This Drives Me Crazy


[ Photo: Flickr: biberfan ]

While the world watches the Euro-zone crisis with a mix of fascination and horror, Congress is once again at work, making the next financial crisis more likely. Who can you thank this time? Democratic Congresswoman Carolyn Maloney, who represents swathes of the East Side and Queens, and her colleague, Rep. Scott Garrett, Tea Party zealot and one of the most conservative Republicans in the Northeast. What bi-partisanship!

Their bill, the impenetrably named “Swap Execution Facility Clarification Act,” recently passed a subcommitee of the House Financial Services Committee by a voice vote. Its apparent aim: to undercut the (limited) Dodd-Frank Reforms that have taken a few steps toward regulatory sanity in the financial industry.

What in the world is Rep. Maloney thinking? Well, I think you can guess from Maloney’s message to a room full of financiers at the Grand Hyatt in Midtown in October:

“I’d like very much to work with you to make sure New York City is the financial capital, not just of New York State, but of the world,” Ms. Maloney told a packed room of some 400 Wall Street traders, brokers and lawyers. “If you see a regulation that is unfair,” she said, “let us know and maybe we can work together.”

When an elected official is worried about “unfair” treatment of traders, brokers and lawyers, you’d better be concerned. (The usual caveat: I know and worked with a fair number of traders, brokers, and lawyers, and they were often good, talented people. I just don’t believe that public policy should be focused on their welfare.)

As we all now know, largely unregulated financial derivatives played a big role in the 2008-2009 financial crisis. They allowed firms to gamble even larger sums with other people’s money, amplified losses, and tethered sinking financial institutions to each other. Warren Buffett put it well: derivatives are “financial weapons of mass destruction.”

Part of the problem was that these derivative contracts were agreed to directly, in one-on-one phone calls: this activity was largely not on an exchange (like the NYSE), nor did it even happen in a transparent way in which all of the contracts — and the interdependent risks that they were creating — could be tracked. As a result, no one really knew who owed what to whom or even (eventually) who was solvent.

So, when Frank-Dodd directed regulators to introduce a mechanism that would inject “price transparency in the swaps market” (a kind of derivative), it was hard to imagine that anyone would object. After all, this was good for the health of the financial system and for the customers who were buying the swaps (transparency helps to ensure that they all get a “fair” price).

As Dennis Kelleher, CEO of BetterMarkets, a nonprofit that advocates for market reforms, put it:

“It is painfully obvious that the financial crisis, which brought us to the brink of international economic collapse, was in large part the result of a ‘shadow’ or nontransparent financial market.”

Unfortunately, transparency is bad for one party: the dealers, who are, in this case, the banks and brokerage houses. With no one watching their trades, banks were able to charge whatever they thought swap buyers would pay. According to a report from the Swaps and Derivatives Market Association, “transaction costs” (that is, essentially, economic waste) would drop from $50 billion to $15 billion per year with the introduction of an exchange. That’s “billion” with a “b.” So, you can understand why banks are loathe to let go of approximately $35 billion of annual revenue, even if it’s the result of purely wasteful activity.

The behavior of banks and brokers is entirely predictable. What drives me crazy is that Rep. Maloney would so brazenly abet this tearing down of part of the (pretty modest) financial reforms, increasing economic costs and the risk of another meltdown. What is her explanation? Well, she offers a view about Congressional intent when it passed Dodd-Frank (which is primarily a distractor as far as I’m concerned). More poignantly, Maloney says she worries about job losses — that is, losses among those on Wall Street who have made a living (some would say many, many livings) off of this market’s dysfunction.

Salon’s Gary Ackerman, who otherwise takes Maloney to task, calls the “jobs” concern “legitimate enough” (before pointing out that financial instability risks the jobs of financiers, too). I could not disagree more: it is not the least bit legitimate. The notion that public policy should protect jobs, no matter what their function or value (or even anti-value), is laughable. Jobs are desirable to the extent that the work done creates something that’s valuable. But when jobs have no economic value, there is no good reason to protect them. (If those jobs are held by vulnerable people, public policy can focus on helping them find new jobs that are valuable, supporting their income in the meantime. Somehow, though, I doubt that swaps dealers employ too many economically vulnerable people.) To my mind, this is one of those rationalizations that elected officials use to justify (to themselves) decisions that they know make no sense. Maloney’s logic is about as compelling as would be opposition to the installation of street lights in a dark alley to reduce the risk of mugging because of concern about the jobs of muggers.

