Article V Convention for Our Children’s Future (AVC4OCF) (see page 1 of the section below this Executive Summary, Footnote 3, for information about us) has published this webpage to provide American citizens with a sampling of the numerous expert opinions regarding how and why Washington’s financial “reform” has failed and how and why this failure leaves the nation’s economy — and every household on Main Street in America — vulnerable to another financial crisis. In addition, we present a sampling of expert opinions regarding Washington’s role in causing the last financial crisis (2007-9) (e.g., deregulation, desupervision, the FBI’s failure to stop the “epidemic” of fraud that caused the crisis, etc.) and Washington’s dangerous responses to the crisis (e.g., the FBI’s failure to prosecute the fraud that caused the crisis; why the Financial Crisis Inquiry Commission (FCIC) was no Pecora Commission; the failings of the Dodd-Frank legislation; etc. — please see a representative sample of these expert opinions, below).
Our objective and our hope is that every citizen reading this publication will conclude, as we have concluded, that:
- The record level of the finance industry’s “power and hubris” (exacerbated by Washington’s responses to the last crisis — e.g., the banks are even bigger and too-big-to-fail has, according to experts, certainly not been resolved; the white-collar criminals are still in the “C-suites;” etc.) has maximized the institutional corruption, cronyism and capture associated with all executive and legislative action related to this industry;
- This status quo renders Washington incapable of implementing effective financial reform; and,
- Therefore, the responsibility for developing a blueprint for the effective financial reform (which can then be submitted to Congress for enactment) that our nation so desperately needs to restore trust in and the safety of our financial system (and end this scenario of the “financial tail wagging the economic dog” in which our nation’s financial resources are not optimally directed to their most productive use — see page 1, Footnote 5, below) now rests on the shoulders of the American people. (Note: please see our Action Plan for our soon-to-be national STOP Financial Crisis II campaign, below our signature on page 6 in the next section, for more details about how we plan to help American citizens succeed with finishing the “unfinished business of financial reform” (a quote from a speech by Senator Elizabeth Warren — see page 5, Footnote 28, below) ).
Below, we provide, as an introduction to what is presented on this webpage, a sampling of the sampling of expert opinions on this page.
Professor James Galbraith (Government — Lloyd M. Bentsen Jr. Chair in Government/Business Relations, University of Texas, Austin) (an excerpt from his 2010 congressional testimony, regarding what Washington SHOULD have done in response to the last financial crisis): “[I]t may be that too few are today speaking frankly about where a failure to deal with the aftermath [of the last crisis] may lead. In this situation [if we do fail to effectively deal with it], let me suggest, the country faces an existential threat. Either the legal system must do its work [referring to the upcoming, at that time, investigation into the crisis by the FCIC and what might be, Galbraith said, an “appropriate response [if that investigation] confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye”], or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.” (See page 5, Footnote 27, below)
Neil Barofsky (former federal prosecutor and first special inspector general of the Troubled Asset Relief Program) (quote from September, 2012, regarding what Washington FAILED to do in their financial “reform”): “The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system. We still have banks that are ‘too big to fail…’ The whole point of Dodd-Frank was to end the era of TBTF banks. It’s fairly obvious that it hasn’t done that. In that sense, it [Dodd-Frank] has been a failure… The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse. We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail and ensures that the executives will never be held accountable for their actions. We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naïve to expect a different result… Standard & Poor’s estimated last year that the up-front cost of another crisis, including bailing out the biggest banks yet again, would be roughly 1/3 of the U.S. GDP or about $5 trillion. The resulting problems will be even bigger…” (See page 3, Footnote 8, below)
Phil Angelides (Chair, Financial Crisis Inquiry Commission, former California State Treasurer) (from a January, 2013 interview, regarding what Washington FAILED to do in their financial “reform”): “These [TBTF] banks need to be broken up for reasons beyond just market impacts. Simply stated, they have become a clear and present danger to our economy and democracy and must now go the way of the trusts that were dismantled at the turn of the last century… [T]here’s something… even deeper that’s happening within the financial industry that I think comes from enormous power and hubris. In the wake of the financial crisis, you would think that there would be some critical thinking about what happened and how things ought to be changed. But what have we seen in the wake of that [more than two years after Dodd-Frank became law]? We’ve seen allegations of money laundering at major financial institutions like ING, Standard Chartered Bank, HSBC. We’ve seen a bid-rigging scandal that’s broken out across this country where cities and towns were robbed of tens of millions, of hundreds of millions of dollars in interest earnings because banks colluded and rigged bids. We’re seeing the Libor [London Interbank Offered Rate] scandal where at least Barclays and perhaps other banks — investigations are ongoing — may well have been fixing interest rates, by the way to the detriment of many savers and investors whose returns were tied to how that index did… [T]here is a corruption, I think, that’s very damaging to the sense of integrity of our financial markets and very damaging ultimately to our economy that’s got to be rooted out. But it won’t be rooted out if our system of broken enforcement continues… I think this is a battle for the future of the country’s economy that has to be won… I didn’t expect instant change [referring to financial reform], because what we’d seen is 30 years of a drive by this powerful interest [Wall Street] at deregulation; 30 years of emasculation of regulatory entities [i.e., desupervision]; 30 years of weakened enforcement. And I believe to change that is going to require a very powerful political dynamic in this country, which I think is beginning to grow. I think there’s an increasing number of people who want to break up the big banks, first of all because of a distorting power they have on the market but also because they distort our democracy. And they’re too big to regulate; they’re too big to manage… I see more and more people in this country — [on the] left and [on the] right — who are concerned about the dominance of the financial industry over the real economy [i.e., the financial tail wagging the economic dog]. So I view this as a long-term struggle for the benefit of the American economy…” We [the FCIC] laid out facts that are a roadmap for investigators which I believe they must follow, and we must speak out to make sure they do. We’ve also, I think, laid down the ugly truth of what happened, which hopefully will be part of the seed corn of a change in the financial industry going forward, because here’s what I think needs to happen. Here’s [what is] at the heart of this. The financial services industry ought to be in place to serve the larger economy. It ought to be about providing lending capital for business expansion, for job creation. It’s become something very different. It’s become a beast unto itself full of speculation, full of risk, full of contempt for the rules of American society and our economy. And in many respects, it needs to be corralled so it can go back to providing its real function, which is to support the American economy, be a lender and provider of capital to create wealth in this country.” (See: “Phil Angelides: Enforcement of Wall Street is ‘Woefully Broken,’” Frontline (PBS), Jan., 2013)
Professor Frank Partnoy (law and finance, University of San Diego) and Jesse Eisinger (senior reporter at ProPublica and a columnist for The New York Times’ Dealbook section) (another expert opinion regarding, again, what Washington FAILED to do in their financial “reform” — from a January, 2013 article): “Sophisticated investors describe big banks as ‘black boxes’ that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records [they analyzed Wells Fargo’s] uncovers the reason for these fears—and points the way toward urgent reforms. The financial crisis had many causes… but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures [financial statements], whether it might suddenly implode. For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever and they continue to behave in many of the same ways they did before the crash [the money laundering, bid rigging and Libor scandal that Angelides mentioned above]… Only a few people have publicly expressed concerns about customer-accommodation trades. Yet some banking experts are skeptical of these trades, and suspect that they hide huge risks… Bankers and regulators today might dismiss warnings that customer-accommodation derivatives could bring down the financial system as implausible. But a few years ago, they said the same thing about credit-default swaps and collateralized debt obligations [the derivatives that played a very significant role in the collapse of Lehman Brothers, Bear Sterns and AIG during the last crisis].” (See page 3, Footnote 12, below)
Professor John Taylor (Mary and Robert Raymond Professor at Stanford University and George P. Shultz Senior Fellow in Economics at Stanford’s Hoover Institution) (regarding the failings of Washington’s “reform” — in this instance, specifically, the Dodd-Frank Act): “Large financial firms still seem to be enjoying a huge subsidy [a taxpayer-funded subsidy of $83 billion per year, per Bloomberg, as cited by Taylor] on their borrowing costs due to market expectations of bailouts… Jeffrey Lacker, President of the Federal Reserve Bank of Richmond, argues that the FDIC’s ‘considerable regulatory discretion’ under Title II [of Dodd-Frank] ‘could encourage creditors to believe they may continue to receive protection from losses,’ summing up that ‘we didn’t end too big to fail.’ Charles Plosser, President of the Federal Reserve Bank of Philadelphia argues that ‘Title II resolution [the process that is supposed to address the insolvency of a TBTF firm and avoid a bailout] is likely to be biased toward bailouts,’ because of the ‘wide range of discretionary powers’ granted to the FDIC and the likely ‘excessive delay’ in implementing the procedure. Understanding these alternative views and taking a position on the likelihood of bailouts requires defining what one means by bailout, examining the Orderly Liquidation Authority (OLA) of Title II, and assessing—based on practical experience—how it would actually work. Doing so leads me to take the position that bailouts and too-big-to-fail are preserved rather than eliminated under Title II.” (See: “Too Big to Fail, Title II of the Dodd-Frank Act and Bankruptcy Reform,” Testimony before the Committee on Financial Services, U.S. House of Representatives, May 15, 2013)
James Rickards (hedge fund manager) (from an August, 2012 article, regarding why another crisis is inevitable): “If there is any hope of avoiding another meltdown, it's critical to understand why [the] Glass-Steagall repeal helped to cause the crisis. Without a return to something like Glass-Steagall, another greater catastrophe is just a matter of time…” (See page 4, Footnote 24, below)
Ron Hera (founder of Hera Research, LLC) (in a May, 2010 article, regarding why another crisis is inevitable): “Federal Reserve Chairman, Ben Bernanke, said in a recent address, ‘It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation.’ Sadly, Mr. Bernanke’s point is moot. Two and a half years on, virtually nothing has been done in the aftermath of the global financial crisis to regulate OTC derivatives or to control the extreme risk they pose. With several US states and European countries now virtually bankrupt, the capacity of Western governments to bail out financial institutions has been exhausted. The risk of systemic failure is higher at present than before the crisis began in 2008, as there is now no backstop for the global financial system other than debt monetization, which would result in high inflation or hyperinflation… The $604.6 trillion derivatives bubble, which is equal to more than ten times world GDP, is a global issue. If existing OTC derivatives remain in place and there are no restrictions on what banks can trade derivatives, there is no actual or immediate reduction of systemic risk. Thus, the risks that led to the financial crisis in 2008 are likely to remain present in the global financial system for years to come. In fact, many banks have more CDS [credit default swaps] risk now than in 2008. Passing a bank-approved version of the financial reform bill [Dodd-Frank], while it may be portrayed as a political victory or serve to calm financial markets temporarily, is unlikely to prevent another global financial crisis.” (See: “Forget About Housing, the Real Cause of the Crisis Was OTC Derivatives,” Business Insider, May, 2010)
Ellen Brown (Public Banking Institute’s founder, President Emeritus and Senior Advisor) (regarding just how far astray Washington’s financial “reform” is from anything resembling a “promoting [of] the general welfare” (see: U.S. Constitution) of American working families): “The insolvent bank is to be made solvent by turning our money into their equity [referring to the FDIC’s bail-in plan, which may include confiscation of bank account balances and issuing bank stock to account holders]… ‘Zombie’ banks are to be kept alive and open for business at all costs — and the costs are again to be to borne by us [referring to, not just account confiscation, but also to potential losses by pension funds that have purchased bank “bail-inable” bonds that are convertible to equity in the event of insolvency].” (See page 3, sixth bullet, below)
Professor Lawrence Lessig (Law, Harvard University) (a quote supporting our conclusion that Washington is INCAPABLE of implementing effective financial reform):”Our capacity for governing — the product of a constitution we have revered for more than two centuries — has come to an end. The thing that we were once most proud of — our republic — [has become something] that we have all learned to ignore. Government is an embarrassment. It has lost the capacity to make the most essential decisions...” (See page 1, Footnote 4, below)
Phil Angelides (AVC4OCF comment: The Financial Crisis Inquiry Commission’s (FCIC) “investigation” into the causes of the last crisis is a perfect example of just how destructive the corruption, cronyism and capture in Washington are to our democratic processes. In addition, this quote supports Lessig’s statement, above, and supports AVC4OCF’s conclusion that Washington is INCAPABLE of implementing effective financial reform.): (In this quote, Angelides is responding to this Frontline interview question: “In putting together your [FCIC’s] report, you faced pressure from Wall Street and friends of Wall Street [in Washington].”) “[Angelides:] Yes… [And] it’s going on today. As we sit here today, there are constant attacks on the budget of enforcers [regulatory agencies], attempts to cut the Securities and Exchange Commission budget even though they take in more money in fines than their whole budget. So this isn’t about saving the taxpayers money. There are attacks on the Commodities Futures Trading Commission’s budget... And here’s the stupidity of it: They were aggressive enough in going after Barclays for fixing the Libor interest rate, and they got a fine of $200 million, enough to pay for their own budget, so good enforcement pays for itself. But this is a pattern. This is an industry that is so powerful it goes after the very people who are charged with overseeing it and investigating it. And yes, we saw it at the commission. The fact is that we were there as public servants called by the Congress of the United States, people from all over this country, and by the way, a professional staff who took their time off to do service to the country to try to tell the story of what happened to the United States, how we got into this financial crisis with its devastating results… Even our own commission… we were subject to an investigation by Darrell Issa (R-Calif.), head of the [Oversight and Government Reform Committee] of the House of Representatives, who was trying to do anything he could to discredit us. And it was quite disconcerting as an American citizen to know that someone was trying to discredit our work merely because we had the temerity to speak the truth, to lay out the facts and to frankly speak very bluntly about the most powerful of financial [institutions] in the country, Wall Street… And by the way, during the course of our investigation, Wall Street applied enormous resources to this effort. We had a budget of $9.8 million. There’s an attorney named Reg Brown who represented a number of banks who bragged that he was being paid by his banks more than our entire budget to represent his firms in front of our inquiry. Quite stunning. And… members of the commission actually brought before us resolutions to strike the word ‘Wall Street’ from our report, to strike the word ‘deregulation’ from our report, to try to emasculate it and eviscerate it. It was quite something to see.” (See: “Phil Angelides: Enforcement of Wall Street is ‘Woefully Broken,’” Frontline (PBS), Jan., 2013)
Professor William Black (Economics and Law, University of Missouri, Kansas City and former federal regulator — see page 2, Footnote 6, below, for full bio) (a fourth quote warning citizens that another crisis is inevitable — given Washington’s failed “reform” — in addition to Galbraith’s “existential threat” warning, Hera’s “passing [Dodd-Frank] is unlikely to prevent another global financial crisis” warning and Rickard’s “another greater catastrophe is just a matter of time” warning): “Dodd-Frank doesn’t address any of the three central elements that create the criminogenic environment that produce the recurrent, intensifying epidemics of control fraud that drive our ever-worsening [financial] crises [Black listed those elements as: “the creation of the… ‘too-big-to-fail’ firms; modern executive compensation, which creates the perverse incentive structures and is the means of looting [control fraud] that the CEOs use; [and] what we call the three D’s — deregulation, de-supervision and de facto decriminalization”].” (See page 3, second bullet, below)
The expert opinions presented above are, again, just a sampling of the many opinions presented on this webpage that provide credible and compelling evidence that, we hope, will lead every citizen to conclude the following (which we briefly stated at the beginning of this executive summary):
- Washington’s failure to implement effective financial reform is, as Phil Angelides described it (above — referring, specifically, to the threats posed by TBTF firms), “a clear and present danger to our economy and [our] democracy;”
- The nation must certainly now be facing Professor Galbraith’s “existential threat,” considering all the evidence that numerous experts have provided that demonstrates how Washington’s financial “reform” has fallen well short of Galbraith’s requirements for “restor[ing]… the market system” — requirements that included “the legal system… do[ing] its work” (in other words, the FBI’s failure to prosecute any of the CEOs who directed the control frauds that destroyed the economy — see page 4, Footnote 23 — is certainly NOT the legal system doing its work). The expert opinions listed above also demonstrate that Washington’s “reform” has obviously also fallen well short of achieving Galbraith’s second requirement: “a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust” (for example, as Professor Black explained, “We still have anti-regulators in all the agencies” — see page 3, bullet 2 — and, as Angelides highlighted, “desupervision (“defunding [of the regulatory agencies], the political pushback on regulators, the intimidation of regulators to do their job”)… [is still] going on today… there are constant attacks on the budget of enforcers [regulators], attempts to cut the Securities and Exchange Commission budget even though they take in more money in fines than their whole budget…” — see page 3, bullet #2)
- The only possible explanation for Washington’s near complete failure to implement effective reform (which now threatens the nation’s economy and, thus, the prosperity of every working American’s household) must be pervasive corruption, cronyism and capture (certainly, when the subject matter is associated with Wall Street/finance industry) and, given this status quo, Washington must be considered as being INCAPABLE of implementing effective financial reform; and,
- Therefore, given all the foregoing, an immediate citizen intervention in the political process in Washington is urgently required in order to ensure that Washington does NOT fail with implementing effective financial reform the second time around — reform that will, hopefully (if we are able to act quickly enough), STOP Financial Crisis II.
As Phil Angelides said in 2013, “[T]o change [the issue of desupervision] is going to require a very powerful political dynamic in this country, which I think is beginning to grow.” Although Angelides was just referring to one — albeit a very critical one — of the many reforms that are urgently required to prevent another crisis, we anticipate that once a majority of American citizens are fully informed about everything that is presented on this webpage (ALL the failings of Washington’s financial “reform,” etc.), we will collectively react with a mad-as-heck-and-I’m-not-going-to-take-it-anymore moment that will ignite a firestorm of citizen action. At that point in time, we expect, the movement in America for REAL financial reform will then rapidly progress and become an unstoppable force (and this author believes that only good things will happen when that force collides with the immovable object that is the “power and hubris” of Wall Street and the corruption, cronyism and capture in Washington — perhaps similar to what happened when the Keating Five were outed during the Savings and Loan crisis in the 80’s and 90’s). We also anticipate that Americans will fully support and, hopefully, demand most, if not all, of the reforms (as recommended by experts) that we have included on this webpage for citizens to consider — reform that will likely be required in order to STOP Financial Crisis II.
