Wall Street

Failures of Financial Deregulation

The financial crisis is the most glaring example of the failures of deregulation. There are five Wall Street lobbyists for every member of Congress. Wall Street employed these lobbyists to convince Congress to repeal the Glass-Stegall Act which allowed their traders to enter the mortgage market and sell securitized subprime mortgages across the globe as triple AAA rated securities. Concurrently, they lobbied for the CFTC Modernization Act of 2000 which allowed them to trade in the derivatives that brought down AIG, Lehman Brothers, and the banking system. Wall Street gives themselves huge bonuses when times are good and when their bets go bad they turn to their lobbyists again to convince Congress to use tax payer money to bail them out. The financial services industry has been bailed out by the taxpayer eight times since 1980.

The Financial Reform Bill

The Financial Reform Bill is not reform at all. It’s a half-hearted attempt to roll back the deregulation that Wall Street bought with $5.1 Billion in lobbying and campaign donations between 1998 and 2008. The Congress bought into the idea that Wall Street could self-regulate itself and then Wall Street turned from banking to gambling.

The Reform Bill didn’t address too big to fail banks. The too big to fail banks are simply too big to exist. No financial institution should be allowed to control or have an ownership interest in assets worth more than 4% of the Gross Domestic Product (GDP) or about $570 Billion in assets. A lower limit of 2% of GDP or $285 Billion should be set for investment banks. This simple solution for too big to fail would affect only the largest six banks. These six banks would find ways around any complex solution to this problem. The ban on proprietary trading by the banks in the Bill is a welcome change as is the creation of a Bureau of Consumer Financial Protection. There are good things in this bill the bill just didn’t go far enough.

The Financial Reform Bill addresses derivatives but allows too many loopholes for the changes to be effective. The bottom line is that all derivatives must trade on an open market to allow for transparency of the process, no exceptions. The use of these highly leveraged instruments can only be monitored on an open, transparent exchange. However, Wall Street doesn’t want transparency because it will reduce their fee income.

Regulators and Trading

The Securities and Exchange Commission (SEC) budget has to be increased so it can better police Wall Street. The budget of the SEC is only $1 Billion a year. Compare this to the $21 Billion Goldman Sachs alone paid out in bonuses last year. The regulators can’t be expected to complete their missions when they’re being strangled for funds. We should provide the FBI financial crimes division sufficient funds to prosecute those in the financial services industry who engaged in fraudulent activities. To further strengthen regulation of Wall Street we need to stop the revolving door between Wall Street and the federal agencies that regulate them. There should be a non-compete clause in the employment contracts of those public officials that regulate Wall Street so they can’t quickly leave their federal position for a high paying job at a bank..

In 1960, it took eight years for the entire value of the stock market to turn over. In early 2009, it took only eight months to turn over the stock market. It takes even less time now that High Frequency Trading (HFT) has recently become popular and accounts for an estimated 73% of all trading on the stock market. One way HFT makes money is by using superfast computers to scalp money off trades made by our pension funds and small investors. This is pure speculation, not investing. One way to bring Wall Street back to its original purpose of providing an environment for long-term investment would be to impose a transaction tax on short term trades held less than a day.

Summary

As you can see the issues facing our financial services industry are complex and wide-ranging. We need a Congress that is not dependent on Wall Street influence to make the required reforms and we need effective regulators who make decisions based on what’s best for America and not their future employment prospects. The Financial Reform Bill while a good start is by no means effective enough to protect us from another financial meltdown within the next three years. We need to move forward with more reform of our financial services industry.

We have to bring back the Glass-Stegall Act. Derivatives trading has to be moved to a transparent, regulated exchange. The Securities and Exchange Commission budget has to be increased so it can better police Wall Street.

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