How Obama can rein in Wall Street without going through Congress

[No1]

It's been hard for the public to accept that the same big banks that had a hand in crippling the economy are churning out record profits and letting their executives take home whopping bonuses.

President Obama also seems uneasy about this turn of events, or at least what he perceives to be its root cause: risky trading.

"More and more of the revenue on Wall Street is based on arbitrage -- trading bets -- as opposed to investing in companies that actually make something and hire people," Obama told Marketwatch radio on Wednesday. "We have to continue to see how can we rebalance the economy sensibly, so that we have a banking system that is doing what it is supposed to be doing to grow the real economy...That is an unfinished piece of business."

It certainly is an unfinished piece of business, but not the kind that requires legislation. Remember Dodd-Frank? The nearly 900-page law is full of reform measures to address the sort of reckless risk-taking that continues to ruffle Obama's feathers. Most measures are already in place (we'll go into that later), but some have languished in regulatory limbo (again, we'll go into that later).

Putting the 2010 Dodd-Frank law to work has been a monumental struggle, fraught with contentious battles in Congress to weaken nearly every measure. Wall Street's relentless lobbying campaign pressured regulators to dial down some of the reforms, but the overhaul law still has a lot of strength.

"There is tremendous authority to restructure Wall Street banks that is already there in Dodd-Frank," said Marcus Stanley, policy director of Americans for Financial Reform. "The regulators have the statutory authority. The question is whether they are going to use that authority."

Here are three specific statutes in Dodd-Frank that could have real impact on Wall Street:


Incentive-based compensation

This provision (a.k.a: Section 956) says banks, credit unions, investment advisers, brokerage firms and other financial institutions have to restructure pay in a way that doesn't encourage risk-taking.

"We continue to see a lot of these banks take big risks because the profit incentive and the bonus incentive is there for them," Obama said during his Marketplace interview.

There is no denying that big bonuses are back on Wall Street. The New York State comptroller's office said employees pulled in an average bonus of $164,530 last year, returning them to the highs of 2008. A lot of the increase was pegged to delayed payout from previous years, a strategy firms have used to keep risky behavior in check. Banking regulators issued guidance a few years back to encourage firms to tie bonuses to performance.

Not every company is cautious about compensation structure, which is why Congress included the incentive-based provision in the first place.

"Bankers engage in these risky trades because they’re paid to do so, and this statute provides power to prevent that," said Bart Naylor, a financial policy advocate with the nonprofit group Public Citizen.

A group of regulatory agencies, including the Securities and Exchange Commission, proposed a rule in 2011. It called on firms with more than $50 billion in assets to defer at least half of incentive-based pay for three years and adjust that compensation to reflect company performance. The proposal also included bonus restrictions for executive officers and folks who could leave the company open to substantial losses, such as traders.

But the proposal has been stuck in the final drafting phase. There are six agencies (that's a lot of people), with varying perspectives and demands, involved in writing the rule. People close to the process say too many cooks in the kitchen is spoiling the stew, but Obama could nudge the agencies to pick up the pace and get it done.

Volcker Rule

Named after former Federal Reserve chairman Paul Volcker, this provision, arguably the centerpiece of Dodd-Frank, requires banks to spin off their trading arms and prevents them from trading for their own benefit.

It took three years for regulators to complete the rule as government infighting and intense lobbying by banks slowed the process. But it got done. Now, it's a matter of enforcement. This is where the president could insist that regulators follow the rule to the letter of the law, without concessions to investment banks.

In anticipation of the rule, many large banks, such as JPMorgan Chase and Goldman Sachs, have shuttered or spun off their proprietary trading desks, as well as their private-equity arms and hedge funds. Trading revenue declined 16 percent in the first quarter compared to the same time a year ago, according to a recent report from the Office of the Comptroller of the Currency.

Banks have generally reduced their exposure to derivatives, but don't let that fool you, said Dennis Kelleher, who heads the watchdog group Better Markets. "Wall Street took down the proprietary trading sign and just moved the business into different parts of the bank," he said. "They are trying to get away with prop trading by calling it something else and hoping the regulators won't enforce the law."

Resolution authority

Dodd-Frank gave the Federal Deposit Insurance Corp. the authority to wind down failed firms and instituted so-called living wills, a blueprint for how banks could be resolved. Regulators can require banks to restructure or streamline their operations if their wills aren't up to snuff.

"There hasn't been very much transparency into that process," Stanley said. "It seems regulators are focusing on ways to try to finance the banks during a resolution, but we haven't seen, at least in a publicly transparent way, much focus on simplifying the banks activities so that they're less complex and easier to manage if they fail."

Reform advocates say now is the time for regulators to take steps to reduce the complexity of banks, with moves such as simplifying the labyrinth of subsidiaries.

On Wednesday, Obama said one of his key focuses over the last couple of years has been "to make sure that we've got a circuit breaker so that if certain banks are making bad decisions, they are less likely to bring down the entire system."

