Jun 14th 2010

Big Banks Make Desperate Last Ditch Effort to Weaken Wall Street Reform

by Robert Creamer

Robert Creamer is a long-time political organizer and strategist and author of the recent book: "Stand Up Straight: How Progressives Can Win," available on amazon.com.

Everyday Americans have made big progress advancing legislation to rein in the recklessness of the big Wall Street Banks that led to the economic collapse and cost eight million Americans their jobs.   Now we have to win one final battle to get a tough bill that will hold Wall Street accountable signed into law. 

Conferees from the House and Senate began meeting yesterday to merge their Wall Street reform bills. The big Wall Street Banks are pulling out every stop in a last ditch effort to cut tough provisions from the bill.  An army of their lobbyists has descended on the Capitol.  It’s up to us to stop them. 

Their best hope is darkness.  The big Bank lobbyists would love to stick a shiv in important provisions of the bill as quietly as possible somewhere in a back room.  Unfortunately for them, the Democratic leadership has done everything it can to make quiet back room dealing difficult.  They plan to televise proceedings of the conference for all the world to see.

Both Senate and House bills include strong provisions – though in general – the Senate bill is tougher.  The Senate bill will be used as the template of the conference.

The battle involved is basically a zero sum game.  Everyday Americans will benefit if the final measure includes the strongest provisions of both bills.  Wall Street – having concluded that a bill cannot be stopped -- wants the weakest bill possible.

Three broad issues are really at stake:

·       The desperate need to rein in the unrestrained greed-fueled recklessness that caused the financial system to collapse and cost 8 million Americans their jobs.

·       The size and political power of Wall Street – and the entire financial sector – relative to the real, productive economy.

·       The ability of the new Consumer Financial Protection Bureau to protect consumers from financial abuse.

These issues will be fought out over a range of specific provisions, but three battlefields are especially noteworthy.

1). Wall Street is apoplectic over the Senate provision – sponsored by Senator Lincoln of Arkansas – that would require them to separate their derivatives trading from normal banking operations that receive access to the cheap funds from the Federal reserve that are available to commercial banks.

Derivatives are basically bets that the price of an underlying asset will go up or down.  And they get complicated.  A derivative can be a bet on a bet on a bet. While some businesses use derivative contracts to hedge their risk, most derivative trading is basically gambling. The premise of the Lincoln provision is simple: speculative activity like trading in derivatives should be separated from the normal activities of banking. 

This was the case for over 50 years under the Glass-Steagall Act that was passed after the financial panic that lead to the Great Depression.  But Glass-Steagall was repealed after heavy lobbying from the geniuses on Wall Street in the late nineties, and that lead to an explosion of speculative derivatives trading by a narrow group Wall Street banks that grew “too big to fail” and ultimately brought down our economy.

 So it makes enormous sense to resurrect a wall between the economically productive activity of bankers that allocate credit to businesses, entrepreneurs, and homeowners on the one hand and gamblers and speculators on the other.

True banking, after all, involves evaluating the soundness of businesses, the underlying value of collateral, the credit worthiness of individual customers.  Speculation involves betting on the movements of markets.  Sometimes speculators bet that the market will go up.  Other times, speculators bet that the value of the underlying asset will drop – they bet on failure and collapse. 

Not a good idea to combine these two functions in the same institutions – especially when banks have access to favorable credit terms from the Federal Reserve that are intended to provide rock bed soundness to the American banking system.

Wall Street claims this provision will cost them billions of dollars – that derivatives trading will move off shore.  In fact, of course, many other countries are moving to rein in – and in some cases ban -- some of these forms of derivative trading.  The fact of the matter is that restrictions like the Lincoln provision will help prevent another financial collapse precipitated by the recklessness of the multi-million dollar bonus crowd and its “too big to fail” bailout aftermath.  What’s more it will also seal off one more way the Wall Street has managed to sop up increasing amounts of money from the real economy.

2). The second provision that has Wall Street squealing like stuck pigs is Senator Durbin’s provision to limit the interchange fees the big Bank credit card operations can charge retailers.  Credit card fees of all sorts – including interchange fees paid by retailers when customers use credit cards – are a major means through which the financial sector has siphoned off money from the real economy.

Bank profits in the first quarter of this year soared to $18 billion, of which almost 87% ($15.6 billion) went to the big Banks who benefit from much lower cost of funds they can lend than their smaller competitors. 

When it comes to the credit card portion of their business, there is no real competition. The top three issuers control 52.82% of the consumer market (JPMorgan Chase 21.22%, Bank of America 19.25% and CitiBank 12.35%).  Add American Express (10.19%) and Capital One (6.95%) – and it becomes clear that five firms control almost 70% of American’s credit card market.

On the merchant processing side, the same is true. Eighty percent of the market is controlled by the top 10 banks. 

Competitive pressures do not prevent big Banks from charging huge interchange fees to merchants for the privilege of taking their bank cards. And then the big banks make money coming and going.  They extract $48 billion per year from interchange fees alone and then turn around and get the consumer to pay an annual credit card fee plus 15% to 29% in interest annually on funds that the big Banks borrowed at an astounding .9% in the first quarter (that’s less than one percent) – the lowest rate since the FDIC has been keeping records.

And then what does Wall Street do with the money?  According to a report by New York Attorney General Andrew Cuomo, employees at nine banks that received money from the TARP bailout received a combined total of $32.6 billion in bonuses. As the Wall Street Journal reported, the bonuses included, “more than $1 million apiece to nearly 5,000 employees – despite huge losses that plunged the U.S. into economic turmoil.”

During the period 1973 to 1985, the financial sector never earned more than 16% of domestic profits.  This decade, it has averaged 41% of all the profits earned by businesses in the U.S.  In 1947, the financial sector represented only 2.5% of our gross domestic product. In 2006, it had risen to 8%.  In other words, of every 12.5 dollars earned in the United States, one dollar goes to the financial sector, much of which, let us recall, produces nothing.

Wall Street’s expansion is one big reason that most of America’s economic growth during the last decade flowed into the hands of investment bankers, stock traders and partners in firms like Goldman Sachs. The Center on Budget and Policy Priorities reports that fully two-thirds of all income gains during the last economic expansion (2002 to 2007) flowed to the top 1% of the population.  And that, in turn, is one of the chief reasons why the median income for ordinary Americans actually dropped by $2,197 per year since 2000. 

Time to cut off one more siphon that the big Banks use it to extract money from the pockets of everyday Americans -- and the real economy -- and transfer it into the hands of Wall Street Bankers.

Lobbyists for the big Banks say that if Congress includes Durbin’s interchange fee provisions the costs will be born by everyday people.  If that were so, the big Banks wouldn’t be lobbying so hard to prevent it from being included in the final bill.

3). A third area where special interests will seek to weaken the bill is by carving out exemptions from coverage by the new Consumer Financial Protection Bureau.            

In particular the auto dealers are trying to convince Members of Congress that they should not be subject to consumer protection requirements when they make or arrange auto loans.

Think of the chutzpa.  Auto loans are the number one source of consumer complaints to the Better Business Bureau and auto dealers think they – of all people -- should be excluded from the consumer protection law?

Any Member of Congress who would fall for that wins the gullibility of the year award.  You wouldn’t want to rely on someone that gullible to help you shop for a used car, much less write the laws of the land.


Robert Creamer's recent book: “Stand Up Straight: How Progressives Can Win,” available on amazon.com.


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