Pence casts deciding vote in Senate to deny consumers rights to sue banks

From today’s Washington Post by Ken Sweet:

Call it a win for “the swamp.”

President Trump and Republicans in Congress handed Wall Street banks a big victory by effectively killing off a politically popular rule that would have allowed consumers to band together to sue their banks.

The 51-50 vote in the Senate, with Vice President Mike Pence casting the deciding vote, means bank customers will still be subject to what are known as mandatory arbitration clauses. These clauses are buried in the fine print of nearly every checking account, credit card, payday loan, auto loan or other financial services contract and require customers to use arbitration to resolve any dispute with his or her bank. They effectively waive the customer’s right to sue.

The banking industry lobbied hard to roll back a proposed regulation from the Consumer Financial Protection Bureau that would have largely restricted mandatory arbitration clauses by 2019. Consumers would have been allowed to sue their bank as a group in a class-action lawsuit. Individual consumers with individual complaints would still have to use arbitration under the rules.

President Trump is expected to sign the Senate resolution into law, overturning yet another Obama-administration initiative. Trump spent months of the 2016 campaign accusing his opponent Hillary Clinton of being in the pocket of the big banks and therefore unwilling to take on Wall Street.

At least among voters, the CFPB’s regulations had bipartisan support. A poll done by the GOP-leaning American Future Fund found that 67 percent of those surveyed were in favor of the rules, including 64 percent of Republicans. Other polls on the subject show similar levels of support.

The overturn marks a significant victory for Wall Street. After the financial crisis, Congress and the Obama administration put substantial new regulations on how banks operated and fined them tens of billions of dollars for the damage they caused to the housing market. But since Trump’s victory last year, banking lobbyists have felt emboldened to get some of the rules repealed or replaced altogether. Top or near the top of the list was the CFPB’s arbitration rules.

“(The) vote is a giant setback for every consumer in this country. Wall Street won and ordinary people lost. This vote means the courtroom doors will remain closed for groups of people seeking justice and relief when they are wronged by a company,” said CFPB Director Richard Cordray, who was appointed by President Barack Obama, in a statement.

The big banks and its lobbyist groups are calling this a victory for U.S. consumers, saying that arbitration is faster and the rules would have been an economic stimulus package for class-action trial lawyers. They also cite statistics from the Consumer Financial Protection Bureau’s own 2015 study that show that the average award from a class-action lawsuit is roughly $32 while an award from arbitration is $5,389.

But reality is more complicated. At best, the banking industry’s arguments twist the truth.

The reason why the award for most class-action suits is small is because people don’t typically sue individually his or her bank over a small sum of money, like an overdraft charge or account service fee, because it’s not worth the financial effort to recover a $10, $25, or $35 fee. Arbitration cases are less common, and usually involve more substantial disputes, hence the larger awards. Also the majority of consumers resolve their dispute with their banks in person, typically at a branch or over the phone.

If the CFPB’s rules had gone into effect, companies like Wells Fargo, JPMorgan Chase, Citigroup and Equifax would have been exposed to billions of dollars in lawsuits for future bad behavior. The Center for Responsible Lending estimates the U.S. banking customers paid $14 billion dollars in overdraft fee last year, and the industry has gotten in trouble in the past for shady tactics like transaction reordering, where a bank would reorder a day’s debits and withdrawals to extract the most overdraft fee income from its customers that day.

To overturn the CFPB’s rule, Congress used the Congressional Review Act. The CRA allows Congress to overturn any executive agency’s rules or regulations with a bare majority vote, but more importantly, the law prohibits that agency from issuing any “substantially similar” regulations without Congressional authorization. That means that until Congress passes a law to restrict arbitration, the CFPB’s hands are now permanently bound on this issue.

The political winds are in Wall Street’s favor going forward. Cordray’s term at the CFPB will end in mid-2018 but he is expected to step down before then to make a run for Governor of Ohio. Trump will be able to choose his own appointee and will likely pick someone more likely to favor the banks.

The CFPB was created after the financial crisis as part of the Dodd-Frank financial regulatory reform law that passed in 2010. The bureau was crafted to be independent and powerful, funded by the Federal Reserve instead of through the traditional Congressional appropriations process. Its director has considerable authority to pursue issues he or she considers important and generally cannot be removed from office.

