Wall Street Is Winning the Long War Against Post-Crash Regulation

By Heidi Moore, Guardian UK

16 June 13

ess than ten years ago, if a Wall Street trader wanted to find a sucker to buy bad mortgages, he knew where to find him: often, sitting in an office in a German landesbank in a small city, looking for a risky bets that would make him a killing.

The German network of savings and loans – 2,000 state-backed banks, fattened over time by Germans saving around 12% of their income a year – were designed to make loans to local businesses. But starting around 2004, they started following the same dangerous path as the the tiny US savings and loans companies in the 1990s, which gorged on mortgage lending.

The investment managers at the German landesbanks, usually unsophisticated compared to their sharper cousins in London and New York, became reliable buyers for risky, complicated mortgage derivatives. In fact, the Germans landesbanks and other foreign investors wanted to gobble up so many mortgage-backed securities that the American banks bundling the mortgage mortgages started pandering to them: many adjustable-rate mortgages in the US, designed for overseas buyers, newly had their interest rates set to Libor, the European interest rate, as that made it easier for the European buyers of the bundled US mortgages.

The rest, you know.

The US banks packaged the mortgage derivatives faster and faster to feed appetite these mortgages from Germany and elsewhere. That led to lower loan standards to speed up the process of packaging the loans. By 2007, the subprime bubble burst. Foreign buyers had grabbed so many mortgages that they choked.

US banks needed bailouts. The German banks needed bailouts. European banks needed bailouts. Lawsuits funneled through the courts on two continents. We're still living the consequences.

All of which is to say, the financial system is global. There are no such things as borders in the world of finance; it's an integrated whole. A fellow sitting in an office in Hamburg or London is as likely to change our financial world as the guy sitting in a trading room on Wall Street.

That's why it's so baffling that the House of Representatives came down, this week, on the side of ignoring abuses of US-made derivatives – known as swaps – as soon as they're wired overseas. These swaps were at the heart of the London Whale trading debacle, which lost $6bn for JP Morgan Chase. The bank was otherwise sound, and survived the stupid move easily. But not every bank is JP Morgan, and the next stupid swap deal could come at a cost to taxpayers if another bank needs a bailout or government support.

The House voted overwhelmingly to let the measure – labeled the London Whale Loophole Act by critics – pass. It's one of several measures that the House has taken to weaken oversight of derivatives; the other two will come up for debate soon.

It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate. According to MapLight:

"On average, House agriculture committee members voting for HR 992 [one of the derivatives bills] have received 7.8 times as much money from the top four banks as House agriculture committee members voting against the bill."

It's no surprise, of course – given the well-known influence of Wall Street in writing and influencing the bills that regulate Wall Street. Citigroup lobbyists infamously drafted 70 lines of an 85-line amendment that protected a large acreage of derivatives from regulation.

There is more to add. Gary Gensler, the current head of the Commodity Futures Trading Commission, was part of the financial industry before he was named, and he was hip to its tricks. He has been, largely, a headache for Wall Street firms who just want to get regulators out of the way. He has been a boon, however, to Americans who want to see Wall Street held accountable.

Wall Street is keenly interested in weak regulation and weak regulators. Enter Amanda Renteria, the potential nominee to take Gensler's place. A capable congressional staffer, Renteria has minimal financial experience: a couple of years at Goldman Sachs after college, and then a life in government. She didn't play a significant role in drafting Dodd-Frank legislation, according to the Huffington Post.

Think of derivatives – these complex securities that render ignorant and bewildered even the CEOs of the finance firms that engineer them – and think about whether a newcomer has a chance against the slick bankers and lobbyists armed with intimidating jargon. No matter how strong the personality, knowledge matters, and it takes years to understand the Wall Street fast-talking game. The CFTC is going to lose an immense source of knowledge when Gensler leaves. It looks like it won't be replaced.

All of this is part of the process of killing off the one flailing, pathetic attempt at financial reform: the Dodd-Frank Act. Dodd-Frank, bloated and vague from the beginning, was never a threat to Wall Street. Big banks thought they could wait out the outrage, then start undermining the intent of the law.

They were right, this time. But when they're wrong – and when those derivatives cause another crisis – it'll be Americans who pay the price.