“Too big” failed on Wall Street in 2008 in a tumultuous explosion that wiped out century old iconoclastic institutions in a week’s time. In their infinite wisdom, Congress and the regulators repaired “too big” with “much bigger,” bundling giant insolvent institutions with the merely teetering. We’re now at the third stage: “much, much crazier to regulate.”
To attempt to oversee the unwieldy bloated tyrants, Congress passed 848 pages of financial reform legislation in 2010. But it was so difficult to comprehend that to implement just one piece of it, the Securities and Exchange Commission (SEC) together with the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency filed a 530-page public proposal seeking comment on how the legislation might impact the markets. The deadline for those comments came last week.
To hear the New York Times tell it, a less than dazzling few hundred public comment letters were filed. The Times tally was off by a mere 16,000 letters. Apparently, the Times does not believe form letters should count, even though they were signed individually and filed electronically with the SEC by the February 13 deadline. (I think anytime 16,442 members of the public take the trouble to comment on a notoriously complex 530-page proposal from the SEC, they deserve to be counted.)
The rule proposal pertained to the adoption of the Volcker Rule – the namesake of former Federal Reserve Board Chairman Paul Volcker that would nix the ability of Wall Street banks that hold insured deposits to place billions of dollars in speculative trades for their own firm’s account (proprietary trading or in Wall Street vernacular “prop desk”) instead of focusing on the interests of their customers.
The Volcker Rule constitutes Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010. In addition to proprietary trading, also impacted will be the ability of Wall Street banks to own hedge funds and private equity funds. The new rules are scheduled to take effect on July 21 of this year if Wall Street lobbyists lose their bid to derail the implementation.
Hoping to derail the derailers is a new SEC sheriff: Occupy the SEC, a spinoff of Occupy Wall Street. Going forward, it will be tougher for right-wing corporate media to spin the Occupy movement as smelly hippie radicals desperate for a cause; any cause. Last week, Wall Street spin doctors just got chewed up in the spin cycle and hung out to dry with Occupy the SEC’s filing of a mesmerizing 325-page treatise on redesigning Wall Street to meet the Nation’s needs rather than its perpetuation as a wealth extraction scheme by lawyered up 1 percenters. (The number of lawyers providing public comment was exceeded only by Wall Street firms.)
Far removed from the unstructured demands of the overall Occupy movement, the 325-page tome is precise, hard hitting and essentially nails the core corrupting elements of the current system and lays out what must change. It shows an uncanny insider’s grasp of the minutiae in the Dodd-Frank financial reform legislation. And, it is more than 171 pages longer than the collective rant of Wall Street’s own sycophant trade groups, the Securities Industry and Financial Markets Association (SIFMA), American Bankers Association, the Financial Services Roundtable, and the Clearing House Association. The trade group letter called the proposal “absurd” and lectured the regulators that they should first “do no harm.” There is striking and arrogant amnesia in this letter regarding the staggering harm done to this Nation by their constituents.
Occupy the SEC was able to convince the SEC to schedule it for a telephone conference on January 12 to discuss the proposed rule prior to filing its weighty volume. Unfortunately, its one meet-up with the SEC was outflanked by a total of 20 SEC confabs with big Wall Street firms like Goldman Sachs, JPMorgan Chase, Citigroup, Morgan Stanley, Bank of America and their trade and lobby organizations.
The letter from Occupy the SEC was signed by Akshat Tewary, Alexis Goldstein, Corley Miller, George Bailey, Caitlin Kline, Elizabeth K. Friedrich, and Eric Taylor. The group calls itself “concerned citizens, activists, and financial professionals with decades of collective experience working at many of the largest financial firms in the industry. Together, we make up a vast array of specialists, including traders, quantitative analysts, compliance officers, and technology and risk analysts.”
One member of the group is Akshat Tewary, an employment law expert who is admitted to the bar in New York and New Jersey and has standing to practice before the U.S. Supreme Court. Tewary got his background in securities law at his former employer, the international law firm of Kaye Scholer.
Tewary explains how he came to be involved in the Occupy the SEC group:
“I shared a deep frustration with other Occupiers stemming from the fact that major banks had caused a world-wide recession due to their excessive risk-taking. It’s one thing if a bank bankrupts itself due to speculation and greed, but it becomes a matter of public concern when those excesses hurt virtually every person in the country and many abroad.
“In October 2011, I was preparing a comment letter on my own for another part of the Dodd-Frank Act, and attended several Occupy Wall Street events as well. It was around this time that the SEC and the banking regulators’ proposed implementation of the Volcker Rule was issued. It became clear to me very quickly that many of the concerns of Occupiers meshed naturally with the objectives of the Volcker Rule. I saw several signs asking to ‘Bring Back Glass-Steagall’ and the Volcker Rule was a clear chance to actually do that (to a certain extent).”
One of the most impressive aspects of the Occupy the SEC letter is that it asks, courteously but firmly, that the SEC and other regulators remove their myopic lenses, particularly on the topic of market making by the banks holding insured deposits.
The SEC defines market making as a firm standing “ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. You’ll most often hear about market makers in the context of the Nasdaq or other ‘over the counter’ (OTC) markets.” Indeed, we heard a great deal about those big Wall Street firms as market makers back in 1996 when the U.S. Department of Justice charged them with coordinating a price fixing scheme on Nasdaq. The SEC found the practice had been going on for years. Then we heard more about market manipulation in 2003 when regulators brought and settled charges that some of the biggest Wall Street firms were inducing the public to buy stocks, potentially with the same firms as market makers, by issuing laudatory research on companies they internally labeled “dogs” and “crap.”
