Lincoln Amendment or Bust

It looks like the fate of financial reform will get decided on Friday. There have been so many ups and downs in this effort. We've lost so many battles over crucial parts of the bill. It was never that tough to begin with; there are issues with capitalization requirements; there isn't enough control of leverage; the Franken amendment reforming rating agencies should have never been removed. And the list goes on and on (though apparently we have had some recent victories as well).

Despite all of these losses, I'm ready to take half a loaf ... if - and this is a big if - we get to keep the Lincoln amendment on derivatives. It can't be watered down at all. It has to be the real deal. But if that is still in the bill then I think it would be worth voting for - and a real accomplishment for the Democrats.

I have always maintained that complex derivatives were the primary cause of the financial collapse. It's one thing for one bet to go wrong (the subprime market), it's another to have a hundred bets on top of that original bet all go wrong at the same time.

If the banks can't use depositor money as collateral for their betting and they don't get backed up by taxpayers on those bets, then they are free to win or lose them all they like. I have never cared how much profits or losses the banks had, as long as they didn't get the money from us.

I know the Lincoln amendment isn't perfect either and the rest of the bill doesn't have enough restrictions on derivatives (I would ban naked CDS's all together, like Europe is considering). But I'll take this as good starting point. At least the derivatives trading would be split off from taxpayer backed funds and deposits.

I'm afraid if we don't do real financial reform and in a hurry, we are almost certainly headed toward another economic catastrophe. And I'm not sure this bill alone would help us steer away from it. But if the Lincoln amendment passes at least we have fighting chance. Without it, the bill is a joke meant to placate you until the next collapse.

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Lincoln Amendment or Bust

It looks like the fate of financial reform will get decided on Friday. There have been so many ups and downs in this effort. We've lost so many battles over crucial parts of the bill. It was never that tough to begin with; there are issues with capitalization requirements; there isn't enough control of leverage; the Franken amendment reforming rating agencies should have never been removed. And the list goes on and on (though apparently we have had some recent victories as well).

Despite all of these losses, I'm ready to take half a loaf ... if - and this is a big if - we get to keep the Lincoln amendment on derivatives. It can't be watered down at all. It has to be the real deal. But if that is still in the bill then I think it would be worth voting for - and a real accomplishment for the Democrats.

I have always maintained that complex derivatives were the primary cause of the financial collapse. It's one thing for one bet to go wrong (the subprime market), it's another to have a hundred bets on top of that original bet all go wrong at the same time.

If the banks can't use depositor money as collateral for their betting and they don't get backed up by taxpayers on those bets, then they are free to win or lose them all they like. I have never cared how much profits or losses the banks had, as long as they didn't get the money from us.

I know the Lincoln amendment isn't perfect either and the rest of the bill doesn't have enough restrictions on derivatives (I would ban naked CDS's all together, like Europe is considering). But I'll take this as good starting point. At least the derivatives trading would be split off from taxpayer backed funds and deposits.

I'm afraid if we don't do real financial reform and in a hurry, we are almost certainly headed toward another economic catastrophe. And I'm not sure this bill alone would help us steer away from it. But if the Lincoln amendment passes at least we have fighting chance. Without it, the bill is a joke meant to placate you until the next collapse.

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Follow Cenk Uygur on Twitter: www.twitter.com/TheYoungTurks
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Weekly Audit: Financial Reform Makes Headway, Jobs And Social Security In Jeopardy

by Zach Carter, Media Consortium blogger

Two critical Wall Street reforms, once declared dead by U.S. megabanks, are suddenly close to Congressional approval. As the House and Senate iron out the differences between their financial overhauls, it now appears that lawmakers are finally willing to ban banks from gambling with taxpayer money by implementing a strong Volcker Rule, and to end taxpayer subsidies for risky derivatives operations.

These reforms will help stabilize the U.S. economy by clamping down on the naked speculation the drove financial markets off a cliff in 2008. But while lawmakers are finally waking up to the economic and political necessity of strong Wall Street reforms, conservatives have blocked key efforts to ease unemployment. President Barack Obama also appears ready to surrender to an assault on Social Security later this year.

