Where Are All the Prosecutions From the Crisis?

NY Times

A consistent question since the financial crisis in 2008 is why has the federal government not prosecuted any senior executives for their roles in the collapse of firms like Lehman Brothers and Bear Stearns or the risky investments that led to bailouts of onetime financial giants like the American International Group, Fannie Mae and Freddie Mac. How can companies worth billions of dollars just a few months earlier suddenly collapse in 2008 without someone being held responsible?

At a hearing before the Senate Judiciary Committee last week, Senator Ted Kaufman of Delaware summed up the frustration on Capitol Hill with the lack of any identifiable villains for the financial troubles of the last two years. “We have seen very little in the way of senior officer or boardroom-level prosecutions of the people on Wall Street who brought this country to the brink of financial ruin,” Mr. Kaufman said. “Why is that?”

Judge Ellen Segal Huvelle of the Federal District Court in Washington expressed similar frustration with the settlement between the Securities and Exchange Commission and Citigroup over the bank’s misstatements in 2007 regarding its exposure to subprime mortgage-backed securities. In its complaint, the S.E.C. refers repeatedly to “senior management” receiving information about increased losses in its portfolio from problems with subprime mortgages, but none were named in its complaint.

Although Judge Huvelle largely approved the settlement, she was confounded by the S.E.C.’s failure to at least identify which Citigroup executives were aware of the information. The judge said that “this is where the S.E.C. is doing a disservice to the public” by not providing any more details, or even charging executives for misleading shareholders.

Judge Huvelle also questioned the deterrent impact of the $75 million penalty the company will pay, or the similarly modest $100,000 and $80,000 penalties imposed in a separate administrative proceeding on two Citigroup officers for their roles in the company’s disclosures. She pointed out that “$75 million will not deter anyone from doing anything,” and that “a $100,000 fine is not a deterrent in corporate America to do a better job.”

At the Senate hearing in which Senator Kaufman questioned the dearth of prosecutions of senior executives, Robert Khuzami, director of enforcement at the S.E.C., testified that his agency has been much more aggressive in pursuing cases against Wall Street. He cited as one example the securities fraud charges filed against Goldman Sachs in April that the firm later settled for $550 million.

Like the Citigroup matter, however, the Goldman case did not name anyone in the firm’s senior management as a defendant, with only a lower-level trader, Fabrice Tourre, sued in the complaint. And in both cases the settlements involved an alleged violation of Section 17(a) of the Securities Act of 1933, which is the lowest-level fraud charge the S.E.C. can bring because it only entails negligence rather than intentional conduct.

The bankruptcy examiner’s report filed by Anton R. Valukas about Lehman Brothers that questioned the firm’s reporting of the so-called “Repo 105” transactions may provide the groundwork for civil fraud charges against former executives of the investment bank. As I discussed in a previous post, the likelihood of criminal charges arising from Lehman’s conduct in the months before its collapse in September 2008 is small, so an S.E.C. case is probably the most serious proceeding that may be pursued, if that ever occurs.

The S.E.C. has already accused executives at Countrywide Financial with civil fraud charges for making misleading statements about the company’s mortgage risks, and also accused its former chief executive, Angelo R. Mozilo, of insider trading for making approximately $140 million in profits by selling shares in the company in the months before its near collapse. The trial in that case is set to begin on Oct. 19.

Even in the Countrywide case, civil fraud charges simply do not resonate with the public in the same way as criminal charges, in large part because a term of imprisonment cannot be imposed in an S.E.C. action and the stigma is not nearly as great. The same would be true if the S.E.C. files suit against Lehman executives — it is “only” civil, not a criminal prosecution, so even just the catharsis of an unseemly perp walk will not be available.

One possible reason for the lack of prosecutions involving senior executives is the Supreme Court’s ruling in Skilling v. United States, involving Jeffrey K. Skilling, the former chief executive of Enron, that limits the right of honest services provision, 18 U.S.C. § 1346, for criminal fraud prosecutions to just those cases involving bribes and kickbacks. It is now impossible to pursue cases against corporate executives for questionable conduct that involved some measure of dishonesty that caused harm to the company unless it also resulted in the person lining his or her own pocket.

The Senate Judiciary Committee will hold a hearing on Tuesday entitled “Restoring Key Tools to Combat Fraud and Corruption After the Supreme Court’s Skilling Decision.” It will be interesting to see whether the absence of any high-profile criminal prosecutions from the financial crisis will be cited as a reason for Congress to amend the honest services law to reach corporate misconduct that does not involve some form of personal benefit to the defendant. In the Skilling case, the Supreme Court questioned whether a crime involving only a breach of fiduciary duty could pass muster.

Even if Congress were to amend the honest services statute to reach a broader range of corporate misconduct, it would not apply to anything that happened back in 2008. Mr. Kaufman’s question is likely to remain unanswered for quite a while because prosecutors have not shown much interest, at least to this point, in pursuing criminal cases against executives of companies involved in the financial crisis.

SEC is Agency Most Affected by Financial Reform

Washington Post

The financial regulation law signed by President Obama on Wednesday will arguably affect no federal agency more than it does the Securities and Exchange Commission.

