How Wall Street killed Financial Regulation

MATT TAIBBI: The Complete Story Of How Wall Street Killed Financial Regulation In 5 Terrifying Steps 

 

Business Insider,

12 May, 2012

From the moment Congress started working on writing new regulations for the financial industry, Wall Street started working on them too — working on killing them.
So writes Rolling Stone's Matt Taibbi. Not that we didn't know that, but his newest piece in this month's issue of the magazine walks us through Wall Street's strategy to patiently and painstakingly maim, and then kill the rules meant to constrain their industry.
From the piece:

This was supposed to be the big one. At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. ...Two years later, Dodd-Frank is groaning on its deathbed. The giant reform bill turned out to be like the fish reeled in by Hemingway's Old Man – no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law – roundly despised by Washington's Wall Street paymasters – a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank.

So if any of you readers are planning on going to Washington to do a hit on proposed legislation (or even some legislation that's already been passed) this is handy guide. Taibbi broke the whole process down to 5 steps.
Step 1 — "Kill it in the womb," says Taibbi. He points out the Dodd-Frank wasn't that tough to begin with. He argues that Obama was in the same position as President Roosevelt after the 1929 crash — In order to protect Americans from another catastrophe, he needed to force Wall Street to make their deals and trades in public, rather than in the dark. But that's not what happened:

...behind the closed doors of Congress, Wall Street lobbyists and their allies got to work. Though many of the new regulatory concepts survived in the final bill, most of them wound up whittled down to such an extreme degree that they were barely recognizable in the end. Over the course of a ferocious year of negotiations in the House and the Senate, the rules on swaps were riddled with loopholes...the best example of how the watering-down process helped make Dodd-Frank ripe for a later killing was the question of Too Big to Fail. Obama, Geithner and the Democratic leadership in Congress never seriously entertained enacting the most obvious and necessary reform at all – breaking up the

Step 2 — "Sue, Sue, Sue"... if killing the litigation in Congress didn't work, the banks simply took the new laws to Court (from the piece):

"First, they hire a shit-ton of lobbyists to go to the regulators," says Jim Collura, spokesman for the Commodity Markets Oversight Coalition. "Then, they beat the crap out of them during the rule making process. And then, when that's over, they litigate the hell out of them."

On a few occasions, Wall Street sued regulators for not running new legislation through enough 'cost benefit analysis.' Or they get more creative — here's what they did when the CFTC tried to implement commodities position limits (from the piece):

"In an even more awesome demonstration of sheer balls, Scalia & Co. also argued that the CFTC's vote to establish position limits was invalid because one of the agency's commissioners, Michael Dunn, did not really believe in the law."

Step 3 — "If you can't beat it, stall." Dodd-Frank is the perfect example of this. It was supposed to be implemented in October 2010, but the SEC decided on a stay at the last minute, "essentially giving the Chamber of Commerce time to prepare its lawsuit to permanently kill the rule," Taibbi writes. Or how about the Volcker Rule which regulators have stalled to April 2014?
Step 4 — "Bully the regulators." Congress can (and has) slash/freeze their budgets, and don't forget all that suing, which can serve as a powerfully deterrent as well (from the piece).

Even the CFTC admits this pressure exists: Commissioner Bart Chilton warned in March that his regulators risk being "scared into making rules and regulations that are weak or ineffective because we are overly concerned about what we call 'litigation risk.'" According to Marcus Stanley, policy director for Americans for Financial Reform, one regulator admitted that he worries in advance about Wall Street going over his head. "If we make this rule too tough," the regulator told Stanley, "industry is just going to go to Congress and punch it full of holes."

Step 5 — "Pass a gazillion loop holes." Wall Street does have useful friends in Congress, so when the going gets tough, it just have friends write some loopholes. Or, as Taibbi reports, Wall Street writes the legislation and then its friends pass it along (from the piece).

You might wonder how a bunch of lunkhead Republican congressmen would even know how to write a coordinated series of "technical fixes" to derivatives regulation, a universe so complicated that it has become hard to find anyone on the Hill who truly understands the subject. (One congressman who sits on the Financial Services Committee laughingly admitted that when the crash of 2008 happened, he had to look up "credit default swaps" on Wikipedia.) It turns out, they had help from the inside. Scott O'Malia, a Republican commissioner on the CFTC who formerly served as an aide to Senate Minority Leader Mitch McConnell, apparently sent a member of his staff over to the House to help the Republicans write bills to undercut the CFTC's authority.

In case you've been living under a rock, you know this strategy works. That's partly because most people don't know what these regulations are meant to regulate anyway. Ask your average person if they know how the swaps market is and you'll likely get a furrowed brow and quizzical glance.
So Wall Street has that going for it — the American people don't understand what they do in the first place.

Now you have the strategy, though. Great, right? Now go undo some good.