Derivative of what?

Lawmakers now have the political momentum to end taxpayer subsidies for the trading of derivatives, as I emphasize for AlterNet. These risky businesses helped sink big banks and jeopardize the broader economy in 2008. These reforms would be a giant step towards reclaiming the U.S. economy for ordinary citizens, and they would fly in the face of opposition from both Wall Street and Treasury Secretary Timothy Geithner.

Derivatives are the infamous financial weapons of mass destruction that brought down AIG and Enron. Many of the biggest scandals arising from the current financial crisis were derivatives operations, from Lehman Brothers’ accounting gimmicks to the SEC’s fraud suit against Goldman Sachs. By allowing traditional commercial banks to sell derivatives, the U.S. government actually subsidizes the entire market, encouraging speculation and ramping up risks across the economy.

Wall Street’s political clout stems from its derivatives machinations and its “proprietary trading,” otherwise known as gambling for their own accounts. Both provide big, easy profits that banks convert to bonuses, lobbying and political contributions.

Ending the subsidies for derivatives, and implementing a strong Volcker Rule to ban outright bank gambling would be the first major blow to Wall Street’s total dominance on economic policy, one with lasting implications for the enforcement of other new regulations, including stronger protections for consumers.

Debtors’ Prisons

Plenty of economic battles will remain after this year’s Congressional contest over Wall Street. As Annie Lowrey emphasizes for The Washington Independent, authorities in several states are actually throwing people in jail for failing to pay off credit cards and other debts. Lowrey highlights a story and study by the Minneapolis Star-Tribune which reveals that, as the recession has deepened, judges have been ramping up arrest warrants for people who don’t pay their debts. In Minnesota alone, 845 people were arrested for being in debt in 2009, up 60 percent from four years ago.

As Lowrey notes, it’s not a crime to be in debt or fail to pay it off. But debt collection agencies have still been able to persuade judges to put borrowers behind bars until they make minimum payments. This is a total abuse of the justice system and a waste of taxpayer dollars.

Sometimes borrowers just can’t pay—that’s the dominant risk involved in banking, and being able to figure out who can pay and who can’t is the job of a banker, not a police officer. Debt collectors, by contrast, purchase debts at a discount, precisely because it is unlikely that borrowers will be able to pony up. If they can’t, that isn’t the business of a criminal court. It’s the risk inherent in a business model based on scavenging.

Slashing Social Security

Other items on the economic policy agenda are looking similarly ominous. As Robert Kuttner emphasizes for The American Prospect, Wall Street tycoon Pete Peterson appears to have found an ally in the Obama administration for his lifelong quest to slash Social Security. The plan is to pull back support for seniors in the name of balanced budgets. These cuts will be totally counterproductive economically, as would the corresponding middle-class tax hike and domestic spending freeze that Peterson is pushing for.

The real fight over Social Security is still a few months away, but as GRITtv’s Laura Flanders notes in an interview with Sen. Bernie Sanders (D-VT), deficit hysteria has already infiltrated contemporary policies. Republicans and conservative Democrats are using the deficit as an excuse to deny people the most basic social services, like unemployment benefits and health care payment assistance for the unemployed.

More on the deficit “problem”

As the editors of The Nation note, there is no short-term U.S. budget deficit problem. Interest rates on U.S. Treasury bonds are at record lows. Anybody who claims to be worried about the deficit is really worried about the longer-term implications, and those longer-term issues have big-picture, long-term solutions.

The single most critical variable in budget calculations in the increasing rate of health care costs, but the bloated defense budget and low tax rates for big corporations and wealthy individuals are also a target. Skimping on unemployment benefits, or refusing federal aid to hire teachers and cops doesn’t help those long-term issues one bit.

Cutting government spending and social services during a recession seriously threatens economic recovery. When everybody is broke, the government is the only reliable source for the spending needed to support growth and employment, and it has to keep spending until things really turn around. Obama’s 2009 stimulus kept the unemployment rate from reaching 12 percent or 13 percent, but it was just too small to really turn the economy around. With unemployment at 10 percent, we need more federal support for jobs, not less.

