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Just when you thought Wall Street couldn’t sink any lower — when its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system, giving birth to Tea Partiers and Occupiers and all manner of conspiracy theories; when its excesses have already wrought havoc with the lives of millions of Americans, causing taxpayers to shell out billions (of which only a portion has been repaid) even as its top executives are back to making more money than ever; when its vast political power (via campaign contributions) has already eviscerated much of the Dodd-Frank law that was supposed to rein it in, including the so-called “Volcker” Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking — yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.

Sit down and hold on to your chair.

What’s the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.

How is this interest rate determined? We trust that the banking system is setting today’s rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.

But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them — bets that will pay off big for them because they have inside information on what the market is really predicting, which they’re not sharing with you.

That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion — trillions of dollars that you and I and other average people would otherwise have received or saved on our lending and borrowing that have been going instead to the bankers. It would make the other abuses of trust we’ve witnessed look like child’s play by comparison. (more…)

In January 2010, after Scott Brown’s upset victory in the special Massachusetts Senate election, a panicky President Obama managed to sound like a populist for a couple of days. He called for a tax on banking profits and drafted Paul Volcker to appear at a quickie press conference so that the administration could call for something dubbed “The Volcker Rule”.

Volcker, an impeccably conservative former Fed Chair skeptical about the abuses of financial de-regulation, was one of the few elder statesmen in 2010 with any credibility. Though Volcker was an early supporter of Obama and adviser to the campaign, Treasury Secretary Tim Geithner and economic adviser Larry Summers managed to marginalize Volcker because the old man turned out to be leery of their schemes to prop up the big banks without cleaning them out. Even worse, Volcker was nostalgic about the 1933 Glass-Steagall Act, which had staved off big trouble for more than half a century by requiring that federally insured commercial banks stay out of the inherently speculative investment banking business.

Financial lobbies had finally succeeded in getting Glass-Steagall repealed in 1999, with Summers and Geithner cheering. Now the president, in big political trouble, was sending for Volcker the way one breaks glass in an emergency. But the so-called Volcker Rule, a phrase the White House made up, turned out to be Glass-Steagall lite. Unlike the 1933 statute, Obama’s so-called Volcker rule did not separate commercial banks from investment banks — a nice clear bright line that was easy to police and hard to evade.

Rather, the administration’s proposed Volcker Rule limited how much “proprietary trading” big consolidated banks could do. Trading, however, is only one of the many kinds of mischief bankers get into when the mix commercial banking and investment banking. The version of the rule that was included in the Dodd-Frank Act left details to the regulators.

Now the regulators have produced a 298-page set of proposed rules, and nobody is happy. The regulators have invited comment on no fewer than 350 questions. Bankers say the whole thing is too bureaucratic and will cut into their profitable lines of business. Consumer groups warn that the thing has too many loopholes. Wiseguys on Wall Street say it is child’s play to disguise a proprietary trade for the bank’s own account as a customer trade. (more…)

By Dave Johnson
Fellow with Campaign for America’s Future

I have been writing about the Tea Party, and asking what they will do if/when the DC Republicans betray them.. CAF has set up a page for the Tea Party Getting Played series. This is the latest in the series.

So, how’s that new Tea Party Congress working out for Tea Party supporters who expected that the lobbyists were going to be cleared out, the “too-big-to-fail” Wall Street banks brought under control and laws enforced?

The election was Tuesday, and on Thursday the expected new Chair of the House financial services committee warned regulators to lay off of Wall Street, particularly Goldman Sachs and JPMorgan Chase, and not enforce the “Volker Rule” in the new Wall Street reform law. That’s right, told them not to enforce the law.

In Financial Times, US regulators warned on new bank legislation, (Matthew Yglesias c/o Brad DeLong):

Spencer Bachus, a potential Republican chairman of the House financial services committee, has fired the first salvo in a battle with regulators – warning them against harming US banks by curbing their trading activity.

. . . Mr Bachus says that a ban on proprietary trading – known as the Volcker rule – … in the new Dodd-Frank financial reform law will “impose substantial costs on the American economy and market participants” with “doubtful” benefits.

. . . The proprietary trading ban, named after Paul Volcker, the former Federal Reserve chairman who proposed it, was opposed by most Republicans when it was passed by Congress in June. It also restricts banks’ investments in hedge funds and private equity firms. (more…)

By Tula Connell
AFL-CIO Managing Editor

When the Republicans take over the U.S. House in January, one of the first things on their agenda is payback to those who helped get them in office: Wall Street.

And they’ve already announced one way they plan to do that.

The financial reform legislation that President Obama signed into law in July gave regulators a significant tool to rein in gambling by big Wall Street banks. The “Volcker Rule,” named after former Federal Reserve Chairman Paul Volcker who proposed it, is aimed at preventing Big Banks from speculating on securities or other complex financial products (a.k.a. “proprietary trading”) and putting strict limits on their ability to bet on hedge funds and private equity funds.

