Wall Street Lobbyists’ View of Financial System Reform

by Linda Beale
crossposted at Ataxingmatter

(Rdan…Linda is still in DC for briefings at Treasury so is not available at AB just now)

Wall Street Lobbyists’ View of Financial System Reform

[edited to add link 5/4/10 at 3:12 pm]

The Washington Post has an interesting story on the bank lobby’s thinking about financial reform. Klein, Lobbyists fret over legislation to reshape financial system, Wash. Post, May 4, 2010.

Basically, the story line is this (with some added interpretive flourishes of my own, in italics).

Bank lobbyists didn’t like the House bill. Too tough. They expected the Senate bill to be better. Sure, Dodd had a couple of provisions they didn’t like, but with Republicans Shelby and Corker making lots of noise about the need for bipartisanship and Dodd trying hard to get a bipartisan bill, there was pretty strong expectation that the bill that came out of that negotiation would be much more favorable to the bankers’ positions. But then something happened. Senators started worrying about upcoming elections.

(My goodness, what might ORDINARY VOTERS think if the senators don’t vote for tough regulation of the banks that caused the Great Recession and the bankers who flew through it with hardly a scrape, while ordinary Americans are suffering high unemployment, stifled dreams, and long-term fears about their financial security, while still paying exorbitant fees for everything provided by banks and getting loans, if at all, only by paying interest at quite a spread over the almost zero rate the bank has to pay to borrow from depositors or from the overly generous FED window.)

The bill made it out of committee with no amendments. None. It was a party line vote (GOP against) but all those expected GOP amendments didn’t materialize. It just took 20 minutes to vote it out of committee and make it possible that there would be real floor debate.

And the lobbyists’ response is this:

Instead of getting the provisions the banks don’t like loosened, the Senators’ thinking about upcoming elections has them adding tougher provisions. Those provisions are likely to actually impact the banks’ profits (their big business in derivatives and proprietary trading, most of it risky, a lot of it used to help banks or others evade regulatory requirements or avoid taxation through some kind of arbitrage) and their “global competitiveness” and benefit to the American economy

(Beale here…read this as –their ability to do all the risky stuff that big banks in other countries may still be able to do, and if you can’t be as risky as the next bank, you won’t make as much mone and, after all, what’s good for the big banks should be understood to be good for the American economy).

So what’s the solution? Why, the usual deal that lobbyists have been comfortable with over the last few decades–getting inside access to the men who have power to shape the bill in a back room somewhere (and letting them know that working for the lobbyists is their job, not paying attention to the ordinary people who put them in office). Says one lobbyist interviewed by the Post:

“They’ve got to get this thing off the [Senate] floor and into a reasonable, behind the scenes” discussion, said one lobbyist. “Let’s have a few wise fathers sit around the table in some quiet room” and work out the details.

Maybe, the lobbyists say, they’ll even have to accept a banker-unfriendly bill from the Senate, but they can work the Conference Committee when a few players from the House and Senate get together to iron out the differences between the two versions of financial reform–maybe even Barney Frank, who has been pretty critical of big banks lately (they seem to think that he can be influenced to be their best friend forever).

And if not, then they’ve got full employment for the next ten years, as they work to persuade Congress to weaken whatever bill is passed (just as they did with the Glass-Steagall Act, where they wheedled and bargained to get exemptions and waivers and eroded the law until the Great Recession was the result).

“I think it’s going to be job employment for me for the next decade, undoing some of this stuff,” said one lobbyist…..

Beale here: Now folks, it’s pretty revealing when lobbyists have become so accustomed to their privileged access and backroom dealings with politicians –as went on in regards to Cheney’s energy discussions, and each of the Bush tax cuts drawn up by a secretive group of GOP without any sunlight (or bipartisansip), for example, and too much with the health care bill as well–that they don’t even bother to hide their scorn for the public’s views and their hopes for getting that back room deal to go their way. No wonder Wall Street honchos have been so brazenly arrogant about their “entitlement” to bonuses, their rights to continue proprietary trading and hedge funds and derivatives desks–“doing God’s work” says Goldman CEO Blankfein–when they are merely running a casino market to strip as much gold off suckers as possible with their “financial innovations” like synthetic CDOs that made the market many times more volatile than “real” securitizations (which themselves were too easily done for our own good).

This is why I have long been worried about the “safe harbor” for mark-to-market rules for tax purposes under section 475, which lets banks use various types of financial statements to determine their “mark” that sets their income for tax purposes. It is far too subject to manipulation, and what we have seen is that there are simply no voluntary curbs that will constrain bankers from taking high risks to get the results they want to get to make their own pocketbooks even fatter.

Accordingly, I’m convinced that tough financial reform needs to break up the big banks so that we don’t have any that are “too big to fail.” Trying to maintain them big and then monitor the systemic risks they cause is a losing proposition, since their hubris and engineering smarts means they will always try to be one step ahead of regulators so they can make more money. See, e.g., The Fourteenth Banker, Huffington Post, Apr. 13, 2010 (management banker at one of our megabanks admits to ethical crisis at banks and need to move proprietary trading so that banks get back to supporting America’s entrepreneurs). The Senate should enact a bill with the Lincoln curbs on derivatives and a ban on proprietary trading for investment banks as well as the Kaufman limits on size. Let the accounting rules fall where they may, by the way, with more, not less, emphasis on taking losses from disrupted markets into account and less, not more, emphasis on mark-to-model accounting. Make bank regulatory decisions independently based on whatever criteria are important to that. All the other measures–capital reserves, liability limits, consumer protection agency with independent enforcement powers, a systemic review council–are important, but without those real teeth they won’t be enough to curb the banks’ appetite for outsize bonuses and the risk that they encourage.