Wall Street's Talking Points, Now Available in Memo Form

Once again, opponents of reform have teamed up with a friend of Wall Street in attempt to add economic credibility to their widely debunked effort to portray their opposition to Wall Street Reform as based on principled objections to fictional perpetual bailouts, and not on their long-held allegiance with Wall Street demonstrated most vividly by their “call to arms” with more than 100 Wall Street lobbyists a few months ago.

Larry Lindsey, a former Bush appointee and a former Enron consultant, put out a memo this weekend in conjunction with House Republicans that may sound familiar because it reads from the same Wall Street drafted talking points that we have heard for the last week.  He even goes so far as to claim that the bill is being “rushed to the floor.”  If more than a year of discussion, meetings and public debate about the best way for Wall Street reform to happen isn’t enough for Larry Lindsey, we may be waiting long enough for another crisis to hit before he is satisfied with the timeline.  As Republican Senator Bob Corker said in lamenting the fact that his party had not supported bipartisan efforts to address Wall Street Reform, "this is an issue that almost every American wants to see passed."

For the meantime, so long as Republicans prefer to work with Wall Street to block reform rather than work with the President to pass it, we will need to continue to correct the record.  So let’s take a quick look through their memo to debunk it piece by piece:

FICTION:

Lindsey Memo: “To date, public attention has focused on whether the bill is a “bailout” bill that will keep “too big to fail” alive.  You be the judge.  First, the bill contains a $50 billion fund for resolution of systemically risky institutions. “

FACT:
Nobody made that argument until Wall Street lobbyists decided that it was the best way to kill financial reform.  The most important principle is that large financial firms – not the taxpayers – bear any costs associated with the failure of another large financial firm.  Chairman Dodd’s bill meets that test.  If a big financial firm fails, it is put into receivership, its shareholders are wiped out, its creditors are allowed to suffer losses, its management is fired.  Taxpayers are completely protected.

FICTION:

Lindsey Memo: “The bill allows a 2/3 vote of the Financial Stability Oversight Council to deem any firm (financial or non-financial) as coming under its rubric and then authorizes the FDIC and Treasury Secretary to treat each of the firm’s shareholders and creditors as they choose, without regard to bankruptcy law.”

FACT:
Wrong on all the facts.  First, only large financial firms whose failure could pose a serious threat to the U.S. economy would be subject to the bill’s enhanced bankruptcy-like process.  Second, similar to a standard bankruptcy, creditors' rights will be respected in accordance with their statutory priorities.  But make no mistake, under the bill, failed financial firms will be sold off, broken apart, or otherwise liquidated; culpable management will be fired, creditors will be allowed to suffer losses, and shareholders will be wiped out.  This is no bailout.

FICTION:

Lindsey Memo: “Second, the bill gives the Treasury and the FDIC authority to grant an unlimited number of loan guarantees to systemically risky institutions.  No Congressional authorization or appropriation is required.”

FACT:
Completely false.  The bill restricts, not expands, the FDIC’s emergency guarantee authorities. The FDIC’s emergency authorities are restricted only to solvent firms and they are designed to keep the economy as a whole from collapsing in a financial panic.  Those authorities can only be used during a financial crisis and after Congress has been given an opportunity to disapprove the use of the authority.

FICTION:

Lindsey Memo: “Third, the bill gives the Fed the authority to fund any “program” to assist these institutions accepting as collateral anything it deems appropriate.“

FACT:
Just not true.   The bill would restrict the Federal Reserve’s emergency lending authority, requiring prior written approval by the Treasury Secretary and robust Congressional reporting requirements. Second, the bill, in unequivocal terms, states that the Federal Reserve may not use its 13(3) lending authorities to “aid a failing financial company” and requires that the collateral received for any such emergency loans be of “sufficient quality to protect taxpayers from losses.”

FICTION:

Lindsey Memo: “Needless to say, the large Wall Street firms aren’t complaining; they will permanently benefit from having lower borrowing costs thanks to these provisions, the same way Fannie Mae and Freddie Mac enjoyed implicit guarantees.”

FACT:
This criticism has it backward.  Today, large financial firms benefit from the perception that they are “Too Big to Fail.”  Because we lack the tools to shut down big, complex financial firms without putting the financial system at risk, the market assumes that the government will prop them up.  And as a result, they have lower borrowing costs.  This bill will put an end to that.  Under this bill, the “implicit guarantee” that comes with being a large, complex financial firm goes away forever.  And you don’t have to take our word for it: a recent Moody’s report acknowledged that the “greatest threat” to too-big-to-fail is “from pending legislative proposals that would allow the government to resolve failing but systemically important financial institutions.”  This is serious reform.

