In Washington, usually the longer lawmakers haggle and debate and offer amendments to a piece of legislation, the weaker the bill gets. On financial regulatory reform, a group of Senate Democrats today touted plans to buck that trend and improve the Senate's bill that would reimagine the guidelines and regulations of our financial markets.
In an afternoon press conference, Sens. Carl Levin (D-Mich.) and Jeff Merkley (D-Ore.) introduced an amendment to break off banks' proprietary trading desks—the riskier operations where traders bet for their own company's gain, not for a client. The Levin-Merkley amendment draws on the "Volcker Rule," a provision popular with the Obama administration that would redivide investment and commercial banking. The Levin-Merkley amendment would ban banks from making high-risk investments involving bonds, stocks, derivatives, and other financial products; it would also block them from sponsoring or investing in hedge and private equity funds, both riskier operations that lie outside the purview of federal regulators. Levin-Merkley would also try to eliminate the conflict of interest inherent in a firm like Goldman Sachs, which both advises on and executes trades for clients while also investing to pad its own bottom line. The conflict of interest is at the heart of SEC's ongoing securities fraud suit against Goldman. "Maybe we can’t stop the extreme greed that lies behind these conflicts, but we can act to end the conflicts which have allowed big payoffs," said Levin.
Meanwhile, Sen. Jack Reed (D-RI) is another Democrat looking to beef up the financial reform bill. Reed said that an amendment he introduced today will crack down on the hedge, private equity, and venture capital funds that operate almost entirely unregulated. In Reed's amendment, all private funds will be required to register with the Securities and Exchange Commission. (The existing Senate bill requires funds larger than $100 million to register, with exemptions for certain types of funds.) Reid toldPolitico, "This amendment will shut down loopholes and provide the SEC with long-overdue authority to examine and collect data from this key industry."
While both amendments boast Democratic support, it's unclear whether they can garner 60 votes. Last week, an amendment from Sen. Ted Kaufman (D-Del.) and Sherrod Brown (D-Ohio) that would've capped the size of banks and the leverage they use, seen by many as an improvement to the bill, fell considerably short, 60-33. The Senate resumes talks on the financial bill tomorrow, and soon enough we'll see whether these amendments have the support or not.
Oil giant BP may be overwhelmed with the clean-up from the collapse of its Deepwater oil rig in the Gulf of Mexico. But the corporation has still found time to fight tougher financial reforms on Capitol Hill. The corporation is a member of the Coalition for Derivatives End-Users, a collection of companies actively pushing for a loophole in new regulations governing derivatives, the complex and opaque products used to hedge risk and bet on fluctuations in the financial markets. Derivatives, experts say, exacerbated the 2008 financial crisis, and lawmakers and the White House have sought to drag that market into the sunlight. The financial reform legislation now in Congress, says President Obama, will “close the loopholes that allowed derivatives deals so large and risky they could threaten our entire economy.”
Not if BP has its way. The corporation, along with the US Chamber of Commerce, Business Roundtable, and other large advocacy groups, wants to ensure that it is exempted from a new provision in derivatives regulation that would increase transparency and make derivatives trading less risky. (BP did not respond to a request for comment.)
[UPDATE]: Earlier, I wrote about rumblings that Goldman Sachs CEO and chairman Lloyd Blankfein could be on his way out if Goldman decides to settle the Securities and Exchange Commission's fraud suit against the firm. Blankfein, however, isn't going down without a fight. Today, in a massive vote of confidence, Goldman's shareholders voted against splitting the firm's CEO and board chairman roles; for now, Blankfein remains the undisputed leader of the firm. "I have no current plan to step down," Blankfein told shareholders. Today's vote is sure to boost Blankfein's, um, stock, and should dampen calls for his ouster.
The Wall Street Journal reports today that besieged investment firm Goldman Sachs and the Securities and Exchange Commission have held early settlement talks to end the SEC's blockbuster civil suit. That's a big step away from the firm's initial reaction to the suit, saying it was completely false. The securities regulator filed suit against Goldman for allegedly misleading its clients about a complicated financial product that the SEC says was designed to fail. Moreover, the SEC claims Goldman failed to disclose that a trader betting against that product, a synthetic collateralized debt obligation named Abacus, played a large role in designing the product and ensuring its demise. Kind of like allowing a guy help build a house out of pure kindling, then letting him buy fire insurance against the sure-to-burn house and wait to collect his payout. Ultimately, the trader "shorting," or betting against, Goldman's Abacus, a hedge fund guru named John Paulson, made $1 billion in the deal, while investors who thought Abacus would succeed lost around $1 billion.
