Occupy the Banks Occupy the S.E.C.

Posted on Sunday, 10th June 2012 @ 11:40 PM by Text Size A | A | A

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Whose base is more energized? That will be a critical question for Obama and Romney come November.

This Occupier fears that there is a ton of energy behind the side chanting “we are all in this alone!” and holding up signs reading “Keep Government Out of Our Medicare” and holding meetings focused on the implementation of “The Hunger Games.” If this side is victorious, I fear that it will truly be the bane of the existence of anything positive in the name of America and the corporation will truly be King.

Obama has not shown nearly enough deference to those who got him there. There are more than enough articles out there to support this point and I will not waste your time nor mine reiterating those points here. What I will argue, instead, is that Obama must do something radical to show the ninety-nine-percent that he is with them. If he wants to get volunteers on the phones, find people willing to do the tough work of door-to-door canvassing, have people leafleting in front of grocery stores, and donating the few extra pennies they have, Obama has got to show us that he understands that “a new world is possible” in which we are all truly our brother’s keeper!

What’s the radical step I am promoting?! Replacing the Wall Street whipping boy Tim Geithner with the Pulitzer-Prize winning economist Paul Krugman! Mind you, only people like Jamie Dimon would find this to be a radical idea!! I guess one could argue that Geithner served a purpose in that he was able to stabilize the banking industry and make people like Jamie Dimon feel secure. And lo and behold, the banks are back to making sizable profits. So Geithner served his purpose.

However, beyond the international playing field, America is still a mess! Why are we still in such a state of stagnation? Read Krugman’s book, “End This Depression Now!” and you will understand that we are in a credit crunch! Essentially, there is plenty of capital out there, but it is stuck under the mattresses of large banks and large corporations who are too wrought with uncertainty about the direction of our economy to spend their capital and thereby put the car in DRIVE! The key element keeping us in PARK is a lack of demand. Thus, we need to have our government spend money to get the gears going again. For more of an understanding about why we must put our jobs crisis above any concerns regarding debt read Krugman’s book.

The point I am getting at is that when you car is stuck in PARK and you want it to be in DRIVE you seek out a mechanic whom you know has the understanding to fix what is broken and the integrity to not rip you off in the process. As you read, “End This Depression Now,” you will not be able to escape the feeling that Krugman cares! Yes, he is a Pulitzer-Prize winner. But, he’s also got heart. He rails against those who would complicate matters in order to benefit the one-percent. He takes Bloomberg to task for arguing that the housing crisis was the fault of Congress for encouraging minority home-ownership and that the bankers were mere innocents. Krugman responds by stating that, “In fact, during most of the housing bubble Fannie and Freddie were rapidly losing market share, because private lenders would take on borrowers the government-sponsored agencies wouldn’t. Freddie Mac did start buying subprime mortgages from loan originators late in the game, but it was clearly a follower, not a leader.” Take that Doomberg!!

In essence, what we need right now is an economic expert who cares deeply about the ninety-nine percent to take the reigns of the economy and steer it in the direction of more jobs! If Obama made this move now, he would fire up his base and get them working for his campaign. He might be afraid to lose independents who are concerned about the debt. But they wouldn’t have voted for him in any case.

Those are just my two cents (which is actually a lot these days).

-Josh Douglass

Member Perspective: Bring Back Glass-Steagall

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The recent brouhaha over the trading losses at JP Morgan’s Chief Investment Office (CIO) has revitalized support for the old Glass-Steagall Act, which created a regulatory wall between investment banking and commercial banking for almost seven decades, until the Act’s repeal in 1999. Under Glass-Steagall, a bank could take your deposits, or take your company public, but not both. Our country needs to rebuild that wall.

The circumstances surrounding JP Morgan’s CIO desk illuminate a fundamental problem in the financial system: greed. The CIO office was ostensibly charged with reducing the bank’s overall risk through safe hedging. In reality, the CIO office did the opposite, taking on as much Value-at-Risk as the entire investment banking division of the behemoth JP Morgan. Those “hedges” have not performed as expected, and now the bank stands to lose over $3 billion and counting. How could this happen?

The SEC, CFTC, the FBI and other enforcement officials are looking closely into this question. But the answer is rather straight-forward. In Oliver Stone’s Wall Street, the flawed protagonist Gordon Gekko brazenly proclaimed that “Greed is Good.” Wall Street has taken this message to heart. Forgetting that Gekko was supposed to a cautionary figure, many Wall Street bankers and traders aspire not just to Gekko’s wealth but also to his tactics, reveling in high-stakes profiteering that often earns them 7, 8 and 9 figure incomes.

