When President Barack Obama signed the Dodd-Frank Wall Street Reform & Consumer Protection Act two years ago, he proudly remarked that the legislation represented a crushing blow to the extravagant financial corruption that caused the global economic crash in 2008; and which four years later we have still not recovered from.
This was supposed to be the bill that addressed all the lax policies that had created the largest transfer of wealth in our nation's history and in turn create the strongest consumer financial protections since Franklin Delano Roosevelt navigated us out of the Great Depression and the Great Crash of 1929. And upon entering office, Obama found himself in the same position as FDR - the American economy was in tatters after the bursting of a massive financial bubble, brought on when speculators borrowed huge sums and gambled on unregistered securities in largely unregulated exchanges. This mania for instant riches led to an explosion of Wall Street fraud and manipulation, creating a mountain of illusory growth divorced from real-world economics. Indeed, of the $50 billion in securities sold in America in the 1920s, half turned out to be worthless.
Financial investigative journalist Matt Tabbi has diligently reported on the recent financial crisis; and his recent piece in the May 24th edition of Rolling Stone is bone-chilling and telling - demonstrating how the failure of Congress and the President to implement Dodd-Frank reforms has placed the very future of capitalism at risk; and easily forms the pivotal and cornerstone issue facing our country in the Presidential & Congressional Election year.
At 2300 pages the Dodd-Frank bill rewrote the rules for Wall Street. In was intended to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money and a new set of rules would limit speculators from making crazy bets that cause wild spikes in the price of food and energy.
But mainly, if any of the nefarious maneuvering that created the crash ever did happen again, Dodd-Frank guaranteed we wouldn't be expected to pay for it in the form of taxpayer funded bailouts. However as we find ourselves in the midst of another election year two years later, nine separate bills have been ushered through the House of Representatives, all designed to eliminate and roll back the few genuinely meaningful reforms contained within the bill. Indeed, that these bills could pass through the House & Senate with little or no debate on simple floor votes underlines everything that is wrong and broken about our current political system.
But first a brief historical recap. The key things that FDR pulled together to navigate us out of the Great Depression was a logical system for protecting consumers by forcing the business of Wall Street into the light. The Securities Act of 1933 required all publicly traded companies to register themselves and offer prospectuses to investors; the Securities Exchange Act of 1934 required all commodities and futures to be traded on organized exchanges and the FDIC was created to protect bank depositors through an insurance fund paid for by the banks themselves. The Glass-Steagall Act was passed to separate insurance companies, investment banks, and commercial banks. And this reform strategy worked for half a century.
What created the financial crash of 2008 was deregulation of the regulated exchange system created by FDR, allowing less-regulated markets to coalesce around brand new financial inventions like credit default swaps and collateralized-debt obligations. All Congress needed to do to rescue the economy and protect consumers was to make sure the financial playground of Wall Street had some rules, which meant moving swaps and other derivatives onto open exchanges, making sure that federally insured banks that dabbled into those dangerous markets retained more capital, and developing a plan for unwinding failing companies like AIG or Lehman Brothers that wouldn't require federal bailouts.
The initial proposal for Dodd-Frank would have addressed most of those concerns by creating a system for shutting down failing mega-firms, requiring swaps to be graded and cleared on regulated exchanges, and prevent federally insured banks from engaging in dangerous speculation. But then behind the closed doors of Congress, Wall Street lobbyists managed to whittle these regulatory concepts down to such an extreme degree that Dodd-Frank now stands poised like a paper tiger.
Over the course of the last two years the rules on swaps were riddled with loopholes: one rule preventing federally insured banks from trading in risky derivates ended up exempting a huge chunk of the swaps market from the new law.
Another rule that didn't make the nightly news centers upon The Volcker Rule banning proprietary gambling. While the rule has survived, Wall Street won broad exemptions for mutual funds, insurers and trusts; and then with the aid of Treasury Secretary and former Citi-bank CEO Tim Geithner and Democratic Senator Chuck Schumer of New York, managed to secure a lunatic and arbitrary numerical exemption that allows banks to gamble up to 3 percent of their 'Tier 1' capital, which is a number for big banks that stretches into the billions.
As for the much vaunted Consumer Financial Protection Bureau, which was an important chunk of the Dodd-Frank Bill designed to be a powerful, independently funded agency protecting the interests of consumers against Wall Street and advanced by Harvard professor Elizabeth Warren, which would have cleaned up the mortgage markets by ending predatory home lending and forcing everyone in the game - especially banks and investors - to post real cash and keep 'skin in the game' when buying or selling a mortgage, it is now a small, dependent office held under the thumb of the Federal Reserve System that is run by Ben Bernanke. So instead of Warren, we now have Richard Cordray, a former Ohio attorney general, running the agency.
But most despicable of all is how Congress has dealt with the 'Too Big to Fail' protections of Dodd-Frank. Rather than stopping financial institutions like Goldman Sachs and Bank of America - entities that are so huge we are forced to bail them out of they collapse - from getting so big that they take everyone down with them when they fail, the future bailout question was supposed to be addressed with Title II of Dodd-Frank known as the Orderly Liquidation Authority.
