Gretchen Morgenson reports that the battle for the safety and soundness of U.S. financial markets is far from won, despite the Dodd-Frank financial reform act, as Wall Street lobbies Congress to relax certain key provisions of that act in an attempt to restart the “assembly line for selling toxic waste to investors.” See “Note to Banks: It’s Not 2006 Anymore.”
For example, one problem with the complex collateralized debt obligations and other derivatives that poisoned the financial system is the lack of transparency about who owns what. Dodd-Frank requires derivatives to be cleared and traded on exchanges or other approved facilities in order to make them more transparent. However, Dodd-Frank allows the Treasury Department to exempt foreign exchange swaps from this requirement. Banks argue that this $4 trillion market is different, not as risky, as other derivatives.
But that simply is not true, says Dennis Kelleher, president of Better Markets, a non-profit, pubic interest group. He says the only reason this market did not seize up was the $5.4 trillion lent by the U.S. Federal Reserve Bank to banks.
Another pressure point involves the definition of a “qualified residential mortgage,” under Dodd-Frank. That is important because sellers are required to retain some of the risk of loan pools that are not qualified. As Ms. Morgenson explains, the requirement is meant to curb the incentive to fill a mortgage pool with risky subprime loans. Wall Street is arguing that mortgage insurance lessens the risk and, therefore, the definition should be relaxed. But Ms. Morgenson points out that this insurance often illusory, as many mortgage insurers refused to pay when insured loans defaulted, claiming that the insurance contract are void for as a result of lending fraud.
A third problem involves a redesigned pool of debt obligations called “covered bonds.” Wall Street designed them to provide investors would have priority over the Federal Deposit Insurance Corporation (FDIC) in the event that a selling bank fails. This would increase the risk of loss for the government entity that protects bank deposits.
“The industry is trying to do an end run around the F.D.I.C.,” Christopher Whalen, publisher of the Institutional Risk Analyst, was quoted as saying. “This proposal is about restarting the Wall Street assembly line for selling toxic waste to investors.”
Ms. Morgenson concludes: “[F]inancial institutions have armies of advocates in Washington. The taxpayers do not, which makes monitoring of these crucial proceedings all the more essential.
Page Perry has over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.