It is industry practice to borrow as much as possible (known as “leveraging”), in order to maximize gains. Unfortunately, leveraging can turn minor adverse price movements into gargantuan conflagrations. When banks start to sink, the specter of Too Big to Fail horrifies us into re-floating them with taxpayer funds (e.g., TARP) or through the Federal Reserve’s inflationary money-printing press (e.g., Quantitative Easing). The current banking model involves privatized gains, and socialized losses — a win-win deal for the banks.

No wonder that Senate hopeful Elizabeth Warren and many others have called for the reinstatement of Glass-Steagall. Glass-Steagall would have required banks that enjoy government subsidies (like the Fed’s “discount window”) to focus on conventional loan-making, thereby limiting the banks’ ability to gamble with those subsidies. That sort of restriction makes sense. The last thing you want to do is give a gambling addict an unfettered supply of cash, but that is exactly what the Federal Reserve’s current monetary policy does for bank holding companies.

The observant reader might protest, what about the Volcker Rule? Wouldn’t it have stopped the CIO office from disguising speculation as hedging? Unfortunately, no.

The Volcker Rule, often called Glass-Steagall-lite, restricts bank holding companies from engaging in proprietary trading, or speculating for their own profit. In theory, the Volcker Rule forces banks to focus on customer loans, the way Glass-Steagall required. Unfortunately, the Volcker Rule’s current form, as proposed by banking regulators, contains many loopholes that would permit egregious speculation like that undertaken by JP Morgan’s CIO office. For instance, the Volcker Rule creates broad exemptions for market-making, portfolio hedging and liquidity management. It also creates lucrative carve-outs for the toxic activities that actually caused the recent financial crisis, like securitizations and repurchase agreements.

JP Morgan can easily bear the $3 billion loss from its CIO desk. That’s not the problem. The real issue is that other banks, and possibly other divisions within JP Morgan, may be replete with similarly mischaracterized and under-capitalized trades. Can we as a society rely on banks, which are private, profit-seeking entities, to do what is best for us all?

The banks seem to think so. Their lobbyists have inveighed upon Congress and financial regulators, assuring them that the banks have sufficient capabilities to self-regulate, free from government constraint. After all, all the major banks are full of astrophysicists and mathematicians with PhD’s from places like Harvard and MIT, and the job of these “quants” is to do nothing else but build esoteric financial models to manage risk. However, despite all that brainpower, banks continually and repeatedly sabotage themselves through excessive risk-taking. The Great Recession of 2008, the worst financial crisis since the Great Depression, is testament to that fact. Simply put, no amount of financial engineering can overcome that entirely mundane human foible: greed. JP Morgan’s CIO debacle hammers that point home. As long as banks remain profitable, there will be gross incentives for them to conjure schemes to make money in ways that put the rest of us at risk.

That is exactly why we need hard-and-fast rules, like the Glass-Steagall firewall between investment banking and commercial banking, or the similar Vickers ring-fencing regime that is gaining traction in Europe. In Macbeth, Shakespeare warned of “Vaulting ambition, which o’erleaps itself and falls on the other.” We need a simple wall like Glass-Steagall to serve as a check on bankers’ vaulting ambitions.

Akshat Tewary

The Need for Credit Derivatives Reform

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JP Morgan’s loss shows exactly why we need an effective Volcker rule or a return of Glass Steagall, along with transparency in all derivatives, especially credit derivatives.  While the markets are somewhat volatile now, we certainly are not in a 2008 freefall.  Yet JP Morgan managed to lose at least $2 billion and counting.  Under extreme conditions, could this derivative position have lost 10x that? 20x given there is practically zero liquidity during a crisis?

While a $40 billion loss still would not leave JP Morgan insolvent, it would most likely put it below regulatory capital minimums, especially considering a fair amount of JP Morgan’s other assets would have lost value too.  This in turn could lead to a liquidity squeeze, (an ability to obtain funds needed in the near-term, typically from short-term markets), which could leave JP Morgan unable to meet its obligations.  In that case, JP Morgan would essentially be bankrupt and a bailout, to protect depositor assets would most likely be necessary.

There is also a concern whether a similar bailout would even be possible.  Consider that the total amount of the bank and corporate bailouts was $16 trillion across all Fed and Treasury programs (source: CBO, July 2011).  While the bailouts were mostly low or no-cost loans, they cost the government at least 2% – 3% per annum, borrowing long term and lending short term.  Can the country afford something like this again?

Worse, this is not even the largest threat.  Everyone in the financial world is worried about the level of borrowing both in the US and globally.  The leverage is extremely high when one considers the sum total of government, corporate and personal borrowing.  Yet the amounts discussed do not even consider the $80 trillion to $300 trillion credit derivative market (depending on your source).

Derivatives add leverage to an economy.  An investor in credit derivatives agrees to an obligation to pay based upon a reference asset, but only puts up a small portion of the notional amount as collateral.  So a $1 billion credit derivative may only have $100 million or more likely closer to $10 million as collateral.  What this implies is $900 million or $990 million of assumed risk without collateral.  That is essentially added leverage to the system.  Multiply this type of leverage by the credit derivative market size and we have a catastrophe waiting to happen.