The SEC is required to issue 95 new regulations governing a wide swath of the financial sector, dozens more than the Federal Reserve, the new Consumer Financial Protection Bureau or other federal agencies. The SEC is also slated to complete 17 one-time studies and five new ongoing reports, according to a tally by the law firm Davis Polk & Wardwell.

The SEC will serve on the new Financial Stability Oversight Council, a new interagency body meant to spot emerging risks to the overall financial system. It will have to write rules to supervise the multibillion-dollar market of derivatives linked to stocks and bonds. It will begin examining the activities of hedge funds and private equity firms and tighten oversight of credit-rating agencies. And it will do studies of short selling and whether brokerage and investment firms must meet higher standards.

Perhaps only the Office of Thrift Supervision can compete with the SEC in terms of the new law's impact. But in contrast to the SEC, which is gaining so many new responsibilities, OTS, which regulated home lenders, is being abolished.

Indeed, the SEC is coming out of the financial regulatory overhaul far stronger than many observers of the agency might have anticipated. The SEC was the object of much criticism -- on Capitol Hill, Wall Street and elsewhere -- for multiple regulatory failures, from oversight of investment banks to the Ponzi scheme orchestrated by Bernard Madoff.

"There was a point in time when things were not looking good for the SEC. People were asking whether it should be merged with another agency," said Marc S. Gerber, a securities lawyer at Skadden Arps. "But with the leadership led by Mary Schapiro, they were able to right the ship and get the SEC on course and improve their standing in Congress, so they were able to get these new responsibilities."

More tasks for agency

Before the financial reform law, the SEC already had a full plate. It is working to implement or finalize nearly 20 new regulations covering areas ranging from money market funds to high-speed electronic trading. It is also conducting numerous investigations growing out of the financial crisis and is in the early stages of implementing many internal reforms in its enforcement and examination divisions.

The agency's new tasks are just as onerous. Schapiro said at a congressional hearing Tuesday that the SEC will have to hire 800 new employees.

"The act requires the SEC to promulgate a large number of new rules, create five new offices, and conduct multiple studies, many within one year," Schapiro told Congress in prepared testimony. "The importance and complexity of the rules coupled both with their timing and high volume and the rule writing agenda currently pending will make the upcoming rule writing process both logistically challenging and extremely labor intensive."

SEC officials say they will look to write rules and conduct studies as fast as they can with the schedule largely dictated by the new law.

Some of the new rules the SEC will implement on its own. Others will require coordination with other agencies. For example, the SEC must work with the Commodity Futures Trading Commission to write rules for derivatives. The agency must work with the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. to write rules requiring that banks that issue securities to the secondary market hold 5 percent of the investment on their own balance sheets -- a "risk retention" measure.

While the new law imposes many new responsibilities on the SEC, it also makes the agency's job easier in several ways. One is offering more explicit support for some of the more controversial rulemaking efforts the SEC had already launched.

For example, the SEC has proposed rules that would make it easier for shareholders to join together to nominate directors to sit on the boards of public companies. But business interests generally oppose "proxy access" and have threatened to sue if the SEC implements the rules.

The legislation, which makes clear that the agency has the power to write rules granting this power to shareholders, makes the threat of lawsuit less ominous. "For a number of years people have questioned whether the SEC has the authority to adopt proxy access," Gerber said. "That question has been answered."

New enforcement powers

The law also gives the agency's enforcement division new powers to conduct investigations and bring lawsuits against companies and people accused of committing financial wrongdoing. It will be easier for the SEC to serve lawsuits and subpoenas and to bring cases in a more favorable and less expensive regulatory court. The agency will also have a new ability to reward whistleblowers who provide information that's essential to a case.

The law gives the agency plenty of new financial support -- but not as much as the agency wanted. It doubles the agency's budget over five years and also creates a reserve fund the agency can use to plan long-term expenditures such as technology. But the agency wasn't given the power to fund itself through industry fees, as it had wanted.

Commodity Manipulation May Be Easier to Prove With U.S. Financial Overhaul‏

Bloomberg News

Traders will face new rules aimed at making it easier for regulators to prove manipulation in markets for commodities such as oil, wheat and natural gas under the financial overhaul awaiting President Barack Obama’s signature.

The regulations, written in part by Senator Maria Cantwell, a Democrat from Washington state, attempt to relieve the Commodity Futures Trading Commission of the burden of proving a trader intended to manipulate prices. Instead, the CFTC will have to show the trading was “reckless.”

“It will make it easier for the CFTC to bring cases and get people to settle, because people will be reluctant to go to court,” said Geoffrey Aronow, former director of enforcement at the commission and a partner at the Washington law firm Bingham McCutchen LLP.

Proving manipulation has challenged courts and lawmakers since the early attempts to regulate U.S. commodity markets in the 1920s. The financial overhaul of the $615 trillion derivatives market, approved by the U.S. Senate last week and the House on June 30, redraws rules that have been determined for decades by a patchwork of case law.

