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More Reasons for Financial Reform

By Kelly Thomas - Posted on 13 April 2010

Did we really need any more reasons for real financial reform?

From NY Times. Lehman Brothers hid risks

In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.

The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.

While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.

None of this was disclosed by Lehman, however.

From LA Times. Washington Mutual "Time Bomb"

Before Washington Mutual collapsed in the largest bank failure in U.S. history, its executives knowingly created a "mortgage time bomb" by making subprime loans they knew were likely to go bad and then packaging them into risky securities, a congressional investigation has found.

In some cases, the bank took loans in which it had discovered fraudulent activity -- such as misstated income by borrowers -- and rolled them into mortgage securities sold to investors without disclosing the fraud, according to the report released Monday by the Senate's Permanent Subcommittee on Investigations.

The actions were driven in part by greed, according to the committee report, which pointed out that WaMu's pay practices rewarded loan officers and processors based on how many mortgages they could churn out.

Do Republicans really want to fight reform and stand up for Wall Street over the middle class? It appears some will try. Here's a memo (as reported by MSNBC) trying to coach Republicans on how to water down or stop the financial reform by pretending to care about the middle class when they really want to protect the banks:

Strikingly, McConnell's words echo a memo that GOP pollster Frank Luntz wrote earlier this year on how to defeat the financial reform legislation.

An example of Luntz's recommended language: "Taxpayer-funded bailouts reward bad behavior. Taxpayers should not be held responsible for the failure of big business any longer. If a business is going to fail, not matter how big, let it fail."

More Luntz: "Highlight the exemptions. Broadcast them. Remind them, 'The legislation is filled with lobbyist loopholes that exclude certain wealthy, powerful industries from regulations.'"

How can that possibly be a winning issue for them? I don't think President Obama should cave an inch on this one. The current plan (pushed by Dodd) has important proposals (if anything it should be tougher) and will help save us from a sequel to the financial horror movie we just went through.

The Democrats are out with a few clever ads to gain traction on the issue. If there is any issue that should be unifying, it's this one.

Brown bucking the party again? Talk about buyers remorse!

From MSNBC First Read.

“Senate Republicans unveiled a fresh attack yesterday against a regulatory revamping of the US banking industry, contending that Democrats’ proposals to curb the reckless practices that contributed to the 2008 economic meltdown would create a ‘perpetual taxpayer bailout of Wall Street banks,’” the Boston Globe reports. “But Scott Brown, a Massachusetts Republican whose vote would be crucial to the success of a GOP filibuster, said he was not ready to join in specific denunciations of the plans, saying he did yet not know what they contained… Although the overhaul bill does not contain any new rescue funds for the industry, [Minority Leader Mitch] McConnell sought to link the measure to the 2008 bailout, which remains unpopular with voters.”

But this story doesn't help that McConnell attack: "About 25 Wall Street executives, many of them hedge fund managers, sat down for a private meeting Thursday afternoon with two of the most powerful Republican lawmakers in Congress: Senate minority leader Mitch McConnell of Kentucky, and John Cornyn, the senior senator from Texas who runs the National Republican Senatorial Committee, one of the primary fundraising arms of the Republican Party."

"The stated topic of the meeting: The Financial reform bill being sponsored by Senator Chris Dodd, the Democrat and chairman of the senate banking committee. Both McConnell and Cornyn listened to numerous complaints the executives have with the bill. These included complaints about provisions that allow the government to continue to prop up financial institutions that are 'too big to fail.'"


While issues such as consumer protection and bank bailouts have drawn most of the attention in the financial overhaul legislation, rules on derivatives are the focus of fierce lobbying because trading of derivatives is one of Wall Street’s most profitable businesses. The derivatives that contributed to the financial and housing crisis — credit-default swaps and collateralized debt obligations — were mostly unregulated, with no public reporting of prices or volumes of trades.


The White House:

"As the bill moves to the floor, we will fight any attempt to weaken it," warned Treasury Secretary Timothy Geithner, in a Washington Post op-ed yesterday. "The American people have suffered through too much to enact reform that does too little."

And sure enough, yesterday, Lincoln--typically one of the most conservative Democrats in the Senate--announced that she was putting forth derivatives regulation language that exceeded the White House's expectations.

