A letter from Washington (June 2010) - Skip Kaltenheuser


The US Senate is fond of portraying itself as Congress’s “cooling saucer”, though it’s usually where legislation is just watered down. But, the longer Senators debated the “Restoring American Financial Stability Act of 2010”, the more the Senate appeared to lobbyists to be as unusually unpredictable as a fl ying saucer. Anyone placing bets on Washington’s prevailing wisdom, that the Senate would play softball, now has a wallet with expectations.

What turned Senate softballs to knuckleballs? Anger. The US Treasury Department notes that in the last two years Americans lost 17 trillion dollars, a quarter of their personal wealth. A recent poll gave Goldman Sachs - the poster child of Wall Street, underscored by government lawsuits and investigations - 4 percent public approval. That’s nearly three times lower than British Petroleum’s approval amid the oil spill.

Nothing focuses legislators like standing before an open grave - a few tumbled in during party primaries just before the vote. Now many would rather publicly greet a tar ball than a Wall Street CEO. This differs from party line, whitehot conflicts over health care reform. As anger at banks increased, finance reform opponents became more muted, and the 59-39 vote saw several Republicans voting in favor, with a couple of democrats voting against because they wanted tougher measures included.

How tough the Bill is won’t be known until the Senate bill is reconciled with the House version. Observers think that a signing by President Obama around July 4th, Independence Day, would be good timing as the mid-term elections loom. The 3,000 or so lobbyists hired by affected industries aren’t expected to go into a coma during reconciliation. Among them, banking lobbyists include 243 former government officials, including from Congress. Goldman Sachs, beyond having well-placed alums throughout government, has fourteen different lobbying firms, and forty lobbyists who are former government officials.

Shape shifter

The Senate version was a shape shifter, nearing 400 amendments, most of which didn’t see a vote and about thirty of which passed. So, how best to judge the final bill after reconciliation? With a Consumer Financial Protection Bureau, the movement of most derivative trading onto a public exchange and a method to liquidate “too big to fail” firms without cost to taxpayers - it already contains the most significant finance reforms since the Great Depression.

But, the regulatory bar has drooped somewhat over the years, not just by deregulation but by “desupervision”, says William Black. A senior regulator during the savings and loan mayhem of the 1980s, Black became deputy director of the body specially created by Congress in the early 1990s: the National Commission on Financial Institution Reform, Recovery & Enforcement. The author of “The Best Way to Rob a Bank is to Own One”, Black, an Associate Professor of Economics and Law at the University of Missouri-Kansas City, says that during the George W. Bush administration regulators were appointed precisely because they opposed regulation. They were followed by the anti-regulatory wing of the Democratic Party, including Robert Rubin, a former Goldman Sachs co-chairman who was Bill Clinton’s Treasury Secretary. Black says that wing remains infl uential. If there’s an upsurge in criminal referrals of CEOs by regulatory agencies, says Black, that will indicate a true embrace of reform by top regulators.

Black also points to the need to scrutinize executive and professional compensation, the tool by which those running major finance operations grease and manipulate company officers and employees into becoming allies in fraud. They enable the conversion of firm assets to personal benefit - rising stock value, bonuses, etc. - in ways that minimize the risk of prosecution. A form of “control fraud”, this manipulation allows CEO’s to get “clean” opinions for fi nancial statements that indicate record profi ts despite a reality of risk or deception, and to garner a stamp of approval from auditors. Search the fi nal bill for iron measures that clamp down the slip and slide in accounting and credit rating.

A Senate provision that surprised many would force some of the largest banks to spin off their trading in lucrative derivatives known as swaps, putting them in separate subsidiaries. If not, the banks are denied access to the Fed’s emergency lending window, as access increases risk to taxpayers. Derivatives are now a $600 trillion business. These banks, which have seen most of their profi ts since the bailout come from derivatives, are going wild trying to stop this. It was news to the House, and the Administration doesn’t back it.

The provision was introduced by Blanche Lincoln. The Democrat is in a primary run-off race and however it turns out, this is her political legacy. There is one accidental loophole. It lacks enforcement. Watch to see if the provision survives in conference, with meaningful enforcement added.

There is plenty more to watch, from the simple (whether or not auto dealers, an influential group, end up under the oversight of the consumer protection agency) to the more complex. Will a measure that didn’t get a Senate vote - the “Volker Rule” - get resuscitated in conference? Former Fed chairman Paul Volker wants to stop banks from proprietary trading - playing the markets with their own money - as it exposes taxpayers.

Reform plot thickens

Odds for stronger reforms improve if the House and Senate conference is open and televised, as Rep. Barney Frank, (D. Mass.), chair of the House Finance Committee, has proposed. If it’s an informal private conference between a handful of legislators, on the other hand, odds are worse. As reform plots thicken, the scrutiny given Wall Street threatens to sink The American Power Act, an energy bill from Joe Lieberman, (I. Conn.), and John Kerry, (D. Mass.). According to Tyson Slocum, director of Public Citizen’s Energy Program, the bill is essentially a Wall Street grab at cap and trade, creating a secondary derivative market of carbon. Slocum says the speculation would distort markets.

Wall Street is salivating for carbon in one of the most subtle but well-orchestrated campaigns this writer has seen. The preferred approach, according to Slocum, is The Clear Act, a bill from Senators Maria Cantwell (D. Wash.) and Susan Collins (R. Maine). It bans secondary trading of carbon futures and offsets. Firms can’t hedge unless they have a direct interest in emissions and are regulated under the act. Carbon offsets would be auctioned monthly by the government. Revenues would go back to families in per capita, tax free, dividend checks.

Neither bill is likely to clear this legislative session. But, as finance reform plays out, the wise money will be betting against the energy bill that Wall Street most desires.

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Skip Kaltenheuser is a freelance journalist and writer. He can be contacted at skip.kaltenheuser@verizon.net

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