There’s another major financial consumer protection now pending in front of Congress focused on the payday lending industry. The CFPB finalized new regulations weeks ago that would severely restrict the ability for payday lenders to make loans that its customers, often the poor and financially desperate, cannot afford. The payday lending industry is pushing hard to overturn these rules using the same process that was used to overturn the arbitration rules.

Occupy SEC played significant role in curbing risky banking and trading

From the “Economix” Blog of the New York Times by Simon Johnson:

There is a tendency in recent American political discourse to use the term “populism” as a form of putdown. The implication is that that while populists may have some legitimate grievances, they are rebelling in a disorganized and ill-informed way. As President Obama implied in early 2009, the populists have pitchforks, while his administration represented the responsible mainstream.

This is an inaccurate portrayal of populism in America, both historically and today. Occupy Wall Street is a perfect example. To be sure, part of that 2011 movement was purely about expressing frustration – justified frustration – at how very powerful people in the finance sector had behaved and continue to behave. But the movement also led to an important offshoot or related development,Occupy the S.E.C., which focused on the Securities and Exchange Commission.

This group wrote a brilliant commentary on the originally proposed Volcker Rule, which is designed to limit proprietary trading and other forms of excessive risk-taking at very large banks. Their comments, along with the work of others who wanted more effective reform, were helpful in pushing officials toward the final Volcker Rule, which was just unveiled.

At a hearing of the House Committee on Financial Services on Wednesday, at which I testified, some technical issues were raised by representatives of big banks and parts of the securities industry, but the broad outlines of the Volcker Rule are no longer resisted. When asked, none of the witnesses suggested that the Volcker Rule should be repealed. This is a big victory for Occupy the S.E.C. and all its allies.

Read the entire article here.

Business behaving badly, why fines don’t deter corporate malfeasance

 

 

 

 

 

 

 

 

This last year was a record one for fines and financial settlements levied against corporations for breaking laws and wreaking havoc on the economy, especially banks and other financial institutions primarily responsible for creating the Great Recession.

The question is whether forcing corporations to pay changes their bad behavior.

Watch this New York Times video that reviews three examples of businesses behaving badly because they view such fines and settlements as the cost of doing business.

The question is whether more severe penalties, including jail time for executives who are responsible for the behavior of their corporations, can incentivize them to follow the law.

After all, corporations are citizens, and when citizens commit felonies, they often lose their rights. Perhaps we need legislation so that corporations that break the law lose their rights as well.

Consumers lack financial literacy, contributed to Great Recession

From the LA Times:

Guess how many Americans correctly answered this basic financial question: Is the stock of a single company usually safer than a mutual fund?

A) 100% B) 80% C) 60% D) None of the above.

The right answer is D. Barely 1 in 2 people knew that a single stock is not safer than a mutual fund, which holds many stocks.

The question, included in a survey by a pair of college professors, underscores a fundamental problem facing millions of Americans. At a time when the world of personal finance is increasingly complex — and when people are more responsible than ever for their own financial future — Americans’ understanding of basic concepts is sorely lacking.

Despite many efforts to boost knowledge, studies show that most people don’t understand rudimentary principles of finance and investing. Even well-educated and upper-income Americans often have poor financial literacy, experts say.

“By and large, people are pretty clueless,” said Olivia Mitchell, executive director of the Pension Research Council at the University of Pennsylvania and coauthor of the study.

A 182-page analysis by the Securities and Exchange Commission last year found that “investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud.”

The result, experts say, is young people who are mired in student debt and older Americans who face bleak retirement prospects. People who don’t understand basic concepts are ill-equipped for more complex tasks, such as ferreting out hidden fees or conflicts of interest that are embedded in many financial products.

The collective ignorance has played a role in recent financial crises, according to some experts. The subprime mortgage meltdown would have been less severe, they say, if people understood the pitfalls of the loans they were taking out.

Read the complete article here.

Five regulatory agencies approve Volcker Rule, curbing risky banking

Five federal regulatory agencies approved the so-called “Volcker Rule” today, restricting commercial banks from trading stocks and derivatives for their own gain and limits their ability to invest in hedge funds. The five agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency:  all five agencies approved the Volcker rule, named after former Fed Chair Paul Volcker who championed restrictions on proprietary trading by banks, which puts into effect the centerpiece of the Dodd-Frank Act’s attempt to reign in financial corruption on Wall Street.