We invite and encourage you to devote the time needed for reading this entire webpage and carefully considering all the opinions of these experts and, if they are anywhere close to being right, the consequences for our nation and our children’s/grandchildren’s future prosperity if we fail to succeed with our task (and every citizen’s responsibility, in our opinion) of ensuring that Washington does NOT fail the second time around with the implementation of EFFECTIVE financial reform (e.g., enactment of a citizen-sourced blueprint for financial reform in Congress, as we recommend)
We thank you for your time and for your support. (And, with a tip of the hat to Edward R. Murrow…) Good Night and Good Luck.
Article V Convention for Our Children’s Future
I. The Next Financial Crisis: Why We are Failing to Prevent It And a Proposal For How to Stop It
(Note from the author: As I post this webpage (early February, 2016), the caucuses and primaries of the presidential campaign are gathering steam. There appears to be only one candidate for president that is talking seriously about financial reform (which is incredible considering that, as we demonstrate on this webpage, Washington’s failed reform is a national emergency, because most of the threats that will cause a crisis — as well as the reform that would enable Washington to prevent or stop a crisis — have not been addressed or have not been implemented, respectively). Also, I think that a valid question to ask is: Even if that candidate wins the election, will he be able to get all of his reform (all of which, as far as I am aware, is currently languishing in committee in Congress) passed in Congress (and we would need all of it — not just some of it — enacted to prevent the next crisis)? My hope is that Americans will mostly ignore all the hype and the promises of the candidates and invest their time and energy in something that is far more likely to generate a return on that investment (versus just voting for a change and just hoping for the best…). I believe that American citizens will commit themselves in sufficient numbers to the task of creating the required political will in Washington (and that can only come from a clear mandate from us — We the People — that conveys in general terms the reform that the nation requires) to enact the comprehensive financial reform that is still needed in order to prevent the next crisis and avoid another Great Recession. (Note: AVC4OCF recommends that citizens work together, with the advice of experts, to develop a blueprint for effective reform that can then be submitted to Congress for enactment. This is the goal of our soon-to-be national campaign.) And I ask every American to please consider the opinions of the experts presented on this webpage and then consider how you can participate in this campaign, or support your fellow citizens who are participating in this campaign. With your help — and if we act quickly enough — I believe that we can succeed — realize REAL financial reform — and STOP Financial Crisis II.)
Before we (Article V Convention for Our Children’s Future (AVC4OCF) — see Footnote 3 for information about us) begin our presentation of expert opinions regarding the threat of a second financial crisis, of which Washington’s failed (according to experts) financial “reform” and other ineffective-to-harmful responses to the last crisis (2007-9) are a part, we want to first explain why we believe that citizens need the information on this webpage. We believe that citizens must have access to a variety of expert opinions in a convenient (one-stop-shop) source that serves as a review of the causes of the last crisis (at the top of that list: Washington’s role in causing the crisis) and the failings of Washington’s investigation of it (Financial Crisis Inquiry Commission (FCIC) ), as well as Washington’s unconscionable (a description that this author and concerned citizen believes is justified) responses to the crisis (both executive and legislative). We believe that having access to such information is absolutely necessary in order to enable every citizen to even BEGIN to fully understand the what, how and why of the last crisis and understand why experts are saying that we need to prepare and brace for the next one (because, in a nutshell, Washington’s “reform” has failed to address the most threatening components of systemic risk in the financial system and other key threat sources — leaving the nation’s economy and households vulnerable to another crisis). (Note: A key element in our belief that many Americans, if not most, are NOT fully informed about these issues — and, thus, in need of the information on this webpage — can be explained with the example of the difficulty we had completing our research of these topics. We found it necessary to access probably a hundred or more sources of news and information (much of it NOT from mainstream news/information-media sources) in order to construct the comprehensive presentation of information on this webpage — an effort that we anticipate the average American citizen would never have the time to do. Based on this time/labor-intensive process that was required to complete our research, we concluded that most Americans are likely somewhat/mostly/entirely uninformed regarding these topics.)
(Author’s note: As we just mentioned above, this is a comprehensive presentation of information on these topics and, as a result, a very long webpage. We hope that you will take the time to read the entire page, but please be prepared for its 62 page (typed) length (includes the nine-page Executive Summary). You might consider reading it through without reading the footnotes (which are probably at least three-fourths of the content), just to get the gist of what we are presenting, then read it a second time with the footnotes (the footnotes contain many of the expert opinions that support everything we are presenting on this webpage). Enjoy!)
In addition, we want citizens to be aware of our soon-to-be national (currently, just statewide in California) campaign to STOP Financial Crisis II (a campaign with the goal of enacting EFFECTIVE financial-reform legislation (as well as executive action?) in Congress based on a citizen-sourced blueprint that will be developed during the campaign — see our Action Plan, below our signature on page 6, for more details). (Note: This is just the genesis of this presentation of information regarding these issues on this webpage, which we hope will continue to grow and become an even more valuable resource for citizens as we update the website during the national campaign with the results of all of our planned events (e.g., town hall meetings, interviews with experts, etc.) and we learn more about the issues and proposals for resolving them… In fact, it is our hope that our national campaign and our website will, together, achieve what the FCIC failed to achieve (because it was set up to fail, according to experts — see page 4 (and Footnote 22), below): an American citizenry that is sufficiently informed about the causes of the last crisis and the elements of systemic risk in the financial system and other primary sources of threats to our financial system — thus, a citizenry having a general understanding of what needs to be done to fix the problem (i.e., they know what effective financial reform looks like) and empowered to perform their duty as responsible citizens and track whether or not Congress has performed according to their constitutional duty to “promote the general welfare” by implementing effective reform. We are not aware of any other organization with the mission of realizing enactment of the required comprehensive financial reform that we believe (based on expert opinions) will be needed to avoid the next crisis. We believe that anything short of this (comprehensive reform) will fail to prevent the impending crisis (e.g., only reinstating Glass-Steagall and/or only ending TBTF). We also believe that the American people will succeed and achieve this goal — with the benefits of proper educational and political action campaigns (such as our STOP Financial Crisis II campaign).)
On this webpage, we present a sampling of expert opinions (NOT OUR opinion) that support the bulleted statements, below, regarding the threat of another financial crisis (which, according to experts, looms on the horizon) and one of the primary sources of that threat (if not THE primary source): Washington’s unconscionable and dangerous responses to the last crisis. (Note: Yes, one could argue that the threat is primarily the systemic risk in the financial system, but we submit that it is Washington’s responsibility, primarily (in concert with the Federal Reserve), to minimize that systemic risk and other threats as much as possible in order to avoid recurring crises — and they are failing, according to experts, to effectively do that — just like they did before the last crisis. In addition, please also note and keep in mind that we are not presenting these expert opinions as being 100% correct versus any opposing opinions of other experts. We are simply presenting a sampling of our research results as a service to our fellow citizens to enable you to consider a significant amount of the discussion/debate that does not appear to be adequately reported in mainstream news/information media sources.)
- Generally, Washington’s responses (executive and legislative) to the last financial crisis (2007-9) are, or will likely be (some reform is still being implemented), ineffective in addressing many of the elements of systemic risk in the financial system and other threat sources — a status quo that is a “clear and present danger” to individual household prosperity and our prosperity as a nation (the nation’s economy), because all of the ingredients are present, according to experts, for a second financial crisis of similar or greater magnitude as the last crisis (see below for examples and details) (Note: the “clear and present danger” quote is from Phil Angelides, who used these words to describe the threats posed by too-big-to-fail (TBTF) banks — see Footnote 23 on page 4, below);
- The OTHER pertinent status quo — the collective status of the legislative, policy-making, regulatory and law enforcement apparatuses/functions in Washington — can be legitimately described as being somewhere in the range between causing-more-harm-than-good to moderately INeffective, which is a function of institutional corruption (see Footnote 4), cronyism and/or capture and which is most evident and nearly complete (effectively, close to 100%) when the legislation/policy/… is associated with the finance industry — a status quo that renders Washington mostly incapable of legislating/administering effective financial reform (OK, this last phrase about being “incapable” is actually the opinion of this author, which is a conclusion based on the opinions of experts — see the examples below, as well as all of the other information on this webpage — which have led this author and concerned citizen to this conclusion — a conclusion at which I believe a majority of Americans will also arrive, once they are fully informed about what is presented on this page);
- Another equally important status quo to consider is that of our nation’s economy, which is described by experts as the “new normal” and characterized as an economy in which a financial tail is wagging the economic dog (see Footnote 5) — a status quo in which Americans live under constant threat of financial crisis — a status quo in which, quite sadly, what used to be thought of as the American Dream will, very likely, remain elusive for a growing number of working families (particularly, if experts are right about the probability of “recurrent, intensifying epidemics of control fraud that drive our ever-worsening crises” — see below); and,
- Given all the above, we believe that American citizens must accept final responsibility (now that Washington has proven that they are unable to do so) for the development of effective financial reform (e.g., a blueprint for reform that can be enacted by Congress) and we (the American people) must also take on the task of ensuring that this reform is implemented in Washington (and we believe that We the People will do so, once everyone is fully aware of the scope of the issues above and the extent to which this status quo threatens everyone’s household prosperity, the nation’s economy and, thus, our children’s/grandchildren’s future prosperity).
- See: “Over 200,000 Petitioners Tell Congress to Reject Wall Street Policy Riders,” U.S. PIRG, News Release, December, 2015.
- See: “Republicans Gut Wall Street Reforms in Must-Pass Spending Bill,” The Huffington Post, July, 2015.
- Article V Convention for Our Children’s Future (AVC4OCF) is a very nascent public-education/political-action non-profit with the mission of achieving comprehensive reform in Washington via federal constitutional amendment(s) originating from our nation’s first Article V Convention (NOT from Congress) — reform that is requisite for the restoration of a fully-functioning democracy and a fully-free press and a respect for the rule of law in Washington (please see our “About” page for more information). The word “we” on this webpage means AVC4OCF’s executive director, volunteers, supporters and board of directors (which will be formed soon). We currently have no funding and no advisory committee and our fiscal sponsor (from which we obtain our tax-exempt status) has no influence on our mission, projects, website content, etc.
- Professor Lawrence Lessig (Law, Harvard University) (on the topic of institutional corruption): “I think there is a feeling today among too many Americans that we just might not make it… [That] distinctly American feeling of an inevitability of greatness culturally, economically and politically, is gone… Not that we as a people have lost anything of our potential, but that we as a republic have… Our capacity for governing — the product of a constitution we have revered for more than two centuries — has come to an end. The thing that we were once most proud of — our republic — [has become something] that we have all learned to ignore. Government is an embarrassment. It has lost the capacity to make the most essential decisions... [Lessig cites deregulation as an example of Washington’s “lost capacity to make… decisions;” offers the deregulation of derivatives as an example; and then talks about the crisis itself…] “It gets worse after 2008… the insult added to injury… After we had suffered the worst financial crisis since the [market crash of 1929]… Wall Street still had the power to blackmail our Congress into giving them, effectively, a get-out-of-jail-free card [i.e., ZERO prosecutions by the FBI of any of the finance industry CEOs/high-level managers who directed the control frauds that caused the crisis – see page 4, footnote 23, below] and not changing at all the basic architecture that led to the instability that brought our economy over a cliff… [Lessig is referring to Washington’s financial “reform,” here.] Now, what explains this consistent inability of [Washington] to regulate sensibly…? Well, there are lots of possible answers, but here is the one thing that we can point to with confidence: Since the 1990s, the fastest growing sector for campaign contributions has been the financial and securities sector. And, in the 2010 election, the largest sector of contributions to congressional campaigns came from the finance and insurance industries.” (See: (video) (L. Lessig) “Republic, Lost (my favorite version),” presentation in Berkeley, CA, October 26, 2011)
- [Re: the “new normal”] Maggie Woodward (economist, Office of Occupational Statistics and Employment Projections, U.S. Bureau of Labor Statistics) (from a December, 2013 article): “Based on historical standards, the current economy seems much less robust than would be expected four years after the official end of a recession… Annual U.S. GDP growth exceeding 3.0 percent, as experienced in the mid- to late 1990s and mid-2000s, is not expected to be attainable over the coming decade.” (See: “The U.S. Economy to 2022: Settling into a New Normal,” Dec., 2013) Professor Barbara O’Neill (Rutgers University) and Dr. Jing J. Xiao (Human Development and Family Studies, University of Rhode Island): “Economists have forecast [“post-crisis outcomes”] slow economic (GDP) growth, tight credit, meager investment returns by historical standards, deflation, inflation, high numbers of ‘underwater’ homes and home foreclosures, and/or continued high unemployment in both the public and private sector… [From 2009 to 2010 studies] U.S. households have been deleveraging their debt balances and increasing their rate of precautionary savings as a percentage of household income. In addition, more than half of working adults reported experience with unemployment, a cut in pay, a reduction in work hours, or involuntary part-time employment… While the ‘Great Recession’ was declared over by the NBER in June 2009, it has not felt like it to many who experienced unemployment and other losses… the labor market continued to struggle in 2010 and 2011.” (See: (2012) “Financial Behaviors Before and After the Financial Crisis: Evidence from an OnlineSurvey,” Journal of Financial Counseling and Planning, 23 (1), 33-46) [Re: “Financial tail wagging the economic dog”] Bruce Bartlett (“held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul”) “Economists are still searching for answers to the slow growth of the United States economy. Some are now focusing on the issue of ‘financialization,’ the growth of the financial sector as a share of gross domestic product. Financialization is also an important factor in the growth of income inequality, which is also a culprit in slow growth. Recent research is improving our knowledge of financialization, which has yet to get the attention of policy makers… Adair Turner, formerly Britain’s top financial regulator, has said, ‘There is no clear evidence that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.’ He suggests, rather, that the financial sector’s gains have been more in the form of economic rents — basically something for nothing — than the return to greater economic value… The rising share of income going to financial assets also contributes to labor’s falling share… This phenomenon is a major cause of rising income inequality, which itself is an important reason for inadequate growth. As the entrepreneur Nick Hanauer pointed out at a Senate Banking, Housing and Urban Affairs Committee hearing, the income of the middle class is critical to economic growth because of its buying power. Mr. Hanauer believes consumption is really what drives growth; business people like him invest and create jobs to take advantage of middle-class demands for goods and services, which must be supported by good-paying jobs and rising incomes… Among those pointing their fingers at financialization is David Stockman, former director of the Office of Management and Budget, who followed his government service with a long career in finance at Salomon Brothers and elsewhere. Writing in The New York Times, he recently said financialization was ‘corrosive’ and had turned the economy into ‘a giant casino’ where banks skim an oversize share of profits. It’s not yet clear what public policies are appropriate to deal with the phenomenon of financialization. The important thing at this point is to be aware of it, which does not yet appear to be the case in Washington.” (See: “’Financialization’ as a Cause of Economic Malaize,” The New York Times, Economix Blog, June, 2013) Steve Denning (author; Forbes contributor): “The excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a new study by the International Monetary Fund. In other words, if the financial sector were the proper size, the U.S. economy would be enjoying a normal economic recovery of 3% to 4% per year instead of the dismal 1% to 2% of the last few years. [The 2% reduction of GDP growth per year] is a massive drag on the economy — some $320 billion per year. Wall Street has thus become — not just a moral problem with rampant illegality and outlandish compensation of executives and traders — Wall Street is a macro-economic problem of the first order… When the financial sector loses interest in the ‘boring’ returns from financing the real economy and instead devotes its efforts to activities that are more lucrative in the short-term… through complex transactions aimed at making money out of money, then excessive risk-taking occurs, with mis-allocation of human and financial resources and periodic financial crashes.” (See: “Wall Street Costs the Economy 2% GDP Each Year,” Forbes, May, 2015) Professor Gautam Mukunda (Organizational Behavior — Harvard Business School):“[T]here are two major ways in which financialization undermines economies. First, larger and more-complex financial systems may be more prone to crashes—a point made by a variety of economists, including Hyman Minsky, Charles Kindleberger, and Raghuram Rajan (who in 2005 famously argued that the risks of financial instability were much higher than most economists thought—only to be dismissed by Larry Summers [who later served on Obama’s Economic Council] as a ‘Luddite’ for his skepticism of financial innovation). [AVC4OCF comment: …And we all know now who was right in that debate…] Second, an overdeveloped financial system may misallocate resources. As far back as 1984 the Nobel Prize–winning economist James Tobin observed that ‘very little of the work done by the securities industry… has to do with the financing of real investment.’ He was troubled that ‘we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services… that generate high private rewards disproportionate to their social productivity.’ …The financial services industry also has a very high level of a form of distributive [see below for definition] activity called ‘rent seeking,’ which involves trying to make a profit by manipulating government policy. The economists Kevin Murphy, Andrei Shleifer, and Robert Vishny have shown that as a nation’s most productive workers shift from entrepreneurial to rent-seeking activities, economic growth slows. [Definition, by Mukunda, of distributive: “The British economist Roger Bootle argues that all economic activity can be classified as either ‘creative’ or ‘distributive.’ Creative work increases a society’s wealth. Distributive work just moves wealth from one hand to another. Every industry contains both. But activity in the financial sector is primarily distributive.”] …So we’re looking at a sector [financial] that serves vital functions (no modern economy can exist without banks) but that, when it grows too large, tends to slow economic growth, increase inequality, and experience crashes that exact a huge toll on society. (The 2008 financial crisis cost the U.S. government more than $2 trillion in lost tax revenues and increased spending.)” (See: “The Price of Wall Street’s Power,” Harvard Business Review, June, 2014)
We also present on this webpage a sampling of the proposals (some have already been introduced in Congress, but none, of which we are aware, have been passed as of the date of publication of this webpage) that have been recommended by experts in order to demonstrate that we already know what needs to be done, generally, to address many of these issues — Washington has just failed to implement the proper reform.
