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.
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.
It’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.
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