The pro-financial reform organization Americans for Financial Reform (AFR) today sent a letter [PDF] to the Senate banking committee, who's leading financial-reform talks right now and is expected to release a bill next week, to make sure it includes new oversights and protections of corporate boards—the very leaders, AFR says, who blindly let financial markets implode under their watch:
"Institutional investors have recognized that risk management oversight failures by the boards of Wall Street banks were a central factor in the financial collapse. Moreover, it is well documented that the executive compensation plans prevalent on Wall Street, in which the vast majority of pay comes through stock options and bonuses based on short-term performance, ensured that bank executives reaped huge gains while the housing bubble grew, but suffered none of the downside when their over-leveraged bets and gambles on complex derivatives went sour."
In a November financial-reform discussion draft in the Senate [PDF], a number of investor protections and executive-compensation crackdowns were included, like giving shareholders a "say on pay" and requiring a majority vote for uncontested director elections, among others. Right now, though, it's unclear whether those reforms from last fall will make it into the draft being crafted by Sen. Chris Dodd (D-CT), the committee's chairman, Sen. Richard Shelby (R-AL), the ranking member, and Sen. Bob Corker (R-TN), who joined Dodd after Shelby briefly dropped out of the talks earlier this month.
AFR's letter is intended as well a counterbalance to recent lobbying efforts, most visibly those by the US Chamber of Commerce, to oppose corporate-governance reform. For instance, Chamber CEO Tom Donahue said in January that the "mad scientists" who created tricky financial instruments (read: synthetic collateralized debt obligations, derivatives, option adjustable-rate mortgages) deserved the high salaries and bonuses they've earned in the past. However, AFR goes after Donahue in today's letter, citing his past leadership roles in maligned companies like Qwest and Sunrise Senior Living, and says his checkered record in corporate governance should cast serious doubt on any of his reform suggestions. "The US Chamber under Mr. Donohue is uniquely unqualified to speak credibly on what corporate governance structures are necessary to protect shareholder wealth," the letter concludes.
"Underwater": that's a watchword you've probably heard plenty throughout the Great Recession and the still dismal housing crisis. It's people who owe more than than their house in worth, and who essentially have few economic reasons (setting aside their own beliefs and fears) to stay underwater when they could rent more cheaply in a comparable, and sometimes better, home. Well, in a sign that the housing crisis remains bleak, the number of people underwater continues to increase, up to 11.3 million by the close of 2009 compared to 10.7 in 2009's third quarter, according to data from analyst FirstAmerican Core Logic. Another 2.3 million, the analysis says, are approaching negative equity but aren't underwater yet. Nationwide, homeowners are a whopping $800 billion underwater.
The details are even more troubling in states hit hardest by the subprime meltdown. In Nevada, for instance, 70 percent of all mortgage properties are underwater; elsewhere, 51 percent are in Arizona, 48 percent in Florida, 39 percent in Michigan, and 35 percent in California. That so many millions of homeowners are underwater reverberates throughout the economy as well: As real estate expert Brent White of the University of Arizona points out in a recent paper, underwater homes result in decreased consumer spending, the lifeblood of the American economy; and decreased household mobility, which can lead to higher unemployment and less productivity. It's a multi-pronged attack on our economy, dragging down not just the housing market but leading to people buying less and working less.
To blame for this pandemic of underwater homes are lenders, mortgage servicers, the government, and—yes—homeowners. Lenders and mortgage servicers, as myself and others have written, are generally loath to write down principal amounts on a homeowner's loan in, say, a modification setting—they don't want to take the losses, preferring to lower interest rates or extend the loan's term. The government, too, has utterly failed to tackle the negative-equity problem: It's flagship homeowner rescue, the taxpayer-funded Home Affordable Modification Program, doesn't force mortgage servicers to reduce principal balances, which is at the heart of our housing dilemma, and offers cursory, modest solutions; the program also has a ceiling on how far underwater you can be to qualify—125 percent underwater—and if you're in even worse shape than that, well, too bad.
And finally, homeowner are to blame for at least two reasons. First, because they purchased their home, as many did, during the housing bubble when prices were grossly inflated, the only direction their home's value could go was down; the odds were high they'd be underwater to some degree. And second, a lot of homeowners, as White highlights in his paper, remain in their underwater homes when the smartest thing to do—economically, at least—is strategically default, walk away, and start anew. For many of those 11.3 million underwater homeowners, walking away makes perfect sense, you can rent for cheaper, and you can take that extra money from your previous mortgage payment and invest or save it. "The real mystery," White writes, "is not—as media coverage has suggested—why large numbers of homeowners have been walking away, but why, given the percentage of underwater mortgages, more homeowners have not been."
The last thing Democrats want is for Congress' long-promised Wall Street crackdown to become a rerun of health care reform. That is, the House passes a bill, only to see grueling negotiations grind to a halt in the Senate, as health care legislation did last fall. But as Sen. Chris Dodd (D-Conn.), chair of the Senate banking committee, prepares to release his proposal for financial reform this week, House lawmakers who have worked on the issue tell Mother Jones they're worried that the talks will once again paralyze the Senate and produce only flimsy restrictions on financial firms.
