News Journal: A Wall Street recipe that puts us all at risk

Back in 2009, as Congress began to debate Wall Street reform, a clear majority agreed on what had to be fixed. First, we had to make sure taxpayers never again had to bail out banks because they were too big to fail. Last week I wrote about how, mainly through the efforts of the Federal Reserve, but also aided by foreign regulators and some growing pressure from the financial markets, it now seems possible that our biggest banks will soon be forced to accept limits on their size.
The second thing a clear majority agreed on was that we had to stop banks from gambling with FDIC-insured funds on risky investments like unregulated derivatives. It was, after all, investments in Credit Default Swaps, Collateralized Debt Obligations, and other derivatives that got the banks in trouble and required a quick infusion of billions of taxpayer dollars to save them.
General agreements, unfortunately, don’t always produce legislation that fixes the problem. The immense Wall Street lobby has played off the fact that many sitting members of Congress, from both parties, voted in 1999 for the repeal of the last vestiges of the Glass Steagall Act, which since 1933 had prevented FDIC-insured banks from engaging in risky investment banking speculation. In 2000, Congress also enacted the Commodity Futures Modernization Act, ending the regulation of derivatives. Reinstating Glass Steagall was the obvious best way to avoid another bank bailout, but it became politically impossible.
The compromise proposed by President Obama in 2010 was called the Volcker Rule, first proposed by former Federal Reserve head Paul Volcker. The Volcker Rule was supposed to prevent banks from engaging in risky investments for their own “proprietary accounts.”
From the day President Obama first announced it, the watering down of the Volcker Rule began. What finally made it into Dodd-Frank was not perfect, but it did put pressure on banks to not mix their FDIC and derivatives accounts. However, like many of the fixes in Dodd-Frank, the details were left to overburdened and underfunded regulators. The Volcker Rule began to die a slow death.
Part of the reason for that was bureaucratic overload. Dodd-Frank required five federal regulatory agencies – the Federal Reserve, the FDIC, the Securities Exchange Commission, the Commodities Futures Trading Commission, and the Controller of the Currency – to agree on the final rule. None of them were given the resources to handle the flood of work Dodd-Frank sent to them, and coordination among agencies was spotty at best.
If there was ever a recipe that favored Wall Street lobbyists with unlimited resources over whatever consumer advocacy groups could muster, this was it. A colleague of mine at the Duke Law School, Kim Krawiek, did a comprehensive study of the lobbying activity on the Volcker Rule. She found that 95 percent of the contacts to the five agencies were by banks, their lawyers and accountants, and financial trade associations. Less than 5 percent were by representatives of consumer groups and unions.
Not until Dec. 10, 2013, did the agencies issue jointly developed final regulations to implement the Volcker rule. They were published in the Federal Register on Jan. 31, 2014, to become effective April 1, 2014 – six years after the crisis and almost four years after passage of Dodd-Frank. On Dec. 18, 2014, the Federal Reserve Board extended implementation until July 21, 2015.
Enter a new Congress, and a majority that is against most, if not all, of the Dodd-Frank reforms. On a largely partisan Jan. 14 vote (although a few Democrats joined the majority), the House of Representatives extended implementation of the Volcker rule until 2019. That bill goes to the Senate, where it might pass. If it does, President Obama has pledged to veto it.
The January vote came just weeks after the so-called Cromnibus spending bill passed by the lame duck Congress in December. That bill included a provision that was written, virtually word for word, by Citibank lobbyists. It repealed the Dodd-Frank requirement that banks move derivative trading out of units that are insured by the FDIC. A veto was impossible, given that not enacting the entire Cromnibus bill would have meant a government shutdown.
Discouraging? You bet. Because derivatives are still what Warren Buffett called “weapons of financial mass destruction?” And you and I will pay the tab when the inevitable next bank crisis caused by derivative trading occurs.
Ted Kaufman is a former U.S. Senator from Delaware.

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