Today Is the 6th Anniversary of the ‘Flash Crash’; No Progress Made to Restore Confidence

By Pam Martens and Russ Martens: May 6, 2016 

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission, January 24, 2013

President Obama Nominating Mary Jo White for Chair of the Securities and Exchange Commission,
January 24, 2013

Today marks the sixth anniversary of the confidence-draining “Flash Crash” of May 6, 2010 when the Dow Jones Industrial Average briefly plunged 998 points, with hundreds of stocks momentarily losing 60 percent or more of their share price.

The public was promised a credible investigation. It never materialized because, for one thing, there was no Consolidated Audit Trail (CAT) to enable regulators to pinpoint exactly which securities firms were gaming the system. The public was then promised a Consolidated Audit Trail. But six long years and many smaller Flash Crashes later, there is still no Consolidated Audit Trail.

The public was also promised an in-depth investigation by Congress into the role that high frequency trading is playing in our markets. That hasn’t happened either. Instead, the stock exchanges are still deeply in bed with the high frequency traders.

As for the Securities and Exchange Commission, President Obama saw fit to nominate and secure the Senate Confirmation of a partner of a Wall Street powerhouse law firm, Mary Jo White, to sit atop the SEC. The impact of that has been another major source of the public losing confidence in U.S. markets.

Below, we provide a small sampling of our coverage of the hubris of Congress and regulators and the Obama administration since the Flash Crash of May 6, 2010:

The May 6 Stock Crash Revisited

Flash Crash Report Raises Flags on Quasi Stock Exchanges Inside Wall Street Firms 

Shhh. Don’t Wake Congress. Let Them Sleep Through the Next Wall Street Crash

Did Small Investors Get Fleeced in the 1089-Point Plunge on August 24?

This One Photo Captures Why Americans Can’t Win Against Wall Street 

Senator Elizabeth Warren: High Frequency Trading Is Like the Skimming Scam in the Movie, ‘Office Space’ 

If the New York Stock Exchange is a “High-Frequency Brothel” then the SEC is its Pimp 

Wall Street Journal Calls It a Trading Glitch; Wall Street On Parade Calls It a Wealth Transfer System 

Congressional Hearing Shows Loss of Public Confidence in Markets

Federal Reserve Tries Wizardry to Cure Derivatives Problem

By Pam Martens and Russ Martens: May 4, 2016

Federal Reserve Tries Wizardly to Cure Too-Big-To-FailYesterday, the Federal Reserve held a public board meeting to propose two new Byzantine rules to prevent another 2008-style financial contagion on Wall Street and potential crash of the U.S. economy. Unfortunately, the details brought images of the curtain scene from the Wizard of Oz. If you looked beyond the copious verbiage, there didn’t seem to be much there, there.

Both plans appeared to target concerns over derivatives. Coincidentally, Freddie Mac, already a ward of the government as a result of the 2008 crash and a derivatives counterparty to some of Wall Street’s largest banks, reported yesterday that it had lost $4.56 billion in its derivatives portfolio in just the first three months of this year. Derivative losses were an early precursor to the 2008 crash.

The first proposal mapped out by the Fed is called the Net Stable Funding Ratio and would require the largest banking organizations “to maintain a stable funding structure in relation to the composition of their assets, derivative exposures, and commitments.” The Fed doesn’t want a bank run or a demand for derivatives collateral to drain the bank of its liquidity. (Read the details of the proposed rule here.)

The second plan would establish restrictions within derivative and repo contracts of U.S. Global Systemically Important Banks (GSIBs) and the U.S. operations of foreign GSIBs. The idea is to prevent derivative or repo counterparties from cancelling the contracts if the GSIB failed and was put into resolution under the terms of the Dodd-Frank legislation. That could trigger a disorderly resolution and contagion at other banks (otherwise known as a repeat of 2008). The details of that rule proposal are here.

One of the Fed speakers described this second plan as follows: “…this proposal would not apply to subsidiary national banks of GSIBs or to federal branches of foreign GSIBs. The Office of the Comptroller of the Currency [OCC] is expected to propose a similar set of restrictions to cover those entities…”

The “subsidiary national banks” of the GSIBs are where the vast majority of the obscene amounts of risky derivatives reside. According to the OCC, as of December 31, 2015, there were $237 trillion in notional derivatives (face amount) at the 25 largest bank holding companies with the bulk of that amount on the books of just four insured banks: JPMorgan Chase, Citibank, Goldman Sachs Bank USA and Bank of America.