Title II would have forced major financial companies to pay $19 billion into an FDIC-style fund that would cover the cost of any future bailouts. But then the balance of power in the Senate was upset by the election of Republican Scott Brown to Ted Kennedy's seat in Massachusetts during the 2010 elections, so as the clock wound down toward the bills passage, Brown insisted on a change: Instead of making these enormous companies pay $19 billion in advance, the FDIC would first use taxpayer money to pay for any bailouts, subsequently spending years trying to recover that money from Wall Street by means of an assessment process that is entirely unintelligible.
Republicans managed to wrangle conference support for the 'bailout now, pay later' idea, and it made it into the final bill. This year Brown is being challenged for his Senate seat by Elizabeth Warren.
But let's fast-forward to earlier this year in 2012.
Republican Presidential Candidate Mitt Romney has offered up Rep. Paul Ryan as his Vice-Presidential candidate. Yet earlier this year Ryan gathered the GOP leadership together and told the chairman of each committee that he wanted them collectively to come up with $261 billion in budget cuts, demanding that $35 billion of those cuts come from the Financial Services Committee, which oversees much of the regulatory apparatus that would enforce Dodd-Frank.
How to do this? Simply eliminate the entire Title II section of Dodd-Frank. While two years earlier Republicans insisted that this assessment process was pivotal; the new faulty logic assumed that taxpayers would wind up footing the bill anyway, so better to scrap the entire plan and have the FDIC pay for the bailouts upfront. Consequently, without Title II, we're right back where we started, with taxpayers exposed and no way to make Wall Street repay any of the bailout money.
On the Democrats side, once they surrendered on the original idea of forcing Wall Street to pay into an FDIC- style kitty ahead of time, Republicans were now in a position to push the whole bailout plan off the table with a simple budget resolution.
To make up the rest of the $35 billion in budget cuts ordered by Ryan, Obama's mortgage-aid program was slashed and the Consumer financial Protection Bureau was subordinate to a congressional appropriations process - meaning its budget can now be subjected to never - ending attacks by the GOP.
The committee is now chaired by Spencer Bachus of Alabama, who's solution to coming up with the massive budget cuts ordered by Ryan was to simply eliminate the entire Title II section of Dodd-Frank. If another bank failed, argued Bachus, it would take too long to recoup the bailout money from Wall Street through the assessment process that Republicans had insisted upon only two years earlier. In the end - their twisted logic went - taxpayers would wind up footing the bill anyway, so better just to have the FDIC pay for the bailouts upfront - thus, in typical double-speak - 'save' taxpayers some $22 billion.
Without Title II we are right back where we started - rushing to implement an expensive bailout in the midst of a crisis, without anyway to make Wall Street repay the money. And while this budget gambit may not have much of a chance of passing in the Senate, which is still controlled by Democrats, opponents of Dodd-Frank have in turn pursued a more dependable arena for gutting the new law.
With an unlimited financial arsenal consisting largely of your own bailout money, Wall Street's first big win in the courts that further helped destroy Dodd-Frank involved the 'proxy access rule', which made it easier for people who own stakes in a company to remove directors from the board - giving shareholders more power to rein in corrupt or overpaid executives. As Commodity Markets Oversight Coalition spokesman Jim Collura puts it: “First Wall Street hires a ton of lobbyists to go after the regulators, then they beat the crap out of them in rule making process, and when that's over they litigate the hell out of them.”
As Tabbi notes: “For all the right's supposed hatred of 'activist judges', conservatives immediately flocked to the courts in search of magistrates willing to casually overturn the work of elected officials. In the case of the proxy access rule, Wall Street convinced its two favorite lobbying arms, the Business Roundtable and the Chamber of Commerce to sue the Securities Exchange Commission - claiming the agency had not done a proper cost-benefit analysis before it instituted the new proxy access rule.
The Chamber's legal team was led by Eugene Scalia son of Supreme Court Justice Antonin Scalia, who pitched a federal appeals court on the idea that the SEC hadn't spent enough time studying the rule's effect on “efficiency, competition and capital formation” and was therefore 'arbitrary and capricious.' In reality, the agency had produced 60 pages of cost-benefit analysis and 21,000 man hours working on the bill and studying its effects. In his opinion, presiding judge and Reagan appointee Douglas Ginsburg not only vacated the rule, but denounced the shareholder rule as a gift to 'unions and government pension funds'. Ironic insofar as the Chamber of Commerce is the 'mother' of all big-time lobbying efforts.
After this win, Scalia let regulators know that any attempt to implement more limits on Wall Street would likely result in the same kind of lawsuit. So rather than challenge the constitutionality of the bill in one broad suit, the finance industry took it apart one element at a time.
Next came a challenge to the Commodity Futures Trading Commission to stop it from implementing 'position limits' in the derivatives market, which is the heart of a monstrous international problem - the perversion of fuel and food prices by financial speculators. The oil bubble of 2008, in which a barrel of oil rose to a preposterous $146 before falling to an equally preposterous $35, was one result of this speculation - and still is with us today.