For the reasons stated above (bulleted statements on page 1), AVC4OCF proposes that American citizens work together, with the advice of experts and congressional representatives, to develop a citizen-sourced blueprint for effective, comprehensive financial reform that would then be presented to Congress for enactment. This is the goal of our soon-to-be national STOP Financial Crisis II campaign (see Action Plan, below our “signature” on page 6, for details).
We believe that the American people are primed for a “we’re-mad-as-heck-and-we’re-not-going-to-take-it-anymore” moment (see: “Network,” the movie) and, when a majority of us are FULLY informed regarding the status quo of Washington’s financial “reform” (failed) and how it poses a clear and present danger to every American household’s prosperity and the nation’s economy, we believe that We the People will readily accept the ultimate responsibility for, and take on the task of, developing this blueprint for effective reform (to be submitted to Congress) and, finally, we believe that Americans will make this commitment of our time and join, or otherwise support, this campaign and this soon-to-be movement for REAL reform (a hypothesis that AVC4OCF will be testing during this national campaign). (Note: AVC4OCF plans to partner with other national organizations with missions to realize effective financial reform and, together, build a national coalition and a national network of citizens working towards a common goal: building a movement for REAL, comprehensive, citizen-sourced reform.)
We believe that when most Americans become aware of the fact that the last crisis was, very likely, completely preventable (if only the FBI and certain regulators had taken action when they first had knowledge, in 2004, of the “epidemic” of fraud that caused the crisis — see Footnote 6) and when most Americans fully understand the TOTAL cost, for every American household, of the last crisis and the recession that it caused (e.g., the destruction of 40% of household wealth, the nationalizing of Fannie Mae and Freddie Mac, quantitative easing, etc. — see Footnote 7) and when most of us understand just how undemocratic (given the pervasive corruption, cronyism and capture) Washington’s responses to the last crisis have been (e.g., the power and influence of these TBTF firms and their ability to delay, alter and stop many elements of reform has been repeatedly demonstrated since the last crisis — a must-see educational opportunity for every American citizen — see below), we will set aside partisan differences, join our neighbors and take action to end this travesty of democracy that Washington refers to as financial “reform.”
And, finally, we also believe that, while most Americans likely understand the too-big-to-fail problem and probably have some level of knowledge regarding some of the other issues that have not been properly addressed by Washington’s financial “reform,” there are many (perhaps most) Americans who are NOT fully aware of the scope of the threats to the prosperity of every American household and the nation’s economy that are posed by the status quo of Washington’s failed “reform.”
6. Professor William Black (Economics and Law, University of Missouri at Kansas City -- He was the executive director of the Institute for Fraud Prevention from 2005-2007, litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, senior deputy chief counsel of the Office of Thrift Supervision and deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement): “The FBI warned in House testimony in September 2004 that there was an “epidemic” of mortgage fraud and predicted that it would cause a “financial crisis” if it were not stopped. It was not contained. Everyone agrees that the mortgage fraud epidemic expanded massively after the FBI warning.” (See: Fiat Justitia Ruat Caelum (Let Justice be Done, Though the Heavens Fall) nakedcapitalism.com, April, 2011)
7. (We provide the following data as a reminder of the economic suffering of every American household that resulted from Washington’s failure to prevent the last crisis and to emphasize our proposal that Americans must act to ensure that Washington does NOT fail the second time around – this time, enacting citizen-sourced, REAL financial reform). The Washington Post reported in 2012 regarding a Federal Reserve report: “The recent recession wiped out nearly two decades of Americans’ wealth… with middle-class families bearing the brunt of the decline… the median net worth of families plunged by 39 percent in just three years, from $126,400 in 2007 to $77,300 in 2010 [which] put Americans roughly on par with where they were in 1992… [causing wealth] that took almost a generation to accumulate [to] evaporate.” (See: “Americans saw wealth plummet 40 percent from 2007 to 2010, Federal Reserve says,” The Washington Post, June, 2012) The Los Angeles Times reported in June, 2014: “Low-paying positions at restaurants, hotels and temp agencies now account for a greater percentage of the workforce than those in higher-paying fields such as construction, manufacturing and banking… Population growth since January 2008 has meant that the economy still is about 6.9 million jobs short of where it should be, said Heidi Shierholz, a labor market economist at the Economic Policy Institute. ‘At the pace we are currently going, it will take nearly four more years to get back to pre-recession labor market conditions,’ she said… The labor force participation rate remained at… the lowest level since 1978 and a sign that many people have given up looking for work… Even more disconcerting to many economists is the lower quality of the jobs being created to replace many higher-paying ones lost in the recession. Compared to January 2008, jobs in construction are down 20%, manufacturing 11.7%.” (See: “Economy has recovered 8.7 million jobs lost in Great Recession,” Los Angeles Times, June, 2014) And, of course, as consumers suffered the ravages of the Great Recession, so did America’s job creators: small businesses. As stated in a Harvard Business School article: “Income of the typical household headed by a self-employed person declined 19 percent in real terms between 2007 and 2010… and the values of both commercial and residential real estate, which represent two-thirds of the assets of small-business owners and are often used as collateral for small-business loans, were decimated during the financial crisis.” (See: “Why Small-Business Lending Is Not Recovering,” Working Knowledge (publication), Harvard Business School, Aug., 2014) To keep this footnote as brief as possible, we will just mention the following regarding the costs of the crisis/recession related to the Federal Reserve’s quantitative easing and the national debt… Reuters reported in 2011: “The U.S. Federal Reserve's journey to the outer limits of monetary policy [quantitative easing] is raising concerns about how hard it will be to [exit its QE policy]. While that day seems distant now, some economists and market analysts have even begun pondering the unthinkable: could the vaunted Fed, the world's most powerful central bank, become insolvent? …But the Fed's newfangled policy steps and the potential for credit losses (from the $2 trillion of [toxic] mortgage-backed securities and U.S. Treasuries that are now on its balance sheet] raises, for some experts, the prospect that the Treasury may actually be forced to ‘recapitalize’ the Fed -- economist-speak for what others might call a bail-out.” (See: “Could the U.S. central bank go broke?” Reuters, Jan., 2011) From an article in Business Insider, 2013: “Deutsche Bank strategist, Stephen Abrahams, calls the combination of the language in the December  FOMC [the Fed’s Federal Open Market Committee] minutes and the contents of the Fed's report [the subject matter of this article] ‘arguably the Fed’s first move to prepare the public for the potential costs of QE.’ One of the big conclusions in the report is that if rising interest rates force the Fed to take losses on its massive bond portfolio, it could be forced to suspend the regular payments it remits to the Treasury – the interest income the central bank earns from the securities on its balance sheet. [Abrahams stated:] Any shortfall in operating income leading to a suspension of remittances would require the Fed to borrow from Treasury.” (See: “Deutsche Bank Explores The Tricky Situation Of A Federal Reserve Technical Insolvency,” Business Insider, Jan., 2013) An, we would be remiss if we did not also quickly mention here the public apology of the person who was in charge of the TARP program, Andrew Huszar, who said: “I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.” (See: “Andrew Huszar: Confessions of a Quantitative Easer,” Wall Street Journal, Nov., 2013) And, finally, regarding this topic, here is the conclusion from a Heritage Foundation article: “The final backstop for the Fed is the U.S. taxpayer, and the only time a capital injection would be necessary is if the Fed can no longer ‘print’ money, either due to a general lack of confidence, too much inflation, or a combination of the two. So far, the Fed’s expansionary policies have not created the rapid inflation that some predicted—but how much longer that can continue without a financial crisis as between 2007 and 2009 is anyone’s guess. It makes sense as an insurance policy against another massive Fed-sponsored bubble, as in 1999 [dot.com] and 2007 [housing], to rein in money [QE] to reduce the probability of another financial crisis. Essentially, the only way that a central bank can truly become insolvent—in the sense that it can no longer operate—is if the public is no longer willing to accept the currency that it issues. The answer to whether a central bank can become insolvent, therefore, centers on what it can do to cause the public to lose confidence in its currency. A good first step in avoiding such a lack of confidence would be to start unwinding the QE policies. If the Fed waits too long, its policies could more easily risk the status of the dollar as the world reserve currency and jeopardize American economic competitiveness [emphasis added].” (See: Norbert J. Michel, PhD and Stephen Moore, “Quantitative Easing, The Fed’s Balance Sheet, and Central Bank Insolvency,” The Heritage Foundation, Aug., 2014)
I. The Next Financial Crisis… ~ Page 3
Providing American citizens with the opportunity to educate themselves about all the issues that we have just briefly mentioned above (and several issues that we have yet to mention) is the purpose of this webpage. Our goal is to reach a majority of American citizens — a goal that, if achieved, might represent a tipping point in building a successful movement for effective financial reform and achieving the final goal: enactment in Congress of financial reform legislation (and executive action?) based on a citizen-sourced blueprint (see: Action Plan, below our “signature” on page 6 for more information regarding how we plan to achieve this goal).
We have bulleted, below, six examples of Washington’s responses (or lack of response) to the last crisis, which, we believe, represent the most urgent financial reform issues. Every one of these reform failures pose a threat that is a clear and present danger to household prosperity and our nation’s economy, according to these experts, because Washington has not addressed, or has ineffectively addressed, some critical element of systemic risk in our financial system or some other threat:
- Washington has NOT, according to experts, ended too-big-to-fail! Ending too-big-to-fail is not negotiable (and we already know how to do it and everyone, including the TBTF firms and their stakeholders, will benefit from it, if it’s done right — see Footnote 8). It should have been accomplished by the Dodd-Frank law when the president signed it in 2010. Instead (because ending TBTF was punted to the regulatory agencies by Congress), we are still talking about it five-years-plus later! American citizens should NEVER AGAIN be called upon — as a bailout, a bail-in (see the sixth bullet, below, for info on this issue), or any other scheme — to fund a rescue of a TBTF bank that becomes insolvent due to losses from gambling in the form of derivatives trading (NOT an unlikely event, according to experts — more about this below — also, see Footnote 9)!
- In an interview in September, 2013, Professor William Black (Economics and Law, University of Missouri, Kansas City and former federal regulator) said, “Dodd-Frank doesn’t address any of the three central elements that create the criminogenic environment that produce the recurrent, intensifying epidemics of control fraud that drive our ever-worsening crises. Those three elements are, first, the creation of the systemically dangerous institutions — the so-called ‘too-big-to-fail’ firms… Second… is modern executive compensation, which creates the perverse incentive structures and is the means of looting that the CEOs use. [Note: Black, in another article, describes the “financial control fraud” — the means of looting that these white-collar-criminal CEOs use — as “seemingly legitimate entities controlled by persons that use them as a fraud ‘weapon’ …[that] produce[s] guaranteed, exceptional short-term ‘profits’ …[that] allow the CEO to convert firm assets to his personal benefit through seemingly normal compensation mechanisms… [and] also cause[s] the CEO’s stock options holdings to appreciate [and also allows the CEO]... to obtain extraordinary income while minimizing the risks of detection and prosecution.”] That [modern executive compensation] has gotten worse since the crisis and there is nothing effective in Dodd-Frank dealing with either executive or professional compensation. The third area is what we call the three D’s — deregulation, de-supervision and de facto decriminalization. Decriminalization [is] as bad as it can get: no [ZERO!] prosecutions. Deregulation — that’s slightly been reversed (banning of liar’s loans, a new consumer bureau and the Volker Rule) [so], a little plus, but nothing to brag about. [Note: the Volker Rule remains, essentially, unimplemented by the Federal Reserve and, thus, ineffective — see Footnote 10.] [However], de-supervision (when the [regulatory] rules remain in place, but they are not enforced or are enforced more ineffectively [by the regulatory agencies] ) is still disastrous… We still have anti-regulators in most of the agencies.” (See Footnote 11) Adding to Professor Black’s comments on Washington’s failed “reform,” Phil Angelides had these remarks in a 2013 interview: “Over the last 30 years, there’s been an emasculation of our enforcement capability with respect to the financial industry, and it was quite deliberate. There [was] first of all deregulation, which means the rolling back of laws overseeing this industry, or when there were opportunities to make sure that growing sectors of the financial industry like over-the-counter derivatives were regulated, the industry moved in. But perhaps as perniciously there has been what you call desupervision, which is the defunding, the political pushback on regulators, the intimidation of regulators to do their job. I mean, take a look at what happened to Brooksley Born, my fellow commissioner. She saw a problem arising with derivatives; she stepped forward, and then the crushing weight of the financial industry and their allies in Washington were brought to bear on her… And I think we’re still seeing that today when we talk about a vigorous enforcement effort… [I]t’s [desupervision] [still] going on today. As we sit here today, there are constant attacks on the budget of enforcers [regulators], attempts to cut the Securities and Exchange Commission budget even though they take in more money in fines than their whole budget. So this isn’t about saving the taxpayers money.” (See page 4, Footnote 23)
- In January, 2013, Professor Frank Partnoy (law and finance, University of San Diego) and Jesse Eisinger (senior reporter at ProPublica and a columnist for The New York Times’ Dealbook section) wrote an article about the issue of opacity in TBTF bank’s financial statements in which they said: “Some four years after the 2008 financial crisis, public trust in banks is as low as ever. Sophisticated investors describe big banks as ‘black boxes’ that may still be concealing enormous risks—the sort that could again take down the economy. A close investigation of a supposedly conservative bank’s financial records [they analyzed Wells Fargo’s] uncovers the reason for these fears—and points the way toward urgent reforms. The financial crisis had many causes… but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode. For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever and they continue to behave in many of the same ways they did before the crash. [Partnoy and Eisinger mentioned JPMorgan’s $6 billion “London Whale” trading loss last year, and said:]. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America… As of this writing, investigators are still struggling to comprehend the bank’s condition… Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk… [and] a major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation… JPMorgan shareholders have filed numerous lawsuits alleging that the bank misled them in its financial statements... Investors are now left to doubt whether the bank is as stable as it seemed and whether any of its other disclosures are inaccurate… Paul Singer, who runs the influential investment fund Elliott Associates, wrote to his partners this summer, ‘There is no major financial institution today whose financial statements provide a meaningful clue’ about its risks… [Partnoy and Eisinger, then site this example of the TBTF risks:] “Only a few people have publicly expressed concerns about customer-accommodation trades. Yet some banking experts are skeptical of these trades, and suspect that they hide huge risks… Bankers and regulators today might dismiss warnings that customer-accommodation derivatives could bring down the financial system as implausible. But a few years ago, they said the same thing about credit-default swaps and collateralized debt obligations [the derivatives that played a very significant role in the collapse of Lehman Brothers, Bear Sterns and AIG during the last crisis].” (See Footnote 12)
- In December, 2014, Congress passed the “CRomnibus” spending bill that contained a provision — about 82% of which was written by a Citigroup lobbyist (see Footnote 13) — that repealed the Lincoln Amendment in Dodd-Frank (a.k.a. the swaps “push-out” rule) that WOULD have required TBTF banks to move certain derivatives business OUT of the banking subsidiary of a bank holding company and into a non-banking subsidiary, thus eliminating the taxpayer subsidy that the largest banks are currently enjoying regarding their derivatives trading business (see Footnote 14).
