Sen. Feingold & Cantwell: Stay Principled and Vote Against Weak Financial Reform Bill -- But Don't Let Republicans Filibuster

The Democrats' financial reform bill is weak tea that doesn't fix the problem of too big to fail megabanks or prevent the next cycle of boom, bust and bailout.

Liberal Democratic Senators like Wisconsin's Russ Feingold and Washington's Maria Cantwell--who have fought so hard for tougher reform and have indicated they may vote "No" on the final bill for being too weak--should vote against the bill when it reaches the Senate floor as a strong statement that this is a multi-year fight that Congress will have to address with stronger reforms in the future. But they shouldn't vote with Republicans in filibustering an up or down vote, thus allowing the bill to pass with a 51 majority instead of needing a 60 vote super-majority that Republicans are trying to impose on every Senate vote, large or small.

If the Republican filibuster of even weak reforms that slightly reign in the most egregious practices of the financial industry can be defeated, then a bloc of up to seven liberal Democratic Senators can vote against the final bill itself for being too weak without preventing final passage. Other Democratic senators like Ted Kaufman, Sherrod Brown, Al Franken, Bernie Sanders (Ind.), and Jeff Merkley--whose proposals for stronger reform have been watered down by the White House, the Senate leadership, the Conference Committee and lobbyists--could join Feingold and Cantwell in voting "Yes" to cut off a Republican filibuster and "No" on the final bill to send a message to the White House and Wall Street that the fight for meaningful limits on the power of the financial industry is not over and will be addressed further in future sessions of Congress. After all, it took five years for the complete panoply of New Deal financial reforms to be passed under FDR. It may take just as long today.

The best possible result would be for the final bill to pass by a vote of 51-48 with seven Democrats making a statement by voting "No."

Progressive organizations who have worked hard on financial reform like Public Citizen, Progressive Change Campaign Committee, and Americans for Financial Reform have been pressing the likes of Feingold and Cantwell to vote "Yes" on the final bill. I urge them to change tact and while pressing liberal Congress members to block a Republican filibuster, support seven Democratic Senators including Feingold and Cantwell in voting against the final bill to send a message that the fight for real financial reform continues.

The final Democratic financial reform bill is a bit like proposing new regulations on jaywalking after the biggest series of car wrecks in recent memory.

And let's remember what a giant car wreck the great financial meltdown of 2008-2010 has been to the economy and the lives of ordinary citizens in the US and around the world: the biggest recession in 70 years since the Great Depression; a 40% increase in government debt as a result of measures like TARP and the stimulus package to prevent the recession from turning into a depression, along with the decreases tax revenues and increases on expenditures on things like unemployment insurance; over 8 million jobs lost in the US; the threat of long-term unemployment and underemployment to millions; the inability of States to be able to pay for basic services like education and police protection; an increase in the concentration of wealth by the very megabanks that caused the meltdown.

The crisis provided a political opportunity to fundamentally restructure the financial system to make it unlikely that another cycle of bubble, bust and bailout will occur in the foreseeable future. But as MIT economist Simon Johnson notes in a blog entitled "Dead on Arrival" Financial Reform Fails,"

"Yet, at the end of the day, essentially nothing in the entire legislation will reduce the potential for massive system risk as we head into the next credit crisis."

Or as Sen. Russ Feingold wrote in an article entitled "Financial Reform Bill Fails Test of Real Reform,"

>"This bill fell short on a number of levels. It did not eliminate the risk to our economy of 'too big to fail' financial firms, nor did it restore the proven safeguards established after the Great Depression, which are essential to preventing another economic meltdown."

Or as former SEC Chairman Arthur Levitt wrote in The Wall Street Journal,

"As a lifelong Democrat and public servant to four presidents, I had hoped the financial reform bill would be the best example of my party's long-standing reputation for standing on the side of individual investors.

It's not. The bill, already weakened by deal-making as it emerged from the Senate, has been bled dry of nearly every meaningful protection of investors."

No wonder the stocks of megabanks shot up the day after the Conference Committee finalized the bill.

The bill has a few positive tidbits: a Consumer Protection Agency (although housed inside the Fed), a limited audit of the Feds massive loans to banks and non-banks in the midst of the financial meltdown; a requirement that some, but by no means all, derivatives be traded on exchanges; and a modified and watered down version of the "Volker rule" on federally insured banks trading for their own account in the global financial casino.