The settlement talks are in the very early stages, the Journal reports, and right now there's a sizeable gulf between the two parties' positions. One fund manager, Michael Mayo, suggested that if Goldman did indeed settle, the settlement figure could reach $1 billion—not much compared to the firm's $850 billion balance sheet, but a symbolic blow nonetheless. Even more jarring would be the forced departure of Goldman CEO and chairman Lloyd Blankfein. There've been rumblings that any settlement agreement would involve ousting Blankfein, the man at the helm during the go-go subprime years, the firm's decision to short the housing markets, and the 2008 collapse. Blankfein was also running the firm when the Abacus deal went down, in 2007.
It would undoubtedly be a blow to Goldman to lose Blankfein, a long-time trader and executive in the firm and the man who's lead Goldman through arguably the bleakest period in its history. But if the firm is to move past the tumult of the last two or three years, odds are you'll see Blankfein packing his bags.
Late on Thursday night, an effort to rein in the mega-banks that brought the American economy to the brink of disaster died on the Senate floor. Sens. Ted Kaufman (D-Del.) and Sherrod Brown (D-Ohio) had offered an amendment that would have broken up the biggest banks and forced them to scale back the amount of money they borrow to amplify their bets in the financial markets (a reform known as leverage limits). Experts said the Kaufman-Brown amendment, which failed by a vote of 60-33, would have helped safeguard the economy against another crisis. So why did the Obama administration, which has urged Congress to overhaul the financial system, distance itself from—and even oppose—this measure?
The Kaufman-Brown amendment would have barred any single bank-holding company from owning more than 10 percent of the nation's total deposits. A bank couldn't hold non-deposit risks—including complex financial products such as derivatives—exceeding 2 percent of the nation's gross domestic product (currently about $14.6 trillion). And non-bank institutions, such as subprime lenders, couldn't hold liabilities exceeding 3 percent of GDP. If the amendment passed, Kaufman said, Citigroup, whose balance sheet totals more than $1 trillion, would have been compelled to shrink to half its current size—or what it looked like circa 2002. Goldman Sachs, with a balance sheet of $850 billion, would have needed to reduce its liabilities to $450 billion.
This week, the number of amendments seeking to improve or gut or merely tweak the Senate's financial reform bill has gone from a trickle to a pour. A few days into the full debate, at least 125 amendments have been offered, ranging from a major kneecapping of the bill's Consumer Financial Protection Bureau to setting caps on the size of banks and the amount of leverage they can use. As expected, nearly all of the amendments to the Senate's financial bill concern, well, financial regulation. A few, however, don't, having only the most tenuous connection to fixing Wall Street—if they have any connection at all.
Like South Carolina senator Jim DeMint's amendment that would require the completion of a 700-mile, double-layered fence along the US-Mexico border. DeMint announced yesterday that he was planning to introduce the border fence amendment because Democrats, and especially the Obama administration, had backed out on their pledge to finish the fence, he claimed. "We’ve had rhetoric and promises for four years without results," DeMint said in a statement. "It’s time we completed the fence and secured our borders to protect American citizens." What the border fence has to do with financial reform is unclear: There's no mention of financial reform in DeMint's statement announcing the amendment, and a call requesting comment from his office wasn't immediately returned.
Following in DeMint's footsteps is Sen. Sam Brownback (R-Kan.), who is planning to introduce an amendment relating to conflict minerals obtained from the Congo. While all the details on Brownback's amendment aren't available, odds are it will mirror past legislative efforts by Brownback to "brin[g] accountability and transparency to the supply chain of minerals used in the manufacturing of many electronic devices." Brownback has been a prominent voice in Congress on the issue of buying minerals from the Congo. He wants the Securities and Exchange Commission to take on the role of increasing transparency and disclosure in the mineral trade. To that effect, he co-sponsored a previous bill, the Congo Conflict Minerals Act of 2009, but the bill never made it out of committee. Again, the connection between disclosure of conflict minerals (a human rights issue, really) and financial regulatory reform seems weak. A call to Brownback's office wasn't immediately returned.