Does Congress Want Another Economic Meltdown?
Here’s a question to consider as Congress prepares to grill JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon on Wednesday: Will the bank’s $3 billion (and growing) trading loss change anything on Wall Street?
A sad truth remains: Despite all the public hand-wringing about the need to finally nail down the details of the regulations that will govern risk-taking at big banks, Wall Street’s well-paid army of lawyers and lobbyists continues to make a mockery of the whole re-regulation process.
It seems increasingly likely that, by the time the charade is over, the American people will end up with fewer substantive rules and limitations on the crazy risks Wall Street can take than we have now. By some counts -- including that of Matt Taibbi, at Rolling Stone -- there are nine obscure pieces of legislation introduced in Congress this year that are designed to in one way or another weaken the already weak provisions of the Dodd-Frank law, passed in July 2010.
Most of the legislation is intended to do little more than waste time, and hold off real accountability until the public has lost interest. Other laws are more pernicious. Consider H.R. 3336, the so-called Small Business Credit Availability bill. Under the guise of helping community lenders, it would limit who is considered a “swap dealer” under the provisions of Dodd- Frank, allowing more and more swaps to be written with less and less oversight. It passed the House in April.
A more insidious effort to water down Dodd-Frank was introduced by Jim Himes, a Connecticut Democrat -- yes, Democrat -- who used to work at Goldman Sachs Group Inc. (GS) and enjoys the support of many financial executives living in his district in and around Stamford, Greenwich, Fairfield and Bridgeport. H.R. 3283 would exempt from Dodd-Frank’s regulatory regime the foreign affiliates of U.S. swaps dealers. If Himes’ bill passes -- it will be considered further sometime before July 16 -- it is not difficult to conceive that Goldman Sachs or JPMorgan Chase could originate trillions of dollars of derivatives or swaps in their foreign subsidiaries -- London, anyone? -- in order to evade Dodd-Frank.
Thus these “weapons of mass destruction” -- as Warren Buffett has famously called derivatives contracts -- could be written here and parked in foreign subsidiaries, all in order to evade Dodd-Frank’s oversight. Gary Gensler, the chairman of the Commodity Futures Trading Association (and, like Hines, a former Goldman executive) warned that the bill “would leave vast parts of the swaps market not coming under reform” and substantially reduce transparency and increase risk” to financial system.
“Death by a thousand cuts” is how Representative Maxine Waters, a California Democrat, aptly described the strategy of the banks and their congressional allies to gut Dodd-Frank. By April, Representative Barney Frank, the Massachusetts Democrat who co-sponsored the Dodd-Frank law, could take it no more. “Unregulated, irresponsible derivative transactions are one of the major causes of the economic crisis,” he declared in a statement. “In the Financial Reform bill, we adopted provisions that allowed derivatives to perform their legitimate function for companies seeking to stabilize prices, while substantially reducing opportunities for abuse. Two bills reported out by the Republican majority on the Financial Services Committee in their current form would re-deregulate derivatives in ways that would again make them a threat to our economy.”
In some ways, Frank himself is to blame for crafting a law Wall Street can drive a Mack truck right through. Instead of definitively stating how derivatives and swaps would be regulated, or delineating the kinds of risks that big Wall Street firms would be able to take, or changing the incentive system on Wall Street to make sure that bankers and traders and executives are no longer rewarded for taking big risks with other peoples’ money, Frank in his own way succumbed to pressures from Wall Street. Many crucial provisions of the law were watered down or purposely left vague. Instead of bright lines, we were given vague promises of study groups with amorphous deadlines -- in other words, the kind of regulatory dog’s breakfast that only a high-priced Wall Street lawyer can feast on.
In the wake of the unexpected losses at JPMorgan Chase, a few efforts are under way to stem the watering-down. On May 31, Waters invited a group of experts on derivatives to a Capitol Hill hearing room to debate for the public -- and for her fellow members of the House Financial Services Committee -- the wisdom of the continued use of derivatives. (At her request, I moderated the panel.)
She plans additional hearings on other relevant subjects. On June 5, Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., set up a new Systemic Risk Council -- sponsored by the Pew Charitable Trusts, where Bair now works -- to monitor the process of financial regulatory reform and to warn the public of where it is going astray.
On June 6, at a Banking Committee hearing, senators grilled JPMorgan Chase’s regulators about how they possibly could have missed the big trading loss that Dimon self-reported last month. “While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement,” said Senator Tim Johnson, a Democrat from South Dakota. On June 13, Dimon appears on Capitol Hill to answer questions about the trading losses.
Although Johnson is undoubtedly correct, the real question is who will prevail in the ongoing death match over how much oversight the big banks will ultimately have to endure. As always, I wouldn’t bet against Wall Street’s ability to prevail.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
Today’s highlights: The editors on why boring banking isn’t safer and on voter registration in Florida; Mark Buchanan on testosterone and trading; William D. Cohan on watering down Dodd-Frank; Albert R. Hunt on November’s election milestones; Simon Johnson on why the U.S. needs another systemic-risk watchdog; Pankaj Mishra on the growing capitalism-democracy split; William Pesek on Greece’s effect on Asia; Red Jahncke on a German exit from the euro; Jay S. Fishman on how to incubate small businesses.
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