Why is the Fed making a big deal of this rulemaking if the rule isn’t even touching the parts of the banks where the biggest threats exist? Was the whole exercise of holding a public meeting to pressure the OCC to adopt the same rule?

The Fed is piling on so many complex layers of rules to the already Frankenbank structure of these too-big-to-fail behemoths that one wonders if lawyers and compliance officers at the banks already outnumber bankers.

When the U.S. Congress was confronted with the same problems after Wall Street collapsed the banking system and U.S. economy in the crash of 1929 to 1932, it eschewed complexity and went for simplicity. It took care of all of these too-big-to-fail problems with the plain English Glass-Steagall Act of 1933. That legislation protected this country for 66 years until its repeal in 1999. Just eight years after its repeal, the country was reliving an epic Wall Street crash and economic meltdown.

It would take only these 31 words in new Wall Street reform legislation to put the country back on the right track:

“No bank holding insured deposits can own or be affiliated with an investment bank, broker-dealer, futures commission merchant, insurance company or engage in the underwriting of stocks, bonds or derivatives.”

Listen to the mumbo-jumbo in this video from the Federal Reserve, our central bank that is also attempting to wing it as a regulator (while failing to ever hire a Vice Chair for Supervision as mandated under the Dodd-Frank legislation) and ask yourself if it isn’t finally time to restore the plain-speaking Glass-Steagall Act and separate the casinos from the insured banks.

Sanders Is Correct: “Evidence Is Extremely Clear…I’m the Stronger Candidate to Defeat Trump”

By Pam Martens and Russ Martens: May 4, 2016 

New York Daily News Front Cover, May 4, 2016Last evening, Senator Ted Cruz of Texas withdrew from the Republican Presidential race, leaving Donald Trump the presumptive nominee following a large margin of victory for Trump in the Indiana primary. That reality triggered a front page cover today at the New York Daily News with an obituary for the Republican Party.

Presidential candidate Senator Bernie Sanders has been anticipating Trump’s success for months and pointing out, time and again, that national poll after national poll shows Sanders to be the much stronger contender in a general election against Trump. (Sanders won the Indiana primary yesterday with a 52.5 percent victory over Hillary Clinton’s 47.5 percent share of the vote.)

In a speech to the National Press Club on May 1, Sanders explained his strategy heading into the Democratic Convention on July 25-28 in Philadelphia (see video below). His written remarks (prior to delivery) explained:

“First, those super delegates in states where either candidate has won a landslide victory ought to seriously reflect on whether they should cast their super delegate vote in line with the wishes of the people in their states.

“Let me give you just a few examples:

“In the state of Washington, we won that caucus with almost 73 percent of the vote but at this point Secretary Clinton has 10 super delegates. We have zero.

“In Minnesota, we won the caucus there with 61 percent of the vote. Hillary Clinton has 11 super delegates. We have three.

“In Colorado, we won that state with 59 percent of the vote. Secretary Clinton has 10 super delegates. We have zero.

“In New Hampshire, we won that state with more than 60 percent of the vote. Secretary Clinton has six super delegates. We have zero.

“And that pattern continues in other states where we have won landslide victories.

“Secondly, and extremely importantly, Secretary Clinton and I have many differences on some of the most important issues facing the American people. We disagree on trade, on breaking up Wall Street banks, on raising the minimum wage to $15 an hour, on imposing a carbon tax to combat climate change, on insisting that the wealthy and large corporations pay their fair share of taxes, on fracking and on a number of other issues.

“But where Secretary Clinton and I agree and where every delegate to the Democratic convention agrees is that it would be a disaster for Donald Trump or some other right-wing Republican to become president of the United States.

“Therefore, it is incumbent upon every super delegate to take a hard and objective look at which candidate stands the better chance of defeating Donald Trump. And in that regard, I think the evidence is extremely clear that I would be the stronger candidate to defeat Trump or any other Republican. This is not just the subjective opinion of Bernie Sanders. This is based on virtually every national and state poll done in the last several months.”

We decided to check out those polls. Sanders is spot on with his analysis as indicated in the graphs below, posted at the RealClear Politics website. In an average of the individual polls listed, Clinton beats Trump by 6.2 points versus a Sanders’ margin of victory of 13.6 points. And that’s now – before Trump runs tens of millions of dollars of negative campaign ads that focus on the serial Clinton scandals like email-gate; the millions of dollars she has taken from Wall Street banks for secret speeches; the foreign and Wall Street money that has been funneled to the Clinton Foundation; and the questionable tactics of the Hillary Victory Fund.