- Also in December, 2014, the Federal Reserve, as reported by the Huffington Post, “granted banks an extra year to comply with a key provision of the Volcker Rule… that bans banks from engaging in proprietary trading — speculative deals that are designed only to benefit the bank itself, rather than its clients. The central bank also said it plans to extend the deadline by another 12 months next year, which would give Wall Street a two-year reprieve through the 2016 presidential election.” The article also contained this quote: "‘The Wall Street Casino is alive and well,’ said Senator Jeff Merkley (D-Ore.), who co-authored the Volcker Rule statute with Sen. Carl Levin (D-Mich.). ‘Last week it was Congress granting the big banks the right to keep trading on banned risky derivatives with government backing [this is the issue presented in the bullet above]. Today it is the Fed granting big banks two more years to make big bets through direct ownership of private equity and hedge funds. It all amounts to the same thing — spineless accommodation of the big banks’ desire to run taxpayer-subsidized hedge funds. This is wrong for taxpayers and it is wrong for the stability of our banking system. We expect more of the Federal Reserve.’" Here’s another quote from this article: "‘Every day — every single day — we are at risk of a market meltdown that would wreck our economy even worse than the 2008 crash did, or even than the 1929 crash did,’ Rep. Alan Grayson (D-Fla.) told HuffPost. ‘Six years after the fact, we have taken no significant action to reduce the Wall Street gambling or 'too big to fail' concentration that caused the 2008 crash. If we can’t even implement the Volcker Rule, an extremely modest effort to stave off total disaster, then total disaster is exactly what we can expect.’" (See Footnote 15)
- Finally, there is the debate regarding the issue of bail-in: the policy that has been agreed — by all G20 member nations (including the U.S.) — as being the universal plan for addressing the insolvency of a G-SIFI (global systemically important financial institution — i.e., a global TBTF firm). (See Footnote 16) Bail-in, according to experts, is a threat to every citizen who has bank accounts in G-SIFIs here in the U.S. and/or to all citizens whose local/state governments have accounts with these firms (since the FDIC has already signaled its intent to implement the bail-in plan in the event of a U.S. headquartered G-SIFI insolvency), because these accounts may be subject to confiscation in the event of insolvency (see Footnote 16). A G-SIFI insolvency (or when two or more of them get themselves in a credit/insolvency crisis again, like they did in 2008 when, per Ben Bernanke, “[O]ut of the 13… most important financial institutions in the United States, 12 were at risk of failure” — see Footnote 17) that is caused by very large derivatives losses (NOT an unlikely event, according to experts, as we already mentioned above — see Footnote 9) — or any other cause, for that matter — may require the conversion of account balances of “unsecured creditors” (which includes ALL depositors/account holders in the bank) into equity (the new, recapitalized bank’s stock) in order to “restructure the liabilities of [the G-SIFI] by writing down its unsecured debt [which may include full/partial confiscation of customer account balances] and/or converting it to equity [stock of the newly created bridge bank] [in order to] achieve a prompt recapitalization and restructuring of the distressed institution (in other words, bailing out the bank via bail-in).” (See: Footnote 16; also see: Footnote 18 for the source for this quote) Since Congress, in Dodd-Frank (section 716 in Title II), has banned public support (bailout) related to derivatives losses and any G-SIFI’s equity is likely to be insufficient to pay all creditors’ claims when there are derivatives counterparties involved (given that at least one U.S. G-SIFI’s derivatives contracts value-at-risk totals are in the multiple TRILLION-dollar range — see Footnote 19 — and totals for other G-SIFIs are likely to be not much less), some equally enormous source of funds may be needed in order to pay the creditors (including derivatives counterparties) of an insolvent G-SIFI in order to avoid a contagion-fueled panic and 2008-like credit freeze and liquidity crisis when one of these mega-derivatives-trading G-SIFIs becomes insolvent as a result of huge derivatives losses. As experts have pointed out, the FDIC insurance fund may well be insufficient when large derivatives losses are involved (see Footnote 20) — an issue with G-SIFIs that conduct their derivatives business within their depository subsidiary (see Footnotes 19 and 20), because the government will be forced to rescue (whether via bailout or bail-in) any G-SIFI that becomes insolvent due to the threat they all pose to national and global financial markets. And, it appears that the G20 nations have decided that bank customers’ deposits are the best source of funds (as Ellen Brown, the Public Banking Institute’s founder, President Emeritus and Senior Advisor, points out: the “‘Unsecured debt’ [of a G-SIFI] includes deposits, the largest class of unsecured debt of any bank”) for bailing out (via bail-in) one or more G-SIFIs that become insolvent. As Brown explains: “The insolvent bank is to be made solvent by turning our money into their equity… ‘Zombie’ banks are to be kept alive and open for business at all costs – and the costs are again to be to borne by us.” (See: Footnote 21) And, finally, the Financial Stability Board (FSB) updated this bail-in plan in November, 2014, as Brown reported: “When there was a public outcry against [the bail-in plan and confiscation of customer account balances], the FSB [updated the bail-in plan to also include a] ‘buffer’ of securities to be sacrificed before deposits in a bankruptcy… [a buffer] equal to 16-20% of their risk-weighted assets in the form of equity or bonds convertible to equity in the event of insolvency.” (See: Footnote 21) Brown explained how this buffer may also be indirectly funded (via our pension funds) by “we the people” because pension funds (and insurance companies) are the only long-term bondholders who would be buying these “bail-inable” bonds. She emphasized this point by quoting a Peterson Institute paper, which warned: “A key danger is that taxpayers would be saved [the expense of a bailout] by pushing pensioners under the bus.” (See: Footnote 21)
8. (Note: Also see quote (testimony) of Professor John Taylor on this issue of TBTF in the Executive Summary, above.) Robert Prasch (Economics, Middlebury College): “Too Big To Fail remains one of our nation’s most significant and unresolved problems… The Dodd-Frank Act was a woefully inadequate response to what ails the American financial system.” (See: “The Next Chair of the Federal Reserve Must be a Regulator,” NewEconomicPerspectives.org, July, 2013) Neil Barofsky (former federal prosecutor and first special inspector general of the Troubled Asset Relief Program): “The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system. We still have banks that are ‘too big to fail…’ The whole point of Dodd-Frank was to end the era of TBTF banks. It’s fairly obvious that it hasn’t done that. In that sense, it [Dodd-Frank] has been a failure… The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse. We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail and ensures that the executives will never be held accountable for their actions [i.e., they will never be prosecuted for the white collar crimes — e.g., control fraud (see Footnote X) — that cause a global financial crisis]. We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naïve to expect a different result… Standard & Poor’s estimated last year that the up-front cost of another crisis, including bailing out the biggest banks yet again, would be roughly 1/3 of the U.S. gross domestic product (GDP) or about $5 trillion. The resulting problems will be even bigger… It just comes down to incentives. A normally functioning free market disciplines businesses. The presumption of bailout for TBTF institutions changes the incentives of a normally functioning free market. In a free market, if an institution loads up on risky assets with too little capital standing behind them, it will be punished by the market. Institutions will refuse to lend them money without extracting a significant penalty. Counterparties [i.e., derivatives counterparties] will be wary of doing business with companies that have too much risk and too little capital. Allowing TBTF institutions to exist removes that discipline. The presumption is that the government will stand in and make the obligations whole even if the bank blows up. That basic perversion of the free market incentivizes additional risk… We have to get beyond having institutions, any one of which can bring down the financial system. We need to break up the TBTF banks. We have to make them small enough to fail so that the free market can take over again.” (See: “Neil Barofsky – Another Financial Crisis All But Inevitable And Taxpayers Will Be Stuck With Another Multi-Trillion Dollar Bill,” InvestmentWatchBlog.com, Sept., 2012) Josh Rosner (Managing Director, Graham Fisher & Co.), testimony before the House Committee on Financial Services, May, 2013: “The ongoing failure to proactively create a banking system where all firms are small and simple enough to be managed through the bankruptcy process is a testament to Washington’s love affair with the campaign financing provided by large financial firms… Nearly three years after its passage, Dodd-Frank, and especially Title II [the Orderly Liquidation Authority], have done almost nothing to mitigate the TBTF problem… Title I should be proactively and specifically implemented to manage the shrinking of these firms to reduce the complexity of insolvencies so they create no future risks to taxpayers… Title II is seriously flawed in that it provides significant benefits to designated firms… Bankruptcy has and should continue to be the preferred means to restructure the assets of failed firms. Instead, OLA… requires a huge amount of debtor-in-possession financing from the Treasury. This Financing is a taxpayer-funded and anti‐competitive subsidy.” (See: “Statement of Joshua Rosner, Managing Director, Graham Fischer & Co.,” House Committee on Financial Services, May, 2013) And, finally, to provide an example of how ending TBTF would benefit EVERYONE, please consider how proper reform regarding the regulation of OTC derivatives might achieve this goal… Christopher Whalen (Managing Director, Institutional Risk Analytics), in testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs (June, 2009), described the “de facto monopoly over the OTC [over-the-counter] markets by the largest dealer banks led by JPM [JPMorgan], GS [Goldman Sachs] and other institutions” and explains how, “without the excessive rents earned by JPM, GS and the remaining legacy OTC dealers [via their monopolistic control of the OTC markets], the largest banks cannot survive and must shrink dramatically;” described credit default swaps contracts as “instruments [that] are entirely speculative, unsuitable for most banks and investors, and thus should be banned entirely;” proclaimed that the “very act of a dealer offering these instruments to a customer must be viewed as entirely speculative and thus an act of deliberate securities fraud;” stated that “imposing appropriate prudential and legal limitations on OTC derivatives would have enormous benefits for investors in terms of better pricing, increased transparency regarding market and liquidity risk, and improved surveillance and oversight by regulators;” and, finally, described who would benefit from “OTC reform” and how and why: investors (for the reasons stated above), taxpayers (due to “less systemic risk, less cost for bailouts of financial institutions, and less time spent by the Congress considering problems that should not exist in the first instance”), consumers (“by limiting the complexity of financial instruments, the Congress can act to limit predatory behavior by lenders and major Wall Street dealer firms. If you do not allow overly-complex financial instruments to exist in the first place, then the Congress will effectively limit systemic risk in financial markets”), and the dealers [TBTF firms] themselves (via “less risk, lower returns, makes dealers more stable and less likely to require a public bailout. The illusory, short-term returns for dealers will fall, and with it the supra-normal compensation for traders and executives of the dealers, but the long-term risk-adjusted returns for large dealers will rise and the shareholders of the dealers will benefit”). (See: “Over-the-Counter Derivatives: Modernizing Oversight to Increase Transparency and Reduce Risks,” Testimony of Mr. Christopher Whalen, Senate Committee on Banking, Housing and Urban Affairs, June 22, 2009)
9. Professor Alan Blinder (Economics, Public Affairs; Princeton University) (quoted in this Forbes article): “Bad mortgages were a serious problem in 2008, but it was unregulated derivatives that turned that serious problem into a global financial disaster. ‘[Blinder:] Derivatives based on mortgages were a principal source of the reckless leverage that backfired so badly during the crisis, imposing huge losses on investors and many financial firms.’ Yet the Dodd-Frank law ‘exempts the vast majority of derivatives [“95%,” per one source, are exempted because they are considered “legitimate lending hedges” by Dodd-Frank — see: “Russian Roulette: Taxpayer Could Be on the Hook for Trillions in Oil Derivatives,” EllenBrown.com, Dec., 2014]’ from any regulation. Since the $5 trillion that the big banks have in derivatives are undisclosed and off their balance sheets, no investor can evaluate the risks involved. Basic transparency is lacking.” (See: “Alan Blinder: Six Reasons Why Another Financial Crisis Is Still Inevitable,” Forbes.com, Sept., 2013) (Note: Also see the quote by Ron Hera (hedge fund manager) in Footnote 14 (about half way down the footnote) regarding the threat posed by derivatives trading of the G-SIFIs, which has not been addressed by Dodd-Frank or any other reform efforts; and the info on the delaying of the Volcker rule compliance deadline by the Federal Reserve and the info regarding the gutting of Section 716 in Dodd-Frank by Congress in Footnote 16, which, according to experts, are examples of how Washington is failing to implement Dodd-Frank and is even reversing key reforms in the law that were enacted to address identified threats that were created by deregulation — thus, increasing the likelihood of another crisis caused by a derivatives-trading-induced insolvency of one or more G-SIFIs.)
10. David Dayen reported in The New Republic: “On Friday [in December, 2014], the Federal Reserve delayed by two years compliance with the Volcker rule, the prohibition on banks’ proprietary trading—deals made to profit the bank instead of their clients… [He then explains how the] Volcker [rule] and [section] 716 [in the Dodd-Frank law — a.k.a. the Lincoln Amendment — the provision that was obliterated by Congress and the president by the “CRomnibus” bill the week prior — see bullet #4, above] were complementary regulations. What the Volcker rule doesn’t prohibit, Section 716 forces out into a separate subsidiary [of the bank holding company — or, it would have, had it not been gutted by Congress — see Footnote 10]… Banks already have had four years since the passage of Dodd-Frank to comply with the Volcker rule; with the multiple Federal Reserve extensions, they now have nearly seven years to unwind investments in entities like private equity firms and hedge funds. The Fed also confirmed a previous announcement that banks need not exit their investments in collateralized loan obligations until 2017. This gives financial institutions nearly three more years of exposure to investments that could easily go sour. So you would definitely want a mechanism to at least push some bank trades away from the FDIC safety net, to protect taxpayers and encourage stability [which is what section 716 would have done: require derivatives business be pushed out to a non-banking subsidiary of the holding company — a subsidiary that would not be subject to FDIC insurance]… But that ended when President Obama signed the CRomnibus and purged Section 716.” The Huffington Post reported: "’It's absurd,’ said Marcus Stanley, policy director at Americans for Financial Reform. ‘It's getting on five years after the passage of the Volcker Rule, and the banks have still not actually been required to stop doing anything... And anytime we get close to [any compliance deadline], somebody comes in with an extension.’" (See: “Happy New Year, Wall Street: Congress Has Another Gift For You,” The Huffington Post, Jan., 2015)
11. (Note: For the source for Black’s quote on this page, see bottom of footnote.) As one example of “anti-regulators” that “we still have… in most of the agencies,” we will just cite here the accommodating treatment of the TBTF firms by the Federal Reserve regarding the Volker rule (continuing postponement of the compliance deadlines regarding proprietary trading and collateralized loan obligations — see Footnote 8). In addition, we will just briefly mention how “desupervision” (which is synonymous with having “anti-regulators in most of the agencies”) was a very significant causal factor in the last crisis as documented by the FCIC: “Many mortgage lenders set the bar so low that lenders simply took eager borrowers’ qualifications on faith, often with a willful disregard for a borrower’s ability to pay… [In 2005,] 68% of ‘option ARM’ loans originated by Countrywide and Washington Mutual had low- or no-documentation requirements. These trends were not secret. As irresponsible lending, including… fraudulent practices, became more prevalent, the Federal Reserve and other regulators and authorities heard warnings from many quarters. Yet the Federal Reserve neglected its mission ‘to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.’ …In our inquiry, we found… profound lapses in regulatory oversight... These are serious matters that must be addressed and resolved to restore faith in our financial markets, to avoid the next crisis, and to rebuild a system of capital that provides the foundation for a new era of broadly shared prosperity.” (See: “The Financial Crisis Inquiry Report,” Conclusions of the Financial Crisis Inquiry Commission, pp. xv – xxviii, January, 2011) (And, this quote…) Phil Angelides: “Over the last 30 years, there’s been an emasculation of our enforcement capability with respect to the financial industry, and it was quite deliberate. There [was] first of all deregulation, which means the rolling back of laws overseeing this industry, or when there were opportunities to make sure that growing sectors of the financial industry like over-the-counter derivatives were regulated, the industry moved in [blocking regulation]. But perhaps as perniciously there has been what you call desupervision, which is the defunding, the political pushback on regulators, the intimidation of regulators… [who are just] do[ing] their job. I mean, take a look at what happened to Brooksley Born, my fellow commissioner. She saw a problem arising with derivatives; she stepped forward, and then the crushing weight of the financial industry and their allies in Washington were brought to bear on her… And I think we’re still seeing that today when we talk about a vigorous enforcement effort… [I]t’s [desupervision] [still] going on today. As we sit here today, there are constant attacks on the budget of enforcers [regulators], attempts to cut the Securities and Exchange Commission budget even though they take in more money in fines than their whole budget. So this isn’t about saving the taxpayers money.” (See: “Phil Angelides: Enforcement of Wall Street is ‘Woefully Broken,’” Frontline (PBS), Jan., 2013) And, finally, here is the reference for/source of Professor Black’s quote on this page (page 3): “Hundreds of Wall Street Execs Went to Prison During the Last Fraud-Fueled Bank Crisis,” Moyers & Company (billmoyers.com), Sept., 2013 (NOTE: please also see the Supplementary Information section on page 7, under the subheading “Criminologists’ (and other experts’) Warnings…,” for more information regarding Washington’s failure to effectively address what Professor Black refers to as: “the three central elements that create the criminogenic environment that produce the recurrent, intensifying epidemics of control fraud that drive our ever-worsening [financial] crises.”)
