It took me seven years to learn about Wall Street what Federico Garcia Lorca gleaned simply by witnessing the 1929 Market crash. An excerpt from a lecture he gave at Columbia University in October 1929:
The truly savage and frenetic part of New York…the terrible, cold, cruel part, is Wall Street.
Rivers of gold flow there from all over the earth, and death comes with it. There, as nowhere else, you feel a total absence of the spirit: herds of men who cannot count past three, herds more who cannot get past six, scorn for pure science and demoniacal respect for the present. And the terrible thing is that the crowd that fills this street believes that the world will always be the same, that it is their duty to keep that huge machine running, day and night, forever. This is what comes of a Protestant morality that I as a (thank God) typical Spaniard found unnerving.
I was lucky enough to see with my own eyes the recent stock-market crash, where they lost several billion dollars, a rabble of dead money that went sliding off into the sea. Never as then, amid suicides, hysteria, and groups of fainting people, have I felt the senstation of real death, death without hope, death that is nothing but rottenness, for the spectacle was terrifying but devoid of greatness. And I, who come from a country where, as the great father Unamuno said, “at night the earth climbs to the sky,” I felt something like a divine urge to bombard that whole canyon of shadow, where ambulances collected suicides whose hands were full of rings.
-Federico Garcia Lorca
Lecture: A Poet in New York
Lorca at Columbia, October 1929
Translated by Christopher Mauer
From the bilingual edition of Poet in New York, with translation by Greg Simon and Steven F. White
Today, I was on the Up with Chris Hayes show to discuss the comments made by President Obama and Governor Romney about Dodd-Frank in the first president debates.
There is much to say on this topic, more than can fit even into a long-form program like Up with Chris, so I wanted to present some of my preparation notes on the topics discussed.
Anyone who knows me, knows that I think Dodd-Frank does not go far enough, and that I want to see bank executives behind bars for the crimes leading up to, and following, the financial crisis. But I also believe there is much in Dodd-Frank that is important, and we need to acknowledge that, or we will lose it to the many efforts already underway to gut it. Thus, it is important that we understand what Dodd-Frank does, giving credit where it’s due.
Does Dodd-Frank Designate Banks as Too Big to Fail?
In the debate, Romney stated that Dodd-Frank “designates a number of banks as too big to fail, and they’re effectively guaranteed by the federal government. This is the biggest kiss that’s been given to — to New York banks I’ve ever seen.”
What Romney is referring to is a designation of being a “Systemically Important Financial Institution” or SIFI for short. But this designation does NOT designate a bank as Too Big to Fail. Further, Wall Street does not see being slapped with the SIFI label as a boon. This was pointed out well by Rep. Maxine Waters in an article at the Huffington Post.
I have been anxiously awaiting the public release of Chris Hayes’ book “Twilight of the Elites” (available at Powells, Amazon) for some time now, because this is a book that leaves one yearning for conversation, dialogue and, yes, debate, about its content. So for the tl;dr crowd, let me begin by saying this was a book I found so stimulating and immersive that I cannot wait to be able to discuss it with a larger audience.
An oft-photographed sign at OWS events is the much-quoted “SHIT IS FUCKED UP AND BULLSHIT.” Hayes’s eminently well-written book outlines in a plethora of areas exactly why that is the case, and how we got there. Even if you think you are aware of the depth of the rot plaguing the highest levels of our society, you will likely earn a new level of outrage by reading this book.
At its heart, Twilight of the Elites is an indictment of the meritocracy—or what passes for it. A compelling revelation that comes early in the book is the bastard etymology of the very word “meritocracy.” The man who coined the term, Michael Young, did so in a book that was written as a satire, though not read as one by the general public. Read more »
When some people think about Wall Street, they conjure up images of traders
shouting on the stock exchange, of bankers dining at five-star restaurants, of
CEOs whispering in the ears of captured Congress members.
