If you don’t believe that there is one set of rules, laws, regulations and consequences for big business, big investors or big banks, and another set for everyone else, I would REALLY like to sell you some prime farm land in the middle of the Mississippi River.
Yesterday’s Knoxville News (Tennessee) ran a story about a man who was sentenced to 12 months in prison and $25,000 for routing cigarettes through a firm in Tupelo, MS to avoid paying taxes. Now compare that to MF Global Holdings Ltd., a brokerage firm that specialized in futures and derivatives trading, which filed for bankruptcy protection in October 2011.
MF Global was the first American financial casualty of the European debt crisis. John Corzine CEO, is the former CEO of Goldman Sachs and the 54th Governor of New Jersey from 2006 to 2010. MFG provided investing services for institutional investors like company 401(k) Plans, IRAs, etc. It made some risky investments in Spain, Italy, Portugal, etc., began to lose customers, and credit agencies eventually downgraded their ratings on MFG to junk.
Regulators believe that MF Global improperly used customer money for its own purposes in its last days before filing for Chapter 11 protection and violated a fundamental Wall Street regulation that firms never commingle customer money with company funds.
In this single instance, and just before filing bankruptcy, MF Global spent $1.6 billion of its customers’ money, or one-third of its total customer funds. No one has gone to jail, and the best prospect appears that the bankruptcy judge MAY be able to recover 70% of the lost customer money.
In another recent case, customers of an Iowa futures trading firm, Peregrine Financial Group Inc., found out last month that they had lost $200 million after the firm’s chief executive officer said in a suicide note that he had been running a Ponzi scheme for 20 years.
I would hope that the ironies, inconsistencies, and inequality of how justice is being meted out in this country would be important to “News” organizations. Oh, that’s right, I’ve established in earlier articles that the U.S. no longer has any “News” organizations and even if we did, very few Americans would pay attention.
I suppose it’s possible that Americans might have forgotten about the 2008 Wall St. collapse, brought on by inadequate financial transaction regulations and lack of transparency, but the economy almost collapsed in 2008. Quite a few “bad things” came afterward:
- Credit froze
- Financial firms went under
- Millions of people were thrown out of work as business owners lost their financing and their confidence.
One would think that something like that would stay with folks.
A GOP Favorite: Regulation Cost-Benefit Analysis
Last month, the House Committee on Agriculture explored what it cryptically referred to as “Recent Events (that would be the lost customer money) and Impending Regulatory Reforms (which better not be too expensive).” This is called the financial regulation, cost-benefit analysis. The emphasis is, of course, on the costs, not the benefits.
Among those testifying were two prominent Futures Industry privileged: Terrence A. Duffy, president of CME Group Inc., the world’s largest futures market, and Walter L. Lukken, CEO of the Futures Industry Association, a Washington-based trade group.
The two men made the obligatory claims about beefing up the industry’s vigilance against fraud. Then both took advantage of the opportunity to get it on the record that there’s “a more important list of items” to be considered.
Quoting Mr. Duffy: “I would hate to see us get over-regulated to a point or have rules put upon us that put us in a very…a place that is very anti-competitive.”At a Senate hearing yesterday, he reluctantly said he guessed he wasn’t opposed to an insurance fund for fraud victims “if people want to pay for it.”
How magnanimous of Mr. Duffy.
Quoting Mr. Lukken: “It would be wise to carefully weigh the costs of any new regulatory mandates.” After all, some of the rules being proposed by the Commodity Futures Trading Commission could lead to “market disruption, the exit of futures brokers from the business, the limiting of customer choice.”
Call me crazy, but I don’t imagine that the customers who lost their life savings, played by the rules, and squirreled away retirement money in the cases cited above (or any other for that matter), just to wake up flat broke one day would be too damn devastated if there were a couple fewer ways for these wealthy elites to steal their money with no consequences.
I suppose I held a modicum of hope after passage of the Dodd-Frank Act two years ago that lawmakers had put some minimum measures in place to avert another financial disaster. Of course had the GOP not made “regulation” their number one boogey man since Ronald Reagan began dismantling protections enacted after the Great Depression, I’d feel a lot better.