Sanders also explained in his speech at the National Press Club how Democrats win when there is a large turnout, noting that the excitement and energy of likely voters are coming from his candidacy. Sanders stated:

“Further, what recent elections tell us is that Democrats win elections when the voter turnout is high. Republicans win elections when voter turnout is low. There is little doubt in my mind that the energy and excitement we have created will, in fact, create a large voter turnout in November, which will mean not only victory for the White House but for Democratic candidates in the Senate, the House and in governor’s races. This is an important reality that super delegates cannot ignore.”

The reality of this energy and excitement was on prominent display in Clinton’s own home state of New York in the leadup to the recent primary there. Sanders was drawing over 20,000 people to his rallies versus 400 to 600 people at Clinton’s rallies.

Corporate media, for the most part, fails to highlight Sanders’ strengths against Trump in a general election match up.  But one thing is for sure now. Corporate media’s efforts to shame Sanders into withdrawing from the race and allowing the Clinton coronation to proceed unchallenged, has simply strengthened Sanders’ resolve.

National Polls Show Sanders Would Beat Trump by a Wider Margin Than Clinton

National Polls Show Sanders Would Beat Trump by a Wider Margin Than Clinton

National Polls Show Clinton With a Much Smaller Lead Over Trump Than Sanders

Derivatives Losses Are Mushrooming at Freddie Mac; Now It’s the Taxpayers’ Problem

By Pam Martens and Russ Martens: May 3, 2016 

On April 21, Wall Street On Parade reported that the U.S. government (also known as the U.S. taxpayer) was on the hook for potentially tens of billions of dollars in derivative losses at Freddie Mac and Fannie Mae – the two companies the government put under conservatorship during the Wall Street financial collapse of 2008. (See related article below.)

This morning, Freddie Mac is adding further angst to this potential derivatives blowup scenario by reporting that it lost $4.56 billion in its derivatives portfolio in just the first three months of this year – a stunning 90 percent increase over what it lost in derivatives in the first quarter of 2015. That brings its derivative losses for all of 2014, 2015 and the first quarter of 2016 to $15.54 billion. (See chart below.) This is certain to bring gasps from some members of Congress.

While positive net income has offset the derivative losses in recent years, making Freddie Mac profitable overall, the company said in its press release this morning that it had an overall $354 million net loss for the first quarter of this year, meaning the derivative losses fully wiped out the earnings it makes from its portfolio of mortgages and other sources of positive income such as the fees it collects for guaranteeing mortgages.

Despite acknowledging that its net worth is a mere $1 billion, Freddie Mac said in its press release that it would not be drawing further from the U.S. Treasury at this time. Under the conservatorship arrangement, the U.S. Treasury has already infused over $187.5 billion into Freddie Mac and Fannie Mae. But according to a government audit released by the Government Accountability Office (GAO) on February 25 of this year, the U.S. Treasury has committed taxpayers to an additional $258.1 billion that Freddie Mac and Fannie Mae can draw down.

The original conservatorship plan called for the government to receive senior preferred stock in both companies that would pay a 10 percent dividend. (Since both were insolvent at the time, the rate was set high as it would be for a junk-rated company.) After years of the 10 percent dividend being paid by additional draw downs of money from the Treasury (sort of like taking out a home mortgage and asking the same bank to advance you the money to pay the mortgage interest instead of being declared in default), in August  2012 the Treasury amended its agreement. Under the new terms, beginning on January 1, 2013, Freddie Mac and Fannie Mae began paying the Treasury all of its net earnings above and beyond a capital cushion. (This has become known as the “net worth sweep”.)

In addition to the Senior Preferred shares, the U.S. Treasury also received a warrant to purchase, for a nominal price, 80 percent of the common stock outstanding at the time the warrant is exercised. The Treasury Department has not yet exercised that warrant and speculators are having a heyday engaging in speculative trading in the over-the-counter stocks of both Freddie Mac and Fannie Mae, guessing on what might happen in the future. (Lawyers are also challenging the 2012 amendment in court as being unfair to other stockholders.) The U.S. Treasury has the right to exercise the warrant, in whole or in part, at any time through September 7, 2028.