When I think about Wall Street, I think about its stunted rainbow of pale
pastel shirts. I think about the vaulting, highly secured, and very cold lobbies.
And I think about the art passed daily by the harried workers, virtually unseen.
Before I occupied Wall Street, Wall Street occupied me. What started as a
summer internship led to a seven-year career. During my time on Wall Street, I
changed from a curious college student full of hope for my future, into a cynical, bitter, depressed, and exhausted “knowledge worker” who felt that everyone was out to screw me over.
The culture of Wall Street is pervasive and contagious. While there are Wall
Street employees who are able to ignore it, or block it out, I was not one of
them. I drank the Kool Aid. I’m out of it now. But I’d like to tell you what it was
+ + +
When you are wealthy and successful, you have a choice. You can believe your
success stems from luck and privilege, or you can believe it stems from hard
work. Very few people like to view their success as a matter of luck. And so,
perhaps understandably, most people on Wall Street believe they have earned
their jobs, and the money that follows.
While there are many on Wall Street who come from wealthy backgrounds,
there are also many people from very humble backgrounds. In my experience,
it is often those who do not come from privilege who are the system’s fiercest
On April 26th, Senators Levin (D-MI) and Merkley (D-OR) put out a letter calling on our financial regulators to finalize a strong version of the Volcker Rule by the summer. Twenty-two Senators signed the letter.
There is a draft companion letter circulating today in the House of Representatives that is being led by Rep. Blumenauer (D-OR3), Rep. Waters (D-CA35) and many other representatives. It is important that as many members of the House of Representatives as possible co-sign the companion letter. This would show the regulators that Congress is looking to them to complete the Volcker Rule by the summer, without loopholes.
Haven’t heard about the Volcker Rule? At its heart, it’s about preventing banks that enjoy an implicit government backing from GAMBLING. On Wall Street, gambling is called proprietary trading. The basic idea is that banks that have received billions in TARP money and more billions in secret Fed loans (that were not disclosed to the public nor to Congress until Bloomberg filed a Freedom of Information Act request) shouldn’t get to act like a Hedge Fund, or someone “feeling lucky” in Vegas.
The Volcker Rule was a part of the 2010 law, Dodd-Frank. And as with many complex laws, Congress placed the responsibility of actually writing the final rule with the financial regulators: the SEC, OCC, Fed, FDIC and CFTC. These Agencies have released a draft of the rule, solicited public comment, and are now writing the final version of the rule.
It is important that the regulators write a strong final version of the rule without loopholes, but it is equally important that they not delay finalizing the rule. The letter from Merkley’s office, and the companion House letter, urge the regulators on just these points.
If you want to rein in Wall Street, and ensure that we have an insurance policy against future bailouts, you should call your House representative and ask him/her to co-sign Rep. Blumenauer et al’s Volcker Rule letter.
The easiest way to do this is to call the Capitol switchboard at (202) 224-3121, and ask for your Representative’s office by name. You can also look up your Representative on Open Congress.
But wait, what should I say?
When you call, we suggest you tell the staffer:
I am your constituent, and I am calling to ask Rep. _____ to co-sign the Volcker Rule letter being circulated by Rep. Blumenauer and Rep. Waters. The letter calls on the regulators to finalize a strong Volcker Rule by this summer.
In case the person you speak to needs more information about the Volcker Rule, you could tell them:
The Volcker Rule is section 619 of the Dodd-Frank Act. It is an important rule that will help address systemic risks to our banking system and the Too Big to Fail status of institutions managing trillions of federally insured deposits. I support the rule and ask you to co-sign the letter from Rep. Blumenauer and Rep. Waters.
The Short Version
A good summary of the problems with this bill can be found in the letter against it written by Americans for Financial Reform. Choice quote:
HR 2586 would undermine a key element of derivatives reform – the attempt to create transparent, competitive markets for previously ‘dark’ over-the-counter (OTC) derivatives.