FICTION:

Lindsey Memo: “The soon-to-be-released Derivatives section requires virtually all derivatives trading to be channeled through exchanges.  While appropriate for some contracts, a lot of Derivative contracts are fairly esoteric, and like highly specialized corporate bond issues, unlikely to face a liquid market.  That is why they are traded over the counter.  It is important to note that some over the counter derivatives transactions, like corporate bond transactions, can be cleared safely while others are appropriately done bilaterally.”

FACT: 
This bill brings derivatives trading out of the dark.  The unregulated OTC derivatives markets were at the center of the recent financial crisis.  The Wall Street banks that dominate this market want to keep it unregulated so they can make money off regular firms.  This bill will bring transparency to that market and reduce the risk to the larger financial system by requiring tough standards for all derivatives dealers and major market participants, requiring trading and clearing for standardized and liquid contracts, and giving full authority to prevent market manipulation, fraud, and abuse.  At the same time, the bill protects the ability of commercial companies to manage the risks that naturally arise in their businesses through customized contracts. 

FICTION:

Lindsey Memo: ”The legislation mandates a six-month study of the Volcker rule by the Financial Stability Oversight Council followed by a nine-month period for the regulatory agencies to implement the results of the study.  No Congressional review – the regulatory agencies’ interpretation of the committee findings are implemented directly through the Administrative Law process.”

FACT:
The bill will separate proprietary trading and hedge funds from deposit insurance and other services that are provided to banks to protect the important role of banking firms in the economy as providers of credit to businesses and consumers and to protect American families’ savings.   The purpose of the study is to make sure the rule is implemented well. That's common sense.

FICTION:

Lindsey Memo: “The Financial Regulation reform bill is being rushed to the Senate floor, possibly as early as next week.  Formal bipartisan negotiations on a number of issues were ended, reportedly at the request of the White House, although informal conversations are still proceeding.”

FACT:
For more than a year the Administration and members of Congress has been involved in a bipartisan discussion and public debate about the best way to reform Wall Street.  The Administration released a comprehensive policy proposal and detailed legislation in the spring and summer of 2009. The White House has been unwavering in its desire to move forward on a bipartisan basis to common sense reform that will restore accountability on Wall Street, end taxpayer bailouts, and place the financial system back on a sound foundation for growth and prosperity for all Americans.  Only in Washington could people still argue for delay more than two years after the start of the worst financial crisis in generations.

FICTION:

Lindsey Memo: “Labor gets ‘Proxy Access’ to bring its agenda items before shareholders as well as annual “say on pay” for executives.”

FACT:
These reforms would benefit every American whose savings, retirement account or pension fund is invested in the stock market. After a decade that began with Enron and Tyco, and closed with Lehman Brothers and AIG, it is difficult to believe that anyone would argue against giving shareholders a voice with respect to executive pay – or say that the SEC should not have the authority to let shareholders meeting reasonable ownership thresholds propose alternative board candidates.  Shareholders are the owners. A basic principle is that they should have the ability to hold management and boards accountable. Giving shareholders a "say on pay" will help to ensure that compensation practices are aligned with the long-term interests of shareholders, not based on short-term profits that lead to irresponsible risk taking.

FICTION:

Lindsey Memo: “Consumer activists get a brand new agency funded directly out of the seignorage the Fed earns.  No oversight by the Federal Reserve Board or by the Congress on how the money is spent.  This is the first known Congressional raid on Fed cash flow to fund projects without oversight.”

FACT:
The consumer financial protection agency would put consumers back in the driver’s seat by forcing big banks and credit card companies to provide clear, understandable information so that Americans can make financial decisions that work best for them.  We already tried putting the bank regulators in charge of preventing unfair bank practices.  That system failed, allowing the big banks, credit card companies, and auto lenders to take advantage of millions of consumers.  We need an agency that is independent, with the sole job of protecting American families from abusive financial practices and writing and enforcing clear rules of the road.  In addition to supervising financial firms, the agency will have a critical role in improving financial literacy, running a single consumer complaint center, and monitoring the marketplace for new consumer protection problems.

The consumer agency will be subject to significant oversight, including annual audits and regular reports and testimony to Congress on its budget, rulewriting, and other activities.  Its maximum budget will be capped, and the agency will be required to submit financial operating plans, quarterly financial statements, and forecasts to OMB.

Learn more about the Dodd-Frank Wall Street Reform and Consumer Protection Act.
 

Jen Psaki is Deputy Communications Director

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