Senate Republicans have brought forward a CEO-friendly “plan” that fails to protect consumers, investors and businesses from the predatory practices of Wall Street. This proposal, hastily written after Senators McConnell and Cornyn agreed to do Wall Street’s bidding, would leave hard-working Americans susceptible to the same reckless behavior that destroyed over 8 million jobs and trillions of dollars in life savings. It would insert loopholes for lobbyists and water down or eliminate critical provisions found in the Restoring American Financial Stability Act.
The Financial Stability Act, brought forward by the Senate Democrats after months and months of bipartisan negotiations, helps American families, not greedy CEOs. This legislation would put a cop on the beat to allow consumers and investors to make their own decisions and ensure that taxpayers are never left to foot Wall Street’s bill. The Democratic plan holds Wall Street accountable for its reckless gambling by bringing sunlight and transparency to shadowy markets.
A recent report from Americans for Financial Reform[i] demonstrates clearly that while Democrats are fighting for Main Street, Republicans continue to protect big banks and Wall Street:
Bank and Non-Bank Financial Regulation
The best way to prevent bailouts is to restore the strong regulatory structure that Congress dismantled over the past 20 years, at the behest of Wall Street lobbyists. That’s why the Restoring American Financial Stability Act of 2010 establishes a new framework to prevent a recurrence or mitigate the impact of financial crises that could cripple financial markets and damage the economy. A new Financial Stability Oversight Council, chaired by the Treasury Secretary and comprised of key regulators, would monitor emerging risks to U.S. financial stability, recommend heightened prudential standards for large, interconnected financial companies, and require nonbank financial companies to be supervised by the Federal Reserve if their failure were to pose a risk to U.S. financial stability. The Republican proposal, by contrast, contains none of the regulations of large, interconnected financial institutions that are necessary to prevent another collapse.
Republican Proposal Excludes Tough Requirements to Rein in the Largest Financial Companies.Nowhere does the Republican plan require the Federal Reserve to impose tougher capital, leverage, and liquidity requirements, as well as living wills, on the largest and riskiest banking and nonbank financial companies. The Republican alternative would maintain the “Too Big to Fail” status quo.
Republican Proposal Fails to Prevent Non-Financial Institutions Like AIG From Harming the Financial Markets. Nowhere would the Republican plan provide for oversight of “shadow banks” – large, complex nonbank financial companies to prevent future Goldman Sach’s, AIG’s, and Lehman’s (none of which were Fed-regulated before the crisis) from also wreaking havoc on financial markets, the economy, and jobs.
The Restoring American Financial Stability Act would establish a new “cop on the beat” to protect consumers. The independent Consumer Financial Protection Bureau would provide American consumers with the information they need to empower them to make smart financial choices for themselves. The Bureau also will help guard against hidden terms and fine print that trap American families in unfair, deceptive and abusive financial products. By contrast, the consumer protection Council included in the Republican proposal would stifle important new protections necessary to empower consumers to make good financial decisions and to prevent a future crisis.
Republican Proposal Worse than the Status Quo. In the Republican plan, the Council would not be able to issue any consumer protection rules without the approval of prudential regulators, and likely would not be able to issue rules to address unfair, deceptive or abusive practices at all – practices which will stifle consumer protections. That is the status quo, or worse. It was the failure of federal prudential regulators to address consumer protection that led to this problem.
Republican Proposal Protects Abusive Lenders. In the Republican plan, payday lenders, auto dealers brokering car loans, check cashers, debt collectors and the like would be exempt from rules designed to prevent unfair and deceptive practices. Because of weak supervision and lax enforcement, the plan would also make it easy for these entities to violate existing laws and operate under the radar.
Republican Proposal Cuts States Out From Consumer Protection. The Republican plan cuts out the role of the states altogether in enforcing consumer protections. Additionally, gutting Attorney General enforcement of consumer protection laws would, in effect, inhibit states from punishing people who break the law.
Many banks, bank holding companies and other companies that control insured depository institutions sponsored and invested in hedge funds and private equity funds. As the financial crisis deepened, these activities produced outsize losses, which threatened the safety and soundness of individual firms and contributed to overall financial stability. When banks engage in proprietary trading, there is also an increased likelihood that their interests will conflict with those of their customers. To address this, the Restoring American Financial Stability Act includes the “Volcker Rule,” which would prohibit or restrict proprietary trading. The Republican proposal addresses some of these risks, but includes a watered-down Volcker rule.
