Why We Can’t Fix Wall Street

There are two articles out that provide the beginning of an explanation of why even good progressives like Dick Durbin and Barney Frank can’t fix our finance system.

Trade Organizations as a Wing of the Republican Party

First, there’s the smoking gun proof that–at a moment when big banks were preparing to negotiate with Dick Durbin on cramdown legislation–banking’s trade organization was attacking that cooperation in conjunction with Republicans. HuffPo’s Sam Stein has posted the email from Tanya Wheeless, president & CEO of Arizona Bankers Association.

Subject: Cramdown Update

Hi All–

Just a quick update in case you were not aware. I’m sorry to say that Chase, Wells, and B of A have been working with Durbin on a cramdown compromise since last week. So far, none of the national trades are at the table. I’ve been told that ICBA is working on a press release to admonish them for trying to cut a deal. The good news is, they aren’t there yet. Apparently, they gave Durbin a wish list awhile back and in his desperation to get something, he’s given on most everything. Reid told Durbin he had until the end of recess to get something done, but it looks like Reid may be willing to wait a little longer if they’re at the table.

I have contacted the market presidents for each of the three banks and explained that in my humble opinion it’s a big mistake to cut a deal with Durbin and alienate our (in Arizona) Senator. I also told them that I thought this would drive a wedge in our industry. Kyl has pointedly told them not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring or systemic risk regulation.I know the [sic] every state association will have to do what’s best for its members, but I have told my largest three members that if they cut this deal, AzBA will fight them on it. They may be willing to alienate Republican leadership, but I’m not quite there yet.

This is the President of a trade association, bullying her largest members, to serve the command of John Kyl. (Arizona, of course, is one of the leading states for foreclosure rates, so Kyl is basically working directly against the interest of his constituents.) And, voila, we still don’t have cramdown. Or, for that matter, regulatory reform (yet).

Hiding the Banks behind the Airplanes

Meanwhile, this Michael Hirsh article explaining how Barney Frank failed to close some loopholes in derivatives legislation describes Main Street companies fronting the lobbyist efforts of the banks–so basically Main Street appears to be fighting to keep the customized derivatives that their bankers charge them extra for.

According to insiders and industry e-mails obtained by NEWSWEEK, the banks have sought to stay in the background and put their corporate customers—a who’s who of American business, including Apple, Whirlpool, and John Deere—out in front of the campaign. “This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints,” says a congressional staffer involved in drafting the legislation. The staffer, who would speak only on condition of anonymity, passed on to NEWSWEEK nine pages of proposed changes in the legislation intended to protect trading from open scrutiny—all of it on paper without a letterhead—that she says came from Goldman Sachs. Samuel Robinson, a spokesman for Goldman, says “it’s not our document” but adds that Goldman has “an active and appropriate involvement in the process of government” and supports “sensible reform.”

The financial industry has argued that curbs on derivatives don’t hurt just Wall Street but also the corporations in Main Street America—the “end users” —that need them to hedge risks. Airlines, for example, use derivatives as protection against sudden gyrations in fuel costs by “swapping” interest-rate payments or currencies with other companies. No one doubts derivatives are useful for that. What upsets Wall Street critics is that the banks that sell these contracts to corporations prefer the derivatives to be privately negotiated off exchanges. The more custom-made and out of public sight a derivative is, the harder it is for investors—and regulators—to assess its fair value and real risk. This makes it easier for the banks to charge a large “spread” and earn big profits. “It’s like the used-car market, except that it’s even less transparent,” says Adam White, a derivatives expert at White Knight Research in Atlanta. The banks deny critics’ charges that they are keeping prices high; many end-user companies are willing to do the deals privately because they aren’t required to post -capital to cover margins, as regulators would require.

All this, so Goldman Sachs can hide the influence it continues to have on federal legislation.

We’ve all gotten much better at unpacking the direct influence that industry has in DC. But these two stories show that the indirect influence is significant–and powerful.

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32 replies
  1. Rayne says:

    Two angles of attack which could change this:

    — The smaller state banks know they have been f*cked over by the national banks due to subprime mortgages. In other words, when the nationals dealt in subprimes and the subprimes failed, they crashed the property values at local level. This damaged the smaller local banks who were more solvent and also were less likely to do rash, imprudent lending, damaging them. The tack to take is rally the states’ attorneys general and the smaller state banks to demand investigations into the subprime market AND to develop state-based facilities to assume the at-risk mortgages from the national banks. If the Obama administration put the squeeze on them from both directions, this might work. (Keep in mind Spitzer’s WaPo op-ed about predatory lenders when you mull this over.)

