FIRA - The 800 LB Gorilla In The Financial 'Reform' Bill

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The lackluster Republican opposition to Senator Dodd's Financial Reform bill is focused on whether or not the Democratic proposal allows for or prohibits additional bailouts. A secondary hot topic is the supposed derivative limitations. Frankly, these are both red herrings. They serve to mask an even larger danger that no one is talking about: a huge new government agency that will control all financial institutions in the US--and not just the "too big to fail" ones. It's called the Financial Institutions Regulatory Administration (FIRA), and its authority absorbs and supersedes every other banking, thrift and stock market regulatory agency including the SEC--though it technically doesn't actually eliminate any agency (as we might expect of government).

Shannon Croll tells us the establishment excuse given for the new regulation scheme: "The Financial Institution Regulatory Administration proposes that a single U.S. bank regulator would combine parts of the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. Since regulatory supervisory duties are split between four independent agencies this allowed for Banks to shop for the supervisor of their choice; certain regulatory agencies have been known to be easier in the examination process than others."

While that may be true, this new proposal does much more that is dangerous and doesn't even close that minor loophole--since insiders from the big banks will always control FIRA and secretly grant exceptions to their friends. The language in this bill is so general as to give FIRA virtually unlimited powers to expand into any area of regulation and control. The record keeping requirements it can mandate will make the IRS look benign. And, because this bill contains no specific limiting criteria, this agency will still be able to do almost anything with total discretion--including covering for the financial evils of the insider banks that brought on the financial crisis of 2008, just as the SEC did before. This is a con job folks and is just as big a leap into socialism as the Health Care reform bill was to medical freedom. The Republicans, as usual, are utterly failing to oppose it properly.

The closest thing I can come to describing the scope of this mega-agency (which could easily absorb all of the $50B premiums taken from the largest banks just for administrative costs) is to compare it to the creation of the huge umbrella agency over national security in the USA --The Department of Homeland Security. It's just that big in both scope, cost, politicization, and potential bureaucratic inefficiency.

The reason I sought out a copy of the bill was to see for myself whether or not it allowed for future bailouts or not. Yes, there was non-binding language that indicated it was the intent of the bill: "To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to

fail', to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes."

But it is those "other purposes" that should worry us--and there are bailout provisions which I will cover later. In the name of protecting us from these Wall Street predators (which are real) it encircles us with new agencies that have the power to mandate all types of compliance and record keeping requirements that eliminate one's liberty to do business without big brother watching over us.

What the bill actually does: The general powers of FIRA are huge:

1) power to collect any information from any other agency, including state government agencies--giving it superiority in scope in all investigations,

2) mandate companies who "pose a threat to the US financial system" (which could be widely applied to almost anything) to register with FIRA and submit to FIRA risk management policies--yet to be written. Later portions force the inclusion of all "private pools of capital".

3) mandate record keeping on all private entities with no limitations on what government may require.

4) monitor all financial services

5) promulgate regulations to establish heightened risk-based capital, leverage, and liquidity requirements that increase on a graduated basis for certain bank holding companies (totally arbitrary, with no guarantee that the real problem ones like Goldman won't be let off the hook);

6) regulate derivatives and hedge funds (these are so complex, however, that loop-holes will surely abound)

7) control all banking and thrift institutions of whatever size

8) control issuance of Municipal securities

9) regulate all credit practices, and mortgages

10) control credit rating agencies

There is no doubt that certain controls are necessary to prohibit fraudulent practices (naked shorts, no capital backing, collusion, misrepresentation etc), but with virtually no specific language in the bill for us to determine if it will do as claimed, passage of this bill is simply a carte blanche grant of unlimited regulatory power.

