Four Critical Changes Needed to Make Wall Street Work for America Again

By Pam Martens and Russ Martens: August 20, 2018 ~

New York Stock Exchange Trading Floor

New York Stock Exchange Trading Floor

Last Thursday the Securities and Exchange Commission (SEC) issued a statement regarding a new $10.5 million fine against Citigroup. The statement read: “Citigroup’s lax supervision and weak internal accounting controls allowed a handful of rogue traders to mismark positions over several years and, separately, resulted in the unnecessary loss of hundreds of millions of dollars of its shareholders’ assets to fraud.”

Lax supervision, weak accounting controls, and losing hundreds of millions of dollars to fraud are not words the American taxpayer wants to be reading about Citigroup in 2018. This is the very same bank that received the largest bailout by the U.S. taxpayer in global banking history following its implosion during the Wall Street crash of 2008 due to grossly faulty internal controls.

The reason that Citigroup was bailed out while Lehman Brothers was left to fail was that, according to FDIC records, Citigroup’s commercial bank, Citibank N.A., held $755 billion in deposits as of December 31, 2008. While more than half of that amount was foreign deposits which the United States had no obligation to repay, it would have destroyed trust in holding money in U.S. banks if the government had permitted Citigroup to go under. Today, Citibank N.A. holds just over $1 trillion in deposits, as of the latest report from the FDIC dated March 31, 2018, effectively still holding a gun to the taxpayers’ head.

Lehman Brothers also owned two Federally insured banks at the time of its bankruptcy filing on September 15, 2008 – Lehman Brothers Bank FSB and Lehman Brothers Commercial Bank. According to FDIC records, Lehman Brothers Bank FSB held $5.4 billion in deposits as of December 31, 2008 while Lehman Brothers Commercial Bank held $4.8 billion in deposits at year end 2008. Resolving two banks with a total of $10.2 billion in deposits is a far cry from attempting to resolve a bank with $755 billion in deposits.

Unfortunately for America, Citigroup has never meaningfully reformed the corrupt practices that led to its implosion in 2008. In fact, its conduct has gotten worse. In 2015, for the first time in its two centuries of existence, it was charged by the U.S. Justice Department with a criminal felony charge for its involvement in rigging foreign exchange trading, to which it pleaded guilty and was put on a three-year probation. The new charges from the SEC show that the traders misconduct and the misstatement of books and records occurred from 2013 to 2016 – well within the period of its probation. In other words, Citigroup cannot adequately police itself and continues to pose grave risk to the U.S. financial system.

Equally noteworthy is that last week’s charges against Citigroup are eerily similar to the charges brought against JPMorgan Chase by the SEC on September 19, 2013. The SEC said at the time that it was charging JPMorgan Chase with “misstating financial results and lacking effective internal controls to detect and prevent its traders from fraudulently overvaluing investments to conceal hundreds of millions of dollars in trading losses.”

The JPMorgan Chase matter became infamously known as the “London Whale” because the trades in exotic, high risk derivatives were conducted in London and were so big that they drew the attention of the press. The bank eventually owned up to at least $6.2 billion in losses and the fact that it had been using depositor funds to make the high risk trades. That was 2013. On the same date in 2015 that Citigroup was charged with a felony for its involvement in rigging foreign exchange trading, JPMorgan Chase was also charged with a felony in the same matter, pleaded guilty, and put on a 3-year probation. JPMorgan Chase had received two prior felony counts in 2014 for its oversight failures related to the Bernie Madoff business account (which was actually a Ponzi scheme) that was held for decades at the bank. The bank has been repeatedly fined for violations since that time. As of March 31, 2018, its commercial bank, JPMorgan Chase Bank N.A., holds $1.6 trillion in deposits.

The simple reality is that rogue traders and leveraged-casino-style bets don’t mix with Federally insured deposits. The Glass-Steagall Act had prevented Federally-insured commercial banks holding taxpayer-backstopped deposits from combining with Wall Street securities firms (broker dealers and investment banks) from 1933 until its repeal in 1999. It took just nine years after that repeal for Wall Street to blow itself up again in a replay of the 1929 to 1933 crash when the stock market lost 90 percent of its value.

The Dodd-Frank financial reform of 2010 failed to make the critical changes needed to make Wall Street work for the country instead of simply minting billionaire CEOs and enriching its own C-suite. Any meaningful reform of Wall Street requires, at a minimum, the following changes:

Restoring the Glass-Steagall Act: Banks holding insured deposits cannot be under the same parent ownership as security dealers and investment banks. This has proven, time and again, to be a recipe for disaster.

Restoring investment banks to partnership ownership: In both the bust of 2000 to 2002 and the epic financial crash of 2008 to 2009, Wall Street’s corrupt practices made it a highly inefficient allocator of capital. Wall Street allocated capital to companies going public which had a sexy story it could sell to gullible investors – and it’s still doing that today. When investment banks were structured as partnerships instead of publicly traded companies, the partners had to put their own money at risk and were, therefore, far more prudent with what companies they brought public. Good jobs, good wages and sustaining U.S. competitiveness demand the proper allocation of capital by Wall Street. That’s not happening under the current Wall Street structure and it’s putting the nation at serious risk.

Eliminating Wall Street’s private justice system: Many of Wall Street’s corrupt practices are shielded for years behind a veil of secrecy because both employees’ and customers’ complaints are contractually barred from being heard in open court where reporters have access to the proceedings. If you want to work for a major Wall Street bank or open an account as a customer, you will be required to sign a stack of papers, one of which indicates that you are agreeing that all claims and disputes will be subject to mandatory arbitration. Unfortunately, like so much else on Wall Street, the arbitration system has been rigged to favor the banks. Unlike a court proceeding which has a small filing fee, Wall Street’s system results in the employee or customer paying thousands of dollars in hearing fees  — a big deterrent to bringing a claim at all. Also unlike a court proceeding, there is no detailed decision and no mandate that the arbitrators must follow case law and legal precedent. Appealing a decision by arbitrators to a court is extremely difficult and typically limited to the ability to show fraud in the proceeding.

Reforming how political campaigns are financed: All of the above Wall Street  reforms require an engaged, independent Congress that is not beholding to Wall Street for campaign money. That means that legislation restricting corporate money in campaigns is central to reforming Wall Street.

Yes, this is all a tall order. But the fate of a nation and the future standard of living of the next generation hangs in the balance. Think about that when you head to the polls on November 6.

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