As the battle over financial regulatory reform continues on Capitol Hill, the US Chamber of Commerce is rallying behind an amendment to the Senate's bill—one of more than 125 proposed amendments—that would exempt a large chunk of companies who use derivatives, the complex financial products used to hedge risk but also to recklessly gamble on fluctuations in, say, the housing market. Yesterday, the Chamber sent a letter, cosigned by trade groups from the oil, manufacturing, financial services, and real estate industries, backing an amendment offered by Sen. Saxby Chambliss (R-Ga.) exempting from regulation "end-users" of derivatives—the utilities, farmers, oil titans (like BP), airlines, and other companies who use derivatives to hedge risk. The letter claims that between 100,000 and 120,000 jobs could be lost because, as the bill looks now, it would require these end-users to set aside cash and other collateral for trading through the more transparent, safer derivatives clearinghouse proposed by Senate lawmakers.
That end-user exemption is opposed by the Senate's architect of financial reform, Sen Blanche Lincoln (D-Ark.), by many Senate Democrats, and by top administration officials like Gary Gensler, chairman of the Commodity Futures Trading Commission, who says (pdf) there should be no exemptions in derivatives regulation. Supporters of complete derivatives transparency cite reports like this one (pdf), from the Congressional Research Service, which says that a broad end-user exemption could essentially gut new regulations altogether. CRS found that nearly two-thirds of derivatives trades involve an end-user, and "[i]f all end users are exempted from the requirement that OTC swaps be cleared, the market structure problems raised by AIG still remain." In other words, it would be the loophole that ate the rule.
The job losses figure cited by the Chamber is undoubtedly cause for concern; no one wants to proactively cut jobs, especially with the 9.9 percent unemployment rate we have now. (An aside: I'm trying to track down the actual report on job losses used by the Chamber to make sure it's been cited accurately—and not twisted to fit an agenda. I haven't found it yet, but rest assured I am digging into this.) Then again, the out of control over-the-counter derivatives market played a huge role in the financial crisis—a meltdown that's caused millions of Americans to lose their jobs and their homes. A record 6.72 million workers who want to work have been unemployed for 26 weeks or more, the highest since the government started counting this figure in 1948; that number began its vertiginous climb in—you guessed it—the fall of 2008, when Wall Street crumbled.
Even if the Chamber is right to say tough derivatives regulation will result in the loss of jobs, you have to look at the bigger picture and broader gains here. 100,000 jobs is tough to swallow. But tougher still is not fixing the derivatives markets and setting the stage for the next meltdown—and the millions of job losses that come with it.
An amendment mandating an audit this year of the Federal Reserve and its multitrillion-dollar bailout resoundingly passed the Senate today, in a 96-0 vote. The audit, to be conducted by the Government Accountability Office (GAO), the non-partisan investigatory arm of Congress, will dig into the Fed's decision-making and actions since the onset of the financial crisis in 2007. To date, the Fed has spent nearly $3.5 trillion trying to backstop teetering megabanks, housing giants Fannie Mae and Freddie Mac, and the secondary mortgage markets as a whole. Nearly all of these actions have taken place in almost complete secrecy, with little disclosure of who's received the Fed's extraordinary support and why.
The Fed audit approved today, authored by Sen. Bernie Sanders (I-Vt.), would require that the GAO post online a report by December 1 of this year outlining all of the Fed's rescue measures. The GAO, Sanders has said, would also shed light on meetings between Fed officials and Wall Street CEOs which took place with alarming frequency in late 2008 and 2009. Those meetings posed serious conflict of interest issues when Fed officials like Stephen Friedman, head of the New York Fed, met with top brass from Goldman Sachs about converting the firm into a bank holding company; Friedman happens to be a Goldman Sachs board member as well. "This amendment begins the process of lifting the veil of secrecy at perhaps the most powerful federal agency there is," Sanders told reporters today.
Originally, Sanders' amendment called for periodic audits of the Fed by the GAO. But after facing considerable pressure from Senate Democratic leaders, like Chris Dodd (D-Conn.), and the White House, Sanders agreed to limit the amendment to one audit of the Fed's bailouts, beginning in 2007. Asked whether he felt his amendment had been fundamentally weakened by limiting the number of audits, Sanders said he was optimistic that a successful initial investigation could spur the public to demand new audits. Sanders said, "They're going to say, 'You know what? We want more. We want more transparency.'"
There's plenty in the news about the latest push by the financial industry's formidable lobbying armada, a coalition of banks' own outfits, ad hoc front groups, and powerful advocacy organizations speaking for all of Big Finance. It's also pretty well-known that many of these influence peddlers are well-connected to very people they're now lobbying. Even so, a new report from the Public Accountability Initiative, "Big Bank Takeover," uncovers some pretty startling statistics about the finance lobby, a powerful force that's shaped financial regulation for decades and, more recently, has spent $600 million on lobbying since early 2008.
For instance, the report (pdf), released today, says that 243 lobbyists for the six biggest banks—Bank of America, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, and Citigroup—and their trade groups used to work in either Congress, the White House, the Treasury, or another federal agency. That comes out to 40 lobbyists per bank who've spun through the Wall Street-Washington revolving door. And those 243 lobbyists weren't paper pushers or interns, either: 33 are former chiefs of staff; 54 used to work for the House financial services committee, which led the House's effort to write new financial regulation; and 28 were legislative directors for members of Congress. Citigroup, the report states, leads the biggest bank with 55 lobbyists that once worked for the government.