Further, unlike cash obligations, derivatives are promises to pay and therefore include counterparty risk.  Unlike Goldman Sachs selling a bond to AIG, if the bond defaults, the only loss is to AIG’s account.  If a credit derivative, at 50x the notional size of a bond trade, goes bad for one counterparty, it may be so bad that the other counterparty would now suffer losses as well.  Indeed this is what happened with AIG and led to $182 billion of taxpayer funded bailouts and guaranties.

So if the market suffers another downturn, how many more crippled institutions will we have that will require a bailout, due to direct exposure on their assets, credit derivative positions or counterparty risk?  What would happen to the economy in the face of such gargantuan losses, even if a bailout could save the market again?  Both are scary questions.

Since credit derivatives are not standardized and not traded on transparent markets, there is no way regulators can adequately check the exposure and market value of financial institutions.  And therefore, our markets are in a precarious position, especially with an overleveraged U.S. Government standing behind the deposits of too big to fail banks.

By: Anonymous OccupytheSEC Member

Member Perspective: Occupy the SEC, JPMorgan-Chase, & the Volcker Rule

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Through its London office, JPMorgan-Chase (JPMC) hedged its overall position and did so with a big enough splash (the Whale) to call attention to itself.  It lost big and is still losing, but that fact is irrelevant.  The only significant question is whether this kind of activity was prohibited by the Volcker rule.  No, says the Comptroller of the Currency (OCC), one of the five federal regulators for the Volcker Rule.  Taking the OCC at its word, there is no story.
Alternatively, there is a story, which is that JPMC did violate the Volcker rule, perhaps not the law’s letter but certainly its intent.  That presumably is the position of the FDIC, which insures deposits at JPMC, and the Fed, which gives JPMC access to its discount window.

If they are correct and the OCC is mistaken, then the Volcker rule comes into question.  It is unlikely to be junked, so it will have to be tightened sufficiently so that the next time JPMC does something like this, the OCC will think there is a story.

That august group called Occupy the SEC (OSEC) aims to work by consensus. On the topic of JP Morgan’s loss, however, it is more like the Supreme Court: producing a majority opinion as well as one or more dissents along the way.   The majority opinion is that the Volcker rule has to be tightened.  The dissenting opinion, at least the one represented by the author of this comment, is that Congress would do better to junk the Volcker rule, start from scratch, and reenact the walls-of-separation familiar to us all from Glass-Steagall.  That minority view will be argued here.

Start with Glass-Steagall itself.  Its hallmark was its separation-of-powers doctrine, which in its case took the form of a separation of commercial banking from investment activities.   Imagine a commercial bank named Chase located on Main Street  and an investment bank named JPM (without the C) located on Wall Street.   Chase makes business loans, JPM makes investments.  JPM authorizes its London Whale to bet big, whether as hedging or not doesn’t matter.  What matters is that the Whale is incurring risks in the names of investors who know what they’re doing and give their consent.
Now what happens if it all goes South, as we like to say, and the investors lose $2 billion, maybe more, because of an investment strategy that was “flawed, complex, poorly executed, poorly vetted and poorly executed,” to use the words of Jamie Dimon at the recent Tampa shareholders‘ meeting.   What do investors do with an agent who says, “I can’t justify what happened” and that “unfortunately these wounds were self-inflicted.”

The answer seems obvious enough: you do what the district attorney would do with a suspect who confesses.   You bring Dimon before a court, present the confession as evidence, get the man convicted and then enjoy the spectacle of his execution as the next best thing to getting your money back.

But the shareholders did nothing of the sort.  They instead confirmed Dimon as CEO and chairman of the board, affirmed his salary at millions of dollars, and gave him a few verbal slaps-on-the-wrist.  The courageous Dimon made Ina Drew the fall-guy, but no one doubts that her severance package will be in the millions.  That Dimon lives to try it all again under a tightened Volcker rule should be sufficiently damning to condemn the rule itself.
So the trouble is with a rule the OCC thinks allowed Jamie Dimon to do what he did.  The trouble is also with a tightened version of that rule, for by the time the regulators get to writing it, Dimon will have gotten beyond his mea culpas and be supporting the new rule while lobbying for exceptions to it.

So what we need is a new two-part rule that allows Dimon to remain in place either at the head of an investment bank called JPMorgan or at the head of a commercial bank called Chase.  If he stays on Wall Street, then the investors will flee or they’ll throw him to the lions if be bets their money and loses it.  Or, under the aegis of a restored Glass-Steagall, Dimon opts to move over to Main Street and goes into the respectable business of dishing out commercial loans, in which case he most likely does not get in trouble.