In Freddie Mac’s 10K filing with the Securities and Exchange Commission for the full year of 2015, the company conceded that “Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent.”

The massive year over year increase in Freddie Mac’s derivative losses suggest that there is more here than meets the eye. It also raises the question as to whether the Federal Housing Finance Agency (FHFA), Freddie and Fannie’s official Federal conservator and supervisor, is on top of what’s embedded in these derivative contracts.

According to Freddie Mac’s 10K filed with the SEC, these are just some of the risks it faces going forward:

“Yield Curve Risk 

“Yield curve risk is the risk that changes in the level and shape of the yield curve, such as a level change, or a flattening or steepening, will adversely affect our economic value. Our yield curve risk under a specified yield curve scenario is reflected in our PMVS-YC disclosure.

“A change in the level of interest rates (represented by a parallel shift of the yield curve, all else constant) exposes our assets and liabilities to risk, potentially affecting future expected cash flows and their present values.

“Similarly, changes in the shape or slope of the yield curve (often reflecting changes in the market’s expectation of future interest rates) exposes our assets and liabilities to risk, potentially affecting expected future cash flows and their present values.

“Volatility Risk 

“Volatility risk is the risk that changes in the market’s expectation of the magnitude of future variations in interest rates will adversely affect our economic value.

“We are exposed to volatility risk in both our mortgage-related assets and liabilities, especially in instruments with embedded options.

“Spread Risk

“Spread risk is the risk that yields in different asset classes may not move together and may adversely affect our economic value.

“This risk arises principally because interest rates on our mortgage-related investments may not move in tandem with interest rates on our financial liabilities and derivatives, potentially affecting the effectiveness of our hedges.

“We are continually exposed to significant spread risk, also referred to as mortgage-to-debt OAS risk, arising from funding mortgage-related investments with debt securities.

“We also incur spread risk when we use LIBOR- or Treasury-based instruments in our risk management activities.

“We are exposed to spread risk arising from the difference in time between when we commit to purchase a multifamily mortgage loan and when we securitize the loan. During this time, spreads can widen, causing losses due to changes in fair value. We also have spread risk on the K Certificates we hold in our mortgage-related investments portfolio.”

If all of this is Greek to you, it may well be Greek to Freddie Mac’s Board of Directors and its overseers at FHFA. Let’s face it, it wouldn’t be the first time Wall Street banks have played their derivative counterparties for a fool. Think about the government’s bailout of AIG and who ended up with more than half the dough from that bailout. Or how about that Merrill derivatives salesman that greased the skids for Orange County, California going bankrupt?

In a March 2015 report from the New York Fed, it conceded who the government was worrying about when it took over Freddie and Fannie – a full week before Lehman Brothers went under. The New York Fed wrote:

“Fannie Mae and Freddie Mac held large positions in interest rate derivatives for hedging. A disorderly failure of these firms would have caused serious disruptions for their derivative counterparties.”

Who are their derivative counterparties? The too-big-to-fail banks on Wall Street of course.

Freddie Mac's Derivative Gains and Losses. Source -- 2015 10K Filed With the SEC

Freddie Mac’s Derivative Gains and Losses. Source — 2015 10K Filed With the SEC

Related Article: 

U.S. Government Is Now a Major Counterparty to Wall Street Derivatives 

Related Documents:

Third Amendment to Freddie Mac’s Senior Preferred Stock Purchase Agreement with Treasury (August 2012)

Second Amendment to Freddie Mac’s Senior Preferred Stock Purchase Agreement with Treasury (December 2009)

First Amendment to Freddie Mac’s Senior Preferred Stock Purchase Agreement with Treasury (May 2009)

Freddie Mac’s Senior Preferred Stock Purchase Agreement with Treasury (September 2008)

Wall Street’s Kangaroo Courts Perpetuate a Business Model of Fraud

By Pam Martens: May 2, 2016

Susan Antilla

Susan Antilla

Speaking of the Wall Street and global banks that populate London’s financial district, John Mann, a Member of Parliament, asked the rhetorical question at a Treasury Select Committee hearing on February 4, 2014: “Have we or have we not just had the biggest series of quantifiable wrongdoing in the history of our financial services industry?…Is there any other industry in recorded history in this country who’s had a comparable level of quantifiable wrongdoing to your knowledge?”

