The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Yesterday, regulatory heads from the SEC, Federal Reserve, FDIC, and CFTC addressed two congressional subcommittees regarding the Volcker Rule.  They showed spine, commitment and solidarity towards the Rule, which should give heart to Main Street.  It’s about time.

Detractors argue that the Rule, which forces banks to return to their role as basic depositor and lender, limits the banks’ ability to “make markets,” politician-speak for “bet the farm.”  This will negatively impact liquidity, making it harder for investment capital to reach those that seek it, they argue.  Blah blah blah.  And needless to say they find “friends” in Congress (read: recipients of donations) to beat the drum.  Well this time, the administration is not budging. Can you say, “Election year”?

Here’s the bottom line.  Banks have served two distinct functions this millennium, one as deposit holders and lenders, and one as investors.  The deposit-holding and lending function (the actual banking) serves Main Street.  The risky investments—or “market-making” if you listen to bank lobbyists—serve the bank executives at the risk of depositors.  The Volcker Rule allows banks to hedge risk but make no other investments.

Investing—for example, in incomprehensible derivatives that include AAA-rated, subprime mortgages not worth the ink in which they’re written—is not the role of a bank.  It is the role of separate institutions, which will certainly step up to fill the void.  And when they step in, they won’t be risking the deposits of unwitting taxpayers.

Dodd-Frank gives banks two years to comply with the Volcker Rule, and they’d better get changes underway.  The regulators are—knock on wood—finally serious and unified in their efforts.  Bankers beware.  Main Street, rejoice.

Assisted by David T. Martin

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Regulators in bed with the regulated: ho hum, business unfortunately as usual.

This time, the CFTC is investigating the CME Group for their “oversight” of MF Global, which recently lost $1.2 billion in about half the time you can say: “Commodity Futures Trading Commission.”  Head of MF Global and former New Jersey Sena-governor Jon Corzine says he “can’t find” the money.  Folks, we are not talking about the pocket change we have in our pants pockets.  Meanwhile the CME, aka the Chicago Mercantile Exchange—MF Global’s primary regulator—says blithely the books have been cooked.  “Really,” as if that tells us anything.

So a dollar short and a day later, the CFTC is going to investigate the CME and its failure to—well—regulate.  The CFTC is also investigating the dozen-plus largest futures brokers for similar improprieties, yet another example of regulatory bodies swinging the bat with the ball already in the catcher’s mitt.

“Fellas, to hit the ball, you must swing earlier and at pitches you can hit.  Are we asking too much?”  Regulators come out of the industry they regulate.  These guys are in the industry, they should know, or at least be able to find out what’s around the corner.  A regulator is not akin to a prosecutor who comes in like a baseball closer to finish the game; a regulator is the Commissioner.  He or she sets the rules of the game and then lets them “play ball.”

I understand that global financial markets move at hyper speeds.  But regulators, jump out of bed with the regulated and spot the next issue before it surprises us on page A1 of newspapers around the globe.

Assisted by David T. Martin

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Today the Corporate Observer welcomes guest co-author David Martin, Office Manager at Berk Law and Director of TCO. Please enjoy.

"Insanity: doing the same thing over and over again and expecting different results."
                                                                           - Albert Einstein

You reap what you sow.  Lazy farming yields poor crops.  Lax practices train an undisciplined basketball team.  A poor diet leads to health issues.  The failure to regulate will inevitably lead to even more dangerous market disruptions and crises.

That’s “crises,” plural, because we’re headed for another one if the Commodity Futures Trading Commission continues to delay regulations on over-the-counter derivatives trading.  Though the Commission’s ability to meet the July 16th Dodd-Frank rules deadline has long been doubted, yesterday the CFTC officially announced it will not meet the statutory deadline.  Merely a year after the passage of Dodd-Frank, the lobbyists have retaken the highest hill on the battlefield and the regulators are pinned down, unable to protect Main Street.  Main Street is left with nothing in its collective cookie jars to save a financial sector wired on greed and designed to maximize risk and profit over long term growth and stability.