12. (Partnoy/Eisinger) “What’s Inside America’s Banks,” The Atlantic, Jan./Feb., 2013
13. “Citigroup Wrote the Wall Street Giveaway The House Just Approved,” Mother Jones, Dec., 2014
14. (Following is some background on Dodd-Frank’s section 716 — a.k.a., Lincoln Amendment/swaps ”push-out” rule (Note: Information regarding the CRomnibus bill that gutted this provision in Dodd-Frank is provided toward the bottom of this footnote — see “Note…”)…) William N. Lay (Research Editor, Tennessee Law Review): “Dodd-Frank was also designed to [among other purposes] end… taxpayer bailouts of financial institutions by prohibiting the federal government from ‘bailing out,’ insuring, or otherwise subsidizing losses to financial institutions that arise from risky financial transactions, such as swaps… Section 716 of Dodd-Frank… explicitly prohibited the federal government from providing ‘federal assistance’ to any distressed ‘swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity…’ Federally insured depository institutions (IDIs) that participated in swaps transactions were required to ‘push out’ certain types of swaps ([with] exceptions and carve-outs [which] exempt around ninety to ninety-five percent of most financial institution’s [swaps] activities) to an uninsured [by the FDIC] or ‘uncovered’ affiliate capitalized separately from the IDI… To understand the importance of Dodd-Frank’s swaps ‘push-out’ provision in the field of derivative finance, one must first understand the thinking behind it. Certain types of swaps transactions have the potential to cause a chain reaction of bank failures, due to the systematic counterparty risks associated with derivative transactions. A common example… credit default swaps… [a] transaction [with] a great deal of counterparty risk — a risk of default [which] contributes to the systematic risk of the derivatives system because if one party fails to meet its obligations, its counterparty may also be forced to default due to lack of funds or illiquidity… The systematic risk that occurred from swaps transactions, such as credit default swaps and other asset-backed securities, was perhaps the ‘prime culprit’ in the financial collapse of 2008 because the failure of institutions that had heavily invested in swaps caused a chain reaction of failures in other institutions… [which led to taxpayer bailouts of] several financial institutions that had heavily invested in swaps and sustained massive losses.” (See: “Understanding the Yoder Provision: Analyzing the Impact of Amendments to Dodd-Frank’s Swaps “Push-Out” Provision,” The Forum: A Tennessee Student Legal Journal, Vol. 2, No. 1, 2015) Daniel R. Warren (Student, Boston University School of Law (J.D. 2016) ): “Section 716 protected taxpayers by preventing them from footing the bill of a government bailout in the event that a bank became insolvent due to swaps activities. Before the enactment of Section 716, federal protections for banks created a potential for banks to enter into ‘no-lose transactions,’ where banks would benefit if a risky swap bet paid off or simply take advantage of FDIC insurance or federal bailout money if the swap didn’t pay off. Section 716 ensured that banks would be responsible for paying for their own risk-taking financial behaviors. Finally, original Section 716 was part of a broader attempt by Congress to prevent a new financial crisis by more clearly separating banking activities, like taking deposits and lending money, from riskier financial activities like swap transactions.” (See: “Congress’s Rollback of the Dodd-Frank Swaps Push Out Rule,” Review of Banking & Financial Law (Boston University School of Law), Vol. 34). David Dayen (freelance journalist): “[The] Volcker [Rule] and [Section] 716 were complementary regulations. What the Volcker rule doesn’t prohibit, Section 716 forces out into a separate subsidiary” (see: “Wall Street is Dismantling Financial Reform Piece by Piece,” The New Republic, Dec., 2014). [AVC4OCF comment: But, as discussed in this footnote and as discussed in Footnote 6, Wall Street and Congress have neutralized Section 716 and it remains to be seen whether or not the Federal Reserve will EVER implement the Volcker Rule. So, the bottom line here is: Critical parts of Dodd-Frank reform are useless in preventing another crisis and more taxpayer bailouts, because TBTF has trumped key components of Washington’s financial reform.] Bloomberg’s Mark Whitehouse (op-ed): “The [mega-derivatives trading] banks have… a special advantage: They are able to finance their derivatives positions cheaply, because their creditors assume the government will rescue them in an emergency. Their central role in derivatives trading, in turn, serves to reinforce their too-big-to-fail status. The largest bank holding companies have gone so far as to put almost all of their derivatives in their deposit-taking subsidiaries, which enjoy the added benefits of federal deposit insurance and access to emergency loans from the Federal Reserve. Put another way, the banks can take federally insured deposits and use the cash to post collateral on derivatives bets. That's according to the Federal Deposit Insurance Corp… The swaps push-out rule [is] a piece of Dodd-Frank that would require the banks to move a small but risky portion of their derivatives out of their deposit-taking subsidiaries and thus remove them from explicit federal support. If you've read this far, you'll understand why this is sensible policy.” (See: “Why Swaps Matter,” Bloomberg View, Dec., 2014) [NOTE: The following is some background on the gutting of Section 716 by the 11th hour negotiation and enactment of a must pass spending bill (in December, 2014) — needed to avoid a government shutdown — known as CRomnibus (which included the Citigroup-lobbyist provision that was designed to effectively negate Section 716):] Thomas Hoenig (Vice Chair, FDIC): “In 2008 we learned the economic consequences of conducting derivatives trading in taxpayer-insured banks. Section 716 of Dodd-Frank is an important step in pushing the trading activity out to where it should be conducted: in the open market, outside of taxpayer-backed commercial banks. It is illogical to repeal the 716 push out requirement.” (See: Simon Johnson, “Don’t Repeal Swaps Push Out Requirements,” Dec., 2014) Senator David Vitter (R-LA): “Ending too big to fail is far from over. Before Congress starts handing out Christmas presents to the megabanks and Wall Street—we need to be smart about this. Removing these risky derivatives that aren’t even necessary for normal banking purposes is important, and Members of Congress need to rethink repealing this critical provision." (See: same source as Hoenig quote) Senators Sherrod Brown and David Vitter: “If Wall Street banks want to gamble, Congress should force them to pay for their losses, and not put the taxpayers on the hook for another bailout. Congress should not gamble on a possible government shutdown by attempting to tuck this controversial provision into a spending bill without having been considered by the committees of jurisdiction, where it can be subjected to a transparent and vigorous debate.” (See: “Brown, Vitter Urge Congressional Leaders to Remove Provision in Spending Bill…” Dec., 2014) Edward Mills:"’This probably does represent a situation of where we are going from 'Dodd-Frank is sacrosanct' to 'Dodd-Frank is an amendable piece of legislation,' said Edward Mills, an analyst at FBR Capital Markets.” (See: “Swaps Pushout Repeal Survives House Vote,” American Banker, Dec., 2014)
15. See: “Fed Delays Volcker Rule, Giving Wall Street Another Holiday Gift,” The Huffington Post, Dec., 2014
16. Ellen Brown: “The bail-in policy for the US and UK is set forth in a document put out jointly by the Federal Deposit Insurance Corporation (FDIC) and the Bank of England (BOE) in December 2012, titled ‘Resolving Globally Active, Systemically Important, Financial Institutions.’” Federal Reserve Bank of New York: “Power to carry out bail-in within resolution [e.g., the Orderly Liquidation Authority (via the FDIC) per Dodd-Frank] is listed as one of the ‘key attributes’ [referring to the FSB document, “Key Attributes of Effective Resolution Regimes for Financial Institutions.”] of effective resolution regimes for financial institutions by the Financial Stability Board (FSB 2011), which the Federal Reserve and the FDIC helped to develop and which G-20 leaders endorsed in 2011. In general, this method could include writing down and/or converting to equity any or all unsecured and uninsured creditor claims in a manner that respects the hierarchy of the claims [emphasis added].” (See: P. White, T. Yorulmazer, “Bank Resolution Concepts, Trade-Offs and Changes in Practices,” FRBNY Economic Policy Review, Dec., 2014) Yves Smith (publisher of NakedCapitalism.com): “…[R]emember, depositors [customers with accounts in the bank] are ‘unsecured creditors’… [emphasis added]” (See: “When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives”). Ellen Brown (Public Banking Institute’s founder, President Emeritus and Senior Advisor): “That [the writing down/confiscation of account balances] could mean not just the ‘unsecured creditors’ but the ‘secured creditors,’ including state and local governments. Local governments keep a significant portion of their revenues in Wall Street banks… Banks taking deposits of public funds are required to pledge collateral against any funds exceeding the deposit insurance limit of $250,000. But derivative claims are also secured with collateral, and they have super-priority over all other claimants, including other secured creditors.” (See: “Winner Takes All: The Super-priority Status of Derivatives”) Yves Smith: “Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs [e.g., state and local government secured creditors]… Lehman [Bros.] failed over a weekend after JP Morgan grabbed collateral [associated with derivatives].” (See: same source as other Smith quote, above). Ron Hera (founder of Hera Research, LLC): “The $604.6 TRILLION derivatives bubble, which is equal to more than ten times world GDP, is a global issue. If existing OTC derivatives remain in place and there are no restrictions on what banks can trade derivatives, there is no actual or immediate reduction of systemic risk. Thus, the risks that led to the financial crisis in 2008 are likely to remain present in the global financial system for years to come. In fact, many banks have more CDS [credit default swaps] risk now than in 2008.” (See: “Forget About Housing, the Real Cause of the Crisis Was OTC Derivatives,” Business Insider, May, 2010) And, finally, regarding the FDIC/BofE “bail-in” plan for recapitalizing G-SIFIs, John Butler (Chief Investment Officer at Amphora; Atom Capital (in the U.K.) ) said: “[C]onsider the brutal, unjust irony of the entire proposal. Remember, [the FDIC/BofE plan’s] stated purpose is to solve the problem revealed in 2008, namely the existence of insolvent TBTF institutions that were ‘highly leveraged and complex, with numerous and dispersed financial operations, extensive off-balance-sheet activities, and opaque financial statements.’ Yet what is being proposed is a framework sacrificing depositors in order to maintain precisely this complex, opaque, leverage-laden financial edifice!” (See: (Butler’s article which is quoted in Brown’s article) “Someone Has to Pay — Will it be You?” FinancialSense.com, Apr., 2013)
17. See: “Why Were 12 out of 13 Major Banks on the Brink?” The Atlantic, Jan., 2011
18. The quote is from an International Monetary Fund paper that is quoted by Ellen Brown in her article — see: “New G20 Rules: Cyprus-Style Bail-Ins to Hit Depositors AND Pensioners,” EllenBrown.com, Dec., 2014
19. Ellen Brown: “According to an article on Bloomberg in November 2011, Bank of America’s holding company then had almost $75 trillion in derivatives, and 71% were held in its depository arm [subsidiary]; while J.P. Morgan had $79 trillion in derivatives, and 99% were in its depository arm. Those whole mega-sums are not actually at risk, but the cash calculated to be at risk from derivatives from all sources is at least $12 trillion; and JPM is the biggest player, with 30% of the market.” (See: “Winner Takes All: The Super-Priority Status of Derivatives,” EllenBrown.com, Apr., 2013)
20. Ellen Brown: “In theory, US deposits under $250,000 are protected by federal deposit insurance; but deposit insurance funds in both the US and Europe are woefully underfunded, particularly when derivative claims are factored in… The chart also illustrates the inadequacy of the FDIC insurance fund to protect depositors [this chart, referenced here by Brown, shows the total of the FDIC fund as being $25 billion, versus the thousands of billions in customer deposits in U.S. banks and the HUNDREDS OF THOUSANDS of billions in U.S. banks’ derivatives exposure]. In a May 2013 article in USA Today titled ‘Can FDIC Handle the Failure of a Megabank?’ Darrell Delamaide wrote: ‘[T]he biggest failure the FDIC has handled was Washington Mutual in 2008. And while that was plenty big with $307 billion in assets, it was a small fry compared with the $2.5 trillion in assets today at JPMorgan Chase, the $2.2 trillion at Bank of America or the $1.9 trillion at Citigroup… There was no possibility that the FDIC could take on the rescue of a Citigroup or Bank of America when the full-fledged financial crisis broke in the fall of that year and threatened the solvency of even the biggest banks.’ [End Delamaide quote] That was, in fact, the reason the US Treasury and the Federal Reserve had to step in to bail out the banks: the FDIC wasn’t up to the task. The 2010 Dodd-Frank Act was supposed to ensure that this never happened again. But as Delamaide writes, there are ‘numerous skeptics that the FDIC, or any regulator, can actually manage this, especially in the heat of a crisis when many banks are threatened at once.’” (See: “New G20 Rules: Cyprus-Style Bail-Ins to Hit Depositors AND Pensioners,” EllenBrown.com, Dec., 2014)
21. See: “New G20 Rules: Cyprus-Style Bail-Ins to Hit Depositors AND Pensioners,” EllenBrown.com, Dec., 2014. (Also, regarding the issue of bail-in…) In a report on the Financial Stability Board’s publication (November, 2015) of its Total Loss-Absorbing Capacity (TLAC) standards (for G-SIB’s — i.e., global systemically important banks) and accompanying reports, the New Rules for Global Finance Coalition stated: “The study (FSB’s TLAC Economic Impact study) does not address the concern of transferring the burden of bank failure from taxpayers (as part of a bailout) to households and savers (when pension and mutual funds are part of a bail-in)... There is a good chance that many mutual funds and pension funds buy these instruments, effectively putting pensioners and households on the frontlines. In the event that a ‘bail-in’ is triggered and savers (i.e. households) do lose money, this will only increase the demand for social services and, thus the fiscal burden on governments. A study is needed to assess what happens (and who is involved) when a G-SIB actually needs to be bailed in.” (Note: New Rules for Global Finance is a non-profit (located in Washington D.C.) with the mission: “[T]o promote reforms in the rules and institutions governing international finance and resource mobilization, in order to support just, inclusive and economically sustainable global development.”) (See: “Financial Reform Agenda for G20 Turkey Summit — Quick Guide…” new-rules.org, Nov., 2015)
I. The Next Financial Crisis… ~ Page 4
If these experts are correct (regarding the bulleted issues above), this period in our (U.S.) history — from the deregulation that occurred toward the end of the previous millennium and in the beginning of the new one to Washington’s responses to the last crisis — is rife with examples of government corruption, cronyism and capture (that SHOULD have been properly investigated — in other words, the Financial Crisis Inquiry Commission was certainly no Pecora Commission, according to experts (see Footnote 22), and, in this author’s opinion, the American people should have demanded a special-commission investigation of Washington’s role in causing/contributing to/failing to stop the crisis). And, since the American people were denied full, unbiased investigations into the crisis, it is our hope that the expert opinions presented on this webpage will provide sufficient credible and compelling evidence that will lead to most citizens concluding the following:
- Washington’s actions in the years leading up to the crisis (which, together with the white-collar crime and unregulated derivatives and the lack of transparency of the TBTF firms’ financial statements and a few other key issues, caused the crisis — essentially, Professor Black’s “three D’s:” deregulation, desupervision and de facto decriminalization), Washington’s responses to the crisis (from the FBI’s unconscionable failure to prosecute ANY of this white collar crime — see Footnote 23 — to the failings of Washington’s financial “reform” law (i.e., Dodd-Frank —regarding which we have heretofore only mentioned three: failure to end TBTF, failure to address the opacity of financial statements and failure to effectively address the threats posed by mega-derivatives-trading banks) ), and the failings of the implementation of Dodd-Frank “reform” (of which we have thus far only mentioned two: the recent victories of the finance industry lobby in repealing the Lincoln Amendment and delaying (indefinitely?) the deadline for compliance with the Volcker rule), are all damning evidence of the existence and pervasiveness of the institutional corruption, cronyism and capture that is the status quo in Washington (at least, as I mentioned above, when the policy/legislation/… pertains to the finance industry); and,
- This status quo in Washington, as described by many experts (a sampling of which is summarized above), renders our federal government incapable of designing and implementing effective financial reform (as Professor Lessig says: “It has lost the capacity to make the most essential decisions” — see page 1, Footnote 4). (Author’s note: I anticipate that most American citizens will conclude similarly, once they are fully aware of the issues presented on this webpage — if they do not already agree with this conclusion now.)
And finally, we present, here, a sampling (not intended to be a complete list of the reforms that are still needed) of REAL financial reform proposals that have been recommended by experts (some of which have already been introduced in Congress) in order to encourage and empower a broader discussion and consideration of potential components of a citizen-sourced blueprint for effective, comprehensive financial reform. In addition, we hope to — during the remaining months of the national campaign and run-up to the November (2016) election — elevate the issues on this webpage to the forefront of debate and discussion among citizens and candidates for office in town halls and in the media on every Main Street in America. (Note: The following bullets might be a good example of a list of reforms that will be both effective in preventing the next crisis, as well as capable of engendering the level of bipartisan support — on Main Street and in Washington — necessary to realize the goal of enactment in Congress):
- (Amend Dodd-Frank/Enact new legislation to…) (as one component of the blueprint that is designed for the purpose of ending TBTF) Restore/Reinstate a Glass-Steagall-like separation of commercial and investment banking (see Footnote 24) AND/OR break up the biggest banks (e.g., enact the Too-Big-To-Fail/Too-Big-To-Exist Act — see Footnote 25);
- (Amend Dodd-Frank and/or otherwise implement policy to…) Implement Professor Black’s recommended reform (e.g., reestablishing collaborations between regulators and the FBI in investigations and preparing for prosecutions, reestablishing the criminal referral process (from regulators to the FBI) that was reduced to a trickle in the years leading up to the crisis, etc. — see: Supplementary Information, page 7, third quote by Professor William Black, for details) in order to effectively address the issues of desupervision and de facto decriminalization and end the “recurrent, intensifying epidemics of control fraud that drive our ever-worsening crises” (see: Professor Black’s quote on page 3, above);
- (Amend Dodd-Frank and/or otherwise implement policy to…) Exclude bank customer (private and government) accounts from the “unsecured creditors” whose debt (bank’s liabilities) will be converted to equity (per the FDIC’s bail-in policy) to recapitalize a TBTF firm (to ensure that taxpaying citizens will, as we said above (page 3, first bullet), never again be called upon to fund the rescue of a TBTF firm that becomes insolvent due to derivatives gambling losses);
- (Amend Dodd-Frank or otherwise implement policy to…) Reduce the threat posed by the “economic bubble” created by the over-the-counter derivatives trading of the mega-derivatives-trading TBTF firms (see (all on page 3): Ron Hera’s quote, Footnote 16 (about half way down footnote); Footnote 14 for background on the dangers of derivatives trading and Congress’ recent (December, 2014) deregulation of this trading; and also see the quote by Christopher Whalen, Footnote 8 (bottom) ) (Note: This would likely be achieved by the implementation of the first, second, fourth and fifth bullets in this list);
- (Amend Dodd-Frank or otherwise implement policy to…) Address the issue of opacity regarding the financial statements of G-SIFIs (described by Professor Frank Partnoy and Jesse Eisinger as the “lack of transparency [that makes the biggest banks] ‘black boxes’ that may still be concealing enormous risks—the sort that could again take down the economy”) (e.g., as recommended by Partnoy and Eisinger to: “Rebuild the twin pillars of regulation that Congress built in 1933 and 1934… [that establishes] a straightforward standard of disclosure [that requires firms to] describe risks in commonsense terms that an investor can understand [— and, regarding enforcement]… a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse… [in other words] vigorous prosecution of financial crime”) (See: page 3, Footnote 12, above); and,
- (Enact new legislation to…) (as another component of the blueprint that is designed for the purpose of ending TBTF) Amend bankruptcy law, e.g., per the following Senate testimony of Professor Thomas H. Jackson (political science/business administration and university President Emeritus, University of Rochester): “[To make] bankruptcy… the preferred mechanism for the resolution of SIFIs [/G-SIFIs]… [B]ankruptcy is designed by the Dodd-Frank Act to be the preferred resolution mechanism. The FDIC has announced that it supports the idea that bankruptcy, not OLA [Orderly Liquidation Authority] under Title II of the Dodd-Frank Act, should be the presumptive resolution procedure.” In his concluding section of his testimony, Jackson states that his proposed legislation: “[E]ffectively accomplishes all of the changes necessary to make the Bankruptcy Code a viable alternative to the proposed SPOE [FDIC’s single-point-of-entry] procedure under Title II of the Dodd-Frank Act… [and would] thus accomplish the original desire of the Dodd-Frank Act to have bankruptcy be the preferred mechanism (and the focus of effective resolution plans [i.e., the “living wills” that are required from the SIFIs per Dodd-Frank] ), and deserves enactment for that reason alone.” Jackson then cites a half dozen reasons to support his claim that his proposal will, if enacted by Congress, provide “not just a ‘parallel’ mechanism to accomplish a SPOE-like procedure outside of Title II, but a superior mechanism” (See Footnote 26).
