Thursday, August 22, 2013

Why Wall Street Will Never Be Reformed

5 years ago on September 15 America received a wake-up call when one of the oldest Wall Street banks, Lehman Brothers, collapsed.  It was 158 years old at the time - nearly as old as Wall Street itself.  We're talking about something that had survived the infamous "Black Tuesday" stock market crash in 1929, the Great Depression and every other economic downturn that followed after that.  But it could not survive the 2008 recession.  That's how bad the 2008 recession was.  Normal recessions just kill off companies. The 2008 recession, on the other hand, killed off banks.  Prior to 2008, that kind of thing just didn't happen.  When you catch a cold you expect to cough, sneeze and maybe have a runny nose.  What you do not expect to happen is for your head to fall off of your body like some kind of bad episode of Walking Dead.  That's basically what happened in 2008 to the American economy.  We thought that our economy had caught the typical cold but by the time we reached for the Robitussin its head fell off.

In order to make sure our head doesn't fall off again, we made a new law called the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (or just simply "Dodd Frank" for short).  We've written about this before (see HERE and HERE).  The only problem is, even though this law was approved by Congress and signed into law by President Obama, we still haven't put this law into place yet.  Why not?  Because Wall Street won't let that happen.  Oh wait, you thought Congress and the President were in charge of making the laws?  Think again.

Per HuffPo:

So far, regulators have missed 60 percent of the rule-making deadlines, according to an analysis by the law firm of Davis Polk, which has been tracking progress on the bill. Even so, the rules are so complicated that the ones already written have filled about 13,800 pages, compared with the 848 pages in the law itself.
"I would have to give it a mediocre grade at this point," said Sheila Bair, the former chair of the Federal Deposit Insurance Corp. "Most of the rules have not been finalized. A lot of them haven't even been proposed yet. When some of the rules have been proposed, they're highly complicated, they're riddled with exceptions, they're watered down."Dennis Kelleher, president of Better Markets Inc., a bank watchdog group, said Obama needs to hold monthly meetings with regulators and fight for more money for the financial regulators to do their job.
But that's never going to happen.  Wall Street lobbyists run Congress.  Congress, in turn, votes against spending any money on regulators who would, in theory, write the Code of Federal Regulations that would police Wall Street as authorized per Dodd-Frank:

Indeed, some 3,000 lobbyists had swarmed the Capitol in hopes of killing off pieces of the proposed bill—nearly six lobbyists for every member of Congress. For Michael Barr, then an assistant secretary at the Treasury Department, the trench warfare spurred by Dodd-Frank left him shellshocked. “You pick a page at random,” says Barr, now a law professor at the University of Michigan, “and I’ll tell you about all the issues on that page where the fighting was intense.” ...The same financial behemoths that had fought so ferociously to block Dodd-Frank were not going to let the mere fact of the bill’s passage ruin their plans.
Dodd-Frank’s Achilles’ heel is that it leaves the tough work of writing the actual regulations to existing federal agencies like the Federal Reserve and the Securities and Exchange Commission, which had failed so miserably at protecting the public interest in the run-up to the 2008 crash, as well as to backwater independent agencies like the Commodity Futures Trading Commission (CFTC), which was tasked with regulating a derivatives market that played a central role in the collapse of the global economy.
The story of how Wall Street lobbyists worked the halls of Congress, blocking the appointment of Elizabeth Warren, Obama’s first choice to head the CFPB, or pushing bills aimed at defanging Dodd-Frank, is fairly well-known by now. But it was the stealthy work of battalions of regulatory lawyers, who descended on the private offices of regulators deep inside the bureaucracy, that has proven more crucial to the industry’s effort to pick off pieces of Dodd-Frank. There, a kind of ground war has been going on for almost three years, with the regulators waging hand-to-hand combat to defend every clause and comma in Dodd-Frank, and the lawyers fighting to insert any loophole they can to protect their clients’ extraordinary profits. This is how the miracle that was the making of Dodd-Frank—hailed as the most comprehensive financial reform since the 1930s—became a slow-moving horror movie called “The Unmaking of Dodd-Frank”: a perfect case study of the ways an industry with nearly unlimited resources can avoid a set of tough-minded reforms it doesn’t like.
In other words, money talks and, well, you know the rest.  This is why Wall Street will never be reformed.  As long as we allow money and well-funded special interests to play a role in our legislative process, how can we possibly expect change to come?  If money writes our laws, then the people with the most money -- which would be Wall Street -- can pretty much write whatever laws they want.  Don't look now, but I think I see our head about to fall off again.

Is there any point in trying to regulate Wall Street?

Do you think we've learned any lessons from the 2008 recession?

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