Congress passed and regulators approved the legislation despite the lobbying efforts of Wall Street banks, and the rule itself includes new wording aimed at curbing the risky practices responsible for the $6 billion trading loss, known as the so-called “London Whale,” at JPMorgan Chase last year. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed into law by President Obama in July 2010, but the complex nature of financial regulation and the lobbying efforts of Wall Street slowed down the process of enacting the law.

The outgoing Fed Chair Ben S. Bernanke stated that “getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”

Consumer advocacy groups praised the spirit of the rule as much needed reform of the greed and corruption that have become synonymous with Wall Street’s practices in the last decade, which led to the catastrophic consequences of the Great Recession including trillions of dollars and millions of jobs lost.

Dennis Kelleher, the head of Better Markets, said:  “The rule recognizes that compliance must be robust, that C.E.O.’s are responsible for ensuring a compliance program that works, that compensation must be limited, and that banned proprietary trading cannot legally be disguised, as market making, risk mitigating hedging or otherwise…Those requirements will not end all gambling activities on Wall Street, but should limit them and reduce the risk to Main Street.”

For a good summary of the Volcker Rule watch this video.

 

SEC takes harder line against fraud

The Securities and Exchange Commission signaled it was taking a harder line on Wall Street’s rampant problem with fraud by extracting its first admission of wrongdoing from Philip Falcone, CEO of Harbinger Capital Partners.

Falcone admitted to market manipulation and as part of a settlement will pay $18 million in fines in addition to being banned from trading for five years. He was accused in June 2012 of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others.

The deal comes a month after the SEC overruled its own enforcement staff to reject an earlier settlement last month. The original agreement called for a two-year ban from raising new capital and no admission of wrongdoing and did not include an injunction against committing fraud in the future. According to reports the SEC’s new chairwoman Mary Jo White said people were increasingly frustrated with the agency because of its lax oversight and punishments.

The new agreement reflects a wider policy change in the Obama Administration, which has been criticized for failing to go after market manipulators and to tackle the problem of fraud on Wall Street. The DOJ announced last week it was filing criminal charges against two JPMorgan Chase traders who lost $6 billion last year from risky derivatives trading. Monday’s agreement between Falcone and the SEC sets a precedent for future cases including those involving JPMorgan Chase and the hedge fund SAC Capital Advisors.

DOJ stands up to corporate greed

In back to back announcements the Department of Justice signaled it was standing up to unrestricted corporate business practices on Wall Street.

Yesterday, the DOJ said it would bring criminal charges against two former JPMorgan Chase employees who are said to be responsible for a $6 billion trading loss last year that they tried to cover up. Javier Martin-Artajo and Julien Grout are charged with wire fraud, falsifying bank records, and contributing to false regulatory records. Federal authorities are also charging them with conspiracy to commit those crimes after an investigation concluded that the traders “artificially increased” the value of their bets “in order to hide the true extent of hundreds of millions of dollars of losses.” The Securities and Exchange Commission is also planning to take action against JPMorgan for allowing the misconduct. It filed civil charges on Wednesday against the two traders.

In a separate announcement the DOJ also said it would file an injunction seeking to block the merger of American Airlines and U.S. Airways. The merger, which was announced last year, would create nation’s largest air carrier, but federal officials claimed in court papers that the merger would have monopolistic results leading to less choices for consumers and higher ticket prices. Both airlines contend the deal would lead to lower prices and better choices for consumers, and they vowed to fight the Justice Department’s claims in court.

Despite huge losses banks continue subprime mortgage securities fraud

There is an interesting article in today’s New York Times business blog about the reverberation of subprime mortgage securities that are still being peddled by banks and financial institutions. Below is an excerpt of the article, which tracks GSAMP Trust 2007 NC1, a subprime mortgage securities bond that has enriched various Goldman Sachs executives despite the fact that 3/4 of mortgages that bond covers are in default.

A subprime deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.

He is not the only one feeling the pain of a subprime transaction six years on.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.

Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

This is the story of one of those bonds, GSAMP Trust 2007 NC1.

Read the entire story here.

Rethinking home loans without regulation means a repeat of crisis

Update:  Thursday, August 9. Today Fannie Mae announced a quarterly profit of $10 billion and projected profits for the foreseeable future. When this dividend is paid, Fannie will have repaid approximately $105 billion of $116 billion it received from taxpayer bailout.