There is also a good explainer from Gretchen Morgenson at the NY Times called “Slipping Backwards on Swaps” that I encourage you to read. Lead quote:
Wall Street loves to do business in the shadows. Sunshine, after all, is bad for profits.
So it is perhaps unsurprising that players in the derivatives market want to thwart one of the worthier aims of the Dodd-Frank financial regulation: to bring transparency to the huge market for instruments known as swaps. Now some in Congress, on both sides of the aisle, are trying to block that goal, too.
The Long Version
But I do want to explain, in nitty gritty detail, why I oppose this bill, and also explain a few things about how this whole rulemaking process works.
Two section of Dodd-Frank, 761 and 721, defined a new exchange-like forum called a “Swap Execution Facility” that is meant to bring more transparency to the derivatives marketplace.
Let’s get wonky, and look at the actual definition:
“SWAP EXECUTION FACILITY.—The term ‘swap execution facility’ means a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that
(A) facilitates the execution of swaps between persons; and
(B) is not a designated contract market. “
Asking for prices on OTC derivatives is like Comparison Shopping without the Internet
Image by bikesaver on flickr
What this means in English, is that there now must be a place where you can, as a customer, ask the question “Hey, how much for that fancy Swap you’ve got?” to multiple Swap dealers at the same time. Think of it like comparison shopping on the internet. If you want to know how much that new bike you want costs, you can just type the make and model (Classic Schwinn Red!) into google or bing, and sort by the lowest price.
Compare that to trying to find the best price for your Classic Red Schwinn by calling up every bike store you know of. It’s slow. It’s inefficient. And for all you know, the bike store may change the price when you actually walk in the door. On the internet, there is this ability to immediately purchase the bike–so the price is fixed. On the phone, you just never know.
Wall Street conducts a huge chunk of derivatives business on the phone. They like it that way, because it keeps margins high. Once you have to post your prices in an electronic forum, well, competition starts to arise! Smaller players can try and gain a foothold in the market by charging less. It puts downward pressure on profit margins. Wall Street likes its phone business, thank you very much, and they’re going to try and protect it.
More wonky details
So back to Dodd-Frank 761 and 721. Why are there two sections? Because each section modifies a different law. 721 amends Section 1a of the Commodity Exchange Act, and 761 amends Section 3(a) of the Securities Exchange Act of 1934.
When laws are passed that modify the Commodity Exchange Act, a regulator known as the Commodity Futures Trading Commission (the CFTC) typically has to take the bill and implement it by writing the actual technical, nitty gritty details in a new regulation. They do this once, ask for public comment, and then release a final version of the regulation.
Why are two Agencies involved, you may ask? Because each Agency governs a different kind of product. The CFTC’s rules on Swap Execution Facilities will apply to index-based credit default swaps (CDS) and interest rate swaps. The SEC’s rules will apply to single name CDS. Don’t worry about the difference if these terms are new to you. All you need to know is that the SEC is in charge of some products, the CFTC other products.
Where are the CFTC and SEC at now with Swap Execution Facilities?
Still with me? Good. So, both the SEC and the CFTC have released draft rules to implement Dodd-Frank 721 and 761. In English, they’ve written draft rules to define what a “Swap Execution Facility” should look like. They have not yet written the final rules. And as sometimes happens, the SEC and the CFTC disagree on a few things.
What they do agree on, is that you should not be able, as a Wall Street Dealer, to only provide price information on the phone. They are still free to use the phone to do their jobs (clients can still call and request a quote on a swap), but they agree to post prices simultaneously to all participants and that all participants have equal access. They cannot show prices to their favorite client first. Brokers already use this method of trading today. It’s called the Voice Hybrid method. Think of it like your non-tech-saavy friend who wants to try the internet, but still needs some hand-holding. The Swap Execution Facility rules say, sure, you can use the phone. But, to go back to our Schwinn example, the person at the bike store also has to post their prices on the internet.