(Note: As just one example of other reform issues that have been proposed and appear to be urgently needed, but are, essentially, being neglected by Washington — and, like the proposals bulleted above, will very likely require a citizen intervention to get them enacted by Congress — is the apparent need for increasing the equity (versus the highly-leveraged debt to which TBTF firms are currently “addicted”) requirements for banks — perhaps, far above the Basel III requirements and certainly more than the Dodd-Frank requirements and anything that has been seriously considered thus far in Washington. Such reform, according to Stanford’s Professor Anat Admati, would be valuable in addressing TBTF (Admati: “[H]igher equity requirements reduce the taxpayer subsidies associated with implicit guarantees [e.g., bailout/bail-in], which perversely encourage recklessness and further endanger taxpayers and the economy. Debt guarantees, particularly to those institutions considered too big to fail, encourage and reward institutions for excessive borrowing, risk taking, growth and complexity. Requiring that banks rely on more equity reduces their ability to benefit from these distortive and outsized subsidies. With reduced subsidies, inefficiently large institutions might become smaller because of pressure from investors, similar to the breakup of conglomerates in the late 1980s” — see: “The Compelling Case for Stronger and More Effective Leverage Regulation in Banking,” Stanford University, Sept., 2014) )
22. Early in January, 2009, in a New York Times op-ed, author Ron Chernow said: “Barak Obama has assigned a top priority to financial reform when the new Congress assembles today. If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans [for the still ongoing financial crisis] to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change. For inspiration, Congress should turn to the electrifying hearings of the Senate Banking and Currency Committee, held in the waning months of the Hoover presidency and the early days of the New Deal… hearings… name[d] [after] the committee counsel, Ferdinand Pecora, [who] was chief counsel for the investigation. Under Pecora’s expert and often withering questioning, the Senate committee unearthed a secret financial history of the 1920s, demystifying the assorted frauds, scams and abuses that culminated in the 1929 crash… Pecora not only documented a litany of abuses, but also paved the way for remedial legislation. The Securities Act of 1933, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934 — all addressed abuses exposed by Pecora… The new Congress [in 2009] has a chance to lead the nation, step by step, through all the machinations that led to the present debacle and to shape wise legislation to prevent a recurrence.” (See: “Where Is Our Ferdinand Pecora?” Op-ed, The New York Times, Jan., 2009) (AVC4OCF comment: The foregoing is a fair description of what the Financial Crisis Inquiry Commission SHOULD have achieved. But, many expert opinions regarding the effectiveness of the FCIC have been very negative to say the least…) Ryan Chittum (former Wall Street Journal reporter, and deputy editor of The Audit, Columbia Journalism Review’s business section) (from a Sept., 2013 article): “The Financial Crisis Inquiry Commission was always destined to fail. It had an enormous task: Tell us what—and who—caused the biggest financial crisis since the Great Depression. For that, it was stacked with bipartisan political appointees (rather than say, seasoned prosecutors), assigned a hard deadline of a little more than a year, and handed an appalling $10 million budget. To put that in context, Fannie Mae spent $60 million on an in-house investigation of its bad accounting a few years earlier. The Valukas report, which examined Lehman Brothers alone, cost $38 million… [Chittum then provides background on Citigroup whistleblower Richard Bowen’s testimony before the FCIC…] Richard Bowen was chief underwriter in consumer loans at Citigroup who in 2006 began raising serious questions with higher executives about fraud at the bank, which was bundling bad mortgage loans into mortgage-backed securities and collateralized debt obligations. Sixty percent of the loans Bowen surveyed were defective, meaning they didn’t meet Citigroup’s own standards. By 2008, 80 percent of Citi’s bundled mortgages were bad. An executive above him, on the Wall Street side of the bank, was overturning Bowen’s underwriters’ decisions to reject loans—all so the bank could create more toxic CDOs to sell off to unsuspecting investors. Bowen blew the whistle… [and] was demoted and run out of Citigroup for his efforts… Unfortunately, Bowen says the FCIC… forced him to significantly water down his testimony. [Chittum then quotes a recent op-ed by William D. Cohan in The New York Times that details this incident (see excerpt from that article, below) and concludes…] If this is true—and I have no reason to doubt Bowen—it’s a scandal. Who else got pressured to water down their testimony? What else did the FCIC short-arm or look away from? What does it say about us that we need a [commission to investigate the FCIC]?” (See: “New Questions About the Financial Crisis Inquiry Commission,” Columbia Journalism Review, Sept., 2013) William D. Cohan (former Wall Street investment banker and contributor to Bloomberg View and Vanity Fair): [Note: this is the segment in Cohan’s op-ed that Ryan Chittum was quoting in his article and this is the FCIC incident that he referred to as “a scandal”] “Mr. [Phil] Angelides [chair of the FCIC] told me that he had no knowledge of Mr. Bowen’s being censored, but… he conceded, the Wall Street banks ‘and their phalanx of attorneys were putting enormous pressure’ on the commission ‘every day of every week with every witness’ in an effort ‘to discredit people who were testifying against their interests.’” (See: “Was This Whistleblower Muzzled?” Op-ed, The New York Times, Sept., 2013) Professor William Black (see page 2, Footnote 6, above, for full bio):”Bowen’s testimony was sanitized at the request of an FCIC attorney. Bowen felt the request was a direction and that his testimony would be barred if he had not followed the request/direction. Bowen was told to take out of his prepared testimony (a) the names of Citi officers, (b) the details of Citi’s officers’ misconduct, (c) the fact of his providing information to the SEC and the SEC’s failure to follow up, (d) his prior experience as a whistleblower with another bank [and] his concerns [regard]ing the truthfulness of Citi’s senior officers’ attestations under Sarbanes-Oxley, and (f) Citi’s retaliation against him. These exclusions were particularly bizarre because during his interview with FCIC’s investigative staff they had asked him to include the materials that the FCIC attorney now wanted removed. The exclusions reduced the length of Bowen’s testimony by 10 pages (one-third)... FCIC then issued a directive barring the public from having any access to Bowen’s FCIC interviews. Other witnesses’ FCIC interviews, such as mine, are freely available to the public… The SEC has also barred public access to the materials Bowen [submitted to them, which] document[ed] Citi’s frauds… [I]t was clear that the FCIC commissioners could not even fathom that the three fraud epidemics that drove the financial crisis (a) existed, (b) hyper-inflated the [housing] bubble, or (c) could really cause a financial crisis... Bitner and Lindsay’s testimony was virtually ignored by FCIC’s report [Bitner testified that 70% of the loan files submitted by loan brokers had false information, including significantly inflated appraisals in half the cases and Patricia Lindsay, from New Century, testified that loan brokers routinely inflated the borrower’s income]. [Susan] Mills’ [Citigroup, securitizations] testimony… in the report… does not even mention her testimony about EPDs’ [early payment defaults] ties to fraud. One might expect that having experts testify under oath to fraud incidences of 70-80% and tripling over the period 2005-2007 would leave the Commissioners in a state of shock. The testimony, even in the sanitized version in Bowen’s case should have led to three major conclusions by the commissioners: It refuted the Citi officers’ claims that there was no way anyone could think that CDOs could suffer material losses ([Black earlier in the article explained:] Citi had been sued [by] the SEC for securities fraud for claiming in its financial disclosures to have little exposure to risk of loss from subprime loans; Citi’s investment bank arm suffered severe losses from subprime loans due to its retention of ‘super senior’ CDO tranches that it issued and sold primarily to other investors; and Citi had direct exposure to loss on those tranches and litigation exposure to those it sold the CDOs), which should have led to devastating cross examination of the Citi witnesses about CDOs; It created a powerful line of cross-examination that needed to be pursued with Citi’s top risk officer, who Bowen testified to be a leading cause of Citi’s fraudulent reps and warranties [that stated that Citi had performed standard due diligence regarding the quality of the assets – mortgage loans – that they were securitizing and selling to investors]; and, It created a need to take fraud seriously as a candidate as a primary cause of the financial crisis. [But], none of this happened. FCIC spurned its one chance for success despite its limited resources. It had the perfect witness set up for the perfect confrontation with Citi’s chief risk officer. It had the perfect evidence to blow apart the ‘perfect storm’ that no one could see coming claim. Bowen saw it coming, warned about it in writing, and was crushed by Citi’s senior leaders because he was correct. FCIC never even took a swing and tried... The cumulative result was that the force of the testimony on fraud was lost completely. The New York Times report on the three panels [testimony]… uses the word ‘fraud’ only to set up a joke. It does not even report the 70-80% fraud incidence testimony… [T]he individual commissioners lacked the combined financial and legal expertise and understanding of accounting fraud to formulate the necessary questions. FCIC needed to bring together Bowen’s insider knowledge and expertise with the most powerful testimony from him that was possible, expert legal ability to cross-examine, and a thorough understanding of accounting control fraud. Instead, FCIC’s attorney greatly weakened Bowen’s testimony and FCIC struck out and squandered its one great opportunity to wake up the public and produce an accurate understanding of the crisis.” (See: “How FCIC Spurned Its One Chance At Greatness,” NewEconomicPerspectives.org, March, 2015) Yves Smith (management consultant with over 25 years experience in the finance industry and author of the Naked Capitalism blog) (from a Jan., 2011 article): “The Financial Crisis Inquiry Commission report increasingly looks like a whitewash. Even though the commission has made referrals for criminal prosecution, you’d never know that reading its end product. The references to ‘fraud’ and ‘crime’ are sparing... The [report] acknowledges the fraudulent lending by firms that were prosecuted like Ameriquest. [But], the notion that the TBTF firms might have engaged in [fraudulent] activity is remarkably absent from the report. The FCIC has also been unduly close-lipped about their criminal referrals, refusing to say how many they made or giving a high-level description of the type of activities they encouraged prosecutors to investigate. By contrast, the Valukas report on the Lehman bankruptcy discussed in some detail whether it thought civil or criminal charges could be brought against Lehman CEO… and accounting firm Ernst & Young. If a report prepared in a private sector action can discuss liability and name names, why is the public not entitled to at least some general disclosure on possible criminal actions coming out of a taxpayer funded effort? Or is it that the referrals were merely to burnish the image of the report, and are expected to die a speedy death?” (See: “The FCIC, in Lockstep with the Officialdom, Refuses to Use the “C” Word,” NakedCapitalism.com, Jan., 2011) (AVC4OCF comment: “Die a speedy death” turned out to be spot-on: zero prosecutions.)
23. As reported by The Huffington Post in 2010: “[K]ey bank regulators -- who did the detective work during the S&L crisis [in the 1980’s and 90’s] and sent more than 1,000 criminal referrals to prosecutors -- have this time left reporting fraud up to the banks themselves. Spokesmen for two chief regulators, the Comptroller of the Currency and the Office of Thrift Supervision, say that they have not sent prosecutors a single case for criminal prosecution… [I]nterviews with several law enforcement authorities… [also included mention of this] explanation [for the absence of any prosecutions]: A lack of active assistance to prosecutors by bank regulators who played key roles during the S&L crackdown ([and who] succeeded in sending scores of S&L executives to prison). Those regulators [during the S&L crisis] sent detailed reports to prosecutors of known and suspicious criminal activity. ‘Only the regulators can make a lot of these cases,’ [Professor William] Black said. ‘…[T]he regulators are the ones that understand the industry.’ … Black scoffs at the strategy of leaving it to banks to ferret out all the fraud. ‘Institutions will not make criminal referrals against the people who control the institutions,’ said Black.” PBS’ Frontline interview of Phil Angelides (chair, Financial Crisis Inquiry Commission (FCIC) ), Jan., 2013 (excerpts only) -- Frontline: How many criminal referrals did you make? Angelides: We made a number of referrals… Frontline: Have any of those referrals, to your knowledge, resulted in indictments? Angelides: Well, I have not yet seen criminal indictments [that are based on FCIC referrals, nor any other] investigations that were undertaken, for example, by the [Senate’s Permanent Subcommittee on Investigations]… Frontline: Are you surprised that there’s been no criminal prosecution to date? Angelides: I’m surprised in this context: We didn’t find isolated wrongdoing. We found pervasive wrongdoing throughout this whole industry. We found a fundamental corruption throughout the chain of origination of mortgages to the packaging of those mortgages [securitization] to the selling of those mortgages to investors all over the world… [I]t really does add up very dramatically to a pervasively corrupt pattern of behavior. You know, one piece of information that we released were documents from Clayton Holdings, who performed due diligence for two dozen banks who were buying mortgages from the Countrywides, the Ameriquests, the New Centurys, [and] packaging those loans up and selling them to investors… Clayton Holdings was finding that a substantial portion of the loans, I think overall from January of 2006 to March of 2007, that 28 percent of the loans did not meet the standards of the lender or of the bank buying those loans. And notwithstanding that very clear evidence… bank after bank after bank... They took those loans, they knew they were defective, and notwithstanding that, they never told the investors. In fact, they told investors quite the opposite. When they knew that they didn’t meet the appropriate standards, they told the investors that in fact they did… I think it raises very serious questions about whether this is criminal conduct… These banks, whether it was Citigroup or JPMorgan or Merrill Lynch, they and the individuals within those banks were undertaking these practices. And the end result is they were the ones selling them in the marketplace; they were the ones representing that the loans did meet all the standards… It’s been front and center in other cases like the Federal Housing Finance Agency’s cases that Fannie Mae and Freddie Mac were sold a bill of goods to the enormous detriment of taxpayers, probably $30 billion-plus in losses to taxpayers because of the peddling of fraudulent loans… And actually if you go back — let’s go back to the mid-2000s — what’s striking is at the very beginning, when the FBI warns about a pandemic of mortgage fraud, what does the Department of Justice do under Alberto Gonzales and Michael Mukasey? They pretty much do nothing… But here’s what I think has to happen: If there have been wrongs committed, they have to be righted. And that means criminal prosecution if people broke the law, and that means redress and compensation to people from whom money was stolen. Number two is: I think it’s fundamentally important that the American people have a sense that the justice system treats everyone alike, that there’s not one set of rules for the wealthy and powerful and well-heeled, who can inundate Washington with thousands of lobbyists and hundreds of millions of dollars of lobbying expenses and political contributions, and a second standard for working Americans. And you see this dichotomy in the prosecutions across this country, where all across the country people are being convicted for having lied on their mortgage application and no consequence for the very firms and executives who drove these products into the market and then sold them across the world and knew they were defective. Here’s the final reason we need a vigorous enforcement effort, and that is you need deterrence. The current system of enforcement in the financial services industry is woefully broken. It works something like this: A bank and their executives break the rules, are charged with breaking the rules. Inevitably they settle, generally for a small fine when considered in the total cost of doing business. And then they go back to doing what they’ve been doing before. And so deterrence is fundamental here… I want to go back to one other thing we were talking about, about the pervasive nature of this… I think there’s something even deeper that’s happening within the financial industry that I think comes from enormous power and hubris. In the wake of the financial crisis, you would think that there would be some critical thinking about what happened and how things ought to be changed. But what have we seen in the wake of that? We’ve seen allegations of money laundering at major financial institutions like ING, Standard Chartered Bank, HSBC. We’ve seen a bid-rigging scandal that’s broken out across this country where cities and towns were robbed of tens of millions, of hundreds of millions of dollars in interest earnings because banks colluded and rigged bids. We’re seeing the Libor [London Interbank Offered Rate] scandal where at least Barclays and perhaps other banks — investigations are ongoing — may well have been fixing interest rates, by the way to the detriment of many savers and investors whose returns were tied to how that index did… If you read the business pages today, it almost reads like a rap sheet. I mean, who would have thought — when you hear words like “money laundering,” “bid rigging,” “price fixing,” “fraud,” you think of the mob… [T]here is a corruption, I think, that’s very damaging to the sense of integrity of our financial markets and very damaging ultimately to our economy that’s got to be rooted out. But it won’t be rooted out if our system of broken enforcement continues…” (See: “Phil Angelides: Enforcement of Wall Street is ‘Woefully Broken,’” Frontline (PBS), Jan., 2013) U.S. District Judge (Manhattan) Jed Rakoff (as reported by Reuters): “‘[Rackoff:]The failure of the government to bring to justice those responsible for such a massive fraud speaks greatly to weaknesses in our prosecutorial system that need to be addressed.’ … Rakoff cited remarks in March  by Attorney General Eric Holder, who said he was concerned that prosecuting some banks ‘will have a negative impact on the national economy, perhaps even the world economy.’ ‘I have to say,’ Rakoff said, ‘to federal judges who take an oath to apply the law equally to the rich and the poor, this excuse, sometimes labeled the 'too big to jail excuse,' is mindboggling in what it says about the department's [Dept. of Justice] disregard of fundamental legal principles.’ Rakoff said the question of whether banks are ‘too big to jail’ is ‘entirely irrelevant’ to whether individual executives should be charged. ‘From a moral standpoint, punishing a company and… mostly innocent employees and shareholders for the crime of a few unprosecuted individuals seems contrary to the elementary notions of moral responsibility,’ Rakoff said.”
