A Look Back at How Reforming Wall Street Failed So Miserably Under Obama

By Pam Martens: March 7, 2019 ~

President Obama Signs the Dodd-Frank Wall Street Reform and Consumer Protection Act, July 21, 2010

President Obama Signs the Dodd-Frank Wall Street Reform and Consumer Protection Act, July 21, 2010

Progressives have every right to harbor a seething contempt toward the Wall Street wing of the Democratic Party. Democrats controlled both houses of Congress in the last two years of George W. Bush’s presidency as Wall Street blew itself up and Congress passed the massive taxpayer bailout of the Wall Street mega banks. (Democrats held fewer than 50 seats in the Senate but they held operational majority since two Independents caucused with them.)

In Obama’s first two years in office (January 2009 to January 2011), Democrats had increased their majorities in both chambers of Congress. Democrats were in charge when it became crystal clear from Congressional hearings that Wall Street mega banks had created, through unbridled greed and corruption, the most catastrophic financial crash since the Great Depression. Democrats were in charge when it became profoundly evident that Wall Street needed a major regulatory overhaul and that simply tinkering around the edges of reform would put the U.S. economy in grave danger in the future.

Notwithstanding the economic devastation being experienced at the time, the Dodd-Frank financial reform legislation which was signed into law by Obama on July 21, 2010 was a vast document of fluff that failed miserably at reforming Wall Street. The legislation was supposed to rein in derivatives. It did not. It was supposed to eliminate the need for future taxpayer bailouts of the too-big-to-fail banks. It did not. It was supposed to prevent Wall Street investment banks from gambling with the Federally insured deposits they held under their roof. It did not. It was supposed to prevent rating agencies from taking payments from Wall Street banks and then handing out triple A ratings on toxic debt. It did not. It was supposed to put a tough cop on the beat to police the Wall Street banks. Instead, it gave increased power to the Federal Reserve, which, then and now, continues to outsource its policing function to the intentionally incompetent and disastrously conflicted New York Fed, whose share owners are the very banks it regulates. As we wrote previously in 2013 — three years after the passage of the Dodd-Frank legislation:

“In early 2012, as JPMorgan was building up an unmanageable position in illiquid, toxic derivatives in a dark corner of its trading empire in London using the insured deposits of its banking customers, its Chairman and CEO, Jamie Dimon, was sitting on the Board of Directors of the New York Fed. As it was being investigated by the New York Fed, Jamie Dimon continued to sit on its Board, serving out his two terms which ended at the end of 2012. This debacle became infamously known as the London Whale trades. JPMorgan has owned up to $6.2 billion in losses from those derivatives.

“In March, Senator Carl Levin told the Senate’s Permanent Subcommittee on Investigations that JPMorgan, in carrying out the London Whale trades, ‘piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.’ Does that sound like a Wall Street firm that’s afraid of its regulators?”

“While all of this was happening at JPMorgan, Bill Dudley was serving as the President of the New York Fed and his wife, Ann Darby, a former Vice President at JPMorgan, was receiving approximately $190,000 per year in deferred compensation from JPMorgan – an amount she is slated to receive until 2021 according to financial disclosure forms.” (Read the full article here.)

Under Dodd-Frank, the Wall Street banks were required to move their derivatives to exchanges or central clearinghouses. That didn’t happen during the eight years of the Obama administration and it still hasn’t happened a full decade after the 2008 crash.

According to a report on derivatives issued quarterly by the Office of the Comptroller of the Currency (OCC) as of March 31, 2016, in the last year of the Obama administration, the amount of derivatives that still had not moved to exchanges ranged from a high of 95.6 percent at JPMorgan Chase to 94.3 percent at Citibank, to 87.8 percent at Goldman Sachs Bank USA and 90.6 percent at Bank of America. That was almost six years after Dodd-Frank legislation was signed into law.

We took a new look this morning at the OCC’s latest quarterly report (See Table 3) which covers the quarter ending September 30, 2018. It shows that 90.8 percent of JPMorgan Chase’s derivatives are still over-the-counter; 89.1 percent of Citibank’s are over-the-counter; 79.2 percent at Goldman Sachs Bank USA are over-the-counter; and 92.4 percent at Bank of America are over-the-counter.

Wall Street has effectively told the American people, the same people who bailed it out of its gross misdeeds in 2008, to go to hell when it comes to derivatives.

This is how the official report from the Financial Crisis Inquiry Commission explained how derivatives had been allowed to grow into nightmare proportions:

“More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe. This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk, such as the shadow banking system and over-the-counter derivatives markets.”