The recent progress on Wall Street reform shows that Congress finally understands that they need votes more than campaign contributions. Lawmakers who leaves those citizens out to dry by refusing to back a jobs bill or allowing unemployment benefits to expire will be in trouble come November.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

Financial reform update

The massive oil spill in the Gulf of Mexico and the many primary elections this month have drawn much of the media's attention away from the Senate debate on financial reform. That's too bad, because this bill will affect the future stability of our financial system and the ability of financial institutions to fleece consumers. I've been catching up with David Dayen's superb coverage of the financial reform debate, and most of the news isn't encouraging.

Senate Republicans voted several times in early May to block the bill from coming up for debate, but they soon decided that was not a viable strategy. In the early days of Senate debate, some decent amendments were adopted to strengthen the bill. For example, one amendment sponsored by Jeff Merkley of Oregon and Amy Klobuchar of Minnesota, which passed last week, would ban some deceptive practices by mortgage lenders.

This week Republicans have been trying to "run out the clock" on more strengthening amendments. By denying unanimous consent to bring these amendments to a vote, they have been able to keep the Senate from voting on an amendment by Byron Dorgan of North Dakota, which would ban naked credit default swaps. Republicans have also blocked a vote on Tom Harkin of Iowa's amendment to cap ATM fees at 50 cents. In addition, a measure backed by Merkley and Carl Levin of Michigan, which would impose the so-called "Volcker rule," has been denied a vote. Merkley-Levin "would ban proprietary trading at banks and require the Federal Reserve to impose tougher capital requirements on large non-banks that engage in the same type of trading". I have a sense of deja vu reading about the Merkley-Levin amendment; like the public health insurance option, Merkley-Levin has the stated support of the White House and Senate Majority Leader Harry Reid. And as with the public option, these Democrats won't do what's necessary to get Merkley-Levin into the bill.

Meanwhile, many Senate Democrats are doing Wall Street's bidding by watering down key provisions of the financial reform. Most of the Democratic Senate caucus backed an amendment from Tom Carper of Delaware, which "would block class-action lawsuits by state Attorneys General against national banks" and "would allow the Office of the Comptroller of the Currency to pre-empt regulation at the state level of consumer financial protection laws." Chris Dodd of Connecticut got an amendment through last night that eliminates real derivatives reform from this bill. Now, instead of forcing some large banks to spin off their businesses in trading derivatives, Dodd's amendment delays that move for two years so the issue can be further studied.

Dayen concludes, "Overall, we have a bill that got less bad through the Senate process, but is generally as mediocre as the House’s version, better in some ways, worse in others. And there’s a whole conference committee to go." Looks like we'll be stuck with a bill that only gives the appearance of solving key problems, as opposed to a bill that would solve the key problems.

Share any relevant thoughts in this thread.

WEDNESDAY AFTERNOON UPDATE: Dodd withdrew his derivatives amendment today, Merkley and Levin are trying a new tactic to get their amendment considered, and Reid's cloture vote failed today, 57-42, despite two Republicans yes votes (Olympia Snowe and Susan Collins of Maine). Reid voted no at the last minute so that he could bring up the matter again tomorrow. Two other Democrats voted no: Russ Feingold of Wisconsin and Maria Cantwell of Washington. Like several other Senate progressives, Feingold wants votes on more strengthening amendments, and Cantwell isn't happy with "a loophole in the derivatives piece".

Weekly Audit: Wall Street Goes to the Movies

by Zach Carter, Media Consortium blogger

Last week, the U.S. Senate rejected a plan that would have broken up the nation’s six largest banks firms into firms that could fail without wreaking havoc on the economy. Even though the defeat reinforces Wall Street’s political dominance, there is still room for a handful of other useful reforms, like banning banks from gambling with taxpayer money and protecting consumers from banker abuses. After looting our houses, banks are now pushing for the ability to bet on movie box-office receipts, and will keep trying to financialize anything they can unless Congress acts.