A resurrection of Glass-Steagall would also allow sinners like Jamie Dimon to become honest people.  If Dimon bet big and lost, he would be able to say, “I bet the house (or houses, in his case) and lost.  It was my money, I knew what I was doing, and I have no regrets.”  Or the last sentence would read: “the money belonged to investors, I didn’t know what I was doing, and I have a lot of regrets because they just sacked me.”  Either way, we could all respect Jamie Dimon.  Right now, under the aegis of the Volcker rule, deep in the realm of legislated hypocrisy, the poor man is forced to lie every time he opens his mouth.

Bob Sullivan

House Volcker Letter Needs Support

On April 26th, Occupy the SEC sent out the following email as a call to action to the members of our mailing list:


Dear Friends,

We wrote to you last week, asking you to call your Senators and Representatives and encourage them to attend our Volcker Rule Congressional Briefing, which was held this past Monday, April 23.  We want to sincerely thank all of you who called your Congresspeople.  Approximately 60 staffers attended from both the House and Senate, and the briefing was very well-received.

We now ask you to take an additional action in support of the Volcker Rule.

This morning, Senators Levin (D-MI) and Merkley (D-OR) put out a letter calling on our financial regulators to finalize a strong version of the Volcker Rule by the summer.  Twenty-two Senators have co-signed the letter, which has been finalized.

There is a draft companion letter circulating today in the House of Representatives that is being pushed by Rep. Blumenauer (D-OR3), Rep. Waters (D-CA35) and many other representatives.  It is important that as many members of the House of Representatives as possible co-sign the companion letter.  This would show the regulators that Congress is looking to them to complete the rule by the summer, without loopholes.

Please call your House representative and ask him/her to co-sign Rep. Blumenauer et al’s Volcker Rule letter.

The easiest way to do this is to call the Capitol switchboard at  (202) 224-3121 , and ask for your Representative’s office by name. You can also look up your Representative on Open Congress.

When you call, we suggest you tell the staffer:

I am your constituent, and I am calling to ask Rep. _____ to co-sign the  Volcker Rule letter being circulated by Rep. Blumenauer and Rep. Waters.  The letter calls on the regulators to finalize a strong Volcker Rule by this summer.

In case the person you speak to needs more information about the Volcker Rule, you could tell them:

The Volcker Rule is section 619 of the Dodd-Frank Act.  It is an important rule that will help address systemic risks to our banking system and the Too Big to Fail status of institutions managing trillions of federally insured deposits.  I support the rule and ask you to co-sign the letter from Rep. Blumenauer and Rep. Waters.

Thank you for your help and support.

In Solidarity,
Occupy the SEC

For More Information:
What is Occupy the SEC?
What is the Volcker Rule?
What was Glass-Steagall?

What is the Department of Justice?

The Department of Justice (“DOJ”) is a Cabinet department in the United States government designed to enforce the law and defend the interests of the United States. The DOJ acts to ensure that laws passed by the legislative branch are properly upheld. Also, it works to deal with crimes at a federal level of government, often dealing with crimes involving multiple states, or acts of violence against the nation as a whole.

The DOJ is headed by the US attorney general, currently Eric Holder.  Holder is the chief law enforcement officer of the US and is appointed by the president as part of his or her Cabinet. Through its various agencies, the DOJ works to provide basic legal support to the president and the federal government. There are numerous offices and groups within the United States Department of Justice, including the Federal Bureau of Investigation, the Drug Enforcement Administration, the Bureau of Prisons, the US Federal Marshals, and the US Parole Commission. (http://www.justice.gov/)

There are also groups and committees within the United States Department of Justice devoted to dealing with specific areas of legal justice. These groups include the Office of Professional Responsibility, which investigates issues of misconduct by legal professionals; the Antitrust Division of the DOJ, which works to ensure fair trade among companies in the US; and the Office of the Solicitor General, which represents the United States in legal cases before the Supreme Court.

The Relationship between the DOJ & the SEC

Many people wonder what the function of the Department of Justice is and why it is not more involved in the recent cases of financial misconduct and  fraud. During the financial crisis, Americans were uncovering the fraud, corruption and misconduct of the financial system. The 2008 crisis has been very different than the Savings & Loans Crisis in the 80’s, because during the Savings & Loan crisis, hundreds of people were indicted and the financial instruments used to conduct fraud were not as opaque and misunderstood. Many believed the DOJ and the SEC should have stepped in sooner to arrest criminals and enforce regulations, respectively. According to Senator Chuck Grassly, “The Justice Department has brought no criminal cases against many of the major Wall Street banks or executives who are responsible for the financial crisis.” The DOJ could pursue more criminal cases but deals with a lot of political pressure from banks and bank-friendly politicians. ( http://blogs.wsj.com/law/2012/03/09/on-the-mortgage-meltdown-has-the-doj-done-enough-chuck-grassley-has-doubts/)

A common misconception about the DOJ and the SEC is that these two departments is that have the same powers and controls.  The Department of Justice is responsible for all criminal enforcement, and for civil enforcement of the anti-bribery provisions with respect to domestic concerns and foreign companies and nationals. The DOJ acts to ensure that laws passed by the legislative branch are properly upheld. The SEC is responsible for civil enforcement of the anti-bribery provisions with respect to issuers.

