This interview with former CFTC Commissioner Michael Greenberger provides useful detail on why financial reform proved to be so weak. Some of it, predictably, is that Obama has consistently put Wall-Street-friendly candidates in key regulatory positions. As Greenberger points out, Gary Gensler unexpectedly switched allegiance.
That likely comes as no news. But what may surprise readers is Greenberger’s assessment that Dodd Frank was actually a pretty decent bill, but was substantially watered-down by extremely aggressive and effective lobbying in the rulemaking phase. Here I have to quibble a bit, since Dodd Frank punted on far more issues than is typical for a bill, kicking many over to a year or two of studies, or delayed implementation, which give the financiers another bite at the apple.
From the summary of this talk with Marshall Auerback at the INET website:
Proprietary trading by Wall Street banks precipitated the 2008 financial crisis that resulted in a near 13 trillion dollar bailout by American taxpayers of Too Big To Fail financial institutions. As early as 2007, Morgan Stanley lost $9 billion dollars due to bullish bets on complex derivatives related to mortgages and in 2008 American International Group famously lost billions of dollars betting on complex derivatives. Similarly, toward the end of 2008, Merrill Lynch lost nearly $16 billion and Deutsche Bank lost nearly $2 billion due to complex bets on risky securities. Additionally, JPMorgan’s $9 billion loss on a giant derivatives trade made by its London trading desk known colloquially as the London Whale is a stark reminder that proprietary trading by Too Big To Fail financial institutions poses an acute risk to U.S. financial markets and exposes U.S. taxpayers to the risk of future bank bailouts.
The whole rationale for what ultimately became known as the “Dodd-Frank” bill was to prevent a recurrence of the 2008 crisis. Has it served its purpose? No, according to Michael Greenberger, a Professor at the University of Maryland Francis King Carey School of Law, and a former top official with the Division of Trading and Markets at the Commodity Futures Trading Commission (CFTC) working directly for then-Chairperson Brooksley Born. He focused on issues relating to financial regulation and derivatives.
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From the INET link above –
“…calling the rigging of global interest rates and recurrent trading losses since the 2009 as evidence of ongoing systemic
instabilitycriminality.”Until these actions are referenced in real world terms, effective remedy will never be taken.
Between the failures of foreign capital to induce growth policy in emerging markets, the Strether article outlining the lack of accountability in the military, and this interview’s look at the taxpayers being left out to dry for the banking classes’ unique and confounding ineptitude I’m starting feel like a systemic look at the causes and effects of moral hazard are in order. People seem to all to frequently act like government alone is the progenitor of moral hazard, but I think one could pretty convincingly argue that modern government is merely a middleman in the process of distributing social ills. The more one is able to see the mechanisms of the state being bent to the will of this nebulous being “the market” the more one can see a continual failure of the Neoliberal establishment to grasp at many of the real lessons of the The Great Depression. Markets Akbar I guess. May the establishment’s faith in markets be rewarded with the virgin minds of 72 business school grads to hump for forevermore.
“…the banking classes’ unique and confounding ineptitude…”
Indeed, with the banking industry having been given what amounts to a monopoly skim on the issuance of the whole nation’s currency, one wonders how in the world they could have screwed that up.
Great synopsis of the post Dodd-Frank regulatory battle with an emphasis on personalities. Speaking of personalities, Greenberger seems to have a remarkable amount of faith in Hillary. I’m not even sure she can win the Democratic nomination let alone the Presidency, then if she does win I see almost nothing in her background to suggest she has any desire to be a great reformer of finance or bane of the wealthy idle class. I think NakedCapitalism should start a Bernie Sanders for President campaign. Liz Warren as a running mate would round out the ticket quite nicely I think.
Good interview. FYI Greenberger wasn’t a commissioner (as stated in post title) — but top official in Division of Trading and Markets.
I must take issue with the statement “Proprietary trading by Wall Street banks precipitated the 2008 financial crisis” . The author confuses the causes of losses incurred on Wall Street. Merrill Lynch was not “proprietary trading” when it ended up warehousing billion of dollars in risky products. Mismanagement by the heads of the firm for sure. They were running a factory, producing very risky products, with credit guarantees from people like AIG, when sales slowed, inventory piled up. When the insurers collapsed, prices for their inventory collapsed. In the case of JPMorgan in London, that was proprietary trading, but that was long after the financial crisis and the numbers are actually a drop in the bucket when compared to the collapse of Lehman, Bear and AIG. The real problem which has not been addressed by Dodd-Frank is leverage. A bank can do proprietary trading, it can warehouse securities, but not at a leverage ratio of 30 to 1. Shutting down the prop desks without addressing leverage is missing the real cause of the financial crisis. And as an aside I’m not sure what insight the CFTC has in these matters, they regulate futures, which were pretty irrelevant to the financial losses in the crisis
You need to read ECONNED. Merrill was the exception, with management pushing pedal to the metal to increase its share in subprime-related when other banks were pulling back. The head of that unit had quit and gone to Cowen (can’t recall his name) and Merrill was desperate to preserve market share.
As we demonsrate, the driver was NOT warehousing. It was a heavily synthetic CDO strategy (hence dependent on so-called derivatives, in this case CDS on the BBB/BBB- tranches of subprime mortgage bonds) which subverted normal pricing mechanisms and drove demand to the worst mortgages. Due to extremely tight publishing deadlines, we failed to incorporate on demand driver in our analysis in ECONNED, the impact on warehouse lines which were critical to keeping subprime lending going. When you include that, the Magnetar strategy drove demand for 50-60% of subprime mortgage origination in the toxic phase of the crisis. And that strategy depended critically on traders keeping CDOs on their balance sheets, because if they hedged them with an AAA counterparty like AIG or the monolines, they were treated as “freeing up capital” which generated huge profits on these trades. They were astonishingly lucrative to the traders and amounted to gaming the banks’ bonus system. And they would have been utterly impermissible with rules against prop trading in place.