    — There needs to be a bigger sales job by the administration to those industries which need derivatives because they are heavily reliant on commodities. I wonder if there is a case to be made that derivatives have caused a new kind of volatility and risk instead of removing volatility and risk as they were supposed to.

    Transportation & chemical industries to name two, have a vested interest in improving the hedging process. There needs to be an intra-industry program to develop hedges to soften the impact of commodity volatility which eliminates the middle man (financial industry), is more transparent and accomplishes the task at hand. It can be done; it’s what Enron was originally trying to do before it went off the rails and got greedy/corrupt/stupid.

    • klynn says:

      Your first point is spot-on Rayne.

      The tack to take is rally the states’ attorneys general and the smaller state banks to demand investigations into the subprime market AND to develop state-based facilities to assume the at-risk mortgages from the national banks. If the Obama administration put the squeeze on them from both directions, this might work. (Keep in mind Spitzer’s WaPo op-ed about predatory lenders when you mull this over.)

      (my bold)

    • readerOfTeaLeaves says:

      There needs to be a bigger sales job by the administration to those industries which need derivatives because they are heavily reliant on commodities. I wonder if there is a case to be made that derivatives have caused a new kind of volatility and risk instead of removing volatility and risk as they were supposed to.

      I nominate this as “Comment Understatement Of the Year!!”

      However, I have no hubcaps to authorize.
      So EW and bmaz… any chance of a competition on this topic…?

  2. readerOfTeaLeaves says:

    Kyl has pointedly told them not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring or systemic risk regulation.I know the [sic] every state association will have to do what’s best for its members, but I have told my largest three members that if they cut this deal, AzBA will fight them on it. They may be willing to alienate Republican leadership, but I’m not quite there yet.

    This woman needs to wake up.
    Kyl’s power is diminishing; he’s in the cohort with Grassley, Toobz Stevens, Inhofe, and the Glory Days of GOP control of the Senate.
    Those days are not coming back.

    Meanwhile, the Congressional staffer who showed those Goldman Sachs documents to Newsweek should get an award of some kind as a whisteblower. OMG, I’d love to see the fun that Sen Franken, Sen Cantwell, Sen Durbin and a few others could have with that language on the floor of the Senate.
    I hope they chortle till their sides ache.

    Shorter Goldman: ‘We’d speak for ourselves, but we have political cooties so we have to hide behind Apple and other companies whose stock prices we’ve manipulated like kids with yo-yo’s for years now… waahhhhhhhhhhhh!’

    So when the Wahbulance comes to pick up the Goldman Sachs lobbyists, maybe it’ll be kind enough to pick up Ms. Wheeless, as well?

    What a pack of whiners, still worshipping a broken, corrupt system.
    Idiots.

  3. Mary says:

    Part of what is so depressing about that is Kyl saying – don’t cut a deal of any kind with the Dems (no matter how good it is for you or the industry) instead of saying – give us your concerns and work with the Republicans to cut a deal with the Dems.

    It really is a line drawn to fight anything coming from the Dems just to fight it and for no other goal, as opposed to saying “side with us and let us side with you to cut the best deal” Getting a good deal for anyone or everyone is nowhere near as important as shunning Dems.

  4. earlofhuntingdon says:

    Thanks for another good piece. It’s a wonderful contrast to the output of the WaPoop’s self-proclaimed, overworked Dana Milbank.

    Cramdown is pretty basic, and none of it is good news for lenders. It’s pro-consumer/debtor. It’s the slippery slope for more comprehensive legislation, especially once Congress sees how wildly popular reinstituting an effective cramdown would be. A simple provision like cramdown would significantly improve how courts, banks and borrowers interact. It would give the bankruptcy court an effective tool to rein in egregious lenders, which would allow borrowers to force lenders to renegotiate loans outside of bankruptcy. It would thereby allow many to keep their homes, preserving their self-respect, productivity, and their communities in the process.

    What’s not to like? Cramdown forces banks to take a haircut, and to take it sooner rather than later. When banks renegotiate a loan, reducing the amount owed or the interest rate or variability of the interest rate associated with it, they have to lower the market value of that asset on their books.