The SEC cannot commence a criminal case against someone who commits fraud.  Nothing the SEC does, alone, will result in prison time for financial criminals. The SEC brings civil enforcement actions, and can obtain injunctions, orders of disgorgement, and orders barring defendants from the securities industry. Essentially, what you really want to know is that the SEC cannot put anyone in prison.  Only the Department of Justice can file criminal charges. That said, often the DOJ’s criminal complaints track the civil complaints filed by the SEC.

Many people wonder why the Department of Justice does not always file criminal charges against scam artists exposed by SEC investigations.  One theory is that the Department of Justice has more work than it can handle; that there is more criminal conduct than they can possibly address.  Some financial fraud cases, therefore, die as a result of those decisions. In addition, the SEC has major gaps on the enforcement side.

Another consideration is the familiarity of the local U.S. Attorney’s Office with the federal securities laws.  Because of their proximity to Wall Street, the U.S. Attorney’s Office for the Southern District of New York is staffed with attorneys who know securities laws quite well.  The same is not true in other districts.  In a district that sees relatively few securities cases, therefore, the U.S. Attorney must consider the learning curve in making his decision about which cases he will prosecute.  Essentially, not every U.S. Attorney is willing to make that decision. Even with these considerations, there is unarguably more that both of these agencies can do to protect consumers, investors, and the financial markets.

What are Anti-Trust Laws?

One division within the DOJ is the Anti-Trust Division. The goal of antitrust laws is to protect economic freedom and opportunity by promoting free and fair competition in the marketplace. Competition in a free market benefits American consumers through lower prices, better quality and greater choice. Competition provides businesses the opportunity to compete on price and quality in an open market and on a level playing field.  Anti-trust laws also attempt to stop the formation of monopolies/oligopolies.  Unfortunately, we have not seen any anti-trust cases pursued against the Too Big to Fail Banks (Bank of America, J.P. Morgan Chase, Goldman Sachs, Citigroup, Morgan Stanley, Wells Fargo), which are anti-competitive in nature, and have effectively formed oligopolies that dominate the financial markets. (http://www.justice.gov/atr/)

Federal antitrust laws apply to virtually all industries and to every level of business, including manufacturing, transportation, distribution, and marketing. They prohibit a variety of practices that restrain trade, such as price-fixing conspiracies, corporate mergers likely to reduce the competitive vigor of particular markets, and predatory acts designed to achieve or maintain monopoly power.

Over the past year, the DOJ and the SEC have begun to address more cases against companies and their executives for fraud and anti-trust. As new regulations are adopted, we hope the SEC will enforce the rules with much more rigor and persistence, and that the DOJ will prosecute more white collar criminals.

By Elizabeth K. Friedrich

ekfriedrich@gmail.com and/or @ekfriedrich

Occupy The SEC, Member

Vote With Your Wallet

In 2008, America was in shock; we had witnessed the stock market crash, the housing market collapse, and a $12.8 trillion-dollar bailout to the very financial institutions responsible for the economic crash. We were paralyzed, unable to see past the madness and despair. At first, our national response was minimal. Americans had lost their homes, jobs, everything. However, from that desperation and pain came action and movement! People began to organize in order to decide their own fate, not leave it up to the 1%or a complacent government. Action came in many forms: marches in streets, letter-writing and media campaigns, peaceful occupation of public spaces, and of course the “Move Your Money” campaign.

The Move Your Money Project actually started several years ago, but last year, it gained significant momentum.  Consumers began to voice their anger and outrage at the very largest for-profit financial institutions, who had been bailed-out with billions in taxpayer dollars, sat on this cheap money and tightened their lending standards, rather than using those funds to expand credit to communities in need. With historically low interest rates set and held by the Federal Reserve system, profit margins became slimmer and many banks responded by increasing their fees across the board, much to the ire of many fed-up consumers.  This action was a catalyst that finally moved people to question the role of their so-called “trusted” financial institutions. On November 5, 2011, over 600,000 people moved their money totaling $80 million dollars out of traditional banking institutions into credit unions and community banks across the country. In addition to that single day of action, over the last few years, over 4 million accounts have moved from the nation’s largest Wall Street banks according to Moebs Services, an economic research firm. They also project an additional 12 million people will do the same in the next two years.

