How Washington Is Doing Its Best to Ensure Another Financial Crisis Is Coming
The following is an excerpt from We Don’t Have an Endless Amount of Time, a new book from The District Sentinel.
If fighting corporate rule in Washington sometimes overwhelms progressives, they can take comfort in one fact: even the most mild of reforms inspire theatrical pants-shitting on the right.
In August, for example, after the Securities and Exchange Commission passed a rule requiring companies listed on the stock exchange to reveal CEO compensation relative to median pay, a Republican member of the SEC described the move as ushering in a new era of anti-capitalism. In his dissent, Commisioner Michael Piwowar said the rule smacked of “Saul Alinskyan tactics” and grander machinations.
“Nearly fifteen years ago, Big Labor supporters published a book called Working Capital: The Power of Labor’s Pensions that contained a strategy to remake the capital markets with a so-called ‘worker-owner’ viewpoint,” he explained. “The worker-owner approach would aim to ‘inject workers’ welfare, broadly understood, into investment priorities’...and principles that guide capital allocation.’”
Labor organizers could be forgiven for admiring Piwowar, for seemingly believing that a bit of transparency will yield Full Communism, when even the most minor of leftish achievements in the US typically result from Sisyphean toil (and only after right-wing catastrophe).
The truth is that the CEO Pay Ratio rule, more than anything, exemplified Wall Street’s handle on the United States government. The SEC had been ordered to make the rule about a half-decade before, by Dodd-Frank financial reform. It might have floated eternally in regulatory purgatory but for a bit of “name and shame” in the Senate.
In June, Sen. Elizabeth Warren (D-Mass.) had written to SEC Chair Mary Jo White, demanding to know why White said in a previous meeting that the rule would be finalized “by fall” on the same day that the White House later said it would be ready in April 2016.
“I am perplexed as to how and why you would have provided me with this misinformation,” Warren said, claiming “there could not have been a misunderstanding.” Eight weeks later, a final rule was adopted. No means of production were seized in the aftermath.
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As already alluded to, the vast majority of pressure on the financial regulatory regime in 2015 was coming from the industry. After Republicans took back the Senate and control of both chambers for the first time since 2006, they attempted to enact all sorts of Dodd-Frank rollbacks. But the biggest and most successful push actually came just after the 2014 midterm.
Backed by a lobbying initiative led, in part, by Citigroup and JP Morgan CEO Jamie Dimon (who personally phoned lawmakers), conservatives proposed exempting vast quantities of derivatives trades from a Dodd-Frank rule that was set to take effect in 2015. Section 716—the so-called “Prohibition against Federal Government bailouts of swaps entities”—was written to limit the types of speculative trades that can be made with consumer savings, which are guaranteed by the federal government. The idea behind the regulation was to diminish private risk with nationalized insurance. It didn't stand a chance.
During end-of-the-year budget haggling that coincided with yet more GOP government shutdown threats, the “swaps pushout” was attached to must-pass legislation. Sen. Warren whipped for a “no vote” on the package, denouncing it as a deregulatory Trojan Horse. She nearly succeeded, but the “cromnibus” was carried by the Wall Street wing of the Democratic Party, squeaking through the House by thirteen votes. (A great number of the Dems who carried it, it should be noted, were among the party's top beneficiaries of JP Morgan and Citibank campaign donations).
Warren, however, wouldn't soon forget the treachery. After a lengthy investigation, she and Rep. Elijah Cummings estimated in November 2015 that the repeal kept $10 trillion worth of derivatives trades tied to public guarantees. Warren called it “a lot of risky business” from the Senate floor. “The whole TARP bailout was less than $1 trillion,” she said.
Warren also noted that Citigroup, Dimon’s JP Morgan Chase, and Bank of America were found to have been “gobbling down most of this $10 trillion in risk.” Whoever points to the myriad debt ceiling crises to say that nothing got done in Washington under Speaker Boehner is besmirching the good name of Wall Street lobbyists.
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Underpinning anxiety about the swaps push-out were fears—not since assuaged—that another massive financial calamity is far from being out of the question. In late 2014, a Treasury Department research arm created after the crisis identified potential systemic pitfalls. Inadequate collateral across-the-board could lead to a credit crunch in the event of a downturn, the Office of Financial Research (OFR) warned. In other words, Very Serious People were somewhat concerned about loads of investors getting caught in a pinch with their pants around their ankles, as they had in a big way in 2008.
To that end, OFR also fretted about more and more economic activity gravitating toward “difficult to assess” sectors since the collapse. “Assets under management have increased ten-fold over the last five years, driven by a search for yield and a hedge against an eventual rise in interest rates,” it said. The trend led to risk being “concentrated in non-bank entities that are not directly regulated by banking supervisors” (i.e. hedge funds, asset managers, and Exchange-Traded Funds).
In the summer of 2015, concerns about stability flared up in Washington; at least for a few news cycles. On Aug. 24, a nosedive by the stock market in Shanghai spread panic throughout the world—first in Europe, then on this side of the Atlantic. Key indices in Frankfurt, Madrid, Paris, and London shed about five cents on the dollar that day. As New Yorkers drank their morning cawffees, the Dow Jones Industrial Average (DJIA), the S&P 500 and the NASDAQ Indexes all started having a serious case of the runs.
The White House, however, seemed confident about its approach to the whole thing. Josh Earnest, on the same day, encouraged reporters to “take a look at the impact of Wall Street reform legislation.”
“US banks have reduced their leverage and added $600 billion in capital since 2009,” he said. “Some of that is related to new requirements under Wall Street reform. Banks are less reliant on unstable short-term funding, and they’re better able to withstand short-term volatility in financial markets.”