The legislation will allow the CFTC to better police manipulation, while also expanding its jurisdiction to the over- the-counter derivatives market, said Michael Greenberger, a former director of trading and markets and now a professor at the University of Maryland law school in Baltimore.

Lower Standard

“The standard of proof is lower,” Greenberger said. “If you can’t police for manipulation, you’ve effectively got one hand tied behind your back. The Cantwell amendment unties the hand of the CFTC.”

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather. Futures are traded on regulated exchanges, while over-the- counter contracts are privately negotiated.

The financial overhaul will push most of the off-exchange contracts to be processed, or cleared, through third-party clearinghouses and traded on exchanges or similar systems. All trades will have to be reported to trade repositories, which will allow regulators a view of the overall risk in the market.

“The problem I’ve got with it is you have no guidance for your traders,” said Jerry Markham, a professor at Florida International University law school in Miami and an expert witness. “Traders have to be aggressive. This is trading, not tiddlywinks.”

Under current law, manipulation cases hinge on a four-prong test that begins with proving that prices were “artificial,” or outside the bounds of normal supply and demand, Markham said. Then the government must prove that the accused had the ability to cause an artificial price, took actions to cause it and intended it. Proving intent typically requires evidence such as traders’ e-mails or taped telephone calls, he said.

‘Artificial’ Prices

Proving manipulation in court is tough because the statute provides little definition, including how to measure an “artificial” price and establish intent, said Craig Pirrong, director of the Global Energy Markets Institute at the University of Houston, who has written essays on the subject and served as an expert witness.

Confusion has existed since the early days of regulation, Pirrong said. He quoted a 1928 hearing where cotton trader William Clayton said manipulation seems to mean any market move “that does not suit the gentleman who is speaking at the moment.”

In 2008, the year after BP Plc paid a record $303 million to settle a CFTC claim that it cornered the propane market, the four BP traders who were individually charged in the case won a dismissal, in part because U.S. District Judge Gray Miller in Houston found that the law they were accused of violating was too vague to be enforceable.

‘Confusing’ Regime

“The court is sympathetic to the government’s desire to discourage the types of behavior alleged here, but its ability to do so is currently limited by a confusing and incomplete statutory common-law regime,” Miller wrote in his decision,

The U.S. Justice Department has appealed the case.

In addition to the anti-manipulation rules introduced by Cantwell, the law contains provisions that allow the CFTC to police trading practices with oddball names such as “spoofing” and “banging the close,” and contains a measure that Commission Chairman Gary Gensler has dubbed “The Eddie Murphy Rule.”

The rule is named for the 1983 movie Trading Places, which starred Murphy and Dan Akroyd. The plot centers on two brothers who plot to get an orange crop forecast and corner the market for orange juice. Murphy and Akroyd beat them to it, substitute a forgery, and make a fortune while the scheming brothers go bust. The provision bans trading using non-public information misappropriated from a government source, such as crop forecasts or fuel stockpile reports.

Canceling Trades

“Spoofing” is a practice where a trader enters a bid or offer with the intent of canceling it before the trade is carried out.

The legislation also targets any activity that shows a “reckless disregard” for “orderly” trading in the closing period, during which the day’s settlement prices are determined. The provision targets a practice known as “smashing” or “banging” the close, where traders attempt to bully the day’s settlement price by buying or selling large volumes just before the close.

“It’s going to be very much like the standard for pornography,” said Gary DeWaal, general counsel for Newedge USA LLC, the world’s largest futures broker. “The CFTC is going to say, we know orderly when we see it. And that’s going to be a bone of contention.”

G20 Market Reform Efforts Start to Splinter

Reuters

 

The Group of 20 countries vowed last year to sing from the same hymn sheet on regulating banks, But the tune from Toronto this weekend sounds increasingly like a line from the Frank Sinatra signature song, "My Way".

GLOBAL BANK TAX TO PAY FOR BAILOUTS: ABANDONED

Any determination to introduce a common tax on banks to shield taxpayers from paying for another bailout -- an approach favored by Germany and its EU partners -- formally fell by the wayside on Sunday. G20 leaders agreed there are a range of policy approaches for making banks pay a "fair and substantial" contribution toward any government interventions.

"Some countries are pursuing a financial levy. Other countries are pursuing different approaches," the summit's communique said tersely.

It marks a victory for host Canada, along with Japan, Brazil and Australia, who balked at piling a tax on their banks, which required no bailouts during the financial crisis.

Any tax now introduced in Germany, France and Britain will have to be modest or else risk banks shifting operations to more tax-friendly locations.

STRENGTHENED BANK CAPITAL: 2012 DEADLINE DELAYED

The Toronto G20 endorsed a long phase-in for the new Basel III bank capital and liquidity rules. This marks a significant setback to last year's pledge to increase by 2012 the amount of capital banks must hold to absorb shocks. The phase-in is now more open-ended, allowing different speeds for different countries. If countries can effectively pick and choose their path, it will be a messy prospect for global banks.

The G20 is under intense pressure from banks and countries like Japan, Germany and France to delay elements of Basel III, for fear that building up capital would reduce lending and harm a fragile recovery.

