A letter from Washington (June 2011) - Skip Kaltenheuser


Will last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act find resounding success? Or is the smart money betting banks will ultimately conduct business as usual?

Those seeking to weaken Dodd-Frank – which requires ample rule-making to implement – will mostly come in under the radar. They’ll let the Federal Reserve or other bank-friendly regulators slowly chip away at rules enacted by Congress. Piecemeal legislation will then repeal prior rules rendered moot by regulatory exceptions, abetted by challenges before a business-friendly Supreme Court. It’s arcane, with plenty of sleight of hand, muddied up by rival business interests jockeying for advantage.

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The effort to hamstring the new Consumer Finance Protection Bureau, and to discredit President Obama’s choice of its leader, Elizabeth Warren, is a more aggressive bellwether. The White House has ways to sidestep that effort, supported by a Senate still in Democratic control.

If derailment efforts become too blatant, proponents will feel the political hammers, powered by anger at huge backlogs of foreclosed properties that will long depress markets and undermine neighbourhoods in many parts of the nation.

Bart Dzivi, former Special Counsel to the Financial Crisis Inquiry Commission and now a lawyer in California, sees Dodd-Frank as an improvement, but ‘still unlikely to reduce the probability of future catastrophic systemic failures.’ Dzivi says, ‘The root causes of the recent collapse – bank executives with oneway financial incentives to incur substantial risk, and a fragmented regulatory system with divided jurisdiction and lack of accountability – remain largely intact.’

Dzivi contrasts the ‘irrational structure of US financial regulatory agencies – ineffective at preventing failures at the largest institutions’ with the ‘much more effective’ Canadian model, in which the central bank does not exercise bank supervisory powers. ‘None of the large Canadian banks failed or required a government bailout.’

‘If unchecked, bankers will always find a way to exploit banks from the inside, piling up assets that appear profitable in the short term, but are catastrophic in the long term,’ says Dzivi. ‘As Warren Buffett said, if massive losses occur at a financial company, senior managers should lose substantially all their wealth created by the company.’ Not yet.

Another point for pessimism is the revolving door spinning key SEC lawyers into corporate defence firms like WilmerHale, known as SEC West, and lawyers from that firm into
prime SEC positions, such as chief of the Enforcement Division. WilmerHale clients include Goldman Sachs, Citigroup, Morgan Stanley and JPMorgan Chase.

Recently Daniel Gallagher went full circle and then some. He started his career at WilmerHale, eventually going to the SEC where he worked on efforts including the elimination of shortselling restrictions and held a leadership role in the Division of Trading and Markets. Last year he returned to WilmerHale, where he’s a partner. The White House recently nominated Gallagher to be one of five SEC commissioners. So it goes.

William Black, a former bank regulator and the author of The Best Way to Rob a Bank is to Own One, worries over the dearth of prosecutions after the latest financial crisis, despite data indicating that in 2006 between a quarter and a half of home loans were ‘liars’ loans’, for which the great majority involved fraud. Lenders supplied the overwhelming number of lies.

Black points to a New York Times column by Gretchen Morgenson and Louise Story which reveals how during the Bush administration, Tim Geithner and Ben Bernanke sought to discourage or limit federal and state prosecutions, enforcement actions and lawsuits. ‘Geithner’s rationale was that the financial system’s extreme fragility made vigorous investigations of the elite frauds too dangerous,’ says Black. President Obama reappointed Bernanke and made Geithner Treasury Secretary.

‘Giving fraudulent CEOs de facto immunity as the road to financial stability is stupid,’ says Black. ‘This was not a fraud-free financial crisis,’ says Black. ‘It’s a prosecution-free financial crisis for the elites whose frauds caused the crisis.’ The recent LinkedIn public offering reaped impressive riches for the company. But some observers, such as Henry Blodget of Business Insider, saw its rise to 90 per cent above the offering as an indication of bankers behaving badly, under-pricing the stock. He thinks Morgan Stanley and Bank of America, and their favoured institutional clients, reaped windfalls at the expense of LinkedIn. Greed’s still good on Wall Street.

Some grounds for optimism:
A recently released 639-page report from Senator Carl Levin’s Senate Subcommittee on Investigations, ‘Wall Street and the Financial Crisis: Anatomy of a Financial Collapse’, details mischief some speculate may lay the foundation for prosecuting Wall Street executives for lying to Congress about dealings, with clients left holding the bag.

A probe of the mortgage securitisation process, by New York State Attorney General Eric Schneiderman, reportedly includes Goldman Sachs, Bank of America and Morgan Stanley. The investigation would derail an imminent bank settlement by states’ attorney generals (AGs) that some regard as advancing without the full scope of investigation warranted. Settlement requires all fifty state AGs to sign on, and Schneiderman is at the sharp end for financial mayhem.

But, remember Willie Sutton, a prolific bank robber in the 1930s? Asked why he robbed banks, he allegedly replied, ‘Because that’s where the money is.’ Creative liberties were taken by the reporter, but Sutton, who enjoyed robbing banks, later endorsed the motive as obvious. The Big Money is still stacking. Political fundraisers salivate over it as the campaign finance arms race revs up. Wall Street is shifting more of its funding to Republicans who’ve proven user-friendly, and Democratic operatives would like to turn that around. The smarter operatives will frame bank backing of opponents as a liability.

As much as for staking Bin Laden, President Obama will one day be judged by whether he whacks back the startling concentration of political power in the finance sector. A pending executive order requiring government contractors to disclose political contributions would seem a no-brainer; hopefully it will be signed without further suspense.

How about another executive order requiring financial outfits that benefited from public money to fully disclose political contributions that would otherwise slip into opaque organisations that both parties now embrace? Call out the politicians in the bankers’ vest pockets.

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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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