On January 18th of this year, SEC chairman Mary Schapiro testified to Congress on the SEC’s Volcker Rule proposal, noting that “the proposal recognizes the important benefits provided by market making activity, including customer intermediation and market liquidity, and would permit market making activities in different markets and asset classes.” Schapiro has a long history of cozying up to Wall Street’s demands.
It’s “nonsensical” says Occupy the SEC to believe that smaller competitors to the Wall Street Goliaths couldn’t fill this market making gap if the big firms were prohibited under the Volcker Rule. “It is well-known that the major dealers have always fiercely guarded their dominance of market making, particularly in the less regulated OTC markets. Firms that attempt to enter this business are regularly strong-armed through anti-competitive arrangements with inter-broker dealers. Again, this is unsurprising: market making desks allow a firm to take proprietary advantage of unparalleled access to valuable customer flow information in the name of ‘customer service.’ ”
In case you think Wall Street has cleaned up its act and can now be trusted with market making, think again. The big press conference less than two weeks ago heralding the $25 billion settlement by the U.S. Department of Justice and 49 state attorneys general against Wall Street’s illegal foreclosure and mortgage servicing tactics had barely turned off its mics when news broke that more lawsuits are on their way for Wall Street collusion in rigging one of the most important interest rate benchmarks in the world, the London Interbank Offered Rate known as Libor. That rate is tied to literally trillions of dollars of financial products, including the rate at which many adjustable rate mortgages reset. Would the Florida state attorney general have included loan origination charges in Florida’s foreclosure settlement if she had been aware of potential collusion in fixing the interest rates of those mortgages?
Occupy the SEC also warns against allowing the big firms to game the system by simply moving their proprietary trading out of the investment banking area and into an Asset Management affiliate. “In their allowances for the continued provision of Asset Management and Investment Advisory services to covered funds by banking entities, Congress granted a boon to the financial industry at the expense of the American public. While the intent of the statute’s allowances for Asset Management may have been justifiable, in reality these anticipated allowances are being used by the banking entities to simply shift proprietary trading from inside their walls to outside, with a healthy amount of ownership interests maintained to keep their involvement profitable.”
Another passage from the Occupy the SEC document highlights the Wall Street banks use of an investor’s “safe” money placed in insured accounts as the firm’s own bankroll to place speculative trades: “When depositors post money at banks, that money does not remain in a vault. Rather, it is utilized by banking entities to make loans, pay off expenses, and otherwise create an infrastructure through which to conduct proprietary trades. Thus, banks stand to gain from the leverage provided to them by depositors. Unfortunately for depositors, this provision of leverage remains uncompensated. This point was cogently recognized by Congressman Keith Ellison during the Congressional House Committee on Financial Services’ recent hearing on the Volcker Rule:
In the absence of something like Volcker Rule, we have a heads I win, tails you lose system in which, if I’m a bank I can go out and buy mortgage-backed securities (‘Triple A rated’) . . . they make a bunch of money, I keep that, I do not give that to those depositors, [whose money] I use. . . . But if I lose a bunch of money, I’m coming to the taxpayer to save me. And it seems so unfair.
“…We know of no bank that repays FDIC-insured depositors for usage of their money in the form of participation interests on the proceeds from proprietary trading. This is an exploitative situation wherein the resources of one party are utilized by another, without just compensation—a clear ‘divergence of interests.’ Thus, simple logic dictates that depositors must be granted some monetary participation in any gains achieved by a banking entity from exempted activities…”
Another infinitely sensible recommendation of Occupy the SEC is the idea of bumping up the pay and stature of the internal compliance officers that skulk among the $3,000 suits and mahogany corridors of power in their polyester button-downs and no-iron trousers fearful of ever reporting illegal conduct less they be told to remove themselves from the premises – an outcome that happens regularly. “A two tiered approach could 1) bring the general level of compensation of compliance professionals to be more in line with those in the front office, to more accurately demonstrate the importance of these roles to the quality of the banking entity itself, and 2) require a compensation design which explicitly rewards quality practices and their implementation.”
Contrasted against the public interest focus of Occupy the SEC, Allen & Overy LLP filed multiple letters with the SEC on behalf of industry interests. Allen & Overy is the very law firm that created the off-balance-sheet Structured Investment Vehicles (SIVs) that were loaded with derivatives that played an integral role in the implosion of Citigroup, tens of billions in losses to shareholders, and the subsequent $345 billion bailout and backstop of the institution by taxpayers. (See “The Rise and Fall of Citigroup.”)
One letter from Allen & Overy urged: “We join other industry groups and market participants in expressing grave concern about the broad implications and unintended consequences of the Proposed Rule on the ability of multinational financial institutions to function effectively and efficiently and give our support to the arguments contained in the Industry Responses. We believe that the Proposed Rule poses significant problems for swap dealers and banking entities that engage in derivatives activity generally.” Now that is raw arrogance.
Pam Martens worked on Wall Street for 21 years. She spent the last decade of her career advocating against Wall Street’s private justice system, which keeps its crimes shielded from public courtrooms. She maintains, along with Russ Martens, an ongoing archive dedicated to this financial era at www.WallStreetOnParade.com. She has no security position, long or short, in any company mentioned in this article. She is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. She can be reached at firstname.lastname@example.org