The Financial Stability Board, tasked to coordinate the G20 reforms, swung behind a longer phase-in on Sunday, saying 2012 should be seen as merely the start date. FSB Chairman Mario Draghi is betting the delay will make it harder to argue for diluting the rules, a strategy that may well falter in coming months when the reform is finalized by November.

"If you don't have a coordinated approach to regulatory (systems)... then there's the risk of regulatory arbitrage," Deutsche Bank Chief Executive Josef Ackermann said.

TOO BIG TOO FAIL: NO CONSENSUS

The "My Way" doctrine may also be required to make progress over how governments handle banks deemed too big to fail. The FSB is working on a string of recommendations by November. So far there is no consensus on whether big, interconnected banks should face capital surcharges or "structural constraints" or other types of remedies to discourage risky activities and shield taxpayers from the cost and damage of a government bailout. The betting is that a menu of options will be finally agreed giving G20 countries plenty of leeway.

UNIFORM GLOBAL ACCOUNTING RULES:MID-2011 DEADLINE SLIPS

Hopes for a single set of global accounting rules by the mid-2011 deadline are also in doubt. The world's top accounting standards setters have reached no agreement on when banks should price assets at the going rate or cost, known as mark-to-market or fair-value accounting.

The G20 reiterated its call on Sunday for a single set of standards but made no mention of the 2011 deadline.

The U.S. accounting board wants to widen the use of fair value. But the International Accounting Standards Board, whose rules are mandatory in the EU, has effectively narrowed the scope of fair value, in response to calls from European policymakers. The FSB said on Sunday it backed the narrower approach, but its appeals may well fall on deaf ears and a Band-Aid solution will be needed if a single set of global rules is to emerge.

FINANCIAL REFORM: OUT OF SYNC

U.S. financial reform, heading for a final vote in Congress this week, incorporates many of the G20 pledges, including requiring credit rating agencies and hedge funds to register, improving supervision of markets and curbing risk in derivatives trading. It goes even further than the G20 proposed. The bill forces structural changes on banks by requiring the spin-off of some derivatives trading and barring proprietary trading.

The sweeping U.S. overhaul puts pressure on the European Union, which has yet to approve rules implementing many of the G20 pledges. Europe is not expected to copy U.S. initiatives.

Britain will be pleased that the G20 communique calls for nondiscriminatory crackdowns on hedge funds -- a swipe at the EU's draft law that could make it much harder for U.S. and other non-EU hedge funds to operate in the 27-nation bloc.

The FSB also noted on Sunday there has been no full implementation of G20 principles to curb bank pay.

Senate Passes Financial Overhaul Bill

The Wall Street Journal

Biggest Regulatory Overhaul of Wall Street Since Depression Moves Closer to Law

Sen. Christopher Dodd, left, smiles while flanked by Senate Majority Leader Harry Reid (second from the right), Sen. Richard Durbin (right), Sen. Blanche Lincoln (second from the left) and Sen. Mark Warner after the Senate voted to pass Wall Street reform on Thursday

WASHINGTON—The Senate on Thursday approved the most extensive overhaul of financial-sector regulation since the 1930s, hoping to avoid a repeat of the financial crisis that hit the U.S. economy starting in 2007.

The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.

The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms. It is designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them. Among other things, the legislation would:

• Establish a new council of "systemic risk" regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.

• Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.

• Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.

• Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.

• Give regulators new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers. Derivatives, which are complex financial instruments, are often used to hedge risk. Speculative trading in the contracts led to losses at many banks in the 2008 crisis.

"Simply, the American people are saying, 'you've got to protect us,' and we didn't back down from that," said Senate Majority Leader Harry Reid (D., Nev.). "When this bill becomes law, the joyride on Wall Street will come to a screeching halt."

Opponents of the bill worry that the government is overreacting, and over-regulating the financial industry. They worry the measures will crimp the free flow of capital in the U.S. economy.

"It will inevitably contract credit," said Sen. Judd Gregg (R., N.H.), who says the Senate bill "is probably undermining the system…probably making for a weaker system."

Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate's two independents in support of the package. Two Democrats voted against the bill, and two senators weren't present for the vote.

Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.

The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.

Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.

One flashpoint will be over the Federal Reserve. The House bill includes a provision that would allow the Government Accountability Office, the investigative arm of Congress, to audit emergency lending and some monetary policy decisions made by the Fed. The Senate bill would allow the GAO to study the emergency lending that occurred during the financial crisis, but it would not be authorized to audit decisions made in the future.

Another area of conflict is how to regulate trading of derivatives. Both bills require most derivatives to be traded through third parties, with the intent of increasing transparency. But the Senate bill goes farther by making it more difficult for companies to be exempt from the new rules. There's also a provision in the Senate bill that could force big banks to spin off their derivatives operations.

Both bills would create a new council of federal regulators with broad authority to protect the financial system from the sort of "systemic" risk that spread rapidly through the economy in 2008. The House bill would let the council impose several forms of restriction, including requiring companies to set aside additional capital, if the council believes a firm has taken on too much risk. The Senate bill leaves that power to the Federal Reserve.

