A less than foolproof check on Wall Street

By Steve Dzielak

On July 15, fifty-six Senate Democrats, two Independents and three Republicans voted "yes" on the Restoring American Financial Stability Act of 2010 —truly landmark financial reform. President Obama quickly signed it into law. Hooray!

The bill promises "to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes." Will it do all that?

Oregon's Jeff Merkley, one of the Senate’s best on regulatory issues, saw it as “a clear message that the financial security of families and businesses on Main Street must always come before the short-term profits of Wall Street.” The law “will help restore safety and soundness to our financial system and ensure that working families get a fair deal in their everyday financial transactions,” Merkley said.

Merkley and other supporters were ecstatic over the creation of a Consumer Financial Protection Bureau (CFPB) to protect consumers from such financial traps as unfair overdraft fees and exploding interest rates. He was not thrilled that the regulators who missed the boat two years ago have been given major responsibility to implement the bill. He stressed the need for vigorous congressional oversight of both regulators and markets.

The Senate’s only real socialist, Bernie Sanders of Vermont, called the overall legislation a “positive step forward” but complained that it doesn’t break up banks deemed “too big to fail,” and fails to impose a cap on runaway credit card interest rates. On the plus side, he praised the bill for lifting “the veil of secrecy at the clandestine Federal Reserve" by directing the Government Accountability Office (GAO) to review all emergency actions by the Fed since the start of the financial crisis in 2007; to investigate apparent conflicts of interest involving the Fed and CEOs of the largest financial institutions, and to divulge the identities of financial institutions that took more than $2 trillion in nearly zero-interest loans or loan guarantees.

One Democrat joined 38 Republicans in voting “No.” Wisconsin's Russ Feingold, a rock-solid critic of Wall voted "No" because “Washington once again caved to Wall Street on key issues and produced a bill that fails to protect the American people from the pain of another economic disaster.”

Ted Kaufman of Delaware was particularly distressed at the scaled back-version of the so-called Volcker Rule (named after former Fed Chair Paul Volcker). Volcker had urged that megabanks not be permitted to own, control and manage hedge funds and private equity funds, and that megabanks be required to put more of their own capital into the hedge funds they managed. Volcker was especially demanding in his call for strict rules on derivatives, which are more like games of chance than investments.

Wall Street being Wall Street, unrestrained speculation is likely to reappear. One thing is likely to make them think twice: a tax on trading in securities and derivatives. Such a tax could be small enough that it wouldn't discourage serious long-term investment in productive businesses, but significant enough to make traders think twice about buying huge volumes of securities only to dump them a few minutes or hours later. It would limit destructive speculation, while raising revenue. The Center for Economic Policy and Research estimates that a tax on trading would reap between $177 billion and $354 billion a year.

One of the law’s biggest pluses was the creation of the Consumer Financial Protection Bureau (CFBP) An article in 2007 by Elizabeth Warren, a Harvard law professor, advocated the creation of such an agency. Amazingly, Congress enacted it into law. Will the Obama administration appoint Warren, a credentialed fighter for consumer rights, to direct CFBP?

Since 2008, Warren has chaired the Congressional Oversight Panel, created to monitor the expenditure of hundreds of billions of taxpayer dollars to bail out Wall Street while struggling to keep distressed homeowners out of foreclosure and small businesses from collapsing.

Warren’s exemplary work on behalf of borrowers has been recognized by the administration. But Warren and Treasury Secretary Tim Geithner have had a frigid relationship. Warren grilled Geithner on his policies and performance during his four appearances before her panel last autumn. Just this past June, she criticized the administration's lackluster foreclosure-prevention plan, and questioned Treasury's commitment to homeowners.

How can the same legislation be at once so flawed AND the biggest thing to hit banking and finance in decades? It’s because the new law is the imperfect product of a war between Wall Street’s lobbying battalions and those courageous members of Congress who responded to the seething outrage at the grassroots.