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Five Ways the Wall St. Reform Bill Needs to Be Fixed

The Wall Street reform bill in Congress won't live up to President Obama's goals -- unless we can push them to change it.

Despite strong rhetoric against aggressive Wall Street lobbying and deceptive Republican attacks, President Barack Obama appears ready to declare victory on a tepid and ineffective financial reform bill. The aims Obama outlined in his April 22 Cooper Union speech are laudable, but the legislation that cleared the Senate Banking Committee under the stewardship of Chris Dodd, D-Conn., simply will not protect our economy from bank abuses.

Fortunately, it only takes a handful of legislative amendments to fix the Dodd bill. Here they are:

1. Break Up the Banks: The Brown-Kaufman Amendment

Washington has tied itself in knots trying to find a way to thwart "too big to fail" without cutting megabanks down to size. It can't be done. When something is too big, the solution is to make it smaller. Sens. Sherrod Brown, D-Ohio and Ted Kaufman, D-Delaware, introduced a bill this week to cap big bank liabilities at 2 percent of gross domestic product (about $300 billion). Right now, Bank of America's liabilities total 7 percent of GDP (about $1 trillion). Nothing--nothing--that has been proposed other than Brown-Kaufman will force our banking behemoths to shrink.

Obama and Treasury Secretary Timothy Geithner have been saying for some time that size alone isn't the most serious problem in today's financial system. That is simply not true. The bigger the bank, the more power that bank has over Washington, and the greater its ability to block other important reforms. But even if Obama and Geithner were right about size, it's worth asking why anybody in Congress would vote against breaking up the big banks. There is no evidence that banks of today's scale create any economic benefits whatsoever. Even if you don't think size is the central problem, voting in favor of this amendment would create zero economic problems.

If your goal is to protect the bonuses of Wall Street executives this amendment looks terrible. The bigger the bank, the more money its executives can pay themselves. If a $1 billion bank and a $1 trillion bank have the same profitability ratios, and pay out the same percentage of profits in bonuses, then the $1 trillion bank is going to have 1000 times as much money available for its executives.

So make no mistake: a vote against Brown-Kaufman is a vote for big bank bonuses.

2. Protect Consumers: The Jack Reed Amendment

The most significant proposal Obama asked for when he rolled out his reform plans in June 2009 was the establishment of a new Consumer Financial Protection Agency. Existing regulators are charged with both ensuring bank profitability and keeping consumers safe from abuses. In practice, this has meant that regulators look the other way on predatory lending, so long as it creates big short-term profits for banks. The solution to this problem is a new agency with the power to write and enforce consumer protection regulations for anybody who offers consumer loans.

Dodd essentially gutted the proposal in the Banking Committee in an effort to garner Republican support. (Never mind that zero Republicans on the Committee actually ended up voting for the bill.) Jack Reed has authored legislation that would reverse all of Dodd's useless concessions and restore President Obama's original intent.

There is no reason anybody should oppose the Reed amendment. A vote against the Reed bill is a vote in favor of the banking industry's right to pillage your pocketbook.

3. Reinstate Glass-Stegall: The Cantwell-McCain Amdendment

As Nomi Prins has detailed, Obama and Dodd have diluted the already compromised Volcker Rule into even weaker broth. Volcker had a good idea: Banks that benefit from federal deposit insurance shouldn't be going out and gambling with taxpayer money. Commercial banks that accept deposits and extend consumer and business loans are the core of the financial system. If they go down, the payments system dissolves, people cannot pay for goods and services with money, and we're back to the barter system. We shouldn't be subjecting such a critical economic function to the risks inherent in the securities markets.