24. As evidenced by the bipartisan support for the 21st Century Glass-Steagall Act and a few other encouraging signs, we may be approaching the tipping point in, finally, realizing a return to Glass-Steagall-like separation of commercial and investment banking. Many experts believe that the opposition to such reform is without merit. The following are just a few examples… James Rickards (hedge fund manager): “The big bank boosters and analysts who should know better are repeating the falsehood that repeal of Glass-Steagall had nothing to do with the Panic of 2008. In fact, the financial crisis might not have happened at all but for the 1999 repeal of the Glass-Steagall law that separated commercial and investment banking for seven decades. If there is any hope of avoiding another meltdown, it's critical to understand why [the] Glass-Steagall repeal helped to cause the crisis. Without a return to something like Glass-Steagall, another greater catastrophe is just a matter of time… In 1999, Democrats… and Republicans… joined forces to repeal Glass-Steagall at the behest of the big banks. What happened over the next eight years was an almost exact replay of the Roaring Twenties. Once again, banks originated fraudulent loans and once again they sold them to their customers in the form of securities... The hard-earned knowledge of 1933 had been lost in the arrogance of 1999… [Prior to 1999,] Glass-Steagall… prevented the banks from using insured depositories to… underwrit[e] their own issues of toxic securities. [These activites], along with [the] financing [that the big banks] provided to all the other players, was what kept the bubble-machine [housing bubble] going for so long. Now, when memories are fresh, is the time to reinstate Glass-Steagall to prevent a third cycle of fraud on customers.” (See: (Op-Ed) “Repeal of Glass-Steagall Caused the Financial Crisis,” U.S. News and World Report, Aug., 2012) Senator John McCain (R-AZ): “Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.” (See: “Warren Reintroduces New-Era Glass-Steagall Law,” GateHouse Media (telegram.com), Jul., 2015) David Brodwin (cofounder and board member of American Sustainable Business Council): “Glass-Steagall's repeal in 1999 did not, by itself, cause the financial crisis, and so its reinstatement unaccompanied by other reforms is not going to prevent a future crisis. Glass-Steagall targets one of five major issues that need to be addressed to buttress the banking system. It is designed to complement other reforms, some already enacted in the Dodd-Frank financial reform law, and others still to come. At the most fundamental level, the financial collapse happened because… normal market discipline was suspended. Financial executives took on far more risk than they could handle. The factors that encouraged excessive risk-taking are worth restating, so we can put Glass-Steagall in perspective: Financial institutions could issue mortgages to inappropriate borrowers and then sell these mortgages right away, so they wouldn't be caught holding the bag when the payments stopped; Financial institutions were allowed to expand their speculation by leveraging their federally-guaranteed deposits (this is what the original Glass-Steagall Act prohibited); Capital requirements were set too low [and] financial firms were not required to keep enough assets on hand to protect against speculative investments that went bad; The massive scale and interconnectedness of the financial system required the government to bail out institutions rather than let them fail due to their poor risk management ([the] "too big to fail" problem); There was a profound misalignment of incentives between the performance of financial firms and the pay of the executives who ran them — the financial incentives for executives and boards, coupled with the lack of criminal prosecution, meant that individual executives profited personally from decisions that were catastrophic for the banks they ran. …It's important to keep in mind that reinstating Glass-Steagall won't address the other causes of the financial crisis and the Great Recession. Glass-Steagall is part of a bigger picture. Glass-Steagall doesn't address… [for example,] the sheer size and systemic importance of the largest financial institutions. (If implemented, it would force certain institutions to break up, but then other mergers would take place along different dimensions.) However, a new Glass-Steagall bill would complement the Dodd Frank legislation enacted in 2010… Together, Glass-Steagall and Dodd-Frank provide an important bulwark to protect our financial system against future crises.” (See: “Glass-Steagall Critics Get a Little Bit Right And the Rest All Wrong,” U.S. News and World Report (usnews.com), Aug., 2013)
25. Former Senator Chris Dodd and former representative Barney Frank proclaimed in a 2013 op-ed that the Dodd-Frank Act, “repeal[ed] the power the Federal Reserve had possessed to extend funds to any financial institution… [and the law requires that, in the event of a SIFI insolvency, regulators] must… begin the process of liquidating the institution... and put the entity into receivership [and,] if the equity is insufficient [to pay the firm’s debts], the FDIC’s only recourse is to draw from the Orderly Liquidation Fund [-- in other words, bailouts are not permitted under the law].” Dodd and Frank, in this op-ed, challenge “critics [of the law who] complain that somehow, we have left too big to fail in existence” and challenge those who say that, “if several institutions were to fail simultaneously, we would be swamped, and a massive, multiple bailout would be required.” Dodd and Frank said: “Even in the crisis of 2008, it wasn’t true” (which would also appear to be a claim that Bernanke’s testimony before the FCIC, in which Bernanke said that 12 of the 13 largest banks “were at risk of failure” (see Footnote 15), was inaccurate). Now, on the other side of the coin, the experts who claim that TBTF is alive and well (and, economically, quite dangerous) are numerous and the following are just a few examples of the opinions of these experts and what they are saying about the dangers of TBTF banks… Phil Angelides (Chair of the Financial Crisis Inquiry Commission) (as reported by EIN News): “[Angelides:] I find myself increasingly seeing the wisdom of Thomas Jefferson’s statement in 1816 that, ‘banking establishments are more dangerous than standing armies.’” (In this EIN News article, the reporter, EIN News editor, Joe Rothstein, writes:) “[Even after the FCIC had completed their investigation,] Angelides still wasn’t prepared to come down on the side of [breaking up] the big banks. Until now. Here, in his own words, is why: ‘[Angelides:] This is the conclusion I’ve come to recently and not lightly. But the banks themselves, through their continued pursuit of the practices and culture that brought on the crisis of 2008 [e.g, the London Whale incident, and the ‘rigging of the critically-important LIBOR rate of interest [and the] massive and ongoing money laundering at HSBC and other banks’ – see: Professor Robert Prasch, “The Next Chair of the Federal Reserve Must Be a Regulator,” July, 2013], their fierce resistance to any kind of reasonable change, the unrestrained use of their enormous political power and their willingness to use whatever means necessary to bend the political system to their self-interest without respect to the public interest, have provided in my mind the conclusive evidence that a modern era of trust busting is now essential. They’ve proven that even nuanced changes are not accomplishable because they’ll beat the hell out of them. Despite all the efforts at historical rewrite, no one should have any questions that but for the tremendous assistance of the U.S. taxpayers every major Wall Street firm was circling the drain and on its way to collapse in September of 2008. Ben Bernanke told us 12 of the 13 major financial institutions would have collapsed. Tim Geithner said all of them. But they’ve forgotten all that and emboldened by their assisted escape from disaster and with their hubris reinvigorated, Wall Street and their political allies in Congress have mounted a fierce frontal assault to destroy the efforts to reform the financial system, spending hundreds of millions of dollars to distort our democracy for their financial interests. And, sadly they have been stunningly successful… By 2011, the top 10 banks in this country held 77 percent of the nation’s banking assets. The top five banks… held $7.9 trillion in assets and 95 percent of the $304 billion in over-the counter derivatives held by U.S. bank holding companies. These banks are too big to fail. They’re too big to manage. They’re too big to regulate. They’re too complex to understand and they’re too risky to exist. And the bottom line is they offer very little benefit. These banks need to be broken up for reasons beyond just market impacts. Simply stated, they have become a clear and present danger to our economy and democracy and must now go the way of the trusts that were dismantled at the turn of the last century.’” (See: “Break Up the Banks,” EIN News, July, 2012) As reported by Reuters in 2012: “[When asked to] predict when regulators would be satisfied that banks are not too big to manage effectively, [Comptroller of the Currency, Thomas Curry, responded,] 'I don't think I can predict when. It's going to take a lot of work.’ The debate over whether banks are not only ‘too big to fail’ but also ‘too big to manage’ was reignited in recent days… On Monday, Bank of America announced that it had suspended its dividend and plans to buy back shares after uncovering a mistake calculating its regulatory capital level. The error, which had gone unnoticed by the firm and its regulators for several years, had previously led it to overstate its capital buffer by about $4 billion. The flub caused observers to question how thoroughly banks and their regulators are scrutinizing firms' books… [A recent Office of the Comptroller of the Currency (OCC) proposal for bank risk-management] reform grew out of another flashpoint in the debate over bank complexity -- the 2012 London whale debacle, in which JPMorgan Chase lost billions of dollars on risky trades. The screw-up caused critics to question how managers and regulators had overlooked massive risk-taking by an overseas unit of the bank. Curry… was grilled by lawmakers over the OCC's failure to spot the dangerous trades.” (See: “U.S. Regulator Says Some Banks Still ‘Too Big To Manage,’” Reuters.com, Apr., 2014) Professor Robert Prasch (Economics, Middlebury College): “Too Big To Fail remains one of our nation’s most significant and unresolved problems… The Dodd-Frank Act was a woefully inadequate response to what ails the American financial system.” (See: (“The Next Chair of the Federal Reserve Must Be a Regulator,” NewEconomicPerspectives.com, July, 2013)
26. See: “Statement of Thomas H. Jackson, Before the Subcommittee…, the [House] Committee on the Judiciary…” July, 2014, [Re:] Financial Institution Bankruptcy Act of 2014
I. The Next Financial Crisis… ~ Page 5
As the list of reform proposals on the preceding page demonstrates (in addition to all the other expert opinions on the preceding pages — including the footnotes), there are numerous examples (and the above list is by no means complete) of how Washington’s financial “reform” needs to be reformed — URGENTLY — BEFORE the next financial crisis is upon us. As we have illustrated on this webpage, Washington has failed to implement effective financial reform, which has left the nation’s financial system, on which our economy depends, vulnerable to another crisis (see page 3, bullets 1-5 and footnotes). And, adding nearly unimaginable insult to the injury (Great Recession; other costs associated with the crisis and the economic recovery efforts…) that was inflicted, with Washington’s help, on American families in the last crisis, Washington has “institutionalized” TBTF and replaced taxpayer-funded bailouts with taxpayer-funded “bail-ins” as the source of funds for rescuing any one, or several, of the G-SIFIs from insolvency (which is very likely to be caused — like in the last crisis — by a finance industry that has already demonstrated a propensity for all kinds of fraud, derivatives trading mishaps, etc., etc.) that is the result of a run on one or more of these G-SIFIs (which, as we learned in the last crisis, will cause a market-wide liquidity/credit crisis because of the interconnectedness of these TBTF firms (they all lend to each other and they are counterparties in one another’s derivatives contracts) that will then lead to cascading failures of other firms). (AVC4OCF comment: Washington’s bail-in plan is their way of being proactive, apparently. But, this author believes that the experts who are calling for breaking up the biggest banks (as Phil Angelides said: “[A] modern era of trust busting is now essential… [to break up TBTF firms that have] become a clear and present danger to our economy and [our] democracy” — see Executive Summary, above, first quote by Angelides) have a much better proposal, versus Washington’s confiscation of bank accounts, for a proactive plan that would finally, effectively address TBTF and, quite possibly, concurrently prevent another crisis.)
We (AVC4OCF) reject this status quo of failed financial “reform,” which, according to experts, is the result of the same kind of violations of the public’s trust by Washington that caused the first crisis (see pages 1 and 2 and footnotes, above) — a status quo that condemns us all to living continuously under the dark cloud of the next financial crisis and the inevitable, subsequent economic destruction. This author believes that Professor (and economist) James Galbraith was spot on when he declared in 2010: “[I]t may be that too few are today speaking frankly about where a failure to deal with the aftermath [of the last crisis] may lead. In this situation [if we do fail to effectively deal with it], let me suggest, the country faces an existential threat. Either the legal system must do its work [referring to the upcoming, at that time, investigation into the crisis by the FCIC and what might be, Galbraith said, an “appropriate response [if that investigation] confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye”], or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.” (See Footnote 27) (AVC4OCF comment: So, if Dr. Galbraith was correct, we must now be facing that “existential threat,” since the FBI has not prosecuted any of the CEOs that directed the control frauds and there has been no “thorough, transparent, effective, radical cleaning of the financial sector [nor] those public officials who failed the public trust.” And, to seal our fate (which, at this point, appears to be our suffering through yet another crisis), there has also not been an implementation of REAL financial reform.)
We have concluded, as a result of our research and the consideration of the opinions of all of these experts — and we hope that you and every other citizen reading this webpage will also similarly conclude — that our only hope for dodging the next, impending financial crisis certainly appears to be an alteration of our current course toward economic disaster via a massive, immediate citizen intervention in the political process in Washington. This, of course, can only be achieved when American citizens by the hundreds of thousands accept responsibility for ensuring that Washington does not fail with the implementation of financial reform the second time around.
Our proposal: citizens, across the nation — working together, with the advice of experts and their congressional representatives — develop a blueprint for comprehensive, REAL/EFFECTIVE financial reform that can then be presented to members of Congress for enactment.
We believe that this citizen intervention (direct democracy) is requisite to ensure that Congress finishes the “unfinished business of financial reform” (a quote from a speech by Senator Elizabeth Warren — see Footnote 28). Our plan for achieving this goal involves organizing this citizen action in Congressional districts in every state in the union with the goal of building a movement and a mandate from a unified American public for this reform blueprint and completing this mission (enactment in Congress of legislation based on this citizen-sourced blueprint) BEFORE another crisis destroys more household wealth and more jobs that American families cannot afford to lose (see our Action Plan on the next page for more details).
Our representatives in Washington — those who choose to support reform legislation based on the citizen blueprint — will need the united voices of the American people behind them when Congress votes on the bill, because a relentless push-back by the finance-industry lobby is certain. We anticipate that Americans of all political stripes and every other demographic will support this movement for REAL financial reform, because we expect that most American citizens, once they are fully informed about all the issues presented on this webpage, will recognize the threats as legitimate and understand what is at risk (i.e., our children’s/grandchildren’s — and our nation’s — future prosperity). And, as we mentioned above, we also anticipate that most citizens will readily accept the final responsibility for developing this reform blueprint and will also readily commit themselves to ensuring that this reform is enacted in Congress.
27. See: “Galbraith: The Role of Fraud in the Financial Crisis,” Economist’s View (economistsview.typepad.com), May, 2010
28. See: “Elizabeth Warren on the ‘Unfinished Business of Financial Reform,’” Moyers & Company (billmoyers.com), April, 2015
I. The Next Financial Crisis… ~ Page 6
Please join us! If you agree with the experts who are warning Americans that:
“The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system… The whole point of Dodd-Frank was to end the era of TBTF banks. It’s fairly obvious that it hasn’t done that. In that sense, it [Dodd-Frank] has been a failure… We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naïve to expect a different result.” (Neil Barofsky — see Executive Summary, above); and,
“For the past four years [the years AFTER Dodd-Frank was signed — 2010-13], the nation’s political leaders… efforts… to restore trust and confidence in the American financial system… hasn’t worked. Banks today are bigger and more opaque than ever and they continue to behave in many of the same ways they did before the crash… [L]ack of transparency [makes the biggest banks] ‘black boxes’ that may still be concealing enormous risks—the sort that could again take down the economy” (Professor Frank Partnoy and Jesse Eisinger — see page 3, third bullet, above); and,
“These banks… have become a clear and present danger to our economy and [our] democracy… [T]here is a corruption, I think, that’s very damaging to the sense of integrity of our financial markets and very damaging ultimately to our economy that’s got to be rooted out. But it won’t be rooted out if our system of broken enforcement continues… I think this is a battle for the future of the country’s economy that has to be won…” (Phil Angelides — see Executive Summary, first Angelides quote, above); and,
“Dodd-Frank doesn’t [effectively] address any of the three central elements [per Black: TBTF banks; dangerous incentives caused by executive compensation; and deregulation, desupervision and de facto decriminalization] that create the criminogenic environment that produces the recurrent, intensifying epidemics of control fraud that drive our ever-worsening [financial] crises” (Professor William Black — see Executive Summary, above)
… and many, many other warnings by numerous experts (some of which are presented on the pages above) about the failings of Washington’s financial “reform” and how this failure leaves the nation vulnerable to another crisis (and every working family in America vulnerable to the ravages of another Great Recession)…
…Then we ask that you please consider what you might be able to do to support this campaign and the construction of a citizen-sourced blueprint for comprehensive, EFFECTIVE financial reform that is based on the opinions of experts that Washington continues to ignore.
Please help us to ensure that REAL/EFFECTIVE reform is developed WITHOUT the influence of industry lobbyists — in a DEMOCRATIC environment that DOES properly consider the “general welfare” of Americans on Main Street (in other words, OUTSIDE the corruption, cronyism and capture of Washington) — reform that will benefit ALL Americans (e.g., reform that, unlike Dodd-Frank, will, as recommended by Partnoy and Eisinger: “Rebuild the twin pillars of regulation that Congress built in 1933 and 1934 [and which Congress and the White House tore down in the years prior to the crisis (deregulation)]… [rebuild] a straightforward standard of disclosure [that requires firms to] describe risks in commonsense terms that an investor can understand [and, regarding enforcement]… [and reestablish] a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse… [in other words] vigorous prosecution of financial crime”).
Please join us — (or, if you are unable to participate, please support this campaign and your fellow citizens who have joined this campaign) as we work with experts and congressional representatives toward the goal of completing the “unfinished business of financial reform” (per the encouragement of Senator Elizabeth Warren — see Footnote 28 on the preceding page, above).
We thank you for your time and for your support. (And, with a tip of the hat to Edward R. Murrow…) Good night and good luck. (Note: Please see our Action Plan, below.)