Speaking over the White House Press Secretary Earnest, however, were nosediving markets. The DJIA shed 3 percent of its value by the end of the day—the eighth worst in its history, in absolute terms. By the middle of the week, the sell-off saw $2.1 trillion in wealth evaporate.
OFR took note of the tumult in its 2015 annual report. The “macroeconomic risk” to the United States, it said, was “moderate,” but “elevated and rising” in certain sectors, with “deterioration concentrated in emerging markets.” More bad news about the troubled Chinese economy could inflict serious pain on this side of the Pacific, with our highly financialized system bound to magnify the problem. If that comes in 2016, Earnest might not be so quick to cite President Obama's impact on the financial sector—unless, by then, he is working for the Bernie Sanders campaign and posting a teary mea culpa on Medium.
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The administration, to its credit, did in 2015 seek to get ahead of some problems. But in one major case, it was after markets had already exposed regulators as being behind the curve.
On Oct. 15, 2014, Treasury bond yields fluctuated in what was their fourth most volatile trading day since 1998 (like 2008, a year synonymous with worldwide instability). The violent swing had particularly troubled global economic gatekeepers because Treasury bonds are widely seen as safe bets, and because it had happened in the absence of a major news event. In OFR's words: there was a “lack of a significant fundamental driver.” It wasn't exactly something that could be explained by an ECON101 professor.
A year later, regulators responded by proposing safeguards on computerized trading, including High-Frequency Trading. A cross-agency investigation published in the summer had found algorithmic transactions featured heavily in the Oct. 15 “flash.” Commodities Futures Trading Commission Chair Tim Massad pointed out that many other increasingly automated markets seemed to be increasingly “irrational” in similar ways.
“In just this year, for example, there were about 35 events meeting this [Oct. 15] definition [of “flash” volatility] involving the [West Texas Index] crude oil contract,” Massad said. He noted flash days were also quite common in corn, gold and other commodity markets. “In fact corn, the largest grain futures market, averaged more than five such events per year over the last five years.” he remarked. In November, the CFTC got started on the lengthy rule-making process, on “malfunctioning algorithms.”
The SEC, too, vowed to apply tougher regulatory standards to a sector of the financial sector that had gotten ahead of it—the asset management industry (the very same that troubled OFR). Mary Jo White, in November, said asset managers would soon be subject to stress tests, living wills, and additional rules on derivatives trades.
That the outcome of these rules are still very much in doubt does not bode well for those concerned that the United States failed to learn the lessons of the last catastrophe. The administration's refusal to disavow hands-off regulation surfaced throughout 2015—like when global financial regulators declined to name the largest asset managers in the world “systemically important,” shadowing a move made by the Obama admin the year before.
White's SEC was singled out as being uniquely captured, and in June, Warren called into question the very legitimacy of her. The senator pointed out how the SEC chair's personal ties to the finance industry have seen her frequently sitting out of enforcement rulings, as ethics rules dictate she must (White's husband, John, is an attorney for the securities law-practicing Manhattan-based firm, Cravath, Swaine & Moore).
“As you know, the impact of a recusal on the operations of the SEC can be quite damaging,” Warren said. “If, for example, the SEC is split 2-2 on whether to pursue a prosecution, your recusal would mean that no prosecution could go forward.”
Noting White's propensity to waive penalties to large banks, Warren then questioned what she was even doing in Washington. “You have now been SEC Chair for over two years, and to date, your leadership of the Commission has been extremely disappointing,” the senator wrote.
The White House wasn't at all concerned about this apparent laissez-faire stroke seizing one of its key regulatory organs. Josh Earnest shrugged off the broadside, telling reporters at a press briefing that “the President does continue to believe that [White] is the right person for the job.”It was after the same inquiry from Warren wondering why White seemingly lied about the timing of the CEO-median pay ratio rule.
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The White House's defense of its SEC Chair followed something of a pattern—one which started with Warren launching into pointed, substantive criticism of the administration. To which, it would reply: meh.
Amid her and Cummings' investigation of the swaps push-out, for example, Warren questioned if a Fed official—Alan Greenspan acolyte and top Fed lawyer Scott Alvarez—enabled Wall Street lobbyists to kill the bailout prohibition.
“Mr. Alvarez openly criticized the swaps push-out rule, saying ‘you can tell it was written at 2:30 in the morning and so it needs to be, I think, revisited just to make sense of it,’” Warren said in February, grilling Janet Yellen about the extent to which the statement reflected Fed policy. “Did Mr. Alvarez provide input into the Fed’s decision to delay the effective date of the push-out rule?” Warren asked.
The Central Banker admitted that she didn’t know if Alvarez’s personal disdain for the rule bought Wall Street time. She did, however, after the hearing say that she “depend[s], with confidence, on Scott Alvarez’ expert advice and counsel” and called him “a dedicated public servant who is committed to thoughtful public policy.
And later, after releasing the findings of the “swaps push-out” repeal investigation, Warren and Cummings reported that the CFTC and the Fed couldn't (or wouldn't) give them a topline estimate of how many trades remained hinged on taxpayer-guaranteed savings (the $10 trillion number came from the FDIC and the OCC). And none of the four regulators they reached out to did an impact assessment of the neo-liberal Cromnibus policy rider, either. The inaction led Warren and Cummings to question “whether federal policymakers are sufficiently attentive to the risk” posed by public backing for Wall Street gamblers.
If not, then at least, per Michael Piwowar's take, left wing intellectuals should be easily able to rouse newly dispossessed workers from their tent cities—by citing data on income inequality that is revolutionary in its accuracy.