April 23, 2010 Issue 15
Financial Regulatory Reform Bill
On Wednesday, the Senate Agriculture Committee voted 13 to 8 to approve its financial regulatory bill, which was sponsored by the panel’s chairwoman Senator Blanche Lincoln (D-AR). The bill is expected to be part of the wider regulatory overhaul put forward by the Banking Committee, though Democrats are still figuring out how to combine the proposals. One Agriculture Committee Republican, Senator Charles Grassley (R-IA) joined all twelve Democrats in voting for the bill, however in a statement later, Grassley said that his vote did not mean he would support the larger financial reform bill when it comes to the Senate floor. The bill that passed out of the Agriculture Committee was marginally different than a draft previously unveiled by Chairwoman Lincoln. One important amendment added to the bill by Mrs. Lincoln just before Wednesday’s vote would allow the Secretary of the Treasury to exempt derivatives tied to foreign currency rates from the new rules requiring swaps contracts to be traded on an exchange and routed through a clearing agency. The bill would require most derivative contracts to be traded on a public exchange and to be processed, or cleared, through a third party to guarantee payment if one of the parties to a trade went out of business. The Agriculture Committee bill would also require Wall Street firms to spin off their derivatives trading into a separate subsidiary. That provision is opposed by the major banks as well as President Obama and therefore could emerge as an issue of compromise before the bill reaches the floor.
Last week, Senate Republican leaders expressed strong opposition to the financial regulation bill, but by Wednesday, with Senate Banking Committee Chairman Chris Dodd (D-CT) and Ranking Member Richard Shelby (R-AL) making progress on negotiations over changes to the larger legislative package, Minority Leader Mitch McConnell (R-KY) claimed victory over forcing Democrats to make changes to the bill including dropping from the bill a provision to create a $50 billion fund, paid for by big banks, which would be used to unwind failing financial institutions, and expressed a willingness to work with Democrats to advance the bill. In order to pass the bill on the floor, Senate Democrats need the backing of at least one Republican to overcome a possible filibuster, and on Thursday Senate Majority Leader Harry Reid (D-NV) announced his plans to push for a first procedural vote on Monday that will test Republican opposition.
Monday’s test vote raises the pressure on Dodd and Shelby to reach a deal, perhaps even one that would address only major elements of the legislation. Points of disagreement include the role of the federal government in winding down failing financial firms; the independence of a new consumer financial protection agency; and the extent of regulations to be placed on derivatives.
President Obama Addresses Wall Street
On Thursday, President Obama addressed Wall Street executives and a crowd of over seven hundred people at Cooper Union College in New York City on the issue of financial regulatory reform. The President discussed four major policy areas he believes should be addressed in the current bill before Congress, namely consumer protection, transparency, and executive compensation. In his speech, President Obama gave credit to Senator Charles Grassley (R-IA) for his willingness to cross party lines to vote with Agriculture Committee Democrats during the bill’s markup on Wednesday. Attendees at the speech included Goldman CEO Lloyd Blankfein and Goldman COO Gary Cohn, Barclays’ Bob Diamond, Credit Suisse’s Paul Calello, Carver’s Deborah Wright, JP Morgan Chase’s Barry Zubrow, Morgan Stanley’s Tom Nides, and Bank of America’s Bruce Thompson.
SEC Case Against Goldman Sachs
Next Tuesday, the Senate Permanent Subcommittee on Investigations will hear testimony from Fabrice Tourre, the former Goldman Sachs trader accused of fraud in the SEC’s case, as well as Goldman’s finance chief, David Viniar, chief risk officer Craig Broderick, and chief executive Lloyd Blankfein. The hearing was initially designed to examine the role of Wall Street banks in the creation and sale of mortgage investments and derivatives, but with the recently announced case by the SEC against Goldman, Subcommittee Chairman Carl Levin (D-MI) decided to invite the Goldman executives as well. The executives are expected to testify that the investors in the deal were sophisticated enough to understand what they were buying, that a bearish hedge fund manager’s influence in choosing components of the investment was not material and that the S.E.C. was faulting Goldman through the lens of “perfect hindsight.” Goldman announced last week that it had retained Gregory Craig, the former White House Chief Counsel, to help the firm navigate the upcoming Congressional hearings and investigations.
