“Wall Street” is an extremely elastic catch phrase, useful for politicians of all stripes. For example, we have Senator Dean Heller (R-NV) reminding us at every possible moment that he “voted against the bail out.” And, we have politicians from the other side of the aisle excoriating the traders for all the ills of modern America. Both are off the mark.
First, beware the thinly veneered populism of Senator Heller. Yes, he did vote against the bailout – an extremely safe vote at the time – but, NO he hasn’t stopped being the Bankers’ Boy he’s always been. Let’s remember that while he was offering himself as the Little Guy’s Candidate he was voting on June 30, 2010 to recommit the Dodd-Frank Act to instruct conferees to expand the exemption for commercial businesses using financial derivatives to hedge their risks from the margin requirements in the bill. Then, on June 30, 2010, he voted against the conference report of the Dodd-Frank Act. Heller wasn’t finished.
In 2011 he and then Senator Jim DeMint (R-SC) introduced S. 712 – a bill to repeal the Dodd-Frank Act.
“What S. 712 does is to (1) repeal measures which require banks to have a plan for orderly liquidation (another word for bankruptcy), (2) repeal requirements that banks keep records of transactions which would need to be transparent in case an “orderly liquidation” is in order, (3) repeal the establishment of an oversight committee to determine when a bank is becoming “too big to fail,” and is endangering the financial system — an early warning system if you will. The new requirements governing (4) Swaps would also be repealed, along with the (5) Consumer Protection bureau.” [DB 2011]
Few could have been more obviously promoting the interests of Wall Street traders than Heller and DeMint. [DB 2012] Few could have been more readily apparent in their enthusiasm to protect the financialists from the provisions of the Dodd-Frank Act including the Volcker Rule.
A word about the Volcker Rule:
“The Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and underwriting. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions were given a seven year timeframe to become compliant with the final regulations.” [SIFMA]
Yes, Senator Heller et. al., if the Dodd-Frank Act is repealed then the financialists on Wall Street may go back to gleefully trading all manner of junk in all kinds of packaging with no limits on bank ownership of hedge and private equity funds. Let’s remind ourselves at this point that capitalism works. It’s financialism that’s the problem. Under a capitalist form of finance resources (investments) are moved from areas (funds) with a surplus to areas (businesses) with a scarcity of funds. Under a financialist system capital (money) is traded for complex financial instruments (paper contracts) the value of which is open to question. Not to put too fine a point to it, but the “instruments” seems to have whatever value the buyer and seller agree to whether the deal makes any sense or not. The Dodd-Frank Act doesn’t forbid “financialism” but it does put the brakes on.
Notice, it puts the brakes on, but doesn’t eliminate the old CDOs. Nor does it prevent the CDO with a new name: The Bespoke Tranche Opportunity. It works like this:
“The new “bespoke” version of the idea flips that business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced. The new products are a symptom of the larger phenomenon of banks taking complex risks in pursuit of higher investment returns, Americans for Financial Reform’s Marcus Stanley said in an email, and BTOs “could be automatically exempt” from some Dodd-Frank rules.” [TP]
Zero Hedge summed this up: “This is the synthetic CDO equivalent of a Build-A-Bear Workshop.” We’re told not to worry our pretty little heads about this because, gee whiz, CDOs got a bad reputation during the Big Recession of 2007-2008, when they were just “hedging credit exposure.” Yes, and ARMs got a bad reputation when they were just putting people in houses… Spare me.
And, we’d think that after the CDO debacle of 2007-2008, some one might have learned something somehow, but instead we get the Bespoke Tranche Opportunity and a big bubble in really really junky bonds. That would be really really really junky bonds:
“Junk bonds are living up to their name right now. As we have noted in the past, the lowest-rated junk bonds may have inflated a $1 trillion bubble at the bottom of the debt market. The thing is, it never should have gotten that way.” [BusInsider]
Indeed, back in the bad old days no one could issue CCC bonds. Now, we have Central Banks supporting Zombie Companies, low yield Treasuries making investors look to more “speculative” debt, and more demand for high yields meant that purveyors of Junk found a market for their garbage. [BusInsider] And, of course, someone out there is hedging all this mess.
Here we meet the second problem with financial regulation in this great country. Not only would the Bankers’ Boys like Senator Heller like to go back to the days of Deregulation, but the Financialists are hell bent on Yield! High Yield! Even if this means supporting Zombie Companies which should probably just die already; even if this means allowing the sale of Bespoke Tranche Opportunities; and, even if this means selling bonds no one would touch only a few years ago. The quarterly earnings report demands higher yields (As in: What Have You Done For Me In 90 Days Or Less) and investors jump like lemmings off the cliff.
We’ll probably keep doing this until someone figures out that in these schemes the chances are pretty good that “getting rich fast” more often means going broke even faster. Thus the financialists package Bespoke Opportunities and C (for Crappy) Bonds.
‘Said it before, and will say it again:’ What needs to be done is —
- Continuing to restrict the activity of bankers who want to securitize mortgages, under the terms of existing banking laws and regulations.
- Continued implementation of the Dodd-Frank Act.
To which we should add, “restrict the creation and sale of artificial “investment” paper products which add nothing to the real economy of this country, and instead soaks up investment funds, and creates Bubbles rather than growth.
Read more at: SIFMA, “Volcker Rule Resource Center, Overview.” Desert Beacon, “Deregulation Debacle,” 2012. Desert Beacon, “Full Tilt Boogie,” 2011. Think Progress, “High Risk Investments,” 2015. Zero Hedge, “The Bubble is Complete,” 2015. Bustle, “Is the ‘Big Short’ Right?, 2016. Bloomberg News, “Goldman Sachs Hawks CDOs,” 2015. Huffington Post, “Big Short, Big Wake Up Call,” 2016. Market Mogul, “BTO, Deja Vu” 2016. Business Insider, “Trillion Dollar Bubble,” 2016. Business Insider, “Bubble Ready to Burst,” 2016. Seeking Alpha, “OK, I get it, the junk bond miracle rally is doomed,” 2016. Wolfstreet, “CCC rated junk bonds blow past Lehman moment,” 2016.