Wall Street calls the shots

Writing for The Nation, John Nichols details last week’s Capitol Hill damage. Today’s financial oligarchy, in which a handful of bigwig bankers and their lobbyists are able to write regulations and evade rules they don’t like, will still be in place after the Wall Street reform bill is passed. The lesson is clear, as Nichols notes:

Whatever the final form of federal financial services reform legislation, one thing is now certain: The biggest of the big banks will still be calling the shots.

Still worth fighting for

As I emphasize for AlterNet, Congress has made a terrible mistake here, but there is still room for reform. It took President Franklin Delano Roosevelt seven years to enact his New Deal banking laws. It took even longer to reshape public opinion of monopolies when President Theodore Roosevelt took on Corporate America in the early 1900s.

What’s still worth fighting for? We have to curb the derivatives market—the multi-trillion-dollar casino that destroyed AIG. We have to impose a strong version of the Volcker Rule, which would ban banks from engaging in speculative trading for their own accounts. We have to change the way the Federal Reserve does business and force the government’s most secretive bailout engine to operate in the open. And we have to establish a strong, independent Consumer Financial Protection Agency to ensure that the horrific subprime mortgage abuses are not repeated.

As Nomi Prins details for The American Prospect, the current reform bill will not effectively deal with the dangers posed by hedge funds and private equity firms—companies that partnered with banks to blow up the economy through investments in subprime mortgages. That means that whatever happens with the current bill, Congress must again take action next year to rein in other financial sector excesses.

The derivatives casino at the movies

As Nick Baumann demonstrates for Mother Jones, banks are doing everything they can to gobble up other productive elements of the economy. The economy crashed in 2008 in large part because banks had used the derivatives market to place trillions of dollars in speculative bets on the housing market. This wasn’t lending, it was pure gambling: Instead of using poker chips, bankers placed their bets with derivatives. But, as Baumann emphasizes, banks are now looking to expand the sort of thing they can make derivatives gambles with. The latest proposal is to allow banks to bet on the box office success of movies. That’s right, banks would be gambling on movies.

Hollywood may be shallow, but it isn’t stupid. It doesn’t want to see the banking industry repeat its destructive looting of the housing industry on the movie business, and is pushing hard to ban banks from betting on movies. But we can’t count on every industry having a powerful lobby group to counter every assault from the banking system.

Taking stock in schools

Consider the unsettling report by Juan Gonzales of Democracy Now!. Gonzales details how big banks gamed the charter school system to score huge profits while simultaneously saddling taxpayers with massive debts that make teaching kids supremely difficult. By exploiting multiple federal tax credits, banks that invest in charter schools have been able to double their money in seven years—no small feat in the investing world—while schools have seen their rents skyrocket. One school in Albany, N.Y. saw its rent jump from $170,000 to $500,000 in a single year.

About that unemployment rate…

It’s not like public schools are flush with cash right now. The $330,000 increase in rent could pay the salaries of more than a few teachers. As the recession sparked by big bank excess grinds on, even the good news is pretty hard to swallow. As David Moberg emphasizes for Working In These Times, the economy added 290,000 jobs in April, but the unemployment rate actually climbed from 9.7 percent to 9.9 percent in March. That’s because the unemployment rate only counts workers who are actively seeking a job—if you want a job but haven’t found one for so long that you give up, you’re not technically “unemployed.” All of those “new” workers are driving the official figures up.

In other words, it’s still rough out there. And likely to stay rough as state governments try to deal with the lost tax revenue from plunging home values and mass layoffs. Nearly half of all unemployed people in the U.S. have been out of a job for six months or more. And while we’d be much worse off without Obama’s economic stimulus package, that percentage is likely to grow this year, Moberg notes.

This is what unrestrained banking behemoths do. They book big profits and bonuses for themselves, regardless of the consequences for the rest of the economy. Congress absolutely must impose serious financial reform this year. After the November election, breaking up the banks must once again be on the agenda when Congress considers the future fate of hedge funds, private equity firms, Fannie Mae and Freddie Mac. If we don’t rein in Wall Street, banks will continue to wreak havoc on our homes, our jobs and even our schools. Congress must act.

This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. It is free to reprint. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora. This is a project of The Media Consortium, a network of leading independent media outlets.

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