    Cramdown also changes the cost-benefit analysis of using bad faith delays against borrowers. Refusing to renegotiate loans outside of bankruptcy now makes banks money. If cramdown comes back, bad faith delays and refusal to negotiate in good faith will cost them money.

    Cramdown would challenge the banks’ now dominant “default income” business model. It also shines a bright light on a white elephant in the bank lobby that is an essential feature of that model. Few banks own their mortgages. They are collection agents – loan servicers – for fungible securities holders who own disparate, fractional interests in loans that have been aggregated into large pools. They can’t renegotiate a loan if they don’t own it or have authority from the holder – the securities owners – to renegotiate.

    In order to renegotiate a mortgage loan, a lender also has to show, revise and re-sign new paperwork – the loan documents. They have written that cost out of their models, and in many cases, they may not have or be able to get the correct paperwork. If they can’t provide it to a borrower, they won’t have it to show to a court. If they can’t show that they own the loan, and that it’s associated with a corresponding valid mortgage on the real estate, they are in a poor position to enforce payment.

    The current system is built around the assumption that the apparent lender has non-challengable, enforceable rights against the borrower. When it has to put up or shut up, the bank/loan servicer – and the entire system – is in a pickle.

    Sen. Durbin would be doing a huge service to America, to its homeowners, the middle class and, yes, to banks, if he succeeds and forces through an effective cramdown provision. We’d all be better for it, and banks might get back to banking.

    • Leen says:

      Forgot to mention that Barney is so “progressive” cough that he voted to oppose the Goldstone Report. How “progressive” of him

      BILL TITLE: Calling on the President and the Secretary of State to oppose unequivocally any endorsement or further consideration of the “Report of the United Nations Fact Finding Mission on the Gaza Conflict” in multilateral fora

      http://blog.unwatch.org/?p=511

        • Leen says:

          yes

          Watching some of our Reps on C-span addressing climate change or not. A bunch of these folks are seriously back in the dark ages

          • fatster says:

            Pls go to the end of the “Made in China” article. I left several links in the last few comments there. They are for you and others interested in where to buy stuff not MIC, etc. Thnx.

      • fuckno says:

        His ethnic background may have swayed his decision on the Gaza issue, just as his Alma Matter is coloring his financial industry ‘reform’.

  5. MadDog says:

    OT – Don’t know about anybody else, but I plan on listening in tomorrow:

    ACLU Teleconference Thursday At 10:30 AM: The Obama Administration And Impunity For Torture

    Experts Will Discuss Major Civil Lawsuits, The Forthcoming OPR Report And The Obama Administration’s Efforts To Shield Bush Administration Officials From Accountability For Torture…

    …WHAT:
    Teleconference featuring ACLU experts discussing major civil lawsuits, the forthcoming OPR report, lack of transparency and the Obama administration’s efforts to shield Bush administration officials from accountability for torture, followed by a question and answer period for members of the media

    WHO:
    Jameel Jaffer, Director, ACLU National Security Project
    Ben Wizner, attorney in the ACLU’s rendition lawsuit against Boeing subsidiary Jeppesen DataPlan
    Alex Abdo, attorney in the ACLU’s torture FOIA lawsuits
    Christopher Anders, ACLU Senior Legislative Counsel

    WHEN:
    Thursday, December 10, 2009
    10:30 a.m. EST

    CALL-IN INFO:
    United States: (800) 288-9626
    International: (612) 332-0335

      • MadDog says:

        Could be a snoozer or merely a cheerleading session. Could have some real news.

        Can’t promise what the results will be. I’ll see what is said and then decide whether there’s anything worthwhile to communicate.

  6. fatster says:

    Oh, no, we cant fix Wall Street. And they’ve surely got us in a fix! Another good article, EW, and many thanks for it, as usual.

  7. Hugh says:

    Frank is certainly no progressive on financial reform. The various “reform” bills he has shepherded through his committee are all worthless. The derivative legislation puts banks in control of the exchanges where they would be trading them and which in some cases like the ICE they own. It allows them to keep the nasty dangerous stuff ou of the exchanges. The CFPA has been effectively gutted. The only halfway decent measure is the auditing of the Fed, which I believe he opposed.

