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Wall Street Already Finding Loopholes in Financial Reform Legislation
north america / mexico | economy | opinion / analysis Wednesday November 17, 2010 02:38 by John E Jacobsen - IWW
Democrats' reform efforts in Washington useless
Continuing in the tradition of watered down, pro-corporate legislation that the Obama administration is becoming infamous for, new reports are surfacing that banks and financial institutions may continue to get away with the same risky trading and investment practices that landed us in a recession.
The Volcker Rules
The Volcker Rules, intended to accompany the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act, comprise a list of restrictions on large financial institutions intended to help prevent a repeat of the 2008 financial collapse.
Only a handful of Paul Volker’s recommendations, however, were incorporated into the final legislation.
Of the rules that were finally adopted, one in particular prohibits banks from making proprietary trades – meaning using the bank’s own assets for speculative investments. This would stop banks from taking customer deposits, turning around, and using them to invest in risky financial instruments, such as the short-term trading of asset backed securities.
Proprietary trading was singled out as a major policy concern following the financial crisis because it is considered by many economists, including five former Secretaries of the Treasury, to have been one of the leading contributors to the 2008 economic crash. Proponents of the ban argue that by allowing banks and financial institutions to engage in proprietary trading, we were providing bankers with the means to continue funding absurd loans and risky investments.
Mortgage backed securities (MBS), in particular, are considered to have financed much of the risky lending which led to the collapse.
Creating a bubble
The concept behind MBS’s was straightforward: instead of selling single mortgages on their own, which isn’t very attractive to large financial institutions, banks would stick hundreds and thousands of mortgages together into a single package and sell them together. These large securities would offer investors much higher profits, and also make mortgages easier to finance – even if one of the mortgages fails now, there are still five hundred others producing a return.
This, in turn, encouraged banks and mortgage companies to sell more mortgages – even to people who normally would not be able to afford them.
As more mortgages were sold, the value of homes in the market skyrocketed, producing more money with which banks could then go out and finance more sales of homes.
So, when the housing bubble finally burst, and the value of millions of homes across the country plummeted, banks and financial institutions lost billions, leading to the recession we are in today.
The reforms failure
Banks such as Goldman Sachs, JP organ Chase, and Morgan Stanley are poised to take advantage of the new regulations by using gaping loopholes left in the legislation.