To get the reforms implemented, however, government agencies first have to write rules that would execute the law’s objectives. So what do the Republicans do? Why they do what they do best, of course.
Another GOP Favorite: Let the Obstruction and Fear Tactics Begin
The financial industry has used many tactics to disrupt the implementation development, but its most brazen victory was a 2010 lawsuit by the Business Roundtable and the U.S. Chamber of Commerce vs the Securities and Exchange Commission. The SEC had proposed a rule to make it easier for investors to oust corporate directors. But the conservative U.S. Court of Appeals in Washington said that the SEC hadn’t properly assessed the rule’s costs and benefits. The wording, much less the ruling was “an aggressive stretch of the law” in the view of John Coffee, a distinguished securities law professor at Columbia University.
Regardless, it is what the SEC is stuck with. Worse, it’s become “the cornerstone of the attack of regulatory reform in the courts,” according to an 82-page report released by the investor advocacy group Better Markets.
To get an idea of the degree to which big business has the advantage in this fight, think about what it involves to be the poor sap that has to explain the “benefits” side of financial regulation.
Costs are easy to figure out. Add up the salaries of necessary compliance officers, there’s probably software needed to conform to Dodd-Frank’s exposure requirements. Boom. Done. An hour tops and you have the cost.
But how do you quantify benefits? Benefits like:
- The frauds that won’t happen because there are explicit rules are in place?
- Is there even a logical way to calculate the dollar figure on preventing credit markets from collapse?
- How would one go about quantifying what the elderly won’t lose in their life savings because regulators have cracked down on rip-off artists who troll retirement villages or buy AARP member lists?
Each should be an important consideration, but you won’t find those being asked at Washington/Republican hearings before the House Committee on Oversight and Government Reform. One such hearing took place in April on, “The SEC’s Aversion to Cost-Benefit Analysis.”
On that day, Jacqueline C. McCabe, Executive Director for Research for the Committee on Capital Markets Regulation had this suggestion for regulators considering the best way to produce the cost-benefit equation correctly:
- If a regulator isn’t able to develop data for its cost-benefit analysis internally, it should get the numbers from third parties…like, say, trade organizations. (Say what?)
- If that doesn’t work, the agency should try to get the information directly from the firms that will be affected by the regulations. (Yeah, I’m sure they will be thrilled to help the SEC put a new rule in place.)
Ms McCabe did admit that financial firms might me “inconvenienced” receiving such requests and that might be “burdensome for the firms.” Wow, what a gal.
Ms McCabe went on, “So overseers should make data requests “with an eye to minimizing the imposition on and disruption to” the firms they regulate.
The object of this exercise, of course, is to swamp regulators with so much cost-benefit work that rule-making will be impossible. Does anybody think they gave a second thought to the elderly folks “inconvenience” who lost their life savings or pensions plans or 401(k)s? If they did they certainly forget to say so every single time!
No, this ruse is to make sure that they keep the SEC busy. In fact, one proponent of cost-benefit analysis showed up at that House Oversight hearing in April with a super-terrific-dandy checklist for the SEC.
J.W. Verret, an assistant professor at George Mason University’s law school, said in his testimony that when the SEC proposes a rule, it should estimate (read, assign a dollar amount)the impact on :
- “Job creation”(of course)
- And gross domestic product
- And whether U.S. stock exchanges might lose listings to overseas rivals
- And then for good measure? What the heck, he said. Why not just have the SEC “retract and re-propose” the Dodd-Frank rules the agency has completed, and start all over again with a new cost analysis.
Maybe by the time the SEC is finished with that, maybe we’ll have had another couple of London whale copycats. Or maybe there will be time for a mini flash crash like the one a couple of days ago. Or who knows, maybe another MF Global, or Barclay’s LIBOR scandal, or gosh, some we haven’t even seen yet!!
Then we can start the whole damn regulation argument all over again!
Providing there’s any money left that fat cats haven’t stolen, or that Republicans haven’t given to oil companies in exchange for campaign contributions in order to eliminate those pesky damn regulations.