Republican Proposal Has a Limited Proprietary Trading Prohibition. The proprietary trading restrictions included in the Republican plan are only for depository institutions, and other entities (presumably affiliates of the depository institutions), and would be restricted only if the holding company is not well capitalized or if the Federal Reserve were to make a determination to that effect.
Republican Proposal Fails to Address Bank-Sponsored Hedge Funds. Nowhere does the Republican plan mention a prohibition of sponsoring hedge funds.
Many of the key provisions of the Republican plan are already included in the Restoring American Financial Stability Act, including provisions that would authorize the systemic risk regulator to monitor large hedge funds, require hedge fund registration, require more disclosure for asset-backed securities, and reform the municipal securities market. Still, the Republican proposal does not go as far as the Democratic bill to protect all investors – from a hardworking American contributing to a union pension to a day trader to a retiree living off their 401(k).
Republican Proposal Limits “Skin-in-the-Game” Requirements. The Republican plan would require risk retention (“skin-in-the-game”) ONLY for residential mortgage loans, leaving the financial system at risk for securitized loans of other toxic assets.
Republican Proposal Has Inadequate Regulation of Credit Rating Agencies. The Republican plan glosses over the failure in our credit rating system, offering minor tweaks to the current broken structure rather than meaningful reform. Their plan does nothing to strengthen the SEC’s ability to monitor the credit rating industry, nor would it raise obligations for ratings firms to undertake appropriate due diligence, or hold them legally accountable for their actions.
Republican Proposal Fails to Include Meaningful Changes to the SEC. The Republican plan simply rearranges the SEC Divisions, but includes none of the numerous provisions included in the Financial Stability Act to strengthen the SEC and its ability to protect investors, such as the ability to reform mandatory arbitration, GAO audits of SEC internal management controls, a robust new whistleblower program, and an Office of Investor Advocate.
Republican Proposal Fails to Strengthen Shareholder Power. The Republican plan does not include any provisions to strengthen shareholder power through reforms of majority voting, say-on-pay, proxy access, and compensation disclosures – all of which are included in the Financial Stability Act.
Republican Proposal Excludes the SEC’s Ability to Monitor Hedge Funds for Fraud. In contrast to provisions in the Financial Stability Act, the Republican plan excludes the ability of the SEC to monitor hedge funds for fraud.
Republican Proposal Would Increase the Risk of Fraud. The Republican plan makes a drastic change to a provision of the Sarbanes-Oxley Act, which would decrease the reliability of financial statements, weaken internal controls, weaken the integrity of business operations, increase the risk of internal financial fraud, increase accounting restatements, and reduce investor confidence in financial statements.
The most important derivatives provisions in the GOP plan are in the Restoring American Financial Stability Act. These include mandatory clearing, mandatory exchange trading, mandatory speculative position limits, prudential capital requirements for swap dealers and major swap participants, margin requirements for uncleared swaps, public reporting requirements, segregation of assets requirement to protect counterparty collateral, and regulation of clearinghouses. Despite these similarities, other provisions in the GOP proposal would weaken provisions in the Financial Stability Act.
Republican Proposal Provides Less Transparency. The Republican plan has no mandatory exchange trading requirement, meaning no pre-trade price transparency and hence no lower costs for users of derivatives, as well as less transparency for regulators and market participants.
Republican Proposal Is Very Bureaucratic. According to the Republican plan, the Federal Reserve, SEC and Commodity Futures Trading Commission (CFTC) would first establish criteria for mandatory clearing, then the CFTC and SEC would use the criteria to identify swaps for mandatory clearing. Real concerns have been raised about how long will it take for the three regulators in the first step and the two regulators in the second step to reach agreement; and about whether clearing could stalled if the regulators fail to reach agreement.
Republican Proposal Unworkable End User Exemption. By using the “bona fide” definition of an end user, the Republican plan would include swaps dealers, hedge funds, other financial institutions, and systemically risky entities within the end user exemption. This is an unacceptable level of risk to American taxpayers.
It All Comes Down to Whose Side You Are On
If you want a financial system that allows banks to become “too big to fail,” puts your retirement security in jeopardy and leaves consumers vulnerable so Wall Street executives can cash in, then you should support the Republican plan. But if you want a system that protects consumers from losing their homes and their savings, protects jobs and prevents another financial crisis, you should support the Democratic plan to reform Wall Street.
[i] AFR Analysis of the GOP Alternative to S.3217, April 28, 2010, http://ourfinancialsecurity.org/2010/04/afr-letter-re-gop-alternatives-to-s-3217/