The House bill also includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy.

The Senate bill, meanwhile, includes a provision that would essentially force banks to stop "proprietary trading," or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.

If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.

But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.

The Senate bill would also try to force almost all failing financial companies through a bankruptcy-type process, while the House bill would make it easier for regulators to take over and bust up a failing firm without going through the courts.

For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies. Under the House bill, the agency would be independent, while the Senate bill would place the consumer agency within the Federal Reserve.

What's in the Fine Print

Key parts of the Senate bill and where it differs from the House version

Consumers

Senate version

    * Consolidates responsibilities from seven agencies into a Bureau of Consumer Financial Protection within the Federal Reserve system to oversee products made available to consumers
    * Limits ability of mortgage lenders to assess penalities on borrowers who pay off the loan early
    * Prohibits paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features; commissions would be based on the size or number of loans originated

How House bill differs

    * Oversight would be independent of the Fed and exclude insurance companies, auto dealers and accountants, among others

Investors

Senate version

    * Creates Investment Advisory Committee within Securities and Exchange Commission
    * Creates Office of Investor Advocate within SEC to identify problems in dealing with SEC and provide assistance
    * Gives SEC the authority to grant shareholders proxy access to nominate directors
    * Requires directors to win by majority vote in uncontested elections
    * Gives shareholders the right to nonbinding vote on executive pay, excluding golden parachutes

How the house bill differs

    * Would require institutions with assets of at least $1 billion to disclose to regulators the structures of all incentive-based compensation

Banks

Senate version

    * Eliminates Office of Thrift Supervision
    * Federal Reserve Board would keep oversight of largest bank holding companies
    * State banks and holding companies would either be regulated by the Fed or FDIC
    * National banks with less than $50 billion in assets would be under Office of the Comptroller of the

Currency

    * Banks would be generally barred from using their own capital to engage in speculative trades

How the house bill differs

    * Preserves the Fed's and FDIC's bank-supervision roles; calls for OTS to be absorbed by the OCC

Markets

Senate version

    * Hedge Funds: Requires investment advisers of hedge funds with $100 million or more in assets to register with the SEC
    * Derivatives: Requires that many derivatives and overthe- counter financial products be traded on regulated platforms
    * Securitizations : Requires companies that package loans into marketable securities to hold at least 5% of the credit risk
    * Requires issuers to disclose more information about and analyze the quality of underlying assets

How the house bill differs

    * Applies to funds with assets of $150 million or more; exempts venture-capital funds
    * Exempts many end users from mandatory central clearing
    * Exempts education, agriculture, veterans and small-business loans

Insurers

Senate version

    * Creates Office of National Insurance within Treasury to monitor industry, recommending to the systemic-risk council insurers that should be treated as systemically important
    * Office would recommend ways to modernize insurance regulation, but it is explicitly not a new regulator

How the house bill differs

    * Proposes creation of a Federal Insurance Office with similar characteristics

Other Elements

Senate version

    * Creates office at SEC to administer credit rating agencies' rules and practices
    * Creates Financial Stability Oversight Council, led by Treasury secretary, with nine voting members. Agency would identify systemic risks to the economy, promote market discipline and respond to emerging risks. It would also write regulations for risk-based capital, leverage and liquidity requirements

How the house bill differs

    * Also creates seven-member advisory board for credit raters
    * Large firms would pay into a $150 billion fund to manage the dissolution of failing firms considered systemically significant

Climax Looms for Finance Bill

The Wall Street Journal

President Barack Obama used a Manhattan speech to urge top banking executives to back his sweeping overhaul of financial-market rules, while in Washington the bill gained steam as cracks in the Republican opposition improved its prospects in Congress.

Two years after a campaign speech at Cooper Union that spelled out his vision for Wall Street, Mr. Obama pressed his case to an audience that included wary finance executives. The president's call for their cooperation lacked the sharpness of his recent barbs and references to "fat cat bankers." Instead, he suggested the "titans of industry" join a legislative push that is in its final stages.

"Ultimately, there is no dividing line between Main Street and Wall Street. We will rise or we will fall together as one nation," Mr. Obama told the audience.

Appearing just up the road from Wall Street Thursday, Mr. Obama hoped to raise the political pressure and seal the deal. Among those in the audience at Cooper Union's historic Great Hall were Goldman Sachs Chief Executive Lloyd Blankfein and President Gary Cohn, who sat impassively as the president pressed bankers to call off "the furious effort of industry lobbyists to shape this legislation to their special interests."

In Washington, senators intensified bipartisan negotiations aimed at producing legislation that could be supported by members in both parties. Timing for a possible agreement was uncertain, but Senate Banking Chairman Chris Dodd (D., Conn.) and Alabama Sen. Richard Shelby, the panel's senior Republican, appeared committed to closing a deal.

Internal GOP divisions improved Democrats' chances of securing another of their big domestic priorities: a bill they could tout as addressing the causes and aftermath of the financial crisis. A big test could come as soon as Monday, when Republicans likely will need all 41 of their senators to stop floor debate on the bill.