It seems like we've got that circuit breaker in place -- but need regulators to make sure Wall Street doesn't fiddle with it.

 

[blackzeus]

You want Obama to go against the people who put him in office?

 

[theworldismine13]

Obama needs to chill with these executive orders, he's a already lost most of those cases when it gets brought up
Obama's Disappointing Year at the Supreme Court
http://reason.com/archives/2014/07/01/obamas-disappointing-year-at-scotus

and him trying to circumvent congress on immigration and appease la raza has caused a crisis at the border

i love obama, but he needs to understand that his career is done and that he has plenty of accomplishments under his belt and he can go down in history as a decent president, he needs to chill for the next two years and/or compromise, or else he will go down as an overreacher and underachiever

 

[Jello Biafra]

What makes anyone think Obama (or any pol) seriously wants to reign in Wall Street?

 

[wheywhey]

BarNone enjoying the last few months of his idealistic years.

 

[Domingo Halliburton]

there's a simple rule that wall street lobbied against and got taken away that would go a long way and isn't mentioned in this article.

that's requiring them to hold a certain percentage (I think the proposed rule was 5%) of the securities they create onto their balance sheets for a specified amount of time...

so next time you make a security loaded with shytty mortgages you have to hold onto it.

now there's obviously going to be liquidity issues but they could implement something at least smaller

 

[Domingo Halliburton]

honestly now that i look at it more closely i dont think any of those rules in the op are changing anything besides a stronger volcker rule one. and i dont know how theyre saying theyre reducing their exposure to derivatives. Derivatives are typically off-balance sheet. They have no idea what their exposure is besides taking JP Morgan at their word

 

[No1]

BarNone enjoying the last few months of his idealistic years.

I don't post articles because I believe in them. I post them because they are a perspective worth considering. If I believe in something, I say I do. As far as whether or not these tools will be used, that's a discussion that no one on here actually wants to have as was evidenced by the fact that only The Real and @Domingo Halliburton even posted when I first posted about the final Volcker Rule. All due respect, but people need to grow up. When I said that @theworldismine13 (despite the fact that he strangely has something against me though I'm more prone to support him than 99% of posters in here because a lot of his stances are good individual advice) was one of the better posters in here, it had nothing to do with agreeing with his opinion. In fact, I disagree with him (and son him despite his delusions) most of the time, but it's because of the fact that he is committed to post articles of interest regardless of whether or not he or anyone else agrees with them. It allows HL to have that "newsfeed" aspect to it. Why wouldn't I post up an article on something that was in the news this past week because of the President's comments......

But whatever

 

[Futuristic Eskimo]

honestly now that i look at it more closely i dont think any of those rules in the op are changing anything besides a stronger volcker rule one. and i dont know how theyre saying theyre reducing their exposure to derivatives. Derivatives are typically off-balance sheet. They have no idea what their exposure is besides taking JP Morgan at their word

Isnt Basel addressing off balance sheet items more thoroughly this time around?

Edit: Prop trading is basically dead on the street other than delta one desks. How can you make the argument that more and more of their profit is being derived from these activities?

 

[Domingo Halliburton]

oh yeah, full disclosure im against all these regs.

there's a certain balancing act you need and you can hurt main street.
that and it makes my job harder.

 

[Domingo Halliburton]

Isnt Basel addressing off balance sheet items more thoroughly this time around?

Edit: Prop trading is basically dead on the street other than delta one desks. How can you make the argument that more and more of their profit is being derived from these activities?

is there a new Basel in place besides 3?.

yeah prop trading is dead most spun off their desks like the article said.

I'm just saying how much do they really know about exposure banks have to derivatives? Wasnt the London whale losing 7 billion 2 years ago?

 

[Futuristic Eskimo]

is there a new Basel in place besides 3?.

yeah prop trading is dead most spun off their desks like the article said.

I'm just saying how much do they really know about exposure banks have to derivatives? Wasnt the London whale losing 7 billion 2 years ago?

Basel 3 isnt even in place yet. It does address off balance sheet assets more thoroughly. Whether adequately or not, that is up to people with more experience in this field to decide.

Fraud on a trading desk doesn't necessarily mean that the regulations in place aren't up to par. The people behind a trader in risk management and internal audit have to do their jobs to make sure that one of these guys doesn't get away with bullshyt like that. $7 billion dollar loss is huge and some heads need to roll, but I guarantee you will be seeing less and less of this kind of activity going forward. The combination of increased focus on risk management, regulatory pressure and less activity on these desks will make sure of that.

I get your point, though. There is an element of trust involved in taking their word for it, but you've seen the feds step in and fukk shyt up for B of A and Citi already in the past couple months.

 

[Domingo Halliburton]

yeah I agree I don't think this is all for nothing...some of these regs have certainly caused reactions in banks and risk management to be beefed up.

and you're right its often some rogue who hides shyt and pulls something stupid.