The financial collapse of 2008 left a pretty sour taste in just about every mouth on the planet; so this week, Congress sharpened their tools and got to work on reforming Wall Street.
Bill S.3217, known by its nom de guerre as the Restoring American Financial Stability Act, passed a final Senate vote and will now move back to the House for reconcilation.
The biggest financial reform in fifty years is set to sweep the Street clean of hustlers and shell games, bringing order and regulation to the world’s financial center.
But, while anyone with a little popularity can be elected to Congress, Wall Street is home to the smartest kids in every classroom ever. Does the Senate really have the will to take on the world’s most powerful financial institutions, ones raking in hundreds of trillions of dollars a year while putting millions of Americans to work?
Banks and financial instruments have become so intertwined and complex that sorting the wheat from the chaff takes a set of tweezers and a surgical laser. Fortunately, TakePart’s got both; so we’re in there like Doogie Hauser, M.D.
The following six amendments seem like financial reform no-brainers, but they all got left out in the cold. We still plan to hold out a little hope – some may find their way back into the bill before it moves to Obama's desk.
The Cantwell Amendment—Once upon a time, a bank was just a bank. It’d take your deposit, put it in a safe, write a few loans, then call it a day.
That little guy had a big, hungry cousin called the investment bank, which couldn’t offer you a checking account, but could roll your money on the market and win some coin.
After the Great Depression, these two lived separate lives under the 1933 Glass-Steagall Act; but in 1999, the two cousins got married, and years of inbreeding since have produced some funky-looking conflicts of interest.
Now, traditional banks like Citibank, backstopped by federal money, can gamble on the market, swallow all sorts of risky investments, grow systemically too big to fail, then get bailed out with taxpayer dollars to prevent the entire economy from collapsing.
Enter the Cantwell Amendment, ready to go retro and break up the marriage between depository banks and their investment cousins. Cantwell would reinstate the Glass-Steagell Act and unravel big banks, but the amendment’s barely kicking on life support; so a trip to divorce court may be put off until the next financial meltdown.
The Levin-Merkley Amendment—You’re a kid with a decent allowance, but you have a bad habit of betting on horses. Well, it’s only a bad habit when you lose, which you often do, because you typically bet on the riskiest ponies.
Thankfully you’re playing with Mom and Dad’s money, which never runs out, because they’re the wealthiest superpower parents in the world. No way they’ll ever hit the skids, right?
Big banks are insured by the fed, which runs on taxpayer money. When banks make bets for their own benefit, they’re engaging in something called "proprietary trading." When they lose, the fed backs them up with taxpayer money—but taxpayers don’t benefit from prop trading; so why should we cover their bets?
Levin-Merkley would’ve introduced the Volker Rule and stopped big banks from gambling with taxpayer money on risky markets that only benefit the bank bottom line. Unfortunately, Senator Richard Shelby shouted down the amendment on the Senate floor, so banks are back to the races with their trust funds intact.
The Harkin Amendment—Imagine a world where the sun never sets and ATM fees are capped at 50 cents. Impossible? Well, yeah, because constant sun exposure would turn us all into beef jerky, and Senator Tom Harkin’s amendment to cap ATM fees didn’t even hear a debate before it was kicked to the curb.
Senators, speaking via banks big and small, said the amendment would kill business and reduce the availability of both private and bank-owned ATMs.
Harkin contends that an average transaction only costs ATM owners about 36 cents, which doesn’t bear a reasonable relation to the average $3.54 ATM fee. But his argument fell on deaf ears; so the planet will spin as it always has, racking up ATM fees as it goes.
The Dorgan Amendment—Credit default swaps (CDS) are financial instruments that investors use as insurance against a bond defaulting.
Say you’re a typical homeowner with a fire insurance policy. Your insurance company thinks you’re all aces, but they want to hedge their bets, just in case you leave an iron on and burn down the entire eastern seaboard.
So they go to a bank and buy protection in the event you tank their business over toast. That’s a credit default swap.
Your neighbor meanwhile knows you walk around town with your head in the clouds and your iron on full steam; so he gets smart and takes out his own fire insurance policy on your house.
If you burn, he wins, even though he doesn’t own your home. If you don’t burn, and he bet the farm on his policy, well then he’s got a motive for arson. That’s a naked credit default swap, one that lets investors buy insurance on securities they don’t actually own. It’s a sometimes shady business that makes up 80 percent of all CDS, and spilled gas across every sector of the economy while the financial crisis burned.
The Borgan amendment would’ve banned naked CDS, but even with all the trouble they caused, the Senate decided to table the debate. Naked credit default swaps live to see another day, with a pocketful of matches and a penchant for burning down the house.
The Lincoln Amendment—One big problem with credit default swaps is that they operate on the unregulated, over-the-counter derivatives market. OTC derivatives make up a multi-trillion dollar backroom business that bets on everything from stocks to indexes to currencies. Matter of fact, you can build a derivative on any underlying asset, from weather patterns to the Washington Wizards.
Banks found out they could use derivatives to diffuse their risk, and the little buggers fanned out like ants at a picnic. Business was so good that banks piled on stacks of risky loans and toxic debt, then leveraged them against their derivatives. When the bottom fell out, derivatives were fingered as the main culprit, one that took out Wall Street giants A.I.G. and J.P. Morgan.
Senator Blanche Lincoln has an amendment that opens up the derivatives market to more transparency and keeps taxpayer-backed banks out of the game altogether. The chances it’ll pass, however, are about even with a Wizards’ championship this year.
UPDATE: With seconds left on the clock and no time outs, Lincoln fired off a shot and sunk a game-changer. The derivatives market will be regulated by the fed for the first time ever, and firms will be forced to separate their derivative business from their normal operation.
The Hagan Amendment—Payday loans work a little like a neighborhood loan shark: You get your money fast with few questions asked. In return, you carry a mind-numbing interest rate and an unrealistic repayment plan. Unlike loan sharks, payday loan agents won’t break a knee. They will drive a family into a cycle of debt that ends in bankruptcy.
To protect consumers, Senator Kay Hagan put something together that would’ve taken the sting out of payday loans and kept the sharks from circling hardworking folks in need. Her amendment would’ve extended repayment schedules, reduced interest rates, and banned creditors from peeling off loan after loan to indebted borrowers. Would’ve, should’ve, but didn’t—Senator Shelby beat the thing down like a red-headed mule.