By Pam Martens: January 7, 2013
The insipid regulators of Wall Street’s biggest and most dangerous banks are recklessly caving in to outrageous demands to roll back or water down protections designed to prevent another 2008-style financial collapse. And the cave-ins are happening in some of the most critical areas of promised financial reform.
The latest Wall Street giveaway was announced this past Sunday evening when Mervyn King, Governor of the Bank of England, announced that the new global banking rules on capital adequacy and liquidity, known as Basel III, will not go into effect in January 2015 as promised, but will be phased in over four years and not become fully effective until January 1, 2019. In addition, the rules themselves have been watered down to allow more risky assets, like mortgage backed securities — which caused many of the problems in 2008 — to count toward emergency liquidity requirements rather than restricting the emergency funds to government bonds and cash.
On April 19 of last year, the Federal Reserve made an equally stunning announcement. The Fed decided that Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act would be stalled from full implementation by two years to July 21, 2014 and suggested it might be extended even beyond that date. Section 619 is the so-called Volcker Rule which prohibits banking institutions that own or have relationships with hedge funds or private equity funds from engaging in “proprietary trading” – trading for their own profit. Numerous banks have blown multi-billion dollar holes in their balance sheets by trading for their own account, most famously this past year’s so-called London Whale operation at JPMorgan Chase which has thus far logged in $6 billion in losses. (The nickname came from a trader, Bruno Iksil, who made outsized bets in London on a thinly traded derivative index.)
The Dodd-Frank financial reform legislation was signed into law on July 21, 2010 by President Obama. Under the Federal Reserve’s guidance, Wall Street powerhouses can avoid full compliance with the rule until 2014. Trading for the house is not something like capital reserves that need to be delicately phased in to avoid cutting off credit flows to the economy. It is risky, ill-conceived, speculative trading – frequently done on the basis of insider information – to boost the firm’s profits in order to justify obscene bonus packages for top Wall Street executives. Proprietary bets can be closed out in a day, a week, a month – it certainly doesn’t take four years. What takes four years is the charade of rulemaking, allowing for public comment, legal wrangling and then the typical wholesale cave-in to Wall Street demands.
The cave-in train is rumored to be whistling through the Office of the Comptroller of the Currency (OCC). In April 2011, the OCC, the top regulator of national banks in the U.S., signed consent orders with 14 of the largest banks and mortgage servicers requiring that they hire “independent” consultants to review 2009 and 2010 foreclosure actions to determine financial injury to borrowers and provide financial compensation for that injury.
Borrowers that suffered injuries were to receive financial awards up to a maximum of $125,000 under these consent orders. Now, business media are reporting that this formally adopted plan of 2011 has been, willy-nilly, shredded at the behest of Wall Street’s serial miscreants and chronic whiners. A quick fix with not even a slap on the wrist is in the works that would impose restitution of $10 billion on the whole lot and bring to an abrupt end the individual investigations of foreclosure fraud.
Confidence in Wall Street, its regulators and Congress is at or near historic lows. These latest surrenders that deny both justice and prudent regulation can only drive more consumer money out of this system, making it even more vulnerable to panic runs.