The latest quarterly gain followed a record $58.7 billion net income in the first quarter, when Fannie capitalized on tax benefits it had saved from its losses on loans during the crisis. It paid a first-quarter dividend of $59.4 billion to the Treasury.

In a major policy speech yesterday President Obama announced plans to reshape federal rules for 30-year fixed mortgages. The idea is to preserve the policy goal of getting American workers and their families into affordable home loans, but in practice this has played out with troubling consequences.

Obama’s speech comes on the heels of news that Freddie Mac, the country’s largest home loan lending institution along with Fannie Mae, reported a $5 billion net profit in the second quarter, compared with $3 billion from the same period last year. The earnings will offset all losses from mortgage defaults, which continue to be a problem for the housing sector, banks, and consumers.

The federal bail out Freddie Mac and Fannie Mae during the financial crisis in 2008 amounted to $187 billion, but since a housing recovery started percolating last year both institutions have again become profitable. Roughly, they have paid back roughly $136 billion of government loans, which is helping to make the budget deficit this year the smallest since Obama took office.

In his speech yesterday the President proposed overhauling the home loan system, including the elimination of Freddie Mac and Fannie Mae from the mortgage guarantee business. Obama claimed taxpayers should not be in the position of “holding the bag” for the risky business strategies of such giant financial institutions. However, President Obama did not clarify the rationale of the goal to preserve the 30-year home loan, a financial instrument that does not appear in other industrialized countries.

One problem with the long-term strategy of home ownership is that the size and cost of owning property has increased while income has stagnated for those working individuals and families who need such long-term loans. Another problem is that banks and lending institutions still have no regulations that prohibit them from using mortgage guarantees in risky financial investments, including derivatives trading, which led to the sub-prime mortgage crisis and, by extension, the financial collapse of the economy. The preservation of this policy goal under the same economic circumstances therefore means a future catastrophe for lenders and borrowers alike. Why finance a 30-year home loan on a mortgage that consumers cannot afford, when it remains a risky investment strategy?

Economists worry financial lessons from last recession are ignored

There is an interesting article in today’s New York Times by Adam Davidson of NPR’s “Planet Money” that explores both sides of the economic spectrum about whether more or less regulation is an essential lesson we have failed to learn from the Great Recession. Below is an excerpt:

Five years ago this month, before Lehman Brothers imploded and the global economy lurched to a halt, Fannie Mae issued a report that encapsulated the financial system’s biggest problem. The mortgage-finance company, which was wobbling on account of rising defaults, tried to reassure investors that it had $47 billion in capital, which was considerably more than the $30 million required by law. At the time, the report’s authors seemed to fear that some investors might think Fannie was too cautious. In any event, a month later, that protection seemed like a joke. Fannie may have conformed to the rules, but the rules didn’t conform to reality. The lender and its brother company, Freddie Mac, were declared insolvent and handed over to the U.S. government.

Remarkably, five years after the crisis, the health of the financial industry is just as hard to determine. A major bank or financial institution could meet every single regulatory requirement yet still be at risk of collapse, and few of us would even know it. Despite endless calls for change, many of the economists I’ve spoken with have lamented that the reports that banks issue about their finances remain all but useless. The sprawling Dodd-Frank Act, which rewrote banking regulation in 2010, didn’t resolve things so much as inaugurate a process of endless rules-writing by regulators. Meanwhile, the European Union is in the early stages of figuring out how it will change the way it regulates banks; and the gargantuan issue of coordinating regulations across borders has only barely begun. All of these regulatory decisions are complicated, in part, by a vast army of financial-industry lobbyists that overwhelms the relatively few consumer advocates.

Economists have also been locked in their own long-running arguments about how to make the banking industry safer. These disagreements, which are generally split between the left and the right, can have the certainty and anger of religious wars: the right accuses the left of hobbling banks and undermining prosperity; the left counters that the relatively lax regulation advocated by the right will lead to a corrupt oligarchy. But there actually is consensus on one of the most important issues. Paul Schultz, director of the Center for the Study of Financial Regulation at the University of Notre Dame, led a project that brought together scholars of financial regulation from the left, the right and the center to figure out what caused the financial crisis and how to prevent a sequel. They couldn’t agree on anything, he told me. But a great majority favored higher equity requirements, which is bankerspeak for the notion that banks shouldn’t be allowed to borrow so much.

Read the entire article here.