The most heated fight in the financial reform battle right now involves a provision blandly named Section 716. This provision, introduced by Sen. Blanche Lincoln (D-Ark.), is arguably the most aggressive of the reform bill's crackdowns on the $600 trillion over-the-counter derivatives market, the home to the opaque yet lucrative financial products that allow big banks and gutsy traders to bet on swings in the financial market. More than 90 percent of derivatives trading occurs within the walls of the five largest commercial banks. Lincoln's Section 716 would essentially force these big banks to carve out their derivatives, or "swaps," desks into separate subsidiaries—a proposal that's anathema to Wall Street, many Republicans, some Democrats, and even the White House.
So far, Lincoln has managed to keep 716 in the bill, despite a lobbying onslaught to kill the provision. But as the New Republic’s Noam Scheiber reports, an unlikely opponent to Lincoln's aggressive plan has emerged: former Federal Reserve chairman and reform advocate Paul Volcker. In a May 6 letter, Volcker wrote to Sen. Chris Dodd (D-Conn.) that commercial banks "should not be prohibited" from dealing in derivatives as a normal part of doing business. Volcker justified his opposition—which more or less aligns him with the Wall Street lobbyists fighting to gut Lincoln's derivatives overhaul—by saying that the "Volcker Rule," a provision he helped create that would wall off commercial and investment banking, would render moot Lincoln’s 716.
But academics and outside experts say the Volcker Rule is no substitute for spinning off swaps desks. Jane D'Arista and Gerald Epstein of the Political Economy Research Institute at the University of Massachusetts, Amherst write today that Section 716 would go a long way toward breaking up the anti-competitive monopoly on derivatives trading held by the five largest commercial banks, "encourage new entrants, and bring the benefits of competition to end users in all sectors of the economy." D'Arista and Epstein add that breaking off swaps desks will actually increase transparency "by bringing derivatives out of the shadows so that dealers can be more easily regulated." Not separating swaps desk will only cement the too-big- or too-interconnected-to-fail status of the biggest commercial banks, they argue.
Nonetheless, with Volcker in opposition, the odds are now stacked heavily against Lincoln's provision. Later this week, Sens. Judd Gregg (R-NH) and Saxby Chambliss (R-Ga.) are expected to offer an amendment that would do away with 716, and it's unclear whether any new lawmakers will come to its defense—or whether the proposal will be left, like other tough provisions, on the cutting room floor.
JPMorgan Chase, the powerful denizen of Wall Street, recently announced yet another lucrative quarter for the bank. $28.2 billion in revenue. $3.3 billion in profit, a 55 percent increase from a year ago. The results laid to rest any lingering doubts about JPMorgan's health and rebound from the financial crisis, and when considered alongside the resurgent profitability at, say, Goldman Sachs, showed that the Street has in many cases come full circle since the Crash of 2008.
All but forgotten in the banks' fight to scramble back into the black was an agreement forged earlier in 2008, a pact among big banks to shine a light on their financial deals involving dirty investments and to potentially move that money into greener, sustainable projects. The agreement was called the "Carbon Principles," and it has essentially fallen by the wayside in the past two years. Whether these banks renew their pledges to shift financing to renewable projects remains to be seen, but in the interim, as I report below, lucrative financing for dirty energy projects throughout the world continues unabated.
(Equator Principles) MOUTH: "Among the achievements of the Equator Principles is the demonstration that competitors are willing, able, and happy to collaborate for the health of the planet." Huibert Boumeester, managing board member (2006). MONEY: After signing Equator Principles, became lead arranger for a $2 billion loan to Russian energy giant Gazprom's vast Sakhalin II oil and gas project; later, helped finance a $1 billion loan for a new coal plant in Chile, built by American power company AES.
Bank of America
(Carbon and Equator Principles) MOUTH: "Helping our nation reduce greenhouse gas emissions is not only the right thing for our planet, but it is also smart business—and Bank of America is proud to be at the forefront." Kenneth Lewis, chairman and CEO (2008). MONEY: A leading lender for Australia's giant Hazelwood coal plant, which the World Wildlife Fund called "one of the dirtiest power stations in the world," and key financier to coal giant Massey Energy.
(Carbon and Equator Principles) MOUTH: "Our success will be measured not only by our financial results, but also by the impact we have on the communities we serve." Charles Prince, chairman and CEO (2006). MONEY: In 2006, the same year it helped produce an update of the Equator Principles, Citigroup financed more coal projects than anyone else in the world. After signing the Carbon Principles, opened a $62 million line of credit for Arch Coal, the nation's second-largest coal producer and a major funder of the lobbying battle against climate legislation.
(Carbon and Equator Principles) MOUTH: "What is earthshakingly different between now and two years ago is the focus on CO2." Eric Fornell, vice chairman, natural resources banking division (2008). MONEY: Has continued to fund 5 of the top 10 mountaintop-removal companies in Appalachia; in 2009 underwrote more than $1 billion in financing for Massey Energy, which mined more than 21 million tons of coal in 2008 via mountaintop removal.
(Carbon Principles) MOUTH: "I don't think [the Carbon Principles] will inhibit the financing of new coal-fired projects." David Albert, managing director, project and structured finance (2008). MONEY: Indeed. Morgan Stanley joined with Citigroup last year to underwrite $700 million in debt for NRG Energy, which owns all or part of nine coal plants. Also part of a consortium financing $4.5 billion in loans for TXU, a Texas power company that tried to build 11 new coal-fired power plants (eight were ultimately scrapped due to public pressure).