Obama touts Banking and Financial Reform as one of his crowning achievements. At the bill signing only two years ago, Obama stated, “These reforms represent the strongest consumer financial protections in history.” It was supposed to insure that the people responsible for such financial calamities would be held responsible for their actions.
Recent events show that the regulations did very little to help consumers or prevent the occurrence of another financial meltdown. Two recent examples include oil price speculation that drove up fuel prices despite supply and demand levels that suggest that prices are inflated while the $2 billion trading loss by JPMorgan Chase showed that credit-default swap speculation continues in an unfettered way.
When Obama was calling for a task force to investigate recent spikes in oil prices, many wondered why. You see, all he had to do was enforce a piece of the Financial Reform package that was meant to prevent unbridled price speculation. He had the tools but chose not to use them.
The $2 billion trading loss at Chase helped everyone to realize that nothing has changed in credit default speculation following the financial collapse of late 2008. Stated in layman terms, Chase bought credit protection as they thought some of their loans would not perform. They then bought credit protection on the credit protection because they thought that they had too much credit protection. Chase achieved this by tying a bunch of derivatives or hedges (aka bets) to the credit default swaps index from a small trading operation that they have in London led by a man named Achilles and another nicknamed The London Whale. A problem occurred when Chase’s modeling did not work the way it was supposed to causing losses that are expected to exceed $3 billion. This scared investors as a larger version of this was done by AIG that could have caused a financial collapse larger than that of 1929 if not for the extraordinary support of the U.S. Government.
The problem oil prices and the Chase trading mistake show is that the Banking and Financial Reform Act was neutered through a mix of actions. Obama appointee, Scott O’Malia, led the charge against financial reform by rewriting rules, delaying implementation of the law and assisting in the writing of additional bills meant to undercut reform. This was done under heavy financial industry pressure from an army of lawyers including Eugene Scalia, son of Supreme Court Justice Antonin Scalia.
The neutering was aided by Treasury Secretary Time Geitner with the help of Democratic Senator of New York by allowing Wall Street banks to use up to 3% of their capital for speculation – an amount that is nearly half of the capital held by many of these firms. Rather than keeping the banks from becoming too big to fail, Obama opted to have the banks pony up $19 billion as a special fund to cover future bailouts. The upfront payment was later abandoned ensuring a status quo. Then there was bipartisan support for the JOBS Act that stripped many investor protections against the advice of the SEC, AARP and other investor protection groups. The implementation of the Volcker Rule which is meant to limit a bank’s portfolio trading to only their own money as opposed to client money will not go into effect until 2014 – by which time, most believe sufficient loopholes will be in place to render the Rule worthless.
Oh, remember that $2 billion loss by Chase? There is currently a bill before Congress would exempt transactions like that with the expected result, if passed, being that many high paying U.S. jobs would simply move overseas.
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