April 19, 2010 Issue 14
Senate Financial Regulatory Reform Bill
On Friday, with the Senate set to begin floor debate on financial regulatory reform legislation the next week, Agriculture Committee Chairwoman Blanche Lincoln (D-AR) unveiled her derivatives regulatory reform bill entitled the “Wall Street Transparency and Accountability Act of 2010” which would increase regulation of the derivatives market. The legislation is more sweeping than both the derivatives language included in the financial reform legislation approved by the House in December and the package approved by the Senate Banking Committee last month. The Senate Agriculture Committee plans to vote on the legislation Wednesday, after which the bill is expected to be merged with the Banking Committee bill and brought to the floor for a vote the week of April 26-30. Under Lincoln’s legislation, financial institutions registered as banks would be required to spin off derivatives trading desks in order to remain eligible for current federal protections such as federal deposit insurance and access to the Federal Reserve discount window.
The Lincoln bill requires a large segment of the derivatives market to trade through clearinghouses, which are intermediaries between buyers and sellers that require participants in the swap transaction to post capital. However, the bill also attempts to exempt commercial “end users” of derivatives products, such as manufacturers and other commercial companies, from this requirement. But the bill would also require commercial end users that are public companies to get approval from their audit committee before using the end user clearing and trading exemptions for their swaps.
The bill also grants new regulatory authority to the Commodities Future Trading Commission (CFTC) and Securities and Exchange Commission (SEC) to investigate and report on any swap that is found to be detrimental to the stability of US financial markets including allowing the CFTC and SEC to ban foreign entities from participating in US swaps markets. The CFTC also is given broad new rulemaking authority over futures margins and position limits.
President Obama on Friday threatened to veto the financial overhaul bill if it failed to include strong restrictions on derivatives. In response, all forty-one Republican Senators signed a letter to Senate Majority Leader Harry Reid (D-NV) urging a more bipartisan approach in developing legislation to tighten regulation of the nation’s financial system. The letter holds out the possibility of a filibuster that could block the legislation.
SEC Accuses Goldman Sachs of Fraud
On Friday, the SEC said in a civil complaint that Goldman Sachs failed to adequately disclose a conflict of interest that the SEC believes resulted in subprime mortgage securities being fraudulently sold to investors. Goldman Sachs denied the allegations. In a statement, Goldman called the SEC’s charges “completely unfounded in law and fact” and said it will contest them. The SEC also charged Goldman Vice President Fabrice Tourre with being principally responsible for constructing and fraudulently marketing the securities. The SEC is seeking unspecified fines and restitution from Goldman Sachs and Tourre.
The complaint has already had an impact on the Senate’s upcoming debate over financial regulatory reform legislation, as evidenced by Senate Majority Leader Harry Reid’s (D-NV) comments that “the Goldman Sachs case reinforces the need to pass strong Wall Street reform this year” and urged Republicans to “stop obstructing our efforts to hold Wall Street accountable.” House Minority Leader John Boehner (R-OH) said the SEC suit provided further reason to oppose the measure saying “these are very serious charges against a key supporter of President Obama’s bill to create a permanent Wall Street bailout fund. The bill gives Goldman Sachs and other big Wall Street banks a perpetual, taxpayer-funded safety net by designating them as ‘too big to fail.’”
Senate Committee Investigates Washington Mutual Collapse
On Tuesday, the Senate Permanent Subcommittee on Investigations began its first of four hearings into the collapse and emergency sale of Washington Mutual Bank (WaMu). The first hearing examined the role that WaMu’s home loans and mortgage-backed securities played in the bank’s collapse. The Committee heard testimony from former WaMu executives including former Chairman and Chief Executive Officer Kerry Killinger. The second hearing on Friday examined the role banking regulators played in the collapse of WaMu and heard testimony from current and former Treasury, FDIC, and Office of Thrift Supervision (OTS) officials. The Committee’s third hearing is scheduled for April 23 and will focus on credit rating agencies. The fourth hearing, which is scheduled for April 27, will examine the role of investment banks and will include Goldman Sachs executives involved in the recently announced SEC suit.
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