The Volcker Rule would help prevent taxpayers from having to bail out banks that make risky bets and lose, which is exactly what happened during the recent financial crisis. Bear Stearns bailed out two of its hedge funds for more than $3 billion shortly before it was taken over by JPMorgan Chase in a fire sale orchestrated by federal regulators. In March 2008, Citigroup spent $1 billion to bail out several of its struggling hedge funds. Six months later, U.S. taxpayers were forced to inject billions of dollars into Citigroup to prevent a systemic crisis.

Republicans, however, are more concerned with making sure bank executives keep getting richer than preventing taxpayer bailouts. According to the Financial Times this morning, Republican Spencer Bachus, a potential chairman of the House Financial Services Committee, sent a letter to federal financial regulators expressing concern that shareholders of Goldman Sachs and JPMorgan Chase “will be hurt because the banks will be less profitable.”

The Financial Stability Oversight Council, whose members include Tim Geithner, Treasury secretary, and Ben Bernanke, Fed chairman, is this week asking for public comments on how the rules should be written.

Volcker and some Democratic senators are urging a broadly defined ban on proprietary trading and strong limits on Big Bank’s ability to invest in hedge funds and private equity. If regulators take a strong stance on the Volcker Rule, as Volcker and the Democrats have urged, banks will have to take a step back from making bets on complex financial products like derivatives and they will have more money to lend and invest in American businesses that create jobs for hardworking people.

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Re-posted from the AFL-CIO Blog

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

The financial reform bill that passed both houses of Congress was far less than we needed. But it was a start — enough of a start that the bankers have spent tens of millions trying to kill it. And now, with the House-Senate conference version of the bill coming back to Senate for final approval, the reform is in jeopardy yet again.

On May 29, the bill passed the Senate, 59-39, just enough to block a filibuster. Four Republicans voted in support and two progressive Democrats voted no to protest its weaknesses. But the banking lobby has used the Congressional recess to work the four Senate Republicans.

And, sure enough, three of the four Republican supporters have gone wobbly. Olympia Snowe of Maine voted for the Senate bill, but is now making equivocal noises about whether she’ll support the conference bill (which is weaker in some respects than the Senate’s version.) Likewise Chuck Grassley of Iowa.

The always wily Scott Brown of Massachusetts threatened to withhold his vote until the House and Senate leaders agreed to scrap a $19 billion tax on large banks. He voted for the senate bill, but now Brown is warning that he may vote against the final bill anyway. Apparently there is no honor among thieves. The financial industry was the largest donor to Brown’s Senate campaign.

Among Republicans, only Susan Collins of Maine is standing firm in her support. The fewer Republicans who are still officially committed to the bill, the easier it is for the banking lobby and the GOP leadership to intimidate or seduce others. (more…)

Sen. Russ Feingold, D-Wis., is defending his decision to vote against the Wall Street reform bill on the grounds that it is simply too weak to prevent future crises, and Tim Fernholz is crying foul.

On policy substance, Feingold is undoubtedly correct. From Feingold:

At the start of this process I made clear that I had a simple test for financial reform — will it stop another financial meltdown? This bill fails that test.

Fernholz claims, to the contrary:

The bill will make bailouts very unlikely and bring derivatives out of the shadows.

I just can’t see how Fernholz can believe that line. Megabanks have spent the past two years “earning” their way back to health with the riskiest businesses—derivatives operations and proprietary trading. They’ve managed to make enormous profits from these trading operations even as the global economy has crumbled. At some point, the economy is going to catch up with the trading, and there is going to be a problem. But it will be seven to 12 years before the critical reforms reining in these activities will actually take effect (and for the most part, those reforms have been gutted). Blanche Lincoln’s derivatives language has a seven-year phase-in, and will not apply to the vast majority of derivatives currently being traded. The Volcker Rule ban on prop trading still allows banks to gamble with hedge funds, and this rule will take a dozen years to implement. (more…)

Zach Carter
Economics Editor, AlterNet

A coalition of conservative New Democrats, whose leader is being investigated by a Congressional ethics committee over Wall Street fundraising, has officially come out in favor of gutting financial reform. The issue they’ve targeted: derivatives, the most closely watched effort of the bank overhaul. Good luck in November, guys.

New Democrats like to say they are “pro-business,” but what they usually mean is, “willing to funnel federal gifts to bigwig executives.” Their chair is Rep. Joseph Crowley, D-N.Y., currently under investigation by the House Office of Congressional Ethics over a fundraiser he held just days before the final House vote on the Wall Street reform package back in December 2009. Crowley is a favorite of Wall Street CEOs, who has pulled in more than $2.6 million from the finance industry over the course of his Congressional career, over 250 percent more than any other industry.