But when it comes to the major systematic failures in the financial system that led to the meltdown and the Great Recession, the bill does far too little:

• Too Big To Fail: The 6 largest banks now control assets totaling over 60% of the nation's Gross Domestic Product--more than they did before the financial crisis--and are still growing. The bill does nothing to limit their size. Since, in the next financial crisis, the government can't let banks this big and interconnected fail, this implicit guarantee allows megabanks to continue to take outsized risks and all but guarantees a future meltdown in the financial system. Moreover, size means outsized political influence that undermines democracy. A bank with assets exceed $2 trillion can spend whatever it takes to influence elections and convince Congress to pass legislation which it favors. Senators Sherrod Brown and Ted Kaufman proposed an Amendment to limit the size of megabanks which garnered over 30 votes (including 2 Republicans) in the Senate, but it failed after being opposed by the Obama administration and its economic team of Tim Geithner and Larry Summers.

• Separation of Commercial Banks and Investment Banks: For nearly 60 years Glass-Steagall Act banned federally insured commercial banks from gambling with depositors' money in the global financial casino, until it was repealed by a coalition of Republicans and corporate Democrats, which repeal was signed by Bill Clinton. An unlikely alliance of conservative Republican John McCain and liberal Democrat Maria Cantwell proposed an amendment to restore Glass-Steagall, but it, too, was defeated after being opposed by the Obama administration. The Obama administration seemed to support a watered down reform dubbed "The Volker Rule" after former Fed Chairman Paul Volker which would at least have banned federally insured banks from proprietary trading for their own accounts. The final legislation watered down the Volker Rule further by letting banks invest up to 3% of their so-called "Tier 1 capital" in hedge funds and private equity funds. But since banks often use leverage (i.e. debt) 10 times, 20 times, or more of their equity in proprietary investments, this would increase risk by allowing many multiples of many times the 3% of Tier 1 capital of equity cash the banks invest in risky trades. Moreover, Bloomberg News is reporting that a last minute loophole will give Goldman Sachs and Citigroup until 2022 to comply with these limits.

• Ratings Agencies: A major cause of the financial meltdown was Ratings Agencies like Standard & Poors and Moodys who were paid tens of millions of dollars by investment banks like Goldman Sachs and Lehman Brothers to supposedly analyze the risks of sub-prime mortgage derivatives the investment banks then sold to investors (including pension funds). Somehow, since the investment banks paid their fees and could shop for a ratings agency that would provide the rating they wanted, the Ratings Agencies invariably awarded about 80% of the sub-prime derivatives their highest rating of AAA. When the housing market crashed, it turned out that a high proportion of these sub-prime derivatives were toxic junk worth only a small percentage of their original value. This was one of the main causes of the failure of Bear Stearns and Lehman Brothers and one of the main reason that AIG, which insured this AAA rated toxic junk against losses, was bailed out with over $180 billion in taxpayer money. Sen. Al Franken proposed an Amendment that would end the blatant conflict of interest of investment banks shopping for higher ratings by having Ratings Agencies chosen by an independent third party instead of by the investment bank which stood to make millions by receiving AAA ratings on toxic junk. The final bill changed this amendment into a two-year SEC study of the Ratings Agencies.

• Derivatives: Prior to the meltdown, banks made tens of billions of dollars as dealers in the mis-rated derivatives, giving them a strong incentive to keep the derivatives merry-go-round spinning as fast as possible. In part to weaken a primary challenge from more progressive Democrats, Sen. Blanche Lincoln proposed an Amendment forcing banks to spin-off their lucrative derivatives-trading business into separately capitalized subsidiaries. The final bill significantly watered down this proposal, allowing banks to keep the majority of their derivatives business in assets like interest rates, foreign currencies, gold and silver, and to make proprietary trades for "hedging" purposes. Only the very riskiest categories of derivatives, like credit default swaps (i.e. fire insurance on someone else's house) must now been spun off into subsidiaries.

• Executive Compensation: While the Senate blocks extension of unemployment benefits to people out of work for more than 26 weeks and help to the states in preventing layoffs of teachers and cops, the financial reform bill does nothing about multi-million bank bonuses which have now returned to pre-meltdown levels. Aside from the manifest injustice, the bank bonus system incentivizes undue risk because executives who take large risks profit from huge bonuses today, but don't have to pay them back when those risky investments turn sour a few years later and their banks have to be bailed out by the taxpayers.

So adding it up, while the financial "reform" bill contains a few tidbits of actual reform, it fails to adequately fix any of the major problems which led to the financial meltdown, taxpayer bailouts and economic recession, and are likely to lead in a few years to the next meltdown.

Senate supporters of real reform like Feingold and Cantwell still shouldn't let Republicans block an up or down vote on the watered-down measure with a filibuster that requires a super-majority of 60 for passage. But having voted against the filibuster, they should insure that the legislation passes by the slimmest of margins with 51 votes, serving notice that, along with grassroots supporters of real financial reform, they'll be back next year, and the next, and the year after that until its safe enough for the financial system to go back in the water.