Season's Greetings: Inside Wall Street's 7-Point Plan to Wreck Financial Reform

Last Updated Dec 17, 2010 3:15 PM EST

With 2011 just around the corner, Wall Street is busily compiling its resolutions for the new year. Topping the list: Weakening Dodd-Frank, the financial-reform bill President Obama signed into law this summer. Related goals could include losing 10 pounds, reading more and hogtieing Elizabeth Warren.

It won't be easy, of course (Warren is scrappy). But bankers will have the assistance of their allies on Capitol Hill, which skew Republican but include prominent Democrats, and of trusty confederates like the U.S. Chamber of Commerce. In that spirit, here's what the financial industry is pledging for next year:
  • Neutralize the Consumer Financial Protection Bureau. During the debate over financial reform, banks large and small opposed creating an agency to shield people from predatory lending and other deceptive practices that have plagued the industry for years. Although the industry lost the fight, the action is now shifting to Congress, where bank-friendly lawmakers are threatening to limit funding for the CFPB. Dozens of financial execs are also jawboning Warren herself to express their concerns about the bureau.
  • Curb the power of financial regulators. Banks are also counting on key lawmakers such as Rep. Spencer Bachus to keep financial watchdogs in line. The Alabama Republican, in line to head the House Financial Services Committee when the new Congress convenes in January, recently said the role of regulators is to "serve the banks." In another warning shot, other GOP lawmakers are threatening to reduce funding for the SEC and CFTC, which are now developing rules for how banks and other firms use derivatives.
  • Retain control of derivatives trading. Dodd-Frank mandated the use of clearinghouses for trading credit default swaps and other derivatives in a bid to bring order to the $600 trillion market. But the law doesn't bar Wall Street firms from cementing their control of those exchanges and otherwise warding off competition in the swaps business. More broadly, banks are pressing financial regulators writing the new swap rules to limit capital and margin requirements. Joining financial firms in the fight are a range of industries, including companies that trade energy securities, seeking exemptions from the regs.
  • Escape the Volcker rule. This part of Dodd-Frank, proposed by former Federal Reserve Chairman Paul Volcker, bars federally insured banks from trading for their own accounts and from owning hedge or private equity funds. Since "proprietary trading" is enormously lucrative, banks are angling to sidestep the rule by redefining some of these activities as so-called principal investments. The idea is to continue proprietary trading under the rubric of "making markets" for clients, which is permitted under Dodd-Frank.
  • Temper bank capital requirements. Big banks are lobbying against proposed new standards that would subject them to the same capital thresholds as smaller institutions (and other financial firms supervised by the Fed). They also oppose a separate proposal that would require large banks to hold more capital to offset potential trading losses.
  • Soften rules capping debit-card fees. The Federal Reserve Board surprised bankers this week by proposing a higher-than-expected limit on the fees debit-card issuers charge merchants for processing transactions. Financial industry lobbyists are up in arms. They warn that capping fees at 12 cents, well below industry norms, would hurt bank lending. Banks will push to increase the cap in hopes of preserving what they view as a critical revenue stream.
  • Delay hikes in FDIC deposit-insurance fees. Industry lobbyists are also working to delay a new FDIC rule that would effectively require banks to pay higher fees to fund federal deposit-insurance. Such fees were previously based on a bank's deposits; now they will be based on total assets, resulting in higher payments.
Other bank industry objectives dovetail with the above priorities. For instance, large financial firms (and other public companies) generally oppose an SEC proposal allowing shareholders to nominate corporate directors, and have succeeded in stalling adoption of the rule. Banks and the rest of Corporate America are also targeting a "whistleblower" provision in Dodd-Frank that offers company employees who disclose internal fraud up to $300,000 for any recovery over $1 million.

None of this is shocking in the least. When industries overstep, let alone lay waste to the global economy, government intervenes -- and is usually met with all the resistance those industries can muster. These clashes play out over years.

What's different today, clearly, is that the economy is still wasted. Yet the power of Wall Street remains largely undiminished, while the political environment, if not public sentiment, is shifting in its favor. Holding the line on financial reform isn't only a test of our ability to police a seriously damaged (and damaging) industry -- it's a test of this country's historical capacity to repair itself following an epic catastrophe. A worthy resolution, indeed.

Image from Wikimedia Commons, CC 2.0
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  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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