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Financial Reform Newsletter: Socially Useless Activities at Wall Street’s Taxpayer-Backed Too-Big-to-Fail Banks

Unleashing Goldman Sachs & Socially Useless Activities at Wall Street's Taxpayer-Backed Too-Big-to-Fail Banks

The handful of uniquely dangerous too-big-to-fail banks like to brag about how important they are to the US economy, jobs and growth.  They hide behind those claims (1) to justify taxpayers bailing them out in 2008, (2) to defend their taxpayer backing and subsidies, and (3) to rebuff all attempts at sensibly regulating them to prevent future crashes.  But, so much of what they do is socially useless trading and activities aimed at enriching themselves, often at the expense of others.  As detailed brilliantly by economist John Kay in his book "Other People's Money," "lending to firms and individuals engaged in the production of goods and services...amounts to less than 10%" of their activities.  In fact, he cogently observed, "the industry mostly trades with itself, talks to itself and judges itself by reference to performance criteria that it has itself generated."


Goldman Sachs, the big-bets trading house masquerading as a bank since the crash, is the paradigm example of this, as illustrated by two of its recent activities.


First, as reported by the New York Times in an article titled "Deal-Making in the Doldrums, Goldman Tries Something New," Goldman has "set up a small team in what's known internally as the Innovation Lab, to cook up supposedly clever ideas for big clients. The resulting acquisitions may end up destroying value for the shareholders of the companies involved, but Goldman's own investors should be pleased the investment bank is trying new things."  Gee, our trading revenues are down, so let's boost revenue by destroying shareholder value, for others of course! 


Second, Goldman apparently thinks that there just aren't enough things to bet on. Clearly an unmet need and priority of the American people and the real economy.  What to do?  Goldman (and, surprise, JP Morgan Chase) has come up with a new way for people to bet on the next banking crash!  I kid you not.  What kind of "bank" -- and what kind of person -- bets on what will inevitably result in misery for tens of millions of people?  (Mervyn King, former head of the Bank of England, put it more kindly in his excellent book "The End of Alchemy": "What kind of person takes pride in separating a fool from his money?") 


Oh wait, that's exactly what Goldman did last time when it created and sold the infamous Abacus deal, which, in part, enabled John Paulson to put a "big short" on the 2008 subprime housing bubble and make $3.7 billion or so off of the resulting crash and economic catastrophe.  Don't forget, Goldman did effectively the same for itself, selling its positions at steep discounts to the "fool" while also shorting the market to other "fools."  Goldman (and Gary Cohn in particular) gets lauded for its "performance," but no one stops to think that they just shifted their losses to their counterparties.


These are not the activities of a real bank, which is supposed to be backed by taxpayers because it provides a social good by lending to the real economy and supporting economic growth and jobs. 


No Legal Accountability  Plus No Cultural or Social Constraints Guarantees More Reckless and Illegal Conduct

The Financial Times' US Editor and particularly insightful columnist, Gillian Tett, had a very thought provoking column recently that compared the aftermath of the Asian financial crisis with that of the 2008 US financial crash.  She first recounted that Japanese bankers went to jail, voluntarily gave up their pensions, saw their fortunes evaporate, their reputations reduced to tatters, and most significantly, they took responsibility for their actions and even felt a sense of shame.  She contrasted that with our financial system following the 2008 crisis, where bankers avoided prison, kept their ill-gotten gains, and resisted and even resented any efforts to hold them accountable for actions that almost brought down the entire financial system.  "Which system is worse?" she asked.


To us, the answer is clear:  the unashamed, unpunished and unaccountable US system is much worse because unrepentant U.S. bankers came out of the crash emboldened and have been incentivized too quickly to return to their high risk, reckless, if not illegal ways -- an approach now condoned, if not outright egged-on by President Trump and his deregulators.  One need look no further than the  FSOC's deregulation of AIG: "The message this sends to gigantic financial firms and their executives - that recklessness and lawbreaking pays - will come back to haunt FSOC" and, by extension, the US and the globe.  While arguably "unfair," the Japanese system punished and likely deterred misconduct and illegal activities by executives, which probably makes a repeat of a catastrophic global financial crash (or even a catastrophic Japanese crash) much less likely.


This highlights a more profound and troubling aspect of the crash which gets no attention:  the utter lack of any cultural constraints on Wall Street's too-big-to-fail firms' unquenchable pursuit of unimaginable riches.  That is to say, Wall Street used to be constrained by a set of professional, cultural, social and business limits - in addition to legal ones.  The cultural punishment (having nothing to do with the legal system) of shame and becoming unacceptable, an outcast from respectable business society, are serious constraints in Japan.


The opposite is true in the U.S.  With bankers relentlessly challenging and often bashing legislators and regulators.  Recall that Lloyd Blankfein unashamedly testified that banks are entitled to do whatever is legal, including selling "shitty securities" to clients and counterparties.  Their self-righteousness has never been higher, reflecting a belief that they are doing "God's work," which they all wholeheartedly believe.


Not one of the US bankers and financiers who rode the bubble to riches and the world to an historic, devastating crash have paid a cultural price, much less a legal or financial one.  Many are back in business like nothing happened.  Unsurprisingly, their riches - really ill-gotten gains -- have enabled them to keep playing golf at the most exclusive clubs, stay on the Board of prestigious hospitals, universities and foundations, and otherwise maintain their positions among the country's elite.


