The Wrongologist

What’s
Wrong Today:

Yesterday, we talked about JP Morgan’s $13 billion settlement
with the Department of Justice, and how parts of Dodd-Frank required claw back
of bonuses based on bad behavior by financial executives. Today, the NYT’s Deal
Book reminds us that the US House of Representatives is working this week to
undermine two other elements of the 2010 Dodd-Frank Act:

The two bills, HR 992 and HR 2374 are
part of a broader campaign to weaken Dodd-Frank. Of 10 recent bills that alter
Dodd-Frank or other financial regulations, six have passed the House this year.
This week, these two are likely to also be approved by the House.

HR 992 would prevent implementation of Section 716 of Dodd-Frank,
which requires banks to “push out”
most derivatives from the banks’ deposit taking entities into new entities
that would not be eligible for bail-outs by the Federal Deposit Insurance
Corporation (FDIC). You remember derivatives, those fancy financial instruments that led directly to the Great Recession and our bail-out of Wall Street?

According to Bloomberg,
both Bank of America and JP Morgan Chase hold most of their derivatives in
their banks:

Just two
banks hold $132 Trillion in their banks, banks that we insure. The value of our
entire Gross Domestic Product in September
2013 was $16.6 Trillion. Does it sound sensible to you that we guarantee
the banks if they are allowed to keep their derivatives in the unit with the
deposits we insure?

HR 2374 would
delay implementation of what is known as the “fiduciary rule,” which would
broaden the definition of “fiduciary” to cover all financial advisers who offer
individuals investment advice for a fee. Despite
what you may have thought, under the new rule, for the first time individual financial
advisers would be legally required to work in the best interest of their
clients.

Currently,
it is common for financial advisers, more than 80% of whom are NOT fiduciaries,
to self-deal when offering
advice. First, they obtain significant fees from the retirement products they
sell. According to the think tank Demos,
a median-income, two-earner household will pay $155,000 during their lifetime
to financial advisers. The lifetime gains for two-earner households from
retirement accounts are around $230,000, meaning that nearly two-thirds of the profits go to the industry. Second,
non-fiduciary financial advisers can enjoy kickbacks; there is no rule against
an adviser from a mutual fund company encouraging clients to put their money in
specific funds sold by that company. In fact, that’s the norm, and the adviser
typically receives a commission for the sale.

None of
these have to be disclosed to the customer, under the current standard.

Lobbyists
claim that the new fiduciary rule would force investment advisers and brokers
to drop millions of
small accounts, depriving investors of all the great financial advice they
offer. The industry is basically saying that it can’t afford to help small
investors if it’s not allowed to rip them off. This is like the industry saying they don’t have a viable business
model if they need to do what is best for their customers.

The rule
has not been updated since 1975, before 401(k)’s and IRAs even existed. The
Labor Department, which is the primary enforcement agency, wants to broaden the
definition of a “fiduciary” to cover all financial advisers who offer individual
investment advice for a fee.

The Treasury Department, the SEC and consumer groups have urged lawmakers to reject both bills, warning that
they could leave the nation vulnerable again to excessive financial risk taking.
The White House threatened on Monday to veto the bill on investment advisers.

But simply voting on
the bills generates benefits for House lawmakers. It comes in the form of
hundreds of thousands of dollars in campaign contributions.

In the case of HR
992, the derivatives bill, Citigroup’s lobbyists also redrafted the proposal,
striking out certain phrases and inserting others, according to Deal Book. The
House Financial Services Committee, a magnet for Wall Street campaign
donations, adopted
the bank’s recommendations in 2012 and again this May.

Wall Street’s support
for the House extends beyond favorable votes. When bank executives are called
to testify before Congress, industry lobbyists distribute proposed questions to
lawmakers and their staff, seeking to exert some control over the debate,
according to emails written by staff members on the House Financial Services
Committee that were reviewed by The Times.

The Wall
Street-backed legislation has attracted broad support from lawmakers in both
parties in the House, including Democrats Rep. Carolyn Maloney (D-NY) and Rep. Jim
Himes (D-CT), who is the second-largest recipient among House Democrats of
financial sector donations, and is a former Goldman Sachs executive.

Why would
anyone be suspicious of legislation drafted by Citibank, pushed by a former Goldman-Sachs
executive, in a House with the majority “whipped” by Eric Cantor, a
guy married to another GS executive? And
the legislative purpose is further deregulating derivatives? You know, those
Wall Street creations Warren
Buffett called “weapons of mass financial destruction” in 2002?

Both bills are
scheduled for a vote on Wednesday.  

While these measures
have companion bills supported by a few Senate Democrats, the bills have little
chance of passing the Senate. But, it is possible that lawmakers could tuck
some of the provisions into a broader budget deal at the end of the year.

Any roll
back in regulations as part of a budget deal should only be traded for a financial
transactions tax. Democrats should hold any budget deal hostage until they
get a tax on financial transactions to help us start paying for the fiscal disaster
that has occurred since the Reagan administration.

This
is what democracy looks like in America: Spying on our citizens, granting
corporations the right to free speech, and not one prosecution for the fraud
committed by Wall Street when they crashed the economy by knowingly selling worthless
collateralized debt obligations.

The House will shill
for the banks as long as the money flows in.