This mass-exodus from the big banks is by no means accidental. It shows the overwhelming, yet untapped energy of the American people who have grown discouraged with a government that was unwilling or unable to enact true, meaningful financial reform. Many of their reasons for this are clear: consumers are looking for ethical practices, re-investment in local communities, fewer fees and more service, and the end of “Too Big to Fail” financial oligopolies. Naturally, people began focusing on credit unions and community development banks, institutions that have the public interest in mind and seek to strengthen local communities. At these community-focused institutions you actually know where your money goes and what is used for.

Convenience over accountability…

Convenience can be many Americans primary financial decision-making criteria; many time it can trump accountability, fairness, and ethics. This comes at a cost – often at the expense of the environment and disadvantaged communities. Big banks place branches and atms on every corner but they predatory fees from overdraft fees to atm-fees moreover they do not offer financing to low-income communities. Since they are convenient and accessible they are left unchallenged. But it doesn’t have to be this way. Consumers can choose to focus on fairness and accountability when making financial decisions.

What to do?

Today we have a choice whether we know it or not. There is a parallel financial industry functioning on the fringe: the Community Development Financial Institutions (“CDFIs”). CDFIs are a national network of community development banks, loan funds, and community development credit unions (CDCUs). These are institutions with a primary mission to strengthen vulnerable communities and invest locally.

Banks and credit unions are regulated depository institutions; banks by the Federal Deposit Insurance Corporation (FDIC) and credit unions by the National Credit Union Administration (NCUA). Credit unions offer many of the same services as banks: mortgages, car loans, personal loans, small dollar loans, credit cards, savings/checking accounts, international money transfers, Individual Development Accounts (matched-savings accounts), retirement planning, financial literacy education and budgeting, affordable savings and checking accounts, and credit and debit cards with low minimum balances and flexible terms. They are not-for-profit financial institutions created to serve their local communities and members first. Unlike banks, which can serve any customer that walks in the door, credit unions are restricted to specific fields of membership.

This means that consumers have more options than ever with respect to their primary financial institutions, and a major selling-point for many is that the money they deposit in their credit union stays local within the specific field of membership. Rather than shareholders profiting; income earned at a credit union-dividends are returned in different forms from free services to better interest rates or to expand services in the community.

Making the choice to bank at a credit union or a community development bank creates a multiplier effect for the local communities being served, and ultimately in the entire the financial system. When you invest in a community development financial institution you are investing in job creation, building schools, developing housing and financing small businesses.

Some banks may be “too big to fail,” but consumers are waking up and realizing they have a choice where they put their money. Rather than letting too big to fail institutions gamble away their hard-earned cash, people are choosing to exercise their power as consumers and Vote With Your Wallet instead of your feet!


By Elizabeth K. Friedrich & Rafael Morales


What is Private Equity?

What is Private Equity?

Private Equity is a closed, unregulated industry, which until recently has been virtually unnoticed by the public. Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more illiquid assets, i.e. companies. As the name implies, private equity funds invest in assets that either; not owned publicly or that are publicly owned but the private equity buyer plans to take it private. The money used to fund these investments comes from private markets.[1]

The private equity sector has grown substantially over the past decade. From the perspective of an investor, they operate under the principle:  the more risk the more potential reward. From the side of the company owner, the more risk you ask an investor to assume the more potential return and more control the investor will demand. Usually, private equity firms (i.e., Blackstone, Carlyle Group, Bain Capital) structure equity investments in stable mature companies  that range in size, with some as small as a couple million dollars to others in the billions. This is a type of investment aimed at gaining significant, or even complete, control of a company in the hopes of earning a high return.

Therefore, the basic objective has remained constant: a group of investors buy out a company and use that company’s earnings to pay themselves back. What has changed are the sheer numbers of private equity deals. In the past ten years, the record for the most expensive buyout has been broken and re-broken several times. Private equity firms have been acquiring companies left and right, paying sometimes shockingly high premiums over these companies’ market values. As a result, takeover targets are demanding excessive prices for their outstanding shares; with the massive buyouts that have made headlines around the world, companies now expect a certain payment over their current value.[2]

These high-priced deals have occurred exponentially in recent years and they have led some to question whether this pace is sustainable in the long run? Two of the driving factors behind this growth are taxation and regulation; growth comes from a largely unregulated environment (Pre-Volcker) and  through executives dodging taxes. Essentially, private equity owners are evading taxes on both profits received from performance fees, from their investors and by taking dividends from indebted companies. The central piece of the problem is “carriedinterest,” which allows private equity owners to reward managers and gain huge profits.[3]

Below is a list of Private Equity firms that currently reside within investment banking firms or have previously completed a spinout from an investment bank.

