Obama yesterday proposes a 28% increase in funding for the SEC. Republicans, on the other hand, want to slash funding to the agency. The SEC was charged with implementing some of the financial reforms mandated by the last Congress in a bill sponsored by Dodd in the Senate and Frank in the House. But the increase recommended by Obama for 2011 has never passed, in part because the 2011 budget has never passed. The head of the SEC, Mary Shapiro, says that they don’t have enough money to do their job. Shapiro estimates that it will take an additional 800 employees to implement the new regulations in the Dodd-Frank bill. The Los Angeles Times reports: Schapiro testified last summer that the SEC needed to hire 800 more employees to implement new regulations called for in the Dodd-Frank financial overhaul law. She said Friday that the lack of additional money has "hampered our ability to do what investors and capital markets deserve." So nothing new here. The SEC is still under staffed and underfunded. But you have to wonder who the Republicans represent. It seems that they don’t support protections for consumers or protections for investors or stable financial markets. I think they’ve gone stark raving mad. Homework Deutsche Boerse & NYSE Mission of Federal Reserve Bank System Mission of SEC Obama's Budget Increases Funding for the SEC Mary Shapiro Talks About the SEC Budget Summary of Dodd Frank Bill
The conference committee must have been an interesting place to be last night. They held a marathon session and, after 20 hours of work, passed a financial reform bill. It now goes back to the House and Senate for final approval. One amusing note is that some of the delay was caused when they ran out of paper for their fax machines.Unfortunately, in the sausage making, some of the more important parts in the bill were watered down. Wall Street got to the legislators, again. That should be no surprise to readers of this blog, since we previously wrote that there were thousands of Wall Street lobbyists trying to get to legislators, while there were only about 60, mostly volunteer lobbyists on the side of Main Street, trying to stand in their way.The Lincoln amendment, which put severe restrictions on the trading of derivatives, was weakened. Remember it was derivative trading that got AIG, Standard and Poors, and the investment banking industry in hot water in the first place. Evidently there is some question about whether the Senate will pass the compromise bill. The part you will most likely hear the most about is a new tax on investment banks that is designed to pay for the bill. (Remember this congress has a pay as you go rule.) Here’s a juicy tidbit from the linked story:The new bank tax also spurred sharp exchanges from tired and testy lawmakers overnight. "Why is it that Congress always sees the need to raise taxes on the American people in the dead of night at 3 o’clock in the morning?” asked Rep. Scott Garrett (R-N.J.).
Dodd shot back that the amount of the tax could effectively be paid for if Wall Streeters were willing to forego their bonuses. Those executive’s firms “are alive because the American taxpayer wrote a check,” Dodd thundered, referring to the $700 billion bank bailout plan. “To ask them to forego their bonuses . . . ought not to be a lot to ask.”Speaking of financial reform, Colorado has a great treasurer. Check out her website.HomeworkFinancial Reform Bill PassedCary Kennedy for Treasurer
Both the House and the Senate have passed bills that change how financial institutions do business. The bills are moving into conference committee this week. Banking industry lobbyists will be working to weaken regulations. Consumer advocates will be working to see that the toughest regulations from each individual bill end up in the final bill. The fight is another David Vs Goliath. Almost 2,000 paid banking industry lobbyists will be trying to get to conference committee members, while about 60, mostly unpaid, volunteers will try to stand in their way.Conference committee members will be appointed on Tuesday, although it is generally known who they will be. They start their work on Thursday. Barney Frank promises that the work will be televised, and votes will be recorded. Without Sunshine laws, along the lines of those in Colorado, it is silly to think that all of the work will be done in front of cameras. There will be lots of back-room meetings, and both the committee members and the consumer advocates will be out-numbered and out-maneuvered.Here’s what is at stake:There is a new consumer protection agency in the works. Whether it is completely independent or part of the Fed will be discussed. Also, under discussion is whether certain groups, like car dealerships, will be exempt from the new regulations.The House and Senate bills differ on how to treat derivatives. One bill requires banks that have access to the Fed’s discount window to spin off their derivative activities. That is the Senate bill, which Barney Frank says will be the document from which the conferees will be working. Big banks will fight hard against this regulation. Another provision would require financial institutions who engage in derivative trading to have ample capital, so that they won’t need to be bailed out by the taxpayer the next time they get high on risk.The second link in the Homework section has a good synopsis of what will be discussed and decided. Barney Frank’s self-imposed deadline to get a final bill to Obama for signature is July 4. Homework:Consumer Advocate watching Financial ReformThe Banking Showdown
While I’ve been away from internet links, Congress passed the Restoring American Financial Stability Act. It does no such thing.
Thanks to 2,000 lobbyists for the financial industry, derivatives will still be unregulated; consumers will still be scammed by used car dealers and credit card companies; and too big to fail still means a government bail-out of gamblers.