Exhibit A for these anxious House lawmakers is the battle for a Consumer Financial Protection Agency, arguably the lifeblood of any financial overhaul. The CFPA, to borrow an analogy, would protect consumers from subprime mortgages and unfair credit card policies in much the same way as the Consumer Product Safety Commission scrutinizes faulty toasters and dangerous toys. It's an essential piece of the puzzle that experts say would rein in the predatory practices and disastrous products that toppled the housing industry and dragged the economy down with it.
In December, the House's major financial reform bill featured such a stand-alone consumer protection agency. But in the Senate, the CFPA has run into serious trouble. Senators like Richard Shelby (R-Ala.), the banking committee's ranking Republican, and other GOP colleagues have sought to neuter or outright kill the proposal for an independent body, suggesting that a consumer agency could instead be folded into an existing department, like the Treasury. Even Dodd, who's led the Senate's negotiations for months, had expressed doubt earlier this year whether a CFPA could make it into the final legislation. And now that Shelby has reportedly rejoined the Senate's main talks, the fate of an independent CFPA is even further in doubt. So contentious is the CFPA that it's been cast lately as financial reform's "public option," threatening to derail the entire bill.
In a letter sent today to Congress' banking and finance committees, a leading government watchdog has urged House and Senate lawmakers to crack down on the financial-services industry's internal "private self-regulatory organizations," or SROs, a less understood but problematic player in the global financial meltdown. Put simply, an SRO is a regulator within, say, the securities industry tasked with protecting investors, but is often led, in a glaring conflict of interest, by the very same people that regulator is supposed to be overseeing. If that sounds dubious, well, that's because it is. And as the Project on Government Oversight (POGO) contends in its letter, one prominent SRO, the Financial Industry Regulatory Authority (FINRA), has an "abysmal track record," so much that POGO openly questions "whether FINRA can ever be an effective regulator given its cozy relationship with the securities industry."
Despite FINRA's stated commitment to "putting investors first," a look at the regulator's record in the past few calamitous years casts doubt on that claim. FINRA, the POGO letter states, neglected to step in and regulate firms like Lehman Brothers, Bear Stearns, and Merrill Lynch that all collapsed under FINRA's watch, while also failing to spot the massive, multibillion-dollar Ponzi schemes run by Bernie Madoff and Allen Stanford. In Stanford's case, POGO found, an internal FINRA review discovered the regulator missed Stanford's scheme on several occasions; and with Madoff, the private regulator claimed it wasn't at fault for letting the biggest Ponzi scheme in history slip by even though experts said Madoff was under FINRA's purview.
Then again, when you look at FINRA's leadership, it's hardly surprising the regulator failed to spot the likes of Madoff and Merrill, Stanford and Bear Stearns. As POGO's letter says, conflicts of interests are rife within FINRA, to wit: FINRA chairman and CEO Richard Ketchum is a Citigroup alum; the regulator's executive overseeing member regulation came from Charles Schwab; and another executive in charge of enforcement is a former partner at a top law firm representing major financial institutions. Not to mention FINRA's ties to Madoff and Stanford—Shana Madoff, Bernie's niece, was on FINRA's compliance advisory committee until the firm went under, and two top level staffers for Allen Stanford served on other FINRA committees. "FINRA's numerous failures," POGO writes, "should hardly come as a surprise given the incestuous relationship between SROs and the financial services industry."
Yet despite these criticisms, FINRA's Ketchum wants more power for his organization, like overseeing investment advisers as well as securities brokers. Thus the purpose of POGO's letter today is to urge Congress not to let that power grab happen, and even more to encourage House and Senate lawmakers to curtail FINRA's authority. "Effective, independent, and efficient government regulation is the only proper way to safely oversee our markets," the letter concludes. "Our economy is too important to be left in the hands of the very financial industry that brought us to the brink of collapse."
The prospects for Sen. Chris Dodd's financial-reform overhaul received a much needed bipartisan boost today, as Sen. Richard Shelby (R-AL), the ranking member on the Senate banking committee, has reportedly rejoined negotiations with Dodd, the committee's chair. Shelby had abandoned the negotiations earlier this month, largely over disagreements on whether Senate's financial-reform bill should include an independent Consumer Financial Protection Agency, a centerpiece of the House's financial-reform bill passed in December. Dodd's had replaced Shelby with Sen. Bob Corker (R-TN) as his Republican counterpart a few weeks ago.
Along with the news of Shelby's return are reports that the release of Sen. Dodd's bill might not occur until next week, a revision of earlier statements by a banking committee spokeswoman, Kirstin Brost, that a draft would come out this week and would be marked up next week. With Shelby now back in the mix, however, the fate of an independent Consumer Financial Protection Agency again hangs in the balance, and the agency could end up being folded into an existing department, like the Treasury, as Republicans like Sen. Corker have previously suggested.