10 Largest Global Private Equity Firms Size Parent Bank Size
TPG Capital $ 50.55B
Goldman Sachs Principal Investment Area $ 47.22B  Goldman Sachs $923B
The Carlyle Group $ 40.54B
Kohlberg Kravis Roberts $ 40.21B Bear Stearns Bought/Bailed Out
The Blackstone Group $ 36.42B Lehman Brothers Bought/Bailed Out
Apollo Global Management $ 33.81B
Bain Capital $ 29.4B
CVC Capital Partners $ 25.07B Citigroup $1.183T
Hellman & Friedman $ 17.20B
First Reserve Corporation $ 19.06B

Private equity funds under management totaled $2.4 trillion at the end of 2010. Nearly $180B of private equity was invested globally in 2010, up 62% from the previous year but still down 55% in the peak in 2007. It continued to increase in 2011, to reach an all-time quarterly record of $120B in Q2. Only until regulations and taxes are implemented  firms will continue to take huge risks with backing of Big Banks to gain massive rewards. Finally, without the enforcement of Dodd-Frank in particular, The Volcker Rule; private equity will remain an industry without any checks and balances.[1]

Elizabeth Friedrich
Occupy the SEC
twitter: @ekfriedrich

Listed vs. OTC: Why the NYSE is not the Problem

At the heart of the 2008 crash were a number of opaque, complex products with three-letter acronyms: MBS, CDO, and CDS. These products that have devastated our economy all have one very important thing in common: they were all traded over-the-counter (OTC).

One defines an OTC product by what it is not: if it is not traded on any financial exchange, it’s an OTC product. Since it is not traded on a public exchange, an OTC product is nothing more than a handshake between two people and a legal document outlining the terms of the trade.

You can think of an OTC trade as a bespoke suit. Instead of going to a department store and buying something off the rack, in a set size that may not fit you, you visit a tailor, who makes a custom suit tailored just to you. Because it’s tailor-made, you’re going to have to pay more for it.

But the bespoke aspect of OTC trades is only one reason Wall Street’s large institutional clients found them appealing. The other appeal of OTC trades is that no one, except the person on the other side of the trade, knows it’s happening. That’s appealing because when you trade on an exchange, the trade’s volume is made public. If you want to trade 10 million shares of Apple, and you start selling, everyone else watching the market may say, “Whoa, someone just sold one million shares of Apple stock in the last few minutes. What do they know that I don’t know? I better sell, too.” And then everyone piles on and starts selling too, and before you’ve finished selling what you want to sell, the price has plummeted. Now you’re stuck selling at a much lower price than when you began selling.

Wall Street loves OTC trades because anything custom-tailored costs a pretty penny more than a boring old listed product anyone could get off an exchange. But there were two things far more dangerous about these OTC products than the fact that they have allowed Wall Street to price gouge their clients. What is was most dangerous about OTC products are the following:

1. There is no way of knowing how many OTC products are out there.
2. These products are largely unregulated

Why are OTC products largely unregulated? In 2000, after heavy lobbying by the finance industry and by Enron, Congress passed the Commodity Futures Modernization Act. This act deregulated Over-the-Counter derivatives. It didn’t happen without a fight. Under the leadership of Brooksley Born, the Commodity Futures Trading Commission, which oversees derivatives trading, requested that there be “functional regulation” of this Over-the-Counter derivatives market. Their request was denied. The CFMA was introduced to Congress on the last day before the 2000 Christmas recess. It was not debated in the House or in the Senate. Worst of all, it contained a specific loophole for Enron that exempted portions of their energy trading from regulation. (To learn more, read Barry Ritholtz’s book Bailout Nation, p.139).

The main argument in favor of the CFMA was that OTC trades happen between sophisticated parties, and thus did not require oversight by the regulators. Unfortunately, we all now know where these sophisticated trades by sophisticated parties took us.

This is all in sharp contrast to the stocks traded on the New York Stock Exchange, or NYSE for short. While a hallowed and important symbol of Wall Street greed historically, the NYSE in recent years has been a fairly benign actor in the crisis. The kind of trading that happens on the NYSE has been regulated since the 1930s, when the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed to regulate the stock market and improve transparency.

The NYSE trades stocks of companies like Whole Foods (WFM). They open at 9:30am and end trading at 4:00pm. Every single minute that trading occurs, you can see the volume of shares that have changed hands. You don’t know who traded, but you know how many and at what price.

The NYSE has a list of companies they trade. There is a certain application process a company must go through to be eligible for trading on the NYSE. Any company that successfully applies is then “listed” on the NYSE. A Listed Product is any product, be it a stock or a derivative, that is listed on an exchange. There are many exchanges other than the NYSE. To name just two, there is the Nasdaq, which trades many tech stocks and smaller companies, and the Chicago Board Options Exchange (CBOE), which trades options.

But what, you might ask, is an exchange? Exchanges are public marketplaces where buyers and sellers come together, and the volume of all trades are made publicly available.