Crowley isn’t the only New Dem close to Wall Street. Rep. Jim Himes of Connecticut is a former Goldman Sachs executive, Rep. Melissa Bean of Illinois has been doing big banks’ dirty work for years, and New Dems score more campaign contributions from Wall Street than their regular-old-Democrat colleagues.

The new Dems are opposing the tough derivatives overhaul being pushed by Sen. Blanche Lincoln, D-Ark., known on Capitol Hill as “Section 716.” The Lincoln plan is a huge blow to Wall Street profits and the first real crack in the too-big-to-fail armor worn by the nation’s largest banks. The derivatives market is the risky casino that brought down AIG and Enron, and played a huge role in the inflation of the subprime mortgage bubble and necessitated the bailouts of megabanks when that bubble burst. While a little under ten percent of the market consists of risk-hedging by businesses, the remainder is a speculative nightmare.

Taxpayers actually subsidize this market by allowing commercial banks to deal derivatives. Since commercial banks have access to cheap Fed loans and FDIC-guaranteed deposits, this funding ends up feeding the global casino. If you force banks to move their derivatives operations to an independently-capitalized subsidiary with no access to taxpayer perks, the market shrinks, and with it, big bank profits and bonuses.

But of course, bankers like their bonuses, and they’ve enlisted the New Dems to protect them. A total of 43 New Democrats are circulating a letter around Capitol Hill in an effort to defang the derivatives overhaul (interestingly, 26 New Dems have refused to sign on to this overt Wall Street sellout). Here’s the key section:

“Section 716 . . . would increase systemic risk by forcing derivatives transactions into less regulated and less capitalized institutions and impede effective oversight of the derivatives markets . . . Legitimate conflict of interest concerns are addressed by the ban on proprietary trading in the Volcker rule, and, accordingly, we believe Section 716 should be removed from the legislation.”

Nobody in Washington takes these claims seriously. One is a bald-faced lie, the other an effort to obfuscate other New Dem efforts to defang the Volcker Rule itself.

First, the lie. The New Dems are claiming that the Lincoln provision would push derivatives into the shadows, when, in fact, it would bring them into the light. Right now, most derivatives transactions are conducted off-balance-sheet, meaning banks don’t have to disclose information about these risky deals to their investors, making it easy for them to skirt capital requirements. The idea that the Lincoln plan could actually make the derivatives market more opaque or harder to regulate than they are now is just laughable.

The Wall Street reform bill includes a set of capital rules for all derivatives trading, rules which apply to everybody who engages in derivatives activity, be they a hedge fund, a bank, or a bank-affiliate. There is absolutely no way in which Lincoln’s plan would be “forcing derivatives transactions into less regulated and less capitalized institutions.”

The opposite, in fact, would happen. Banks would have to put up more of their own money in order to back derivatives trades, because they wouldn’t have access to taxpayer money to back them. That’s why the bank lobby is fighting the Lincoln language like crazy.

The bank lobby has been pushing for weeks to secure some kind of compromise in which the Volcker Rule is substituted for Lincoln’s derivatives plan. There is almost no overlap between the two proposals. The Volcker Rule bans outright gambling by banks– Lincoln’s plan is an effort to rein in gambling outside of the banking system itself.

And New Dems are also making a huge push behind the scenes to gut the Volcker Rule. As Brian Beutler has reported, New Dems Dennis Moore, D-Kan., and Gregory Meeks, D-N.Y., are part of a team that hopes to secure a giant fatal loophole allowing banks to invest up to 5 percent of their capital in hedge funds. In other words, no gambling, except when you conduct this gambling with a hedge fund. This would totally gut the purpose of the Volcker Rule. Hedge fund investments have a habit of creating absolutely massive losses—even when the upfront investment is relatively low. In the go-go years of the housing bubble, Bear Stearns put $40 million into a hedge fund to gamble on mortgages. As Mike Konczal has emphasized, when that hedge fund blew up in 2007, Bear Stearns had to payout over $3.2 billion in losses—80 times what they put into it. If that $40 million had been 5 percent of Bear’s capital, the company would have been bankrupt four times over when the hedge fund went down.

The New Dems are hoping that this overt hatchet-work for the bank lobby will simply go unnoticed in the media firestorm surrounding the BP oil catastrophe and General McChrystal’s inability to understand chain-of-command under a Democratic commander-in-chief. Don’t let them get away with it.

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This piece is re-posted from the Campaign for America’s Future blog, OurFuture.

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Zach Carter also is a Fellow a Campaign for America’s Future. His work has appeared in The Nation, Mother Jones, The American Prospect and Salon.