The position limits set by Dodd-Frank were designed to prevent any one speculator from controlling more than 25% of a commodities market at any given moment. The rule would help ensure that prices are pegged to the real supply and demand of real producers and consumers, not to fantasy bets placed by market-monopolizing speculators. But the industry sued the CFTC over this exact issue - the supposed lack of a cost-benefit analysis - and once again the industry hired Scalia, who argued that the CFTC had failed to provide 'sufficient evidence' for its decision to establish position limits.
The lawsuit is likely to drag on for months and regardless of the outcome, Wall Street groups intend to appeal it. Many key sections of Dodd Frank are also experiencing such delays. The Volcker Rule, which severely restricts the ability of banks to gamble with taxpayer insured money, is being delayed because regulators have been understaffed to wade through the 17,000 comment letters submitted on the rule, most from wall Street interests, that two years after passage of the legislation, they have not been able to finish the writing of the regulation by the mandated deadline of July 21, 2012.
Last year after Republicans attempted to slash the CFTC's funding by more than 33 percent, Congress settled for freezing the agency's budget, despite the fact that under Dodd-Frank, the market that the CFTC is responsible for overseeing soared from $40 trillion to $340 trillion.
And thanks to Vice-Presidential Candidate Paul Ryan, his Ryan-led budget cuts that the House passed in April that scrapped the entire bailout portion of Dodd-Frank, may not survive in the Senate. Because of the continual whippings in the House of the new law, regulators are crippled because the law's actual rules are not even completed.
Examples of how this is happening are numerous. For instance, take the provisions of Dodd-Frank designed to curtail complex derivatives, like swaps, which caused disasters like the crash of AIG. Under the law, the SEC and CFTC must decide which swaps dealers will be governed by new rules, requiring them to maintain more capital and collateral and skin in the game. Originally, the agencies were thinking of regulating any dealer who manages more than $100 million in swaps. But then Rep. Randy Hultgren, a Republican from Illinois, proposed HR 3727 - one of nine GOP sponsored bills to kill Dodd-Frank - that would raise the threshold to $3 billion in swaps. Overreacting to industry pressure, both the SEC and CFTC volunteered to raise the threshold to $8 billion.
That means at least two-thirds of all swaps dealers in America will now be exempt from Dodd-Frank. Given the new threshold, consumer advocates calculate, you could make 1,600 swaps transactions a year, each worth $5 million, and still not have to so much as register as a swaps dealer.
The nine bills being contemplated by Congress take a variety of approaches to gutting Dodd-Frank.
Two bills, HR 1840 and HR2308, are essentially stalling tactics, requiring regulators to undertake more of these cost-benefit analyses that result in lengthy delays. Another bill, HR 3283, which is sponsored by Connecticut Democrat and hedge-fund industry BFF Jim Hines, exempts foreign affiliates of U.S. Swaps dealers from all Dodd-Frank oversight. If adopted, this bill would make the next AIG possible, given that AIG was undone by a half a trillion dollars in derivative bets produced by just such a foreign affiliate - its London-based financial products outfit, AIGFP. The bill also exempts from oversight any swaps deals between company affiliates - meaning that Goldman Hong Kong can sell swaps to Goldman New York without having to deal with Dodd-Frank.
And finally there is HR3336, which raced through Committee process with a simple voice vote, that grants broad exemptions form swaps regulations to any company that offers 'extensions of credit' lines they will use to win exemptions for banks engaged in almost any kind of lending activity - including those involved with municipal bond offerings.
What is even more curious in this entire mix is the fact that all President Obama needed to do to rescue the economy and protect consumers was to make sure the new financial playground had some rules, which is what Dodd-Frank initially was fought for over a two-year period and finally passed in 2010 to attain.
Dodd-Frank ordered the CFTC to begin enforcing position limits by no later than Jan 17, 2011. But then Gary Gensler, the head of the CFTC and a former executive of Goldman Sachs, announced that he hoped to implement the rule of September 2011. Before we knew it, it was 2012 and even Obama got into the stalling game.
As Tabbi writes: 'During the year of non-action on position limits - the 'disease that did not exist' - energy speculation returned to ravage the American gasoline market, with oil prices spiking despite fundamentals of supply and demand that would have suggested a price drop. Obama blasted fuel speculators for the price hike and announced that he was creating the Oil & Gas Price Fraud Working Group to “root out any cases of fraud or manipulation in the oil markets.”
This was a curious decision. If Obama really wanted to stop speculation in the oil markets, he didn't need to create a brand new task force. He would have just needed to pick up the phone and call Gensler and say, 'The Dodd-Frank Act required you to put in strong position limits by January, 17, 2011. Get off your butt an act.”
Americans are frustrated and shell-shocked from politics because of the fact it is so inundated with special interests and lobbying efforts that work to enrich the few rather than foster the general welfare. Hopefully, these financial reforms of Dodd-Frank and the actions that have led to its un-doing will be a driving force as voting Americans go to the polls in November to re-shape our future destiny.