There are other factors that make listed products more transparent than OTC products. They have set expiration dates, and have standardized contracts. Data regarding trading volumes and prices is made public for all listed products. Finally, listed trades all go through clearing houses.

A clearing house ensures that the trades made are actually executed. If I promised to pay the farmer $30,000 for 5,000 bushels of corn on November 2nd, and I didn’t pay, the clearing house would pay the farmer for me. How can the clearing house afford to make that promise? Several ways: they can require that participants post collateral, they can monitor how credit-worthy the participants are, and finally, they charge all members fees that go into guarantee funds for use when needed.

In the world of finance, what happens on the NYSE and on exchanges is considered transparent, simple, and even a bit quaint. The sexy stuff, the profitable stuff, and the extraordinarily dangerous stuff is all OTC. OTC trades that are opaque and custom-tailored are more valuable to Wall Street’s institutional clients, and thus more profitable to Wall Street. Until, of course, they aren’t.

Part of what made the crash so severe was that the warning signs were somewhat shrouded in fog. Because many of the riskiest products were traded over-the-counter, no one realized just how many of these Wall Street was creating and stockpiling. Further, no one realized how reliant on each other some of these companies had become. Goldman Sachs, for example, had a vested interest in AIG not failing because Goldman held thousands of CDS trades with AIG that Goldman wanted to be paid for. Perhaps if the public, or the regulators had known that there were so many outstanding CDOs at the six big banks, someone would have sounded the alarm before everything crashed and burned.

Examples of OTC Products

Mortgage-Backed Security (MBS) – An MBS is a large number of mortgages (e.g. 1000) pooled together and turned into financial products (i.e., securitized). Think of it as taking 1000 mortgages, putting it in a box, and selling that box to someone.

Instead of a commercial bank having to keep all the mortgage loans on their books, it can sell them off via an MBS. The buyer of an MBS receives a rate based on what home-owners are paying to the bank. The risk for the MBS buyer is that either the underlying mortgage will be pre-paid (via refinancing or pre-payment), or that the mortgage will default.

Collateralized Debt Obligation (CDO) – A CDO involved taking hundreds of MBSes and structuring them into tranches. Again, think of a CDO as hundreds of MBS boxes put into an even larger box, and then sold off. Except this box is divided up into sections: the tranches.

The tranches are varying levels of risk, based on the credit-worthiness of the mortgage holder. A tranche full of subprime loans would receive a higher interest rate payment, but has a higher risk of the underlying mortgages defaulting, which would result in the CDO tranche becoming worthless.

Credit Default Swap (CDS) – You can think of a CDS as an insurance policy that protects against the default of a company. If you want protection against the possible default of a company, you could buy a Credit Default Swap on that company. You will pay a quarterly fee for this protection (much as you may pay an insurance company a premium for insurance on your car or apartment).

With real insurance, there are laws preventing someone who doesn’t live in a house from taking out fire insurance on that house, because that creates perverse incentives. Because CDSes are not legally considered insurance, there are no laws against holding CDSes on companies you have no reason to need insurance on. So there is a perverse incentive for a CDS holder to do what they can to make the company they hold a CDS on fail, and fail hard.

What is the CFTC?


The Commodity Futures Trading Commission (CFTC) is an independent government agency tasked with regulating commodity futures and option markets in the United States. The CFTC was created in 1974, by an amendment made to the Commodity Exchange Act.

The CFTC’s mission is to protect market users and the public from fraud, manipulation, abusive practices and systemic risk related to derivatives that are subject to the Commodity Exchange Act, and to foster open, competitive, and financially sound markets.

The CFTC and the “Commodity Futures Modernization Act”

In 2000, the Commodity Futures Modernization Act (CFMA) deregulated Over-the-Counter derivatives. These are the products that would eventually be core to the 2008 crash.

The CFTC clarified the law so that most over-the-counter (OTC) derivatives transactions between “sophisticated parties” would not be regulated as “futures” under the Commodity Exchange Act of 1936 (CEA) or as “securities” under the federal securities laws. Instead, the major dealers of those products (banks and securities firms) would continue to have their dealings in OTC derivatives supervised by their federal regulators under general “safety and soundness” standards.

The Commodity Futures Trading Commission had opposed deregulation, requesting instead that there be “functional regulation” of this Over-the-Counter derivatives market. Their request was denied by lawmakers with the passage of the CFMA.

Read more: http://www.pbs.org/wgbh/pages/frontline/warning/etc/script.html

The CFTC and the Volcker Rule

The CFTC has released their own version of the Volcker Rule, that is nearly-identical to the initial rule that the SEC, Fed, OCC and FDIC jointly prepared. You can find the CFTC’s version of the rule at: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2012-935a.pdf. The deadline for public comment on the CFTC rule is April 16th, 2012.

Notable CFTC Employees

The current chairman of the CFTC is Ga

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