The answer, of course, is that there is no other industry on either side of the pond that has inflicted as much economic pain as Wall Street through “quantifiable wrongdoing.” And yet, the U.S. government continues to allow this serially crime-infested industry to run its own private justice system where both its customers and its employees are barred from taking their lawsuits into a court of law so that the public and the press can monitor the proceedings and have future access to the detailed court records to analyze patterns of crimes or recidivism.

Depending on which side you’re on, this private justice system on Wall Street has various monikers. Wall Street firms and their lawyers call it “mandatory arbitration” or “pre-dispute arbitration agreements” and say it is fair and fast. Many plaintiffs who have been through the system call it “a kangaroo court.” The plaintiffs’ bar has in the past produced evidence of an intentionally rigged system. Feminist Gloria Steinem once dubbed it “McJustice.”

One veteran Wall Street reporter, Susan Antilla, has spent two decades chronicling the abuses occurring under Wall Street’s private justice system while also writing on the myriad other ways Wall Street has tilted the playing field. In her 2002 book, Tales from the Boom Boom Room: Women vs Wall Street, published by Bloomberg Press, Antilla devoted a full chapter to the “No-Court System.” The award winning book traversed a pitched five-year Federal court battle in which I and other Wall Street women sued the retail brokerage firm, Smith Barney, the New York Stock Exchange and the National Association of Securities Dealers (NASD) for effectively voiding the nation’s civil rights statutes by forcing these employee claims into an industry-run arbitration forum. The lawsuit documented that serious sexual assaults were occurring, as well as an enshrined system of sexual harassment, because Wall Street correctly perceived it had built an impregnable wall of immunity around itself. Wall Street had not only masterminded a “No-Court System,” it had carved out a no-law-zone for the financial securities industry.

Just where this kind of no-law system can lead has found a textbook case in the corrupted culture and collapse of Smith Barney’s parent, Citigroup, during the 2007-2010 financial crisis. To stay alive, Citigroup was propped up with the largest taxpayer bailout in U.S. history, including a $45 billion equity infusion; over $300 billion in asset guarantees; and more than $2 trillion in initially secret, low-cost loans from the Federal Reserve. Its thank you to the U.S. taxpayer was to be charged with, and admit to, a criminal felony on May 20, 2015 for rigging U.S. foreign currency markets. According to the details in the felony charge brought by the U.S. Justice Department, Citigroup’s illegal behavior in the foreign currency rigging matter spanned a period from December 2007 through January 2013. Outrageously, that includes the period after 2008 when Citigroup was being kept alive with taxpayer money. (See Citigroup’s broader rap sheet here.)

The arbitration issues exposed by Antilla should have shamed the U.S. into legislative action. But as a testament to the power and money of Wall Street in Congress, bills to overturn Wall Street’s no-court system have failed to make it out of committee for decades. In her 2002 book, Antilla provides specifics on how a female broker and a female sales assistant were sexually assaulted by the same male broker in a branch office of Smith Barney. In advance of the arbitration, Smith Barney “forced the two women to undergo examinations by a psychiatrist of the brokerage firm’s choosing,” writes Antilla. The female broker was “subjected to a grilling by Smith Barney’s consultant that included questions about her sex life, the opening of her gynecological records, and queries about her menstrual periods, her marital counseling and her divorce.” The female assistant, continues Antilla “was placed in a chair in the middle of a room, was similarly grilled with two-and-a-half hours of questions that ranged from her sexual experience to her childhood.” Antilla adds that “in an utterly bizarre moment, he asked her to recite the names of all the U.S. presidents in reverse order,” causing her to finally break down in tears.

In 2013, Antilla reported in an article at the New York Times that looking at the outcome in seven months of arbitration awards on Wall Street, “arbitrators granted awards to only 39 percent of claimants, the lowest win rate in five and a half years…” Earlier that year, Antilla had explained to Times readers how Finra, the industry’s self-regulator that oversees arbitration claims, could magically make charges against brokers by customers disappear from their official records at BrokerCheck, a database operated by Finra where customers can check on the background of their broker or a broker they’re considering to handle their investments.

In June 2015, a report from Antilla appeared at, showing that Finra had allowed an imposter posing as a lawyer to “participate in 38 arbitrations over a 15-year period,” before it caught on. In another case, an arbitrator had been indicted by a grand jury. And in yet another situation, an arbitrator “had been accused of judicial misconduct and had been arrested for voyeurism.”