What the SEC and the CFTC disagree on is whether you should be allowed to ask for a price (via this new electronic forum) form only one dealer. The SEC says that’s ok. The CFTC says you need to ask for prices from at least five dealers. I am with the CFTC on this one. More prices, more transparency.
Enter the Swaps Execution Facilities Clarification Act
At its heart, this bill is all about defending the one-on-one phone business, which is at risk due to the Swap Execution Facility Rules.
HR 2586, the Swaps Execution Facilities Clarification Act (full text), is set to hit the House around mid-April. This bill seeks to change this part of the Dodd-Frank Act before the regulators have even finished the final rules. The CFTC and the SEC have proven and thoughtful process that works–we should let them do their jobs.
Rather than requiring clients ask for prices from five dealers, as the CFTC has proposed, the bill says you can’t require a minimum number of dealers to receive price requests (“how much is your Classic Red Schwinn?”). The bill’s logic is that one on one phone calls are best (read: for Wall Street), and requiring that multiple dealers provide prices is bad (read: for Wall Street). So much for trying to make an opaque market more transparent.
What else does it do? Well, it bars the mandating displays of prices. If you don’t want to display prices, you don’t have to, says HR 2586. Again, so much for transparency!
So What Now? HR 2586 has eight co-sponsors, and will likely hit the House in two weeks. If you think that risky, opaque derivatives trading had something to do with the financial crisis, you may want to think about calling your Congressperson (capitol switchboard is: (202) 225-3121, just ask for your Congressperson by name) and voice your opposition to the Swap Execution Facilities Clarification Act (HR 2586). Tell your Congressperson we need more transparency in the derivatives market, not less.
UPDATE: Unfortunately the JOBS Act passed the Senate, albiet with important amendments to the Crowdfunding section that added in important disclosures, and then the amended version passed the House. It awaits Obama’s signature. I am updating this post to reflect the problems that still remain with this bill, but to also explain the problems that were fixed by the Senate amendment.
At a time when it’s is clear that Americans deeply want want more accountability, more justice, and more financial regulation, Congress is quickly and sneakily paving the way for less accountability, less financial records, and more potentials for investors to be completely exploited.
They are doing so with a new bill that flew through the House with bipartisan support and is set to his the Senate this Tuesday. It sounds great: the J.O.B.S Act (Jumpstart Our Business Startups). Except it’s not great, it’s absolutely egregious. It’s probably the worst roll-back of investor protections in decades. It risks putting us back into the wild west environment that led to the 1929 crash.
Worse still, they’re couching it in this JOBS language when really it’s about financial deregulation. And at a time when anti-bank, anti-fraud sentiment is so high, and people are talking about conflicts of interest (see: Greg Smith’s recent op-ed on why he left Goldman Sachs), here we have Congress passing a bill through the house with flying colors that will create the potential for more fraud, more conflicts of interest, and more scams.
The bill is touted for helping startups, but if you actually read it, it defines a new class of company called an “Emerging Growth Company,” which is defined as a company with up to $1 billion in gross revenues per year. It proceeds to undo reporting and audit requirements for these new class of companies, which I’ll detail next.
For five years after an IPO, Emerging Growth Companies (EGCs) and not required to submit to Sarbanes Oxley internal control certifications–which were controls put in place post-Enron to put the CEO on the hook for accounting fraud. With the JOBS Act, these EGCs are not required to run audits to prove you’re not cooking the books for 5 years following the IPO.
The approach to IPOs makes U.S. markets less transparent than Hong Kong. It will lower the required disclosure of core financial information to two years for these Emerging Growth Companies. Three years of financial statements have been required of all U.S. public companies for over 70 years.
An Emerging Growth Company does not have to be a new company. A private equity firm could take a public company private, and as long as they had less than $1 billion in revenues, they’d qualify for treatment as an EGC. The Private Equity firm can now flip the company (i.e. sell it to another investor or facilitate a merger) with only two years of financial disclosures.