The part that irritates me the most is that “too big to fail” amendments failed. Reality is that banks that are “too big to fail” really are a danger to our national security. By taking risks with our economy, they are still rewarded with huge fees and bonuses, and have the backstop of the federal government’s ability to tax. It’s a get-out-of-jail-free card for investment bankers. It privatizes profits and socializes losses. The rich get richer and the rest of us get screwed.
Read the linked story to see how laws like this get passed. Warning, you may lose your lunch.
Homework:
http://www.rollingstone.com/politics/news/;kw=[36899,157778]
The linked story demonstrates how the FDIC works. Small banks fail all the time, usually because of bad management. In this case, banks are probably failing because unemployed consumers and small businesses, which have seen revenues drop as the result of the recession, are unable to repay their loans. Some of the loans were good, however—that is what the story is talking about when it says that assets were purchased by another bank. Look at the size of the banks that failed on Friday: $242.9 million, $120.2 million, $335.8 million, and $32 million. These are not the multi-billion dollar banks that the government bailed out as “too big to fail.” Look at how these banks failures were treated—other banks purchased their deposits and assets. When another bank purchases deposits, the full amount of the deposit is purchased, even though FDIC only insures deposits up to a certain amount. In other words, no depositor lost any money as the result of these bank failures. Good loans and investments are the “assets” that were purchased by other banks. The FDIC keeps the bad loans, but doesn’t just write them off. They go after collateral and judgments against the borrower in order to recover as much money as possible for the FDIC fund. Stockholders and the FDIC took the loss, and the FDIC will try to recover some of its losses. The shareholder is out of luck. Look at how the FDIC is funded. The story says that as of 12/31/2009 they had a deficit of $20.9 billion, caused by bank failures. The reaction of FDIC was to force BANKS to pay premiums of $45 billion in order to replenish their fund. In other words, the banking industry is paying for the costs of these bank failures, not the U.S. Treasury. When a mechanism similar to FDIC was taken out of the banking reform legislation, I shook my head in disgust. That tells me that congress is not serious about fixing the “too big to fail” problem with big banks. Small banks pay into an insurance fund that protects depositors, but there is no such protection for small investors who invest their money with investment firms. And the only way to save the economy when a failing bank is “too big to fail” is to have the government bail out the bank. Homework:http://finance.yahoo.com/news/FDIC-shuts-banks-in-Fla-Minn-apf-2475780035.html?x=0&sec=topStories&pos=main&asset=&ccode
Finally, something to cheer about in financial reform! Small Businesses could be paying less for the privilege of accepting credit cards when consumers make purchases. One of the reasons I left the world of banking was that it was becoming increasingly mercenary. When I started my career, we were drilled on providing good service to our customers. When I ended that career the focus had moved to increasing fee income and a strategy of selling multiple products to a customer. The idea was that the more products a customer purchased, the more difficult it would be for that customer to move to a competitor. A revenue stream as secure as an annuity!I also watched banks go from offering small loans to consumers and small businesses to moving small transactions into credit cards. (At one point in my career, you couldn’t get in to see me unless you were attempting to borrow at least $1,000,000. Small business need not apply.) To the extent that small transactions could be automated, the bank could lower its cost of doing business. Credit cards were exempt from all usury laws, so they could be priced in the range of 18 to 24 percent, thereby increasing the bank’s revenue at the same time. And when a customer used a credit card, the bank received a percentage of the transaction as a fee from the merchant. This new legislation limits those fees. And it only came about because small business lobbied harder than the banks did on this one piece of legislation.Now if only consumers had a lobbyist. Maybe we could bring credit card interest rates back in line with the actual cost of funds plus a bump for the risk of an unsecured transaction.Homework:http://www.nytimes.com/2010/05/15/business/15credit.html?hp http://www.denverpost.com/business/ci_15090107
Today Mark Udall sent out a newsletter about his work to give Americans free access to their credit scores. While people have been granted free access to their credit report, they do not have free access to their credit score.A credit score is what most financial institutions and insurance companies use in making decisions to do business with a consumer and/or what rate to charge. Currently that information is available for a fee. I pay about $30 a month to a credit reporting company for the privilege of knowing about changes in my credit score, including when someone tries to access my credit information. I also block access to one credit agency, so it requires my active participation for someone to gain my credit information. To me that is a service worth paying for in order to protect myself from identity theft, especially since my name is increasingly available to people using the internet. Udall’s bill would make the information available at no cost, although I suspect the reporting of changes and blocking of access would continue to be a fee based service.When Mark was here in Grand Junction, I asked him to introduce a bill that would have even more value to consumers—a national usury law. Usury is