The Securities and Exchange Commission's civil-fraud action against Goldman Sachs filed last week appears to have supercharged Mr. Obama's legislative push, just as the implosion of WorldCom all but ensured passage of the Sarbanes Oxley corporate-governance law in 2002.



Nerves appeared to be fraying among Republicans faced with the increasingly unappetizing prospect of opposing new curbs on Wall Street. At a contentious meeting of GOP senators Wednesday, some expressed concern about Mr. Shelby's talks with Mr. Dodd. According to people familiar with the meeting, Arizona Sen. John McCain questioned why the Senate was debating derivatives trading, something he ventured few of them understood, while huge numbers of homeowners in his state were struggling to hang on to their houses.

New Hampshire Sen. Judd Gregg responded that if Republicans don't unify against the bill, Congress could pass legislation that would chase the derivatives industry overseas and into even darker corners.

Republican aides said the party faced a dilemma: It could sign on to a bill that they and many of their constituents won't like, or watch a bill pass with them largely on the sidelines and give Democrats an issue to run on in the fall.

Senate Majority Leader Harry Reid (D., Nev.) sought to begin formal debate on the bill using a fast-track procedure that requires all senators to agree. Senate Minority Leader Mitch McConnell (R., Ky.) objected, setting up a likely showdown vote early next week and a deadline for the Dodd-Shelby talks.

The proposed legislation seeks to revamp almost every area of finance, from trading to borrowing to lending and investing, with the ultimate goal of forestalling another credit crisis. The federal government would get the power to seize teetering financial giants and dismantle them, just as the Federal Deposit Insurance Corporation now seizes failing banks. It would create a financial consumer regulator, boost the strength and budget of the SEC and impose new rules on the trading of derivatives, the complex financial instruments that helped bankrupt Lehman Brothers and nearly wiped out American International Group Inc.

The legislation also would reach into areas unrelated to the financial crisis, such as the relationship between corporations' shareholders and their boards, and the role of investors in start-up businesses. Shareholders would get a "say on pay"—a nonbinding vote to ratify the compensation of publicly traded companies' top executives. And the SEC would be required to raise the threshold for so-called angel investors to qualify for "accredited investor status," to take into account price inflation since the standard was set in 1982. The Angel Capital Association said that could eliminate more than two-thirds of accredited investors who invest directly in start-ups and young small businesses.

Opponents say the bill would entrench, not end, government bailouts of companies. The Senate measure includes a $50 billion pool, funded by the financial industry, to be used for unwinding a teetering financial giant. Some Republicans say firms would see that as "implied insurance" that would bail them out if needed, and because the fund is insufficient, taxpayers would be on the hook for any additional costs. In constraining financial firms, they say, the new rules would also crimp access to credit.

Mr. Obama didn't threaten to veto the bill if it didn't meet his standards, as he did during his State of the Union address and again as recently as a few days ago.That could be because the Senate legislation appears to reflect all of his major priorities, as aides have fought off many of the changes he found objectionable.

In Thursday's speech, Mr. Obama dodged discussing elements of the bill that might change, including state regulators' power over national banks and certain provisions designed to beef up the clout of company shareholders that Republicans strongly oppose.

He also suggested that certain companies could be shielded from rules that would redraw the market for derivatives, especially those that use the instruments to hedge exposure to fluctuating prices of commodities. By making that distinction clear, Mr. Obama could win over senators who are concerned about the breadth of the proposed curbs.

"The only people who ought to fear the kind of oversight and transparency that we're proposing are those whose conduct will fail this scrutiny," he said.

While the crowd, comprising mostly students and supporters, was largely receptive, the Wall Street executives filling the first three rows were considerably more subdued. Their hands remained in their laps when the president spoke of a bank fee to recover outstanding bailout funds and his plea to call off the industry lobbyists.

J.P. Morgan Chase & Co. CEO Jamie Dimon, a longtime Democratic supporter who has grown frustrated with Washington, was in Chicago receiving an award and didn't attend. Other big financial firms represented included Barclays, Morgan Stanley and Credit Suisse.

Key issues remain unresolved in Washington, and tensions continued to bubble over.

Shuttling between negotiating sessions, Mr. Shelby said he hadn't heard the president's remarks, and didn't see any immediate impact on efforts to piece together a bipartisan bill. "What'd he do, give them a lecture?" he scoffed at midday. "We're down in the weeds dealing with serious subject matter."

Obama: Fresh Crisis Without New Financial Rules

Why Did we Bail out the Banks?

WASHINGTON (AP) - The U.S. is destined to endure a new economic crisis that sticks taxpayers with the bill unless Congress tightens oversight of the financial industry, President Barack Obama said Saturday.

The overhaul is the next major piece of legislation that Obama wants to sign into law this year, but solid GOP opposition in the Senate is jeopardizing that goal.

"Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities," Obama said in his weekly radio and Internet address. "And if we don't change what led to the crisis, we'll doom ourselves to repeat it.

"Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again," the president said.

A proposal that Senate Democrats are readying for debate creates a mechanism for liquidating large financial companies to avoid a meltdown.

