By Pam Martens and Russ Martens: March 8, 2016
Last Friday, the Obama administration announced that the President would be meeting at the White House with key Wall Street regulators yesterday. In fact, the meeting yesterday included 9 of the 10 voting members of the Financial Stability Oversight Council (F-SOC), the body created under the 2010 Dodd-Frank financial reform legislation to prevent another catastrophic collapse of the U.S. financial system. The President also brought along a key group of his economic advisers and, interestingly, Neil Eggleston, the White House Counsel. (See full attendee list below.)
F-SOC is chaired by U.S. Treasury Secretary, Jack Lew, who likely functions as President Obama’s eyes and ears on the Council and for financial stability issues in general. Lew attended yesterday’s meeting and sat across from the President at the press conference that followed. (See video of full press conference below.) Lew may have some qualms about what’s he’s hearing in F-SOC meetings from the Office of Financial Research, another body created under Dodd-Frank. The Office of Financial Research has raised repeated warnings about the interconnected mega banks posing potential threats to stability. The last thing President Obama wants for his legacy is to take office in the midst of the greatest financial crash since the Great Depression and leave office in the midst of a new one.
Shoring up his legacy was clearly on the mind of the President, based on his comments during the press conference. (See full transcript here.) At one point the President suggested that the political bashing coming at him from the campaign trail was getting under his skin, stating:
“As we worked to recover from this crisis, we’ve also worked to prevent this crisis from happening again. And Wall Street reform — Dodd-Frank — the laws that we passed have worked. I want to emphasize this because it is popular in the media, in political discourse — both on the left and the right — to suggest that the crisis happened and nothing changed. That is not true.”
The problem with the President’s new public relations push to cement his image as the fierce enforcer of Wall Street reform is, unfortunately, the facts on the ground.
Dodd-Frank was signed into law by President Obama on July 21, 2010. It left in place many of the worst abuses on Wall Street, like the ability of Wall Street firms to pay the rating agencies (like Moody’s and Standard and Poor’s) for the ratings they assign to bonds underwritten on Wall Street. The financial collapse and U.S. housing collapse was greatly influenced by the fact that the ratings agencies were assigning triple-A ratings to subprime mortgage debt — what was effectively junk bonds destined to fail. The Financial Crisis Inquiry Commission had this to say on the practice in its final report:
“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.”
Dodd-Frank also left in place the ability of Wall Street banks to use the FDIC insured deposits of savers to gamble in exotic derivatives. JPMorgan Chase exquisitely demonstrated this technique in 2012 in the London Whale episode where $6.2 billion in losses of depositors’ funds piled up, while, according to Senator Carl Levin, JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.”
JPMorgan Chase is the largest U.S. bank, and yet, just two years after Obama’s seminal work on financial reform, the Office of the Comptroller of the Currency (OCC) stated in its settlement with JPMorgan Chase in the London Whale matter that its “credit derivatives trading activity constituted recklessly unsafe and unsound practices.”
To most rational minds, “recklessly unsafe and unsound practices” is precisely what led to the epic 2008 financial collapse on Wall Street and the greatest taxpayer bailout in U.S. history. If Dodd-Frank was really working, how could the London Whale have happened at all?
The other big promise of Dodd-Frank was the so-called “push out rule” where the trillions of dollars of risky derivatives would be pushed out of the FDIC-insured banking units and onto other parts of the Wall Street banks that could be wound down in a crisis. In December 2014, Citigroup deftly repealed this part of Dodd-Frank by tucking its repeal legislation into the $1.1 trillion Cromnibus spending bill that was essential to keeping the government running. President Obama, knowing full well what Citigroup had done, signed the Cromnibus into law.
As of September 30, 2015, according to a report from the OCC, just five mega Wall Street banks now control $247 trillion in notional face amount of derivatives, 93 percent of the total of more than 6,000 banks in the U.S. Trillions of dollars of credit default swaps still exist on the books of the insured units of these banks – the very instruments that took down the mega insurer AIG and forced a back door bailout of Goldman Sachs because the counterparty backing its credit default swaps was AIG.
And, of course, the biggest problem with Dodd-Frank reform was that it failed to restore the Glass-Steagall Act which had protected the U.S. banking system for 66 years until its repeal in the Clinton administration in 1999. Restoring that legislation would have prevented the London Whale losses in the insured banking unit of JPMorgan Chase and future derivatives crises at insured banks because it would legally separate insured deposit-taking banks from speculative investment banks and brokerage firms on Wall Street.
President Obama may be focused on preserving his legacy of reform, but Presidential candidate, Senator Bernie Sanders, who is calling for the restoration of the Glass-Steagall Act and pointing out that the continuing business model of Wall Street is fraud, has a far greater purpose in mind – saving the country.
Voting Members of the Financial Stability Oversight Council Who Attended the March 7, 2016 Meeting with President Obama
- Jack Lew, Secretary of the Treasury
- Janet Yellen, Chair of the Board of Governors of the Federal Reserve System
- Mary Jo White, Chair of the Securities and Exchange Commission
- Martin Gruenberg, Chair of the Federal Deposit Insurance Corporation
- Mel Watt, Director of the Federal Housing Finance Agency
- Richard Cordray, Director of the Consumer Financial Protection Bureau
- Timothy Massad, Chairman of the Commodity Futures Trading Commission
- Thomas Curry, Comptroller of the Office of the Comptroller of the Currency
- Debbie Matz, Chairman of the National Credit Union Administration
(The 10th voting member of F-SOC who was not in attendance was the independent insurance expert, S. Roy Woodall, Jr.)
White House and Administration Participants:
- Shaun Donovan, Director of the Office of Management and Budget
- Jason Furman, Chairman of the Council of Economic Advisers
- Jeff Zients, Director of the National Economic Council and Assistant to the President for Economic Policy
- Brian Deese, Deputy Director of the Office of Management and Budget
- Neil Eggleston, White House Counsel
- Sarah Bloom Raskin, Deputy Secretary of the U.S. Department of the Treasury
- Seth Wheeler, Special Assistant to the President for Economic Policy