Michael Lewis’ The Big Short superbly chronicles the role played by unregulated credit default swaps in fueling risk to a degree never contemplated by the regulators or markets and spurring a financial crisis that brought our economy to its knees.  Investor faith collapsed, financial institutions went from unassailable to insoluble in weeks; in some cases overnight.  Some of the most venerable names on Wall Street disappeared, others became irrelevant, and we saw exactly how quickly in the age of the Internet and instantaneous trading that not just a market, but an entire economy could be crippled.

As devastating as the crisis was—nationwide unemployment is still at 9.1 percent—we survived, barely, and had the opportunity to return from the brink stronger and smarter.  The proverbial “fool me once, shame on you” situation; instead, we are headed towards “fool me twice, shame on me” territory.  The lobbyists and future private-sector employers of the regulators have efficiently forced the CFTC to push back its estimated date of rule finalization.  Meanwhile, if I’m heading up a bank or financial institution today, my takeaway is, “Don’t take the regulators seriously.”

A year ago, the regulators had all the momentum and political capital in the world.  On the heels of a financial crisis that pitted every average American against the financial institutions that created the mess, rules were necessary and urgent.  Sadly, that momentum has evaporated quicker than the Miami Heat’s, and it continues to dissipate—pun intended.  Those creators of “synthetic derivatives” and other newfangled instruments that leverage the level of risk to extraordinary heights are back, and with this delay they will surely lap the field, leaving regulators in the dust.

The mission of the regulator is not to please the industry it regulates (that’s called a trade association).  It is to regulate, to be an irritant, to ask tough questions, to be obstinate at times, to trust in some cases, but to always verify. 

It may already be too late, but the CFTC must tighten their chin straps and take the field.

Post co-authored by David Martin and Steve Berk

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Because trading in derivatives was at the heart of the 2008 financial meltdown, the Dodd-Frank financial reform bill drastically expanded the powers of the CFTC to oversee and regulate this trillion dollar market. However, congress’ budget hawks threaten to leave investors and the markets largely unprotected. The Wall Street Journal reported today that the CFTC may have to forego both improvements to a technological overhaul and a potential increase in staff. With less technology and fewer bodies, how can the CFTC adequately regulate these burgeoning markets?

Hmmmm. Budget hawks, tea party surrogates for the most part, now find themselves in bed with billionaire investors and millionaire hedge fund managers. Was that why they came to Washington? The CFTC needs more money, a lot more money to fulfill its responsibilities. A little bit of regulation can go a long way toward safer markets and stability for main street.

 Assisted by Zachary Kady

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The confluence of budget cuts to regulators like the SEC and CFTC, which were no Batman and Robin even at full strength, coupled with a likely skeleton staff at the new consumer finance protection agency spells disaster sooner rather than later.

Sadly Mr. Ferguson's prediction, made during an interview with Andrew Ross Sorkin of the New York Times, that another financial meltdown is ten years away is overly optimistic.  I fear the confluence of budget cuts to regulators like the SEC and CFTC, which were no Batman and Robin even at full strength, coupled with a likely skeleton staff at the new consumer finance protection agency -- thanks to the tea party's misguided efforts to demand budget cuts no matter the harm to Main Street -- spells disaster sooner rather than later.

Moreover, on Wall Street the beat goes on, with new "synthetic derivatives" being created on a daily basis.  These instruments merely line the pockets of lawyers and bankers and traders -- while substantively increasing one thing and one thing only: volatility and risk.

Finally, world events will no doubt add to market turbulence.  Even if every government in the Middle East miraculously survives this latest wave of popular uprising, tensions will remain high.  All that is needed is a nuclear scare in Iran or Pakistan and US markets could be thrown into a another tailspin.

With all due respect to Mr. Ferguson, my prediction is 3-5 years.