Article V Convention for Our Children’s Future (AVC4OCF)
Action Plan (summarized)
Our plan for achieving the goal of the soon-to-be (see Note at bottom of Action Plan) national STOP Financial Crisis II campaign (enactment in Congress of a citizen-sourced blueprint for comprehensive, REAL/EFFECTIVE financial reform) includes:
- A statewide campaign in California (being launched concurrently with the publication of this webpage) — Goal: obtain the support of California’s congressional representatives, from both parties and in both houses, to work with us (their California constituents) on the introduction of a bill in Congress based on the blueprint (see “Organizing Constituent Meetings,” below, for details);
- An ongoing series of public-education events — Primarily, town hall meetings with expert guests, congressional representatives, community leaders, etc., via webinars, conference calls, community radio programs, etc. Each one of these events will focus on one of the urgently needed financial-reform issues (see page 3, above) — potential components of the citizen-sourced blueprint — featuring round-table discussions on how the issue poses the threat of causing another crisis and how Washington’s “reform” has failed/will likely fail to address this threat and the presentation of reform proposals to address the issue, etc. Each event will launch a program of post-event activities/action (e.g., initial up or down online votes on reform proposals; opening of online forums on the issue; setting up a working group on the issue; etc.) with specific objectives to be achieved (e.g., discovering any uncertainties/objections/… associated with any of the reform proposals and attempting to find acceptable fixes for any objections and taking follow-up votes — all with the goal of achieving a majority of support by voting participants for the proposal) Note: All votes will be stored in our database to inform our constituent meetings with representatives (e.g., so constituents can report any support within their district for any blueprint components…);
- Building online working groups — via all of our outreach efforts and public-education events (Goal: development of the blueprint — a mandate for REAL financial reform that is supported by business and labor, community leaders, members of Congress… in as many congressional districts and as many states as possible) (Note: We hope that we will be able to recruit experts, who have supported or participated in the campaign in some way, to also commit some amount of their time to act as a consultant to one or more of these working groups, OR to serve on the (yet to be formed) AVC4OCF Advisory Committee);
- National coalition building — Goal: a coalition of national organizations and regional/state/local level organizations that will form a national network of citizens supporting the development of the blueprint and achievement of the final goal of enactment of legislation (and executive action?), based on the blueprint, in Congress;
Organizing constituent meetings (California — ongoing; Congress — Congressional Recess, Aug.-Sept., 2016)
- California Campaign — Goals: Passage of a Resolution in either house, or both houses, of the California legislature compelling Congress to pass legislation based on the citizen-sourced blueprint; and, obtaining the commitments of both of California’s Senators (U.S.) and as many of California’s Representatives (U.S. House) as possible to writing/introducing/supporting a bill in Congress that is based on the blueprint; Action Plan: Circulating a petition in support of the Assembly/Senate (Calif.) resolution(s); Collecting petition signatures via phone/letter/email/social media solicitation (Targets: local chambers of commerce, political party organizations (local, regional, state), labor organizations (ditto), community leaders…); Campaign promotion: Via our public-education events (and associated press releases) and podcasts, primarily — also via public service announcements, AVC4OCF Website, Social Media, Letters to editor/Op-eds (newspaper)…;
- National Campaign (planned — see Note, bottom of Action Plan) — (Note: the national campaign will essentially be the same actions as in the California campaign expanded into congressional districts in every state in the union, with any luck, by utilizing our partner organizations to advocate for participation in and support of the campaign within their memberships and in the general public).
(Note: We hope to soon obtain funding for our planned national campaign that will enable us to expand our California campaign to every state in the union, with any luck (i.e., staff and other resources that will enable us to assist citizens in congressional districts across the nation with organizing action in their communities and their states — modeled on our California campaign — that is coordinated with other local, state and national action).)
II. Supplementary Information ~ Page 7
Criminologists’ (and other experts’) Warnings: To Avoid Another Crisis, Financial Reform Must Address the Criminogenic Environment that Washington Created and Has Thus Far Failed to Effectively Resolve Via Its Financial Reform
(Note: As an introduction to the expert quotes below, we have inserted a brief review of a New York Times article from 2009 that provided citizens with one of the key must-learn lessons from that crisis: we, the American people, were robbed (or, more accurately — “looted”). ) The New York Times: “Sixteen years ago, two economists published a research paper... title[d]: ‘Looting.’ The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government [taxpayers] holding the bag for their eventual (and predictable) losses. …Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a ‘total disregard for even the most basic principles of lending,’ failing to verify standard information about their borrowers or, in some cases, even to ask for that information. The investors ‘acted as if future losses were somebody else’s problem,’ the economists wrote. ‘They [the investors] were right.’ [The article then takes the reader forward to the most recent crisis…] …Looters… the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem… Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses [with a bailout, or — the latest plan coming out of Washington — a ‘bail-in’ (just another way taxpayers will get stuck with covering the losses) — see page 3, sixth bullet, for information on this — just one more — must-know/understand topic for every American citizen] ...Profits are privatized and losses are socialized… With looting, the government’s involvement is crucial to the whole [ponzi scheme] enterprise… Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.”) (See: “The Looting of America’s Coffers,” The New York Times, March, 2009)
Professor William Black (In the following quotes, Black talks about two of the “three central elements that create the criminogenic environment that produce the recurrent, intensifying epidemics of control fraud that drive our ever-worsening [financial] crises:” the “three de’s” — deregulation, desupervision and de facto decriminalization — and modern executive compensation (the third element, the creation of TBTF firms, has been discussed considerably on the preceding pages.) ): “[Black:] The Clinton and Bush anti-regulatory policies created the “three des” — deregulation, desupervision, and de facto decriminalization. [These] policies were a catastrophic failure that permitted the epidemics of fraud that drove the Great Recession and the loss of over 10 million jobs. (See: Footnote 29)
“Deregulation occurs when one reduces, removes, or blocks rules or laws, or authorizes entities to engage in new, unregulated activities. Desupervision occurs when the rules remain in place but they are not enforced or are enforced more ineffectively. De facto decriminalization means that enforcement of the criminal laws becomes uncommon in the relevant industries... The combination of the three ‘des’ was so criminogenic (an environment that creates strong incentives to act criminally) that it generated an unprecedented level of accounting control fraud, which in turn produced unprecedented levels of ‘echo’ fraud epidemics [such as the ‘robo-signing’ (see Wikipedia: “2010 United States foreclosure crisis” for info) and appraisal frauds (see: ‘The Wall Street Journal Still Refuses to Grasp Accounting Control Fraud via Appraisal Fraud,’ neweconomicperspectives.org, Dec., 2014)]. The combination drove the crisis in the U.S. and several other nations. (See: Footnote 30)
“[Clinton and Bush administrations] adopt[ed] anti-regulatory policies that were so perverse that they were intensely criminogenic. The recent epidemics of accounting control fraud, the creation of the largest bubble in history, and the Great Recession could not have occurred if the Clinton and Bush administrations had actually learned a great deal about what works and what fails in regulation. The Clinton and Bush anti-regulatory policies created the ‘three des’ — deregulation, desupervision, and de facto decriminalization.” (See: Footnote 29)
Professor William Black (on the topic of modern executive compensation and the related topic: accounting control fraud): “When we fail to regulate or supervise financial firms effectively, we create a criminogenic environment because we, de facto, decriminalize accounting control fraud. ‘Control frauds’ are seemingly legitimate entities controlled by persons that use them as a fraud ‘weapon.’ A single control fraud can cause greater losses than all other forms of property crime combined… Financial control frauds’ ‘weapon of choice’ is accounting. Fraudulent lenders [during the run-up to the last crisis] produce[d] guaranteed, exceptional short-term ‘profits’ through a four-part strategy: extreme growth (Ponzi-like), lending to uncreditworthy borrowers, extreme leverage, and minimal loss reserves. These exceptional ‘profits…’ allow the CEO to convert firm assets to his personal benefit through seemingly normal compensation mechanisms… [and] also cause the CEO’s stock options holdings to appreciate. Fraudulent CEOs that follow this strategy are guaranteed to obtain extraordinary income while minimizing the risks of detection and prosecution. The optimization strategy for lenders that engage in accounting control frauds explains why such firms fail and cause catastrophic losses. Each element of the strategy dramatically increases the eventual loss. The record ‘profits’ allow the fraud to continue and grow rapidly for years, which is devastating because the firm grows by making bad loans [‘liar’s loans’]. The ‘profits’ allow the managers to loot the firm through exceptional compensation, which increases losses. The accounting control fraud optimization strategy hyper-inflates and extends the life of financial bubbles, which causes extreme financial crises… The factors that make a finance sector most criminogenic are the absence of effective regulation and the ability to invest in assets that lack a readily verifiable asset value [such as future payments from a pool of mortgages, which is what the banks/shadow banks were selling to investors in the run-up to the crisis]. Unless those initial frauds are dealt with effectively by the regulators or prosecutors, they will produce record profits and other firms will mimic them… When many firms follow the same optimization strategy in the same financial field a financial bubble will arise, extend, and hyper-inflate. This further optimizes accounting control fraud because the rapid rise in values allows the frauds to hide the real losses by refinancing the bad loans. Mega bubbles can produce financial crises…” (See: Footnote 31)
Professor William Black (In the following excerpt from an article, Black talks about how regulators during the S&L crisis in the 80’s and 90’s submitted tens of thousands of criminal referrals to the FBI and how this led to thousands of prosecutions of white-collar criminals, who were “looting America’s coffers” (see: N.Y. Times article at the top of this section (page 7) ) during that crisis. This information could be used, or so it seems to this author, as part of a citizen-sourced blueprint for effective financial reform that might successfully address the status quo of de facto decriminalization of accounting control fraud and, perhaps, enable us to avoid the next, impending financial crisis): “Reporters love numbers and we [Black and his colleagues in the Office of Thrift Supervision] eagerly released [during the S&L crisis] regularly updated numbers on our criminal referrals. As the number of referrals soared into the thousands and there were only a small number of prosecutions, DOJ came under strong criticism with every new update on our criminal referrals to prosecute. It had no capacity to prosecute the number of frauds we were referring… Once DOJ began successfully prosecuting the elite frauds, it got great praise not only from the regulators, but from the media and the public. DOJ’s senior leadership and President Bush came to understand that elite frauds drove the S&L debacle. They assured the public that they would bring the elite criminals that led those frauds personally to account for their crimes.
[Black, in his article, includes this excerpt from the book cited below:] “Attorney General Richard Thornburgh prefaced a Justice Department report on savings and loan fraud with this promise: ‘The American public can be assured.., that prosecution of white collar crime—‘crime in the suites’–and particularly savings and loan crimes, will remain a top priority of the Department of Justice.’ In a speech to U.S. Attorneys in June 1990 President Bush stated, ‘We will not rest until the cheats and the chiselers and the charlatans [responsible for the S&.L disaster] spend a large chunk of their lives behind the bars of a federal prison.’ The president was unequivocal about his plans for attacking financial institution fraud: ‘We aim for a simple, uncompromising position. Throw the crooks in jail’” (Big Money Crime, Calavita, K, Pontell, H., Tillman R., 1997).
“In the savings and loan debacle (less than one-hundredth the size of the [last] crisis) our agency, the Office of Thrift Supervision, made over 30,000 criminal referrals. The referrals produced over 1,000 felony convictions... [S]lightly over 300 S&Ls and 600 individuals... were nearly all prosecuted and despite having the best criminal defense lawyers in the world we achieved a 90% conviction rate...
“The [criminal] referral was the roadmap to a successful investigation and prosecution. It explained and documented the fraud scheme, the perpetrators, the most important documents and excerpts, witnesses, key supervisory correspondence, and testimony taken under oath in our enforcement actions.
“The criminal referral process only begins the transfer of expertise from the regulators to the FBI and the prosecutors. For the most important and complex cases we would ‘detail’ an experienced examiner, who was part of the team that examined the S&L, to the FBI. The examiner would serve as the FBI’s internal expert…
“At peak, 1,000 FBI agents were assigned to the S&L investigations. The federal S&L regulators… had roughly 1300 professionals available to assist the FBI and the prosecutors. Each of those 1300 regulatory professionals, of course, had greater industry expertise than any FBI agent or prosecutor. The combined expertise of the regulators, FBI agents… and prosecutors produced the greatest success in prosecuting elite white-collar criminals in history.
[Black then compares the regulatory and law enforcement resources of the S&L crisis to those at work during the last crisis…] “At peak, in response to the vastly larger [as Black stated above, the S&L crisis was one-hundredth the size of the last crisis] and more destructive fraud epidemics that drove the recent crisis, there were roughly 250 FBI agents assigned to all cases of mortgage fraud nationwide. The vast bulk of them were assigned at all times to cases in which the FBI in essence served as a collection agency for the most fraudulent lenders. The result [was] the greatest strategic failure in prosecuting elite white-collar criminals in DOJ’s modern history.
“Under Bush (II) and Obama, DOJ has refused to prosecute any senior bank officer who helped lead the three most destructive financial fraud epidemics in history. Most Americans assume that only the elite bankers that led the three fraud epidemics have received this de facto immunity from criminal prosecution, but that immunity has extended to senior bankers at even bankrupt and notoriously fraudulent mortgage banks and junior officers at the large banks. The Bush administration brought an inept prosecution of two relatively junior Bear Stearns hedge fund officers that failed in 2009. There have been no prosecutions of even junior officers of the large banks who took even modest leadership roles in the three fraud epidemics in the following six years… The three fraud epidemics caused our financial crisis and Great Recession which [led to] a $24 trillion loss of GDP and over 10 million jobs [in the U.S.]. (Both numbers are far larger in Europe.)
“The criminal referral process at the banking regulatory agencies was effectively ended, without any public notice or rationale, by the second President Bush. References to the criminal referral coordinators disappeared or were removed from the bank examiners’ manuals. The result was that OTS and the Office of the Comptroller of the Currency (OCC) admitted that they made zero criminal referrals in response to the most recent crisis. FCIC says that the Fed made three referrals for discriminatory lending. The FDIC was smart enough to refuse to answer the question. Despite recurrent criticism the Obama administration has never announced that it has ordered the creation of an effective criminal referral process at the banking regulatory agencies. The Obama administration cannot claim that it is vigorously pursuing the frauds when it refuses to do the simplest, fundamental things that we know how to do and know are essential to successful prosecutions. The Obama administration does not need to reinvent the wheel. We know exactly how to create a superb criminal referral system at the banking regulatory agencies. Any administration that wished to enforce the law against elite bank frauds would have made this there first action.” (See: Footnote 32)
(Note: We will soon be adding much more information to this page — opinions of other criminologists, judges and other experts.)
29. See: “Obama Embraces the ‘Economic Philosophy that Has Completely Failed,” firedoglake.com, Jan., 2011
30. See: “Wallison and the Three ‘des”’: Deregulation, Desupervision and De Fatcto Decriminalization,” The Big Picture (ritholtz.com), Feb., 2011
31. See: W.K. Black, “Epidemics of ‘Control Fraud’ Lead to Recurrent, Intensifying Bubbles and Crises,” ssrn.com, April, 2010, pp. 27-34 and Abstract
32. See: “The DOJ and the SEC Spurn Their Ace in the Hole: Richard Bowen,” neweconomicperspectives.org, March, 2015
II. Supplementary Information ~ Page 8
Why Reform of Dodd-Frank “Reform” Is Urgently Needed (according to experts): Regulatory Capture Trumps Dodd-Frank; Financial Stability Oversight Council May Fail; Organized Liquidation Authority May Also Fail; Systemic Risk And Other Threats Remain Largely Unaddressed…
(On the issue of TBTF…) Richard Fisher (Dallas Federal Reserve President): “This morning [congressional testimony, U.S. House Committee on Financial Services, June, 2013] I want to address what I consider the injustice of perpetuating financial institutions that are so large, complex and opaque that they are seen as critical to the proper functioning of our economy and are therefore considered TBTF. I will argue that these institutions operate under a privileged status that exacts an unfair and nontransparent tax upon the American people and represents not only a threat to financial stability, but to the rule of law as well as principles of fair and open competition—hallmarks of the democratic capitalism that makes our country great.
“I will argue that the effort crafted by Congress to correct the problems of TBTF—known as the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank)—is, despite its best intentions, ineffective, burdensome, imposes a prohibitive cost burden on the non-TBTF banking institutions and needs to be amended…” (See Footnote 33) (AVC4OCF comment: This is the point at which my concurrence with Fisher’s testimony ends, because he concludes his introductory remarks by saying: “The American people will be grateful to whoever liberates them from the risk of a recurrence of taxpayer bailouts and the serious threat of another Great Depression.” I disagree with Fisher because I believe that he is presenting a proposal to Congress in this hearing with the expectation that Congress will recognize the need for it and act accordingly to craft an amendment to Dodd-Frank that will “liberate [us] from [further] taxpayer bailouts and the serious threat of another Great Depression.” I believe that people like Professor Lawrence Lessig and Phil Angelides accurately perceive the status quo of “institutional corruption” in Washington and the “power and hubris” of the finance industry and, therefore, I believe that the American people cannot trust anyone but themselves with the task of liberating the nation from these threats. Congress has repeatedly demonstrated that it is not worthy of our trust — at least not when the policy/legislation involves the finance industry. As Ron Hera stated (see Executive Summary), Dodd-Frank is “a bank-approved version of the financial reform bill.” In this author’s opinion, to expect an amendment (to Dodd-Frank) from Congress that is anything different is unrealistic. We the People MUST accept responsibility for ensuring that Congress receives a citizen-sourced blueprint for effective reform and we must persevere and ensure that they implement it — ASAP. Note: Fisher/Dallas Fed proposes: “…roll back the federal safety net—deposit insurance and the Federal Reserve’s discount window—to where it was always intended to be, that is, to traditional commercial bank deposit and lending intermediation and payment system functions. Thus, the safety net would only be available to traditional commercial banks and not to the nonbank affiliates of bank holding companies or the parent companies themselves. This is how the law needs to be applied, even in times of crisis. Second, customers, creditors and counterparties of all nonbank affiliates and the parent holding companies would sign a simple, legally binding, unambiguous disclosure acknowledging and accepting that there is no government guarantee—ever—backstopping their investment… Third, we recommend that the largest financial holding companies be restructured so that every one of their corporate entities is subject to a speedy bankruptcy process, and in the case of the banking entities themselves, that they become an appropriate size, complexity and geographic footprint that is “too small to save.”)
(Note: We will soon be adding much more information to this page — as the subheading on this page describes)
33. See: “Speeches by President Richard W. Fisher: Correcting Dodd-Frank to Actually End Too-Big-To-Fail,” Testimony, U.S. House Committee on Financial Services, June, 2013