The bill also creates a Consumer Financial Protection Agency (CFPA) which has wholesale powers to regulate all sales claims, and business practices of any company of any size. "It shall be unlawful for any person to advertise, market, offer, sell, enforce, or attempt to enforce, any term, agreement, change in terms, fee or charge in connection with a consumer financial product or service that is not in conformity with this title." The actual regulations and rules, however, are not in the bill. They will be written later. This supposed consumer watchdog has the power to impose fines, and record keeping requirements on all business transactions.

An Office of National Insurance is created as well which appears to be a larger and more powerful FDIC, supposedly funded by $50B in fees from the "too big to fail" institutions. $50B is peanuts compared to the $500B -and still counting--in funds the FDIC has gone through in the past two years. It is in this provision that bailouts will still occur.

The Hill.com reported on Sen. Mitch McConnell's similar objection. McConnell "argued that the bill's $50 billion industry-supported fund wouldn't be enough to cover the costs of future crises and that taxpayers would be left to foot the rest of the bill." However, "Deputy Treasury Secretary Neal Wolin sought to refute several arguments made by the senator, saying: 'The legislation makes clear that if the $50 billion fund is insufficient, then the institutions themselves, the industry, will be assessed to make up the difference... There are no more taxpayer-funded bailouts. Period,' Wolin said."

It certainly isn't that cut and dried. As Andrew Cockburn wrote for CounterPunch: "More recently, there are reports that the bill will be stripped of a provision requiring a levy on the 'too big to fail' banks as an insurance fund in the event of possible future defaults. However, anyone who believes official trumpetings about ending mega-bank bailouts should take a look at the paragraph on page 1379: 'During times of severe economic distress,' it reads, the Federal Deposit Insurance Corporation [under the new direction of the Office of National Insurance] 'shall create a widely available program to guarantee obligations of solvent insured depository institutions orsolvent depository institution holding companies (including any affiliates thereof)...' In plain English, this means that the next time they bring the system to ruin, the banks and bank holding companies will get bailed out by the taxpayers, just like this time. However disgruntled they may feel, the banks are not undone just yet."

I expect we have the same feigned cry of protest that the big banks put on in 1913 to make the public think they were against the passage of the Federal Reserve Act--which they had in fact conceived at the secret meetings on Jekyll Island.

For arguments sake, let's suppose that large scale bailouts won't be forthcoming even if still permitted by the fine print as a "just in case" clause. Certainly, there would be a huge public outcry even though the PTB know the public can't do anything about it even if it happens. The point is: the bailouts have already been done. The worst offenders of these huge speculative con-jobs that brought down the economy have already been made whole and are prospering like no other banks--not only because of their access to TARP funds and other off the books bailouts, but zero interest loans from the FED, to which they have applied to low risk carry trade investments that have reaped steady profits in the billions.

If FIRA makes good on its promises to start liquidating problem firms, who will be the beneficiaries of that liquidation process? The big banks, of course--because only they have the new liquidity to be offered first choice in buying up the good assets of the failing institutions. This is precisely how the FDIC is operating today. Slowly but surely, the good assets of all failing banks are being transferred to the stronger and the poor taxpayer is having to pick up the tab for the bad assets nobody wants. This is the process that is being institutionalized on an even larger scale in this phony reform bill. Result: the big get bigger and the small get smaller and can't compete.

Also, it is important to note that the Senate version of Ron Paul's Audit the Fed proposal, it would not allow the GAO to look into the Fed's massive purchase of toxic assets, its hundreds of billions in foreign currency swaps with other central banks or its open market operations, among other restrictions.

Andrew Cockburn tries to give some perspective on the convoluted and technical attempts to control the derivatives trade--which is a hot topic now that Goldman Sachs and Merrill Lynch were caught selling packaged mortgages that they knew in advance were certain to fail and which they had shorted in the markets in order to profit from both sides of the transactions.

"Amid the SEC's indictment of Goldman-Sachs and consequent reminder to the citizenry of the crookedness rampant in the financial 'services' industry, a hitherto loyal ally, Senate Agriculture Committee chair Blanche Lincoln, has proposed legislation requiring major banks to divest themselves of their vitally lucrative derivatives trading desks.