For the first time, the government would regulate derivatives, those financial instruments whose value depends on an underlying asset, such as mortgages or stocks. Derivatives can help hedge risks. But derivatives can produce steep losses, or huge profits, if the value of their underlying asset sinks.

The proposal also would create a council to detect threats to the financial system and set up a consumer protection agency to police people's dealings with financial institutions.

On Friday, Obama promised to veto the bill if it doesn't regulate the market for derivatives, which contributed to the nation's economic problems after their value plummeted during the housing crisis.

But Democrats haven't agreed on how far such regulation should go, and all Senate Republicans are united against the bill. That opposition complicates Democratic efforts to get the 60 votes necessary to overcome likely GOP procedural roadblocks.

Republicans contend that a provision creating a $50 billion fund for dismantling banks considered "too big to fail" would continue government bailouts of Wall Street. Obama administration officials say such a fund is unnecessary and they want Senate Democrats to remove it.

Obama criticized financial industry interests for opposing the proposed regulations and for waging a "relentless campaign to thwart even basic, commonsense rules." He repeated his call for Republicans and Democrats to work together to overhaul the system but made it clear that Democrats are prepared to go it alone.

"One way or another, we will move forward," he said. "This issue is too important."

In the weekly Republican address, House Minority Whip Eric Cantor of Virginia took note of the week's April 15 income tax filing deadline and criticized government spending and climbing deficits that he said are driving taxes higher.

Cantor said Obama has enacted 25 tax increases passed by the Democratic-controlled Congress that will cost families and small businesses more than $670 billion over the next decade and create a "bleak future for our kids and grandkids."

He urged a vote for the GOP in the November congressional elections.

"You have to take action so that we can begin to erase our deficits and free our children from our debt," Cantor said. "And rather than putting the squeeze on our nation's job creators and entrepreneurs, we believe in a pro-growth strategy to create jobs and empower the American entrepreneur and small business people to thrive."

Davos: Sarkozy Calls for Global Finance Regulations

NY Times

DAVOS, Switzerland — France wants to use its presidency of the Group of 20 next year to create a new international monetary system, President Nicolas Sarkozy said on Wednesday, adding that he believed the U.S. dollar should no longer be the primary reserve currency in the global economy.

In an expansive and lofty speech to the business and political leaders gathered here at the annual World Economic Forum, Mr. Sarkozy also called for a “revolution” in international regulation that would make labor, health and environmental standards as enforceable as trade rules.

Like Prime Minister Gordon Brown of Britain, he backed a tax on financial market transactions. But Mr. Sarkozy, pursuing his call for a more moral form of financial capitalism, suggested the proceeds be used to combat climate change and create a World Environment Organization as powerful as the World Trade Organization.

Mr. Sarkozy also took a hard line on bankers’ bonuses, insisting that lavish rewards should be denied to those destroying wealth and jobs.

But before an audience that contained many Americans and many Chinese, his comments on currencies arguably had the greatest resonance.

“We need a new Bretton Woods,” Mr. Sarkozy told a packed auditorium. “We can’t have on the one hand a multi-polar world and on the other a single reserve currency on a global level.”

In a thinly veiled reference to China keeping its currency at an undervalued level, he added: “We cannot on the one hand laud free markets and on the other tolerate monetary dumping.”

During its 2011 presidency of the Group of Eight — the leading Western industrial powers plus Russia — and the wider G-20, which also includes several important developing nations, France “will put the reform of the international monetary system on the agenda,” Mr. Sarkozy said.

Mr. Sarkozy also warned that the economic recovery currently underway remains vulnerable, urging central banks against withdrawing monetary stimulus measures too abruptly, saying it could prompt a collapse of the world economy.

"We must take care to prevent too abrupt a tightening,” he said.

The powerbrokers at Davos were not Mr. Sarkozy’s only audience. Six weeks ahead of regional elections in France, which are widely seen as at least a partial judgment on his presidency, the president has tried to reverse a decline in his approval rating, currently at a record low.

“It was an effective, quite populist speech,” said Timothy Garton Ash, a professor at Oxford University and political commentator who was in the audience. “As always at Davos, national leaders are at least half talking to their own audience.”

In 2008, when France held the presidency of the European Union for six months, Mr. Sarkozy proved a dynamic — if controversial — leader, first negotiating a ceasefire that halted the war in Georgia with Russia, and then bringing together European leaders to coordinate their response to the financial crisis.

As president of the G-20, he could repeat that performance, and even observers who find his style at times overbearing applaud his tenacity and energy.

“The dynamism of the chair,” Mr. Garton Ash said, “may bring some more substance to the G-20.”

Mr. Sarkozy was the first French president to give the keynote address at the Davos forum, and it afforded him the chance to pit well-paid bankers against ordinary citizens.

He reiterated themes that have resounded in recent days, starting with President Barack Obama, who proposed a tax on banks’ liabilities, and then went further, suggesting that their size should be limited.

The French president said he agreed with Mr. Obama, but stressed that all regulation concerning banks should be dealt with at an international level, coordinated by the G-20.