In October of last year, Antilla was back in the New York Times with an article describing how Morgan Stanley (which purchased the Smith Barney brokerage firm outright in 2013 following a joint venture in 2009) had instituted a policy going forward where “court will be eliminated as an option for all workplace claims and employees will be barred from taking part in class-action lawsuits.” Class action claims brought in court, where broad based discovery and depositions are allowed, can show an entrenched pattern of fraud, or in civil rights matters, how the same conduct is condoned in coast to coast offices of the firm, buttressing claims of management-authorized practices. It’s clear why Wall Street would want to gut these court protections from workers.

Antilla’s broadly based knowledge of the underbelly of Wall Street brings little applause from its privileged elite. Her writing has, however, been recognized regularly by fellow journalists. Antilla will receive an Excellence in Journalism Award at the Society of the Silurians’ annual dinner on May 18 in Manhattan. She was also recognized with a 2016 first place award from the Connecticut Press Club and her commentary in 2015 at garnered an award from the Society of American Business Editors and Writers.

Antilla is not the only one to consistently raise alarms about this crony system of justice. On July 20, 2000, the Public Investors Arbitration Bar Association (PIABA) accused the National Association of Securities Dealers (NASD), the industry’s self-regulator and predecessor to Finra, with rigging its computerized system that selected arbitrators. PIABA wrote in a statement it released to the public: “In direct and flagrant violation of federal law, the NASD systematically evaded the Securities and Exchange Commission approved ‘Neutral List Selection System’ arbitration rule requiring arbitrators to be selected on a rotating basis. Instead, the NASD secretly programmed its computers to select some arbitrators on a seniority basis – just what the rule was designed to prevent.”

Selecting arbitrators from a limited pool of well-paid repeat players stands in stark contrast to the jury pool selection process in court where potential jury members are randomly selected from tens of thousands of citizens.

PIABA discovered the manipulation when its attorneys attempted to test the arbitrator selection system at a conference in Chicago on June 27, 2000.  PIABA said in their statement that “this rule violation tainted hundreds or even thousands of compulsory securities arbitrations – many still ongoing.  In every such instance, the substantive rights of public investors to a neutral panel have been cynically violated,” wrote PIABA, adding that “Many public investors were thus twice cheated: first, by an NASD member firm that fraudulently conned them out of their life’s savings, and second by the NASD Arbitration Department’s rigged panels.”

On July 21, 2010, when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, it failed to extinguish this thoroughly discredited private justice system run by the most corrupt industry in America — which just two years prior had crashed the entire economy in the worst collapse since the Great Depression.

As a gesture to those demanding reform, Congress threw a few crumbs. It created the Consumer Financial Protection Bureau (CFPB) and authorized it to study mandatory arbitration for non securities-related financial products like credit cards, checking accounts, student loans, payday loans, etc. The CFPB was also given authority to “prohibit or impose conditions or limitations” on pre-dispute mandatory arbitration clauses in these non securities-related areas if it felt it to be in the public interest.

The CFPB released its extensive study on March 10, 2015. In October of last year, CFPB released a statement indicating it is proposing to ban financial firms from barring class action claims from proceeding to court. Richard Cordray, Director of the CFPB, said at the time: “Consumers should not be asked to sign away their legal rights when they open a bank account or credit card. Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”

The CFPB also announced two other proposals to make arbitration more transparent: requiring that companies that choose to use arbitration clauses for individual disputes provide the CFPB with the details of the arbitration claims filed and awards issued so it can function as a monitor. It is also considering publishing the claims and awards on its website so the public has access to them.

The CFPB also agreed with the premise that the private justice system in the financial industry is perpetuating a culture of fraud, writing: “Arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.”

The CFPB’s aggressive posture in this area is why Republicans in Congress and Wall Street lobbyists are treating it like a rabid dog and attempting to remove its independence.

While the CFPB has done yeoman’s work in a short period of time in the arbitration arena, the Securities and Exchange Commission (SEC), which was given sole authority under Dodd-Frank’s Section 921 to “prohibit, or impose conditions or limitations” on mandatory arbitration contracts in the securities industry, where tens of billions of dollars of frauds occur on a regular basis, has done nothing since Dodd-Frank’s enactment in 2010 regarding mandatory arbitration but to take public comments and tinker a little around the edges while also maintaining a shroud of secrecy concerning its oversight of Finra’s arbitration processes and how it selects its arbitrators.