"Only at the very end of the senate Democrats' enormous 1408 page financial reform is there a hefty chunk of solace for the bankers, in the form of Section 1155, a generally unnoticed provision clearly mandating another taxpayer-funded bailout all round the very next time disaster strikes. Although there may be a lifeboat ready for future emergencies, bankers are currently feeling 'quite undone,' one lobbyist with a fine eye for Wall Street's Washington operations told me recently. 'Lincoln's proposal is their worst nightmare.

"Up until now 'reform' has been going fine for them. The administration and congress have largely been proposing what the banks wanted,' such as leaving them under the benign regulatory supervision of the Federal Reserve. Thanks to masterly work by the lobbyists, it seemed that the world would be kept safe for derivatives trading operations. True, Senator Chris Dodd's 'Restoring America's Financial Stability' bill makes popular noises about forcing derivatives trading into clearing houses and onto exchanges, but the big dealers were not unduly worried. After all, they already controlled major clearing houses, such as ICE, the Intercontinental Exchange, and anything too unwholesome in Dodd's banking committee bill could be purged in a companion bill emanating from the Agriculture committee.

"Readers will recall that this was the tactic adopted in emasculating the derivatives-trading provisions of the house financial reform bill, which defined an exchange as two dealers talking on the phone. Ready and apparently willing to supervise the same operation in the senate was Arkansas' Lincoln. 'We always considered her reliable,' sighed my lobbyist friend. But Lincoln's re-election campaign is in serious trouble, not least because her primary opponent has been harping on Lincoln's warm relations with Wall Street [all kinds of politicians are pretending to change in order to win votes]. Even so, she had shown every sign of hewing to the derivatives traders' policy of highlighting the requirements of 'end-users' in making the case for keeping things as they are (in the dark, with no public disclosure of market prices, thus preserving the opportunity for profitable gouging of customers.) '

"'End users' in this context are businesses which in theory at least use the commodities they are betting on -- thus Coca Cola might buy derivatives on the price of sugar to hedge on future prices. Such corporations, wrangled into the Coalition for Derivatives End-Users by the bank lobbyists, dutifully broadcast the case that mandatory exchange trading would cramp their style and 'hurt the consumer.' In reality, the end-user argument has always been an almost total sham, since derivatives trading has been overwhelmingly a matter of speculation, with little discernable effect on the consumer -- apart of course from the derivatives-induced financial crash.

"Unfortunately for the banks, Lincoln was so energetic in touting the end-user line that even Timothy Geithner grew a little uncomfortable. So, accompanied by Commodities Futures Trading Commission Gary Gensler, Geithner called on the senator and brusquely informed her she was being '"too soft' on the issue. Her reaction was not at all what the treasury secretary expected, still less desired. Piqued beyond measure by his graceless approach, Lincoln not only abandoned the cause of the end-users altogether, but inserted the requirement, thermonuclear in its implications for the profitability of JP Morgan and others, that banks dump their derivative trading operations. Adding insult to injury, the legislation clearly defines an exchange as a 'trading facility,' another unpleasant surprise for the banks. ... Sad to say, the proposal is far too sensible and necessary for the health of the financial system to be allowed to stand, and will doubtless disappear in some administration-brokered compromise in pursuit of Republican votes."

In the end, we have to look at all these attempts to reform major corrupt institutions by Congress as futile or worse. Campaign Finance Reform didn't stop the political payoff system and only restricted private political speech. Health Care Reform did nothing to stop all of the evils of the government and business subsidized insurance system, but it did destroy our liberty to choose. Likewise, Financial Services reform was written many months ago by insiders who will give it the appearance of reform, but it will do nothing by put a regulatory noose around those few financial institutions that remain in this country-who were not part of the problem.

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World Affairs Brief - Commentary and Insights On A Troubled World

Copyright Joel Skousen. Partial quotations with attribution permitted.