actually a biblical concept that says that charging interest on money is a sin. Most states have usury laws that define a cap on interest rates that can be charged to borrowers. Frequently the rates differ by type of borrower. It is assumed that a commercial borrower is sophisticated enough to walk away from a bad deal, but that a consumer may need some regulatory protection.In Colorado the usury cap for commercial borrowers is 45%. For consumers, the cap is 12%. (I can hear the reader now. “This woman doesn’t know what she is talking about. My credit card rate is way above 12%.”) But hold on to your hat! Banks, Credit Unions, and Savings and Loans are exempt from the Colorado usury law, because their lobbyists went to Washington and whined that they couldn’t be competitive in all 50 states if they had to pay attention to the laws of each individual state. In a bill passed this legislative session, Pay Day lenders were given a new cap in Colorado, no thanks to Steve King who voted against the bill, and who accepted money from the Pay Day Lending Lobby.Since Federal laws trump state laws in this case, it is time for a national usury law. Sorry, reader, you can’t depend on me to change that one. I’m asking you to send me to Denver, not Washington. But you can be that I’ll continue to put that bug in the ear of Colorado’s representatives. I’ve already mentioned it to both Udall and Bennet. If I get the chance, I’ll mention it to Romanoff on Friday.Homework:http://thehill.com/blogs/congress-blog/economy-a-budget/94347-a-critical-number-sen-mark-udallhttp://www.usurylaw.com/state/http://www.reuters.com/article/idUSN1221637220100512
Because of my background in banking and finance, I’ve been following the Dodd bill as it makes its way through the Senate. I’m discouraged. We are not going to see any kind of meaningful reform.One of the proposals being weakened is an independent Consumer Protection Agency. Elizabeth Warren has a four part test for a successful Consumer Protection Agency:1. The head of the agency appointed by the President.2. Funding that is independent of legislative actions.3. Authority to write rules that protect consumers.4. Ability to enforce the rules.What is being discussed, instead, is an agency that is headed by the heads of the current regulatory agencies—the Fed, the OCC, and FDIC. The problem is that their charge is to ensure the safety and soundness of banks, which implies profit, which implies a conflict of interest when it comes to reining in the high interest rates paid by credit card borrowers, or other consumer product fees.Speaking of the FDIC, it is primarily funded by “premiums” paid by member banks. The “premiums” are assessed according to the size of the institution and the risk profile of the institution. The risk profile measures how many loans the institution makes that are unsecured, how many are secured, what investments are made, etc. If the bank has a high risk profile, they pay high FDIC premiums. When a bank fails, the depositors are paid, up to the insured amount out of the money received by FDIC from these “premiums.” After depositors are paid, assets are sold by the FDIC, and large depositors, creditors, and investors absorb any losses. In short, there is an orderly liquidation of the institution, using primarily funds obtained from the industry, not the federal government.The original Dodd bill had a similar vehicle for large investment banks. When that provision was removed, I concluded that nobody was serious about regulatory reform. Can’t wait for the next financial crisis, it should be another barn burner. Homework:http://www.huffingtonpost.com/2010/04/29/elizabeth-warren-gop-refo_n_556362.htmlhttp://www.csmonitor.com/USA/Politics/2010/0511/Will-financial-reform-end-big-bank-bailoutshttp://www.fdic.gov/
It seems that both Denver and Washington, D.C. have taken up the call for financial reform. In my opinion, which is based on 40+ years in the industry, neither is going to address the problem.
In Washington the two proposals are create a consumer protection agency and make shareholders vote on executive compensation. Both sound good on the surface, but when one looks at the detail they look a bit weak.
If large corporations were owned by lots and lots of individuals, the vote on executive compensation might actually reduce the disparity between the top earners and the bottom earners in this country. But large corporations aren’t owned by lots and lots of ordinary individuals. They are owned by extremely wealthy individuals who run other large corporations and/or mutual funds or other institutional investors who are operated by other extremely wealthy individuals. I don’t expect the echo chamber to hear any of the pleas of the small guy.
A consumer protection agency, with real teeth, is a better idea. How viable it would be may be another story. I think back to the laws that said that consumer contracts had to be written in plain English so that the average individual could understand what they were signing. What happened was longer and longer contracts that only loan closers ever actually read. I don’t know where to place the blame for that one. I don’t know if there ever could be an agency able to protect people from signing documents that they don’t understand.
In Denver legislators were trying to put a cap on interest charged by payday lenders. But the Democrats, who were sponsoring the bill couldn’t get enough people in the room to ensure a vote, so the bill was tabled for lack of interest. I’d like to see a national usury law, and have told Colorado’s Senators and our Representative that. It is the lack of a national usury law that allowed interest rates on credit cards to get so high. Credit card companies argued in federal court that they were chartered nationally, and thus were not under the jurisdiction of state laws, then high-tailed it to states without usury laws.
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