Calling the current crisis a “crisis of globalization itself,” he urged broad coordination of regulation and accounting rules.

“If competition is distorted by accounting rules that remain very different from one country to another, and one continent to another, market actors will find it normal to return to pre-crisis habits,” Mr. Sarkozy said. “How, in a competitive world, can we demand of European banks three times more capital to cover their risks in their activities and not ask the same of American and Asian banks?”

His aim was not, he stressed, to do away with capitalism itself but to tame financial markets. To this aim, a tax, he said, was now unavoidable.

“We can’t escape the debate about taxing speculation,” Mr. Sarkozy said. “Whether you want to rein in frenetic financial markets, finance development aid or associate poor countries to the fight against climate change, everything brings us back to the taxation of financial transactions.”

House Passes Sweeping Financial Reform Bill

CNN Money

Measure, aimed at preventing another big financial crisis, imposes more oversight and creates consumer protection agency.

The House passed legislation Friday aimed at preventing the next big financial crisis, ushering in the most sweeping set of changes to the banking regulatory system since the New Deal.

The bill, which passed 223-202, imposes more oversight and stronger capital cushions for the largest banks and Wall Street firms. It forces them to pay a total of as much as $150 billion into an emergency fund that could be tapped when a troubled company needs to be taken over and broken up.

"The bailouts of AIG and Bear Stearns would be not possible -- made illegal -- under this bill," Frank said. "If a company fails, it'll be put to death."

The legislation also calls for the regulation of some derivatives and creates a new Consumer Financial Protection Agency to regulate products such as credit cards and mortgages.

"We are sending a clear message to Wall Street, the party is over. Never again will reckless behavior on the part of the few threaten the fiscal stability of our people," said House Speaker Nancy Pelosi during a press conference after the bill passed. "The legislation will finally protect Main Street from the worst of Wall Street."



On the Senate side of Capitol Hill, the bill is moving much more slowly and final passage is likely months away.

As chairman of the House Financial Services committee, Rep. Barney Frank, D-Mass., has spearheaded the financial reform package since last Spring -- especially the part that creates the Consumer Protection agency.

"The bailouts of AIG and Bear Stearns would be not possible -- made illegal -- under this bill," Frank said. "If a company fails, it'll be put to death."

Overhauling the financial regulatory system has been a major priority of the Obama administration, which has been involved in almost every step of the nearly year-long process. High ranking Treasury officials visited House Speaker Pelosi's office this week, when some parts of the bill appeared in trouble.

"This legislation brings us another important step closer to necessary, comprehensive financial reform that will create clear rules of the road, consistent and systematic enforcement of those rules, and a stronger, more stable financial system with better protections for consumers and investors," President Obama said in a statement.

House Republicans have been united in their opposition, saying the bill would provide a permanent bailout of Wall Street and a step toward socialism. One of the bill's lead opponents, Rep. Jeb Hensarling, R-Texas, said it would impose "sweeping draconian powers" on private businesses.

However, over the past several months, the bill has faced its biggest hurdles among Democrats.

Conservative Democrats picked apart different sections, especially the consumer protection agency, saying they worried it would hurt small businesses.

In fact, the plan for the agency has been watered down from the version first proposed by the White House. It no longer would examine and enforce consumer protection rules at 98% of credit unions and banks, most of them smaller. It also would not regulate auto loans, even though auto loans are among the most common issued to consumers.

The Congressional Black Caucus held up the bill at one point, citing displeasure with the lack of support for loans and jobs to those in minority communities.

To smooth things over with those lawmakers, the bill transfers $3 billion from the federal bailout program to provide emergency loans capped at $50,000 to unemployed homeowners to help them prevent foreclosure.

It also would redirect another $1 billion of bailout money into federal neighborhood stabilization programs to redevelop abandoned or foreclosed homes.

Here's what else it would do:

Federal Reserve: The bill would allow Congress to order the Government Accountability Office to audit Fed activities, which the Fed says would interfere with the central bank's ability to carry out independent monetary policy.

Derivatives: The bill attempts to shine a brighter light on some of the different kinds of complex financial products, called derivatives, that are blamed for bringing down financial companies such as American International Group (AIG, Fortune 500) and Lehman Brothers. It would pass some of these derivatives on to clearinghouses, which would help pinpoint the value of such trades. However, some derivatives would still be unregulated, including those traded by big agricultural and airline companies to mitigate risk.

Oversight: It creates a new oversight council that would look out for major problems at large financial firms, giving the Federal Reserve a key role in enforcing tougher regulations on larger firms.

Breaking up: It would also give regulators new powers to break up companies that have grown too big, if they threaten to destabilize the financial system.

Executive Compensation: It would give shareholders the right to a nonbinding proxy vote on corporate pay packages.

The House rejected, by 223-208, an amendment that would have effectively killed the Consumer Financial Protection Agency, replacing it with a council of existing regulators.

The members also voted down, by 241-188, an amendment that would have given bankruptcy judges new powers to lower balances on mortgages in order to prevent homeowners from losing their homes in foreclosure.