    There are dozens of excellent reforms that he left out of the bills (I have made lists time to time of them). Bottomline, both Frank and Dodd are in the bag for the financial industry.

    As for Durbin, I used to like him but he simply has no follow through.

    • earlofhuntingdon says:

      I’m afraid that’s right, on all three counts. Dodd and Frank being in the bag for big finance in NYC and Boston, and Durbin lacking the ability to follow through on his progressive noises.

    • readerOfTeaLeaves says:

      Frank seems to increasingly reveal himself as suffering from Ideological Capture Syndrome. In his case, by banksters.

      As for Dodd, I don’t have enough info to judge.

      But at this point, I’d trade either of them for Eliot Spitzer ;^}

      • Leen says:

        Spitzer is one sharp fella…makes a great deal of sense. Have heard him on the Ed show and Chris Matthews

  8. georgewalton says:

    Frank is certainly no progressive on financial reform. The various “reform” bills he has shepherded through his committee are all worthless

    Here are Barney Frank’s top five corporate contributers:

    Real Estate $659,408
    Securities & Investment $636,855
    Insurance $585,481
    Lawyers/Law Firms $563,056
    Commercial Banks $505,550

    And if you go to a public watchdog site like opensecrets.org, you can punch in the name of all the other Democratic Party power brokers in Congress [and the White House] and come up with much the same duplicity.

    For example, here are the top ten corporate doners for Barack Obama. Take a gander at these enormous sums of money going back only to 2006:

    Lawyers/Law Firms $45,518,596
    Retired $43,735,259
    Education $23,459,325
    Misc Business $16,668,854
    Securities & Investment $15,983,457
    Health Professionals $12,093,433
    Business Services $12,008,416
    Democratic/Liberal $11,229,581
    Real Estate $11,036,591
    TV/Movies/Music $9,265,115

    Or Rahm Emanuel, Mr. Fixer:

    Securities & Investment $1,600,542
    Lawyers/Law Firms $740,518
    TV/Movies/Music $465,864
    Real Estate $341,125
    Commercial Banks $276,350
    Health Professionals $251,850
    Misc Finance $244,500
    Insurance $238,750
    Pro-Israel $230,405
    Business Services $198,175

    Who do you think he did the fixing for?

    The system is Wall Street in Washington.

    Indeed, the only reason this information is circulating now is because the economic crisis and the Wall Street bailout started nudging people into exploring these relationships more fully.

    Nothing will change until this does.

    • readerOfTeaLeaves says:

      Awesome. Thank you.

      Just landed on Alabama’s Gov Riley (whose name I associate with a certain ‘Siegelman’ case) on Morning Ho, talking about why all the car companies have/are relocating to the luverly, beeeutiful southern USA.

      Rayne, do not watch without your favorite beverage close at hand.
      EW… don’t let Mr. EW watch it 8-0

      (Oh, if only the brilliant TBogg would write about this Morning Ho segment… ‘Twould be a treat.)

  9. Leen says:

    “Why can’t we fix Wall Street”
    Uh because they own us

    Uh because They have congress by the balls

    Because they set the rules, break the rules, take the money and then set the new rules.

    Revolving door operating

    no Resolving doors in play

    Hank Paulson, Geithner, Rubin, Greenspan, Summers,

  10. JohnEmerson says:

    Frank is partnering with Collin Peterson on an amendments, which tells you that a.) the amendment has a good chance of passing and b.) it’s no good. Peterson is the alpha Blue Dog.

  11. BayStateLibrul says:

    OT…

    Martha Coakley wins primary.
    Low turnout, only 10% voted.
    Final is on January 19, 2010.
    Could be even lower on that date.

  12. iremember54 says:

    You can’t fix something, until you realize it’s broken.

    The whole Country is clapping that the Banks are making money and everything is getting back into the groove that caused the problem.

    Were clapping that the markets are up.

    Forgetting that nothing has been fixed, repaired, or even regulated.

    The commodities markets are just as free to play, and it’s just a matter of time till the speculators get greedy.

    Washington seems only capable of talking, and actions are almost non existent.

    We can never put the cat back in the bag, until we can catch the cat and have a bag ready. No cat, no bag, no fix, and no hope.

  13. masaccio says:

    On Friday, Steve Cohen is having a hearing on what we are now calling Judicial Mortgage Modification in Federal Courts. There may be some interest in the Senate.

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