As a result of those unregulated derivatives, in 2008 one of the largest insurers in the world, AIG, blew up. It required a $185 billion taxpayer backstop. More than half of the taxpayer bailout money went in the front door of AIG and out the backdoor to the largest banks on Wall Street and hedge funds to pay off derivative bets and securities loans. Public pressure eventually forced AIG to release a chart of these payments, but the chart showed just a narrow window of disbursements from September to December 2008.

The Dodd-Frank legislation also required the mega Wall Street banks to move their derivatives out of the FDIC-insured banks they owned and onto the books of uninsured affiliates to prevent another forced bailout by taxpayers. That didn’t happen either. Citigroup, parent of Citibank, was able to slip language into the December 2014 spending bill to completely repeal that provision of Dodd-Frank.

Senator Elizabeth Warren publicly railed against the move by Citigroup while President Obama quietly signed the bill into law.

The official report from the Financial Crisis Inquiry Commission said this about the ratings agencies’ role in the 2008 crash:

“We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction. The three credit rating agencies were key enablers of the financial meltdown. The mortgage-related securities at the heart of the crisis could not have been marketed and sold without their seal of approval. Investors relied on them, often blindly. In some cases, they were obligated to use them, or regulatory capital standards were hinged on them. This crisis could not have happened without the rating agencies. Their ratings helped the market soar and their down-grades through 2007 and 2008 wreaked havoc across markets and firms.

“In our report, you will read about the breakdowns at Moody’s, examined by the Commission as a case study. From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A. This compares with six private-sector companies in the United States that carried this coveted rating in early 2010. In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day. The results were disastrous: 83% of the mortgage securities rated triple-A that year ultimately were downgraded. You will also read about the forces at work behind the breakdowns at Moody’s, including the flawed computer models, the pressure from financial firms that paid for the ratings, the relentless drive for market share, the lack of resources to do the job despite record profits, and the absence of meaningful public oversight. And you will see that without the active participation of the rating agencies, the market for mortgage-related securities could not have been what it became.”

In the lead-up to the 2008 crash, the Wall Street banks paid the ratings agencies to get the coveted triple-A ratings on their toxic bundles of debt. Today, Wall Street banks still pay the rating agencies for the ratings.

Dodd-Frank accomplished two good things. It created the Consumer Financial Protection Bureau (CFPB) which did play a major role in exposing and disciplining companies that abuse consumers in areas like credit cards, auto loans, student loans, and mortgages. Dodd-Frank also created the Office of Financial Research (OFR) in the U.S. Treasury Department – which during Obama’s two terms issued regular warnings that Wall Street is still a dangerous, toxic brew of interconnectedness and OFR shined a bright light on how the Federal Reserve is mismanaging its stress tests of the mega Wall Street banks.

Those two accomplishments, however, were easily dismantled under the Trump administration which simply gutted the leadership of the agencies.

In a speech delivered by Senator Elizabeth Warren on the Senate floor on December 12, 2014, we finally found out why Democrats didn’t use their majorities in both chambers of Congress in 2010 to pass legislation that would actually protect the American people from Wall Street’s greed and hubris. Warren said this:

“During Dodd-Frank, there was an amendment introduced by my colleague Senator Brown and Senator Kaufman that would have broken up Citigroup and the nation’s other largest banks.  That amendment had bipartisan support, and it might have passed, but it ran into powerful opposition from an alliance between Wall Streeters on Wall Street and Wall Streeters who held powerful government jobs.  They teamed up and blocked the move to break up the banks—and now Citi is bigger than ever.

“The role that senior officials working in the Treasury department played in killing the amendment was not subtle: A senior Treasury official acknowledged it at the time in a background interview with New York Magazine. The official from Treasury said, and I’m quoting here, ‘If we’d been for it, it probably would have happened. But we weren’t, so it didn’t.’ That’s power.”

We now know that how those Wall Street shills got all of that power in both the Obama and Trump administrations happened during what is benignly called the “Transition Team.” What happens during the “Transition Team” process is that the elected President of the United States effectively surrenders power and control to the big money that put him in office. It’s that “team” that picks the cabinet and subcabinet heads that will run the government on behalf of Wall Street interests. There is hard evidence of this in both the Obama and Trump transition teams. See Trump Transition Team Emails: Here’s Why Washington Insiders Are Freaking Out.

Equally problematic is that investigative reporting in America today deals mostly with the symptoms of this malignancy – not with the disease itself. That disease is how political campaigns are financed in America. Until that changes, we’ll all continue to be Wall Street’s serfs.

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