It rolls back the wall between the investment bank and the research analysts. It used to be that if you were an investment bank underwriting a company’s IPO, you couldn’t create research touting the stock–that’d be a conflict of interest. With the JOBS Act, Emerging Growth Companies are exempt from this rule. Goldman Sachs can take a company public, and provide research to the market on why you should buy the stock, too.
Currently, Regulation D prevents solicitation or advertising for what’s called a “private placement.” Hedge Funds, for example, cannot advertise. Now, that rule is gone. Solicitation is ok, as long as the only people who buy in to your hedge fund or private placement are “accredited investors” (i.e. have a net worth of $1 million or more). Accredited investors isn’t a new thing. What’s new is that the JOBS Act will now allow Hedge Funds and private placements to advertise. So, we could see things like investment banks posting billboards by senior citizen homes and cold calling seniors to try and get them to pump “private” investments.
There is no SEC registration is required for websites engaged in crowdfunding. In fact, companies can raise up to $1 million while providing no financial information at all to potential investors. This is nothing more than a recipe for fraudulent activity. UPDATE: The Senate thoughtfully amended the Crowdfunding provisions, and now a number of important disclosures and SEC registrations are present
And to top it off, investors can bet up to $10,000 (or 10% of their annual income, whichever is less) on a given company. There is no aggregate cap on investments, so an investor could in theory repeat this bet 100 times over across 100 different companies. UPDATE: This was also addressed in the Senate Amendment, and now individuals cannot invest more than $1 million in aggregate.
There is also no prevention of, nor disclosure required for, a company hiring people to promote the stock. UPDATE: The Senate also fixed this with the amendment, requiring that if someone provides “promotional communication” and is paid to do it, they must “clearly discloses the receipt, past or prospective, of such compensation”
Sound bad to you? It should. This is being hyper-aggressively pushed as a bi-partisan jobs effort, but this is really a boon to Wall Street, Venture Capitalists eager for an easy exit on their investments, and an invitation to re-inflate the dot com bubble and bring back the Boiler Rooms.
If you care about investor protections, preventing fraud, you should contact your Senator as soon as possible and urge them to throw out the JOBS Act. There is an amendment, the INVEST Act, that builds investor protections into the bill, but the best thing to do would be to throw this bill out all together.
You can send a form letter here or here, but I urge you first thing on Monday to also call your Senator’s Office. You can simply call the Capitol Switchboard and ask to be connected to your Senator’s Office: (202) 224-3121.
I think they are trying to fast-track this before the public can decipher what it’s truly about. I heard they may vote in the Senate on Tuesday. I find it truly alarming. It seems the Obama administration and Congress want a quick win that is bipartisan and has “jobs” in the title, but they are doing so with this sneaky piece of deregulation that will increase conflicts of interest, increase potential for fraud, and help all the wrong people.
Please note that this, and all content on my blog, represents only my personal view, not the view of any of the working groups I participate in at Occupy Wall Street.
Settling would have allowed Citi group to avoid having to admit any guilt at all. All the SEC charged them with was “negligence.” They did NOT charge them with “scienter” which is legal-speak for fraudulent intent. This is despite the SEC having referred to Citigroup in a memo as a recidivist (a habitual criminal). Judge Rakoff states in the ruling: “By the S.E.C.’s own account, Citigroup is a recidivist, SEC Mem. at 21.”
Settling also would have allowed Citi to avoid going to court, where the case would be argued out in public and put before a jury, and should they lose, they could be subject to FAR more in fines than the $285 million they were trying to settle for.
Essentially, the SEC was offering Citi a slap on the wrist. Usually, judges just rubber-stamp these settlements.
But not this time. This time, Judge Rakoff threw out the settlement, insisting it must go to trial. His ruling is really a smack-down of both Citigroup and the SEC. He doesn’t really pull any punches.
