As the White House announced Sunday that President Obama will campaign across the country for financial regulatory overhaul, there were new indications that big banks are worried about a clampdown on their gambling schemes known as "derivatives," much more than they are about a consumer protection agency.
Politico reported yesterday that "mammoth financial institutions like Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley are worried about one provision that would force more open dealings in the $450-trillion over-the-counter derivatives market, an unregulated playground largely dominated by the quintet."
The government filed a civil case against Goldman on Friday. Attention to that latest Wall Street scandal is benefitting the effort to pass what many now say will be the most comprehensive overhaul of financial regulation since the Great Depression.
Goldman is accused of creating and marketing derivatives tied to high-risk subprime mortgages - without telling investors that the mortgage bonds for the portfolio had been picked by a billionaire investor who then bet against them and profited immensely when the bonds failed.
Many say the big banks would now accept a consumer financial protection agency, wich they had been fiercely battling, in exchange for a deal where Congress doesn't come down on them too hard on the issue of derivatives. Alabama Republican Sen. Richard Shelby's recent offer that he would drop his opposition to the agency as part of a bigger deal is seen as a reflection of this. Creation of the consumer agency, once seen as an impediment to passage of a final bill, is now seen as an inevitability by the GOP.
The financial institutions that have opposed the consumer protection agency feel that they have the legal resources to deal with it, whether it's independent the way originally proposed by President Obama, or as part of the Federal Reserve, as proposed in the Dodd bill advocated by Sen. Chris Dodd, D-Conn., who chairs the Senate Banking Committee.
Instead, the Wall Street firms are devoting their efforts to fighting off stronger curbs on derivatives trades and other aspects of regulatory reform that they say would hurt their profits.
They strongly oppose the so-called Volcker rule, for example, which would reestablish the dividing line between commercial and regular banks. Under such a rule a financial giant like JPMorgan would have to be broken up.
More than a consumer protection agency, the financial titans are also worried about new rules that would govern companies once deemed "too big to fail." They fear regulations that would break up or close down such entities.
The government case against Goldman creates perhaps one of the biggest public relations problems for all the financial giants, according to Paul Krugman, the Nobel prize-winning economist, because Goldman, and perhaps others, took the fraud on Wall Street to a new level.
Thus far, Krugman wrote, the fraud has been seen as centering around predatory lending and misrepresentation of risks, all of it facilitated by lax Bush-era federal regulators. "We've known for some time that Goldman Sachs and other firms marketed mortgage-backed securities even as they sought to make profits by betting that such securities would plunge in value," Krugman wrote in a New York Times column today. "This practice, while reprehensible, wasn't illegal," he said. "But now the SEC is charging that Goldman created and marketed securities that were deliberately designed to fail, so that an important client could make money off that failure. That's what I call looting."
Krugman went on to urge that the final regulations adopted by Congress include language that forbids this kind of looting. "Much of the financial industry has become a racket," he said. "And if we don't lower the boom on these practices, the racket will just go on."
Labor and its allies plan a mass march and rally for financial reform on Wall Street on April 30. The day before, unions will march on the financial district in Chicago.