I have obtained fast cash payday loan from the convenience of my home and I did not have to stand in queue. The application process is easy and you do not have to wait long to get the approval. Just within 24 hours, you can get the money transferred into your bank account.

And they should be giddy. This is a winner for them and the idea of arguing against Wall Street reform is silly and shows that some would rather fight for the banks. Judd Gregg and some other Republicans have already expressed interest in supporting a bill. I'm sure the Dem's will have to give a small carrot of something to them on this but I sure hope they stick to their guns and follow the President's outline pretty closely. In other words, don't wimp out. This is too important.

From The Hill. Reid hoping to get this to the floor by next week.

Sheila Bair, head of FDIC states reform will make bank bailouts impossible, in an excellent, interview with The American Banker,

I'm hoping with all this uproar regarding Mitch mcConnell will lead to some Republicans deciding that perhaps they should vote with the President.

Minngirl: Thank you for posting about Sheila Bair.  She does an incredible job and I have applauded everything she has done.  I've read things that lead me to believe she and Geithner butt heads quite a bit; I hope it's just rumor, but if it's not -- I hope she wins every contest. 

 Another group fighting to impact this bill is NASAA, the North American Securities Administrators Assn.  NASAA is the oldest international organization dedicated to investor protection, and is comprised of the securities administrators of each of the 50 states, plus USVI, Canada, etc.

The group held a conference this week to discuss pending legislation and how it will press Congress toward meaningful change.   

"This is the time for real reform that brings accountability and increased transparency to our financial markets. Investors deserve more from Congress than legislation driven by industry interests,” said NASAA President and Texas Securities Commissioner Denise Voigt Crawford. “Now is the time for Congress to do the right thing for investors and restore integrity in the marketplace.”

The NASAA link discusses some of the provisions that have been watered down and how they intend to fight those.  One of those provisions that was watered down from the original was the issue of raising the standard of care stock brokers need to abide by.  As it exists, brokers need only to show "suitability;" that means that as long as the broker can prove an investment was suitable for his client, then he did his job properly.  The original proposal was to raise the standard for brokers to that of "fiduciary," placing them on the same level as trust departments/companies.  Fiduciary standard means you HAVE to be on the same side of the table as the client. 

Other items high on their list are:

Crawford also outlined three additional priority issues state securities regulators will press with Congress in the weeks ahead to provide real reform for investors, including:

  • Increasing state regulatory authority over investment advisers by raising the assets under management threshold for state advisers to $100 million from $25 million. “This will shift the workload from the SEC to the states and will allow the SEC to concentrate on the larger firms.” Crawford said.
  • Ending the oppressive system of mandatory arbitration to settle securities disputes. “Neither the House nor Senate bills go far enough,” Crawford said. “They should call for an SEC rule prohibiting these oppressive clauses. The SEC has historically been unwilling to take up the issue of mandatory arbitration and that is not likely to change simply as the result of a discretionary rule-making provision in the bill.”
  • Allowing the proposed Financial Services Oversight Council to benefit from the essential added perspectives of state banking, insurance and securities regulators. “We believe that it is essential to add state regulators as members of the council to formalize regulatory cooperation and communication among all federal and state regulators, resulting in more effective oversight of our intertwined financial markets,” Crawford said. “This holistic approach is effective and efficient...."




If most Republicans oppose this bill, does it mean they defend Wall Street?

Well, demagogy and populism work both ways. Republicans can argue that most of them voted against Wall Street Bailout with taxpayers money.

Where is the debate?? What about cutting banking privileges (basically their ability to fearlessly borrow short and invest long) instead of giving more discretionary powers to central planners?? The same in the EU. The bills they are going to pass will not prevent further crisis.


Communist Manifesto:

1) Abolition of property in land and application of all rents of land to public purposes.

2) A heavy progressive income tax.

3) Abolition of all right of inheritance.

4) Confiscation of the property to emigrants and rebels.

5) Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.

6)  Centralisation of the means of communication and transport in the hands of the State.

7)  Extension of factores and instruments of production owned by the State; and the improvement of the soil generally in accordance with a common plan.

8) Equal liability of all labour. Establishment of industrial armies.

9) Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country.

10) Free education for all children in public schools.

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