The public comments that have been received at the SEC regarding mandatory arbitration include one dated February 4, 2016 from retired trial lawyer, David Noble. He told the SEC that he has had “numerous experiences with arbitration and none of them have been at all satisfactory.” Noble adds: “There might as well be a provision to settle disputes by throwing darts as to have an arbitration.”

Timothy Heilig wrote the following to the SEC in a November 14, 2014 letter:

“With mandatory binding arbitration, the consumer has no access to the public courts no matter what crimes a financial firm may have committed against him. I have seen cases of fraud, forgery, and other laws broken, and the consumer still has no right to have his claims heard by a jury of peers. Instead, the victim of the bankers crimes is forced to submit his claim to a biased forum controlled by the financial industry itself. How is that in any way fair?”

Jeffrey R. Sonn, a Florida attorney, wrote an impassioned appeal to the SEC on December 3, 2010. Sonn raised the constitutional issue, writing:

“…today virtually every brokerage firm in America includes a mandatory arbitration provision in its new account documentation for every type of account. Practically speaking, the provisions are non-negotiable. The result is that if customers want to buy a stock or a bond or seek to participate in the capital markets in America, they must give up their Constitutional right to a jury trial by an independent and impartial judiciary and agree to mandatory arbitration.”

Sonn also warned the SEC that mandatory arbitration is undermining trust in the securities industry. He noted in his public comment letter the following:

“In 2005, amid concerns about the fairness of the arbitration process, the Securities Industry Conference on Arbitration (‘SICA’) conducted a study of perceived fairness in the arbitration process. It consisted of a survey that was sent to over 30,000 participants with questions assessing perception of the arbitration process…Over sixty percent of customers perceived the process as unfair, with nearly half perceiving arbitral panels as being biased. And, most significantly, three out of every four customers found securities arbitration to be ‘very unfair’ or ‘somewhat unfair’ when compared with the judicial system.”

One of the key reasons that participants in Finra arbitrations view the process as unfair is because it is, literally, a lawless system. Arbitrators are instructed that they do not have to rely on case law or legal precedent as courts do. Instead, they can simply follow their gut instincts as to what would be an equitable solution. Detailed written decisions, as a plaintiff would have in court, are rarely provided to explain the arbitrators’ rationale. Melinda Steuer, an attorney from Sacramento, California told the SEC in her comment letter of August 18, 2010 the following in this regard:

“Arbitrators do not have to follow the law, and often do not, to the detriment of the customer. For example, in California, financial advisors owe a strict fiduciary duty. Because arbitrators do not have to follow this law, this fiduciary standard is often ignored in arbitration, and brokers and broker-dealers are able to get away with arguments and defenses which would not pass muster if the case was in court.”

Appeals to a court after an arbitration are almost impossible, leading Steuer to remind the SEC that “the fact that a judge has an appellate court looking over its shoulder usually prevents the worst abuses. There are no such checks and balances in arbitration.”

This same lack of checks and balances could also be said of the SEC. From the Bernie Madoff Ponzi scheme, to the epic securitization of toxic subprime debt that was allowed to be peddled to investors with triple-AAA ratings, to the accounting frauds at Enron, WorldCom and Tyco, to the current unchecked wave of high frequency traders effectively gaming every market that trades today, to the $163 trillion in derivatives that sits on the books today of the four largest banks on Wall Street – who exactly is it that’s looking over the shoulder of the SEC? Who exactly is it that authorized this failed regulator with its crony ties to Wall Street to be the overseer of a private justice system that looks increasingly like an institutionalized wealth transfer system from the middle class to the one percent.

Tragically, the SEC’s overseer is Congress – a body whose disapproval rating among the American public is 79 percent according to an April 6-10 Gallup poll.

As American voters assess the anti-establishment mood in the country heading into the general election, they might want to think about this: the Declaration of Independence on which this nation was founded specifically cited the tyranny of King George III and his own no-court system. The founding fathers wrote in that historic document that King George III “has made Judges dependent on his Will alone, for the tenure of their offices, and the amount and payment of their salaries” and, furthermore, he was “depriving us in many cases, of the benefits of Trial by Jury.”

Not only is mandatory arbitration a travesty against the very taxpayers who fund our nation’s courts while finding themselves increasingly locked out of them, and a travesty against the idea of equal justice under law – but mandatory arbitration has gutted the Seventh Amendment to our nation’s Bill of Rights, which guarantees: “In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.”

A bloody revolution finally settled the grievances against King George III. Let’s hope that today, a political revolution comes in its place.