The Dodd-Frank Act, the 2010 law aimed at preventing another financial crisis, "put in place a variety of measures that work together as a system to protect consumers, hold big banks accountable, and reduce the risk of future crises," Warren said in a statement. "It is dangerous for Congress to amend the derivatives provisions of the Dodd-Frank Act." (Derivatives are financial products that have values based on underlying numbers, like crop prices or interest rates; some economists believe these products helped cause the 2007 financial collapse.)
Warren's condemnation of the bills, which just passed out of the House Financial Services Committee (HFSC), echoes a May 6th letter from Treasury secretary Jack Lew to House Financial Services Chair Jeb Hensarling attacking the bills. "The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put into place to strengthen our financial system by improving transparency and reducing risk for market participants," Lew wrote in the letter. "These reforms should not be weakened or repealed." Last year, former Treasury Secretary Tim Geithner denounced a series of nearly identical bills.
"Wall Street's aggressive determination paid off last week" when the bills passed out of committee, Warren said. The bills also have bipartisan support, and have a good chance of being taken up in the Senate. If they do, Warren says she'll go to battle: "Now is no time to go backwards," she said. "I will do what I can in the United States Senate to stand up to those who would chip away at reform."
A bill designed to tie the hands of a key Wall Street regulator is headed for a vote in the House this week.
The SEC Regulatory Accountability Act, introduced by Rep. Scott Garrett (R-N.J.) and co-sponsored by 23 other Republicans, sounds innocuously administrative. The bill would direct the Securities and Exchange Commission (SEC) "to conduct cost-benefit analyses to ensure that the benefits of any rulemaking outweigh the costs," according to a statement by the House Financial Services Committee. Plus, says Garrett, the bill is good for jobs, job-creators, and people who want jobs. "The American people are hungry for common sense reform that will help unleash the economy," he said in a statement. "I regularly hear from constituents, especially job creators, about how Washington red tape needs to be cut."
But financial reform advocates say the bill could kill tons of new regulations designed to rein in the industry that crashed the economy a few years ago. "Cost-benefit has become a favorite club used by industry to try and kill legislation," Dennis Kelleher of the financial reform group Better Markets told me earlier this year. The SEC is in the process of finalizing scores of new rules required by the 2010 Dodd-Frank financial reform law, and reformers say Garrett's bill would force the agency to study the impacts of regulations before they are known, and require analysis that would delay final rules. Not only that, says Kelleher, but the cost-benefit analysis the bill calls for includes only "industry costs," not potential longer term costs to the broader economy that could result from killing these rules. For example, the SEC would have to consider the cost of to industry of making foreign banks adhere to US regulations, but not the cost to the global economy of allowing those banks to be regulated by potentially weaker foreign rules. (Many federal agencies are required to consider cost-benefit analyses when developing major rules, but the SEC and other independent agencies—those outside federal executive departments that are headed by a Cabinet secretary—are exempt.)
The White House slammed Garrett's bill when it was approved by the House rules committee Wednesday, arguing that it would keep the SEC from doing its job. "The Administration believes in the value of cost-benefit analysis," the White House Office of Management and Budget said in a statement. "However, [the bill] would add onerous procedures that would threaten the implementation of key reforms related to financial stability and investor protection." Still, the president stopped short of saying he'd veto the bill.
As my colleague Tim Murphy reported Wednesday, Rep. Louise Slaughter (D-N.Y.), the top Democrat on the House rules committee, attempted to stymie the deregulatory bill by attaching an amendment that would have required political intelligence operatives to register under the Lobbying Disclosure Act and disclose their clients. It was voted down.
Now the GOP bill is headed to the House floor for a vote by Friday. Kelleher has his fingers crossed that the bill doesn't make it into law. "Financial reform does not exist to minimize cost on the industry that almost caused a second great depression," he says.
It looks like one of the primary causes of the 2007 financial crash may be here to stay.
Before the crisis, the credit-rating agencies (such as Fitch, Moody's, and Standard & Poor's) that evaluate the relative risk of investment products offered by Wall Street banks, routinely assigned their highest ratings to bonds built out of junky, high-risk mortgages. Because of those ratings, the bad bonds sold like hotcakes, which in turn encouraged lenders to make more high-risk loans to sell to the banks to package into more risky bonds—and so on until the house of cards came down. (For a great read on all of this, see Michael Lewis' "The Big Short.")
Part of the reason the ratings agencies behaved so recklessly is that they were (and still are) paid by the banks whose products they rate. Yet even now, years after the financial crisis, the Securities and Exchange Commission isn't sure what it wants to do, if anything, about this loaded situation. So it held a roundtable discussion on Tuesday to think about it some more.
Credit-rating agencies "effectively took huge bribes from banks to misinform people about risk," says Marcus Stanley, policy director of Americans for Financial Reform. "This is a critical issue and [the SEC] has taken a complete pass on it" so far.
On Tuesday, fierce consumer advocate and needler of banks Sen. Elizabeth Warren (D-Mass.) called out Wall Street regulators for their habit of giving tepid punishments to misbehaving banks, and asked the agencies to justify their policy of settling with the wrongdoers out of court.
Warren sent a letter to the Justice Department, as well as to the Securities and Exchange Commission and the Federal Reserve, asking them for evidence on how a settlement that doesn't require a bank to admit guilt would be better policy than taking the bad apple to trial. If regulators at least show that they are willing to play tough, she argued, it will help deter bad behavior and allow regulators to negotiate bigger fines in the event of a later settlement.
Late Tuesday, Sen. Rand Paul (R-Ky.) introduced a bill that would repeal part of a law aimed at fighting offshore tax evasion.
The law, called the Foreign Account Tax Compliance Act, was passed in 2010 and is supposed to go into effect on January 1, 2014. It requires foreign financial institutions to report information about Americans with accounts worth more than $50,000 to the IRS. Firms that don't comply will be fined.
Tax policy watch dogs say the FATCA is essential to rooting out tax cheats. "The increased bilateral exchange of taxpayer information that...[is] crucial to cleaning up the worldwide shadow financial system," Heather Lowe, director of government affairs for the advocacy organization Global Financial Integrity told Accounting Today earlier this month. "[F]oreign financial institutions should not harbor the illicit assets of U.S. tax evaders."
But Paul's bill to weaken the law was immediately hailed as "heroic" by the biggest independent financial advisory firm in the world. In an email press release from the deVere group, chief executive Nigel Green said, "Senator Paul’s heroic stance against this toxic, economy-damaging tax act is a landmark moment in the mission to have it repealed. He has taken a courageous stand against FATCA, [a law that] will impose unnecessary costs and burdens on foreign financial institutions."
Paul, generally a die-hard anti-taxer, says the intent of his bill "is not to disrupt legitimate tax enforcement." Instead, he says he objects to FATCA because it "violates important privacy protections," by giving foreign governments too much access to US citizens' tax information. Paul says he is only in favor of repealing those provisions.
But Paul has a long history of fighting the offshore-tax evasion law. Since FATCA was signed, the Treasury Department has been negotiating and signing treaties with over 50 countries to implement the law's provisions. Paul has put a hold on Senate approval of all tax treaties since he was elected in 2010, and as such has been blamed for trying to block FATCA.
A companion version of Paul’s bill is expected to be introduced in the House soon.