Here are a few choice quotes (emphasis mine):
“An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts — cold, hard, solid facts, established either by admissions of by trials — it serves no lawful or moral purpose and is simply an engine of oppression.”
Another choice part of the ruling:
“Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”
This is one of the strongest signs yet, in my opinion, that not only is the world watching, but our movement is holding the powers that be accountable, and our allies are all emboldened by everything we do. Now, to be fair to Judge Rakoff, he’s expressed doubt over these settlements in the past:
He “reluctantly” approved a $150 million settlement between Bank of America and the SEC last year, after calling the deal “half-baked justice at best.”
But today he seems to be willing to go further than he has before.
Monday’s decision could have implications beyond Citibank. Settling out of court with no admission of wrongdoing has frequently been the SEC’s modus operandi in cases like this. If political momentum built in the wake of Rakoff’s ruling and other judges picked up his banner, Wall Street could face a level of scrutiny it has so far avoided.
Pat yourself on the back today, Occupy Wall Street. The world is starting to change.
I have been busy. I have been actively involved with the Occupy Wall Street protests, in a number of Caucus and Movement groups (including Occupy the SEC which is a part of the Alternative Banking group). I’m long overdue to post to tell you about how I feel like a lawyer these days as I comb through The Volcker Rule text looking for loopholes the banks will use.
The point is simple: unlimited campaign donations by corporations is free speech, per the Citizens United Supreme Court Case. But tents in a park is not free speech. Instead, it requires a military-style show of force at a time when our city is ostensibly unable to afford anything. And now I am hearing that Brookfield Properties who owns the park is not even allowing signs into the park. Free speech, indeed?
Here is an excellent video of the scene at the night of the eviction, set to Frank Sinatra:
I used to work on Wall Street, so I do think I have a sense of what is good and what is bad (and what is egregious) there. I do think that marching on the NYSE is not the best strategic move. The NYSE is a public, transparent exchange where listed products trade. This is not a warehouse of opaque CDOs that trade Over-the-counter in numbers no one knows and, per the 2000 “Commodity Futures Modernization Act” no one could regulate.
But the movement overall has shone a light on a fact Wall Street wished we’d simply forget: that they are not playing by “free market” rules, though they expect us to.
I lost all sympathy with the executives and producers of major banks in 2009. Here, after having gotten massive, hugely visible rescues, and continuing support in the way of super low interest rates (a massive transfer from savers), they did not do the right thing, which was to lay low for a couple of years, cut pay, and rebuild their balance sheets. Instead, banks fell all over themselves to repay the TARP simply to escape its think restrictions on executive pay, and Wall Street bonuses in 2009 and 2010 exceeded the 2007 record.
As we’ve argued, banks, particularly in this era of extraordinary support (rock bottom interest rates, regulatory forbearance, underpriced insurance schemes) enjoy far more government support than any other industry, including defense contractors. They can’t properly be considered to be private companies. They are utilities and need to be regulated as such. And if they won’t rein in pay levels on their own, it should include restrictions on pay.
And so, today at 5pm I will march on Foley Square. If you have been on the sidelines up until now, come join us today. Come see what we are up against. And come feel your heart soar, as mine has, as you stand side-by-side with a community of people who are finally getting out from behind their laptops and into the streets to make lasting change that’s been so long overdue.
In my mind, there are two possible interpretations here. The first is this is an attempt at suppression from multiple levels: communication and law. If you control the medium, you control the message. If you control the enforcers, you can supplant the law.
Hedges recently gave a lengthy interview at Occupy Wall Street (which was so good I stayed up until 4am last night watching every part of it. He is so articulate and moving that I think my brain exploded a little listening to him), and one of the things he said is relevant here:
The real people who are scared are the power elite. Of course, they’re trying to make you scared and us scared. But I can tell you, having been a reporter for the New York Time, that on the inside, they’re very, very frightened. They do not want movements like this to grow.
Which interpretation is right? Perhaps both. We shall see.
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