At the risk of using a cliche, it seems more likely that Maloney is thinking about someone else’s job.

Maloney Campaign Contributions

With Rep. Barney Frank’s announced retirement, the top Democratic position on the House Financial Services Committee is available. Next after Frank in terms of seniority among Democrats is Rep. Maxine Waters, a long-time liberal from California whom the banking industry loathes. After Waters is Maloney. And Maloney’s chances don’t look bad: Waters is currently under ethics investigation, with results expected in July.

MaloneyMapIt’s disappointing to see Maloney advocate for wasteful, abusive Wall Street practices when the cost to Main Street is so obvious, especially because she has often been a good friend to progressives in the past.

If you live in Maloney’s district, I’d encourage you to call to express your view at (202) 225-7944 or (212) 860-0606. If not, please add your voice to the Working Families Party’s call for Maloney to stop undermining reform.



  1. Bob Lamm says:

    Great piece, very disturbing. Maloney’s statement to the 400 Wall Street traders, brokers, and lawyers… well, if I used words like “hideous” or “shameful” here, they wouldn’t seem nearly strong enough. Excellent analysis, Andrew.

  2. Katya G says:

    I guess it’s a case of political shortsightedness. It is also hard for people, both on Wall Street and politicians, to come to terms that the ground has shifted so much that those jobs – paying PhDs and jocks millions to trade air – are gone forever. No doubt that getting those kind of jobs back would be good for NY in terms of tax revenues in the short run – the focus of Rep. Maloney’s concern. But, like for a relapsing alcoholic, it would create just a temporary relief with more damage down the road. I wonder if she’s aware of it. The purpose here is not to apply a band-aid but to adress the underlying cause of such a boom and bust scenarios. That would require bringing 10-20 year perspective to a roomful of traders and brokers with ADD and an attention span of a fly. Perhaps for Maloney to frame it as “If you have any suggestions and concerns – please let us know” was a safe bet under the circumstances. To utter “Look at the big picture – you’re not producing anything of value” to THAT audience is not for the fainthearted.

    • Andrew Solomon says:

      I agree with you, Katya. Maloney was actually challenged from the right in her 2010 primary by Reshma Saujani, who spent about $1.3 million to ultimately win 6,200 votes (or 19%). Saujani has some very big backers in the tech and finance industries.

      • Bob Lamm says:

        Now, Andrew, I believe you’ve gotten to the heart of the matter with your discussion of Saujani’s challenge to Maloney. This makes Maloney’s awful, inexplicable statement much easier to understand–but still awful.

  3. Keith says:

    Let’s be fair:

    1 – Maloney sponsored the credit card bill, which was pro-consumer and NOT something the financial services backed. That was, at least partially, part of the reason she had a challenger.

    2 – Carolyn represents Manhattan, including the Upper East Side, so it’s not surprising to me that there would be a lot of money raised from the broad classification of “Finance, Insurance, and Real Estate” versus, say, “Agribusiness.” Those are many of the constituents in the 14th CD.

  4. Carolyn says:

    Good grief! So disappointing when Democrats have so little backbone. So she gets to be head of the committee (providing, of course, Democrats control the House).Then what?

    • Andrew Solomon says:

      Good question, Carolyn. It’s actually unclear that she will be ranking Dem soon. In part this hinges on Maxine Waters’s ethics investigation, whose results are not due until July. I don’t know too much about that investigation, but my guess is that, given the extremely long timeline, the results are unlikely to be a very important political event.

  5. Alan says:


    Thanks for a penetrating analysis, with Keith’s point being a helpful clarification to relieve some of Maloney’s villainy perhaps. Troubling when our Congress can’t even let a piece of reasonable and limited reform like Dodd-Frank actually go forward to be put in place so we can see how it would operate.

    Who is the “mugger” here, really, Andrew? Love the turn of language in your example….

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