A system that allows that has to be worse for lots of reasons, but the incentives it creates have to be on the top of the list, as the next catastrophic crash will likely prove.


Financial Consumers Should Not Be Discriminated Against, Have Their Rights Taken Away and Forced into Biased Arbitration Proceedings Where Wall Street's Biggest Banks Will Get to Keep Tens of Millions If Not Billions of Dollars They Ripped Off

One would have thought that between Wells Fargo trying to force customers who had bogus accounts opened in their name into arbitration and Equifax doing the same to consumers who just want to see if their private, personal data has been hacked, the push to kill the CFPB's rule allowing financial consumers to have the same rights as everyone to go to court when they are ripped off would finally be dead.  Sadly, that's not the case.  Those who want to keep take away consumers' rights, discriminate against financial consumers and force people into biased arbitration have instead tried to convince the American public that the rule will usher in an era of non-stop class action lawsuits, line the pockets of trial lawyers, and leave average consumers out in the cold.  Nothing could be further from the truth.


The need for the CFPB's arbitration rule is quite simple and clear: Consumers who lose money as a result of deceptive or abusive conduct often cannot afford to pay a lawyer and sue on their own.  This is particularly true for consumers who are seeking to recover smaller amounts.  After all, if you've been ripped off $100, $500 or even $1,000, hiring a lawyer to just represent just you against the banks' army of lawyers will cost way more than you lost.  However, when those amounts are multiplied tens or hundreds of thousands of times, these rip offs of even smaller amounts add up to tens of millions of dollars for the banks.  Those are ill-gotten gains, most of which the banks will get to keep if they are successful in forcing financial consumers into biased arbitration proceedings.  As Senator Lindsey Graham (R-SC) put it, "Nobody is going to get a lawyer over a $10 overcharge, but when you overcharge millions of people $10, the bank or the credit-card company makes out like a bandit" in arbitration.


Class action lawsuits are also far more fair and transparent than industry-biased arbitrations.  When class actions are adjudicated, whether it be in a courtroom or a negotiated settlement, strict rules of procedure are applied in open court before an impartial judge. By comparison, arbitrators are typically people who have had long careers in industry and who are not bound to apply the law when deciding claims.  Arbitration panels are not required to issue written decisions and rarely do.  Moreover, the cases are strictly private, allowing the bank to conceal widespread abuses -as we learned in the Wells Fargo scandal. Finally, there is almost no opportunity to appeal in arbitration.


The banks' attempt to change the focus from ripped off consumers they want to discriminate against to trial lawyers and ignore the clear benefits of open court class suits over secret biased arbitration is nothing more than the industry's same old scare tactics.  It won't work.



Policy Destruction Is Happening At the Agencies and That's Where Better Markets Is Battling the Trump Administration Efforts to Kill Financial Reforms That Protect Our Economic Prosperity and Help Prevent Another Financial Crisis

As the Trump administration has continued its relentless assault on financial protection rules, Better Markets has been battling back in the regulatory trenches, fighting these efforts.  Often, that means filing comment letters and meeting with officials in the various agencies to ensure that the public interest is represented and heard. 


Most recently, Better Markets has filed several letters on the Volcker Rule, the Commodity Futures Trading Commission's broad Project KISS (keep it simple, stupid) deregulatory effort, and, as has become all too frequent, the DOL's "best interest" fiduciary rule.


Regarding the Volcker Rule ban on proprietary trading, we pointed out that changes to the Volcker Rule would "...threaten or narrow important regulatory protections that were put in place to prevent a recurrence of the 2008 financial crisis or an economic calamity even more damaging."  Moreover, we further highlight that the Volcker Rule is working as intended and without the ill-effects opponents of the rule had predicted: banks are doing better than ever, loan volume is up and market liquidity is healthy.


When the CFTC Chairman launched Project KISS, he described it as an agency-wide review of rules and regulations.  He voluntarily undertook this effort following President Trump's executive order instructing executive branch departments to examine existing regulations, which didn't apply to independent agencies like the CFTC.


While maybe having laudable goals, we pointed out that all too often efforts such as Project KISS will "weaken the regulatory structure that the Commission carefully crafted and previously adopted to ensure that our commodities and derivatives markets are as stable, transparent, and fair as possible."  Phrases such as "reduce regulatory burdens and costs for participants" are often nothing more than code words for weakening rules and exposing the public to greater dangers.  Indeed, as we further note in our letter, some comments from industry groups have abandoned any pretense of streamlining rules and instead seek to significantly revise and ultimately weaken existing rules. 


Finally, Labor Secretary Acosta and the Trump administration are seeking to delay for 18 months the implementation of the enforcement aspects of the DOL's fiduciary rule, which are scheduled to go into effect in January 2018.  However, any delay of the full implementation of the rule as well as any additional efforts to re-examine and revise the rule are misguided, unwarranted and unwise, as we detailed in our letter.  We also made clear that the DOL's efforts are so grossly deficient and inconsistent with the facts and the record that any delay "will be subject to legal challenge as arbitrary and capricious," among other legal causes of action.


As we have for years now, Better Markets will continue to be watching and fighting what is going on in the policy trenches and outside of the headlines of the day, at the agencies, in the administration and, if need be, in court.


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