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In 2010, we had plenty of opportunities to come to the keyboard in hopes of shining a light on hypocrisy, pleading for fairness, particularly on behalf of consumers and investors and just plain venting about our corporate culture that has too often lost its way. As 2011 nears, we thought a wish list for the coming year would be fun.

1.       Elizabeth Warren Officially Named Head of the CFPB

There’s no hiding it, we have a crush on Elizabeth Warren (click here and here for past blogs). Her leadership and influence were essential to the creation of what we hope will be an engaged and powerful consumer finance protection agency. While we were delighted when President Obama chose Professor Warren to lead the formation of this new agency, we hope in 2011 he shows the courage to name her the Director. Will there be a battle in the Senate over her nomination? You bet. But we say bring it on; she is uniquely qualified for the post. Professor Warren has the knowledge, intelligence, creativity and passion to get the job done. That scares corporate America. But a tough fight, played out on the evening news and on You Tube will be good for the nation.

2.       The SEC Gets the Money it Was Promised and Opens Its Whistleblower Office

The passage of the Dodd-Frank bill was merely the strategy for restoring confidence in the American financial system. Implementation requires funding. Hard working, honest citizens have the right and deserve an opportunity to report corporate fraud without fear of retaliation. To be meaningful, this right must be backed up by resources ready to investigate and provide a response up or down. Unfortunately, congress’ recently imposed budget freeze has temporarily stalled funding for a new, independent whistleblower office at the SEC. For now, whistleblower claims will be handled by the enforcement division, the same division that missed Madoff. That same enforcement staff is unlikely to effectively handle the many complaints the office is likely to receive. (click here) Hopefully in 2011, congress and the SEC can work together to give whistleblowers an effective means to spot, prosecute, and curtail corporate fraud.

3.       A Stronger, More Active CFTC Enforcement Division

Dodd-Frank greatly expanded the powers of the CFTC enforcement division. The change turned what was once a poor man’s SEC, into a regulatory power house. Several trillion dollars are under management and supervision of this agency. As a threshold matter they must write thousand of rules and regulations. We hope that process steams along at a good pace. We also hope that the hiring of David Meister as new head of the enforcement division (click here) will help continue this trend through 2011.

4.       Banks like JP Morgan Chase and Bank of America are Held Accountable for their Roles in Massive Ponzi Schemes and Other Fraud

We’ve mentioned it time and again, some of the largest banks have played surprisingly important roles in support of massive Ponzi schemes. Investors lost billions. (Click here,  here, here for our blogs). Our firm, Berk Law (www.berklawdc.com) is currently litigating four cases against both Bank of America and JP Morgan Chase for their roles in fraudulent investment schemes across the country. (Click here, here, here, and here for blogs on JP Morgan Chase) We hope 2011 will bring justice for thousands of investors who have lost much of their life’s savings.

5.       A Favorable Ruling for Consumers in AT&T v. Concepcion

Just a few weeks ago, the Supreme Court heard oral arguments to determine the enforceability of mandatory arbitration clauses, which ban class actions completely (“whether brought in court or before the arbitrator”). This ban is not only unfair to a consumer holding a valid claim but it also a fast one on consumers. We hope for a ruling upholding the California court’s decision invalidating such contracts under the doctrine of unconscionability. Click here for our blog on the case and here for the scotusblog entry.

6.       Wall Street Makes Billions of Dollars

Seriously. Prosperity on Wall Street should be encouraged. What should be discouraged are the risky, unfair, and myopic practices of the past decade. Investing in sound businesses and long-term plans will help lift the American economy, stabilize the investment world, and restore confidence to investors who will invest more comfortably in sustainable portfolios. Click here for a blog about responsible investing.

7.       An Active SEC Enforcement Unit to Stomp Out Fraud Before It Hurts Investors

The SEC must bring more cases. While the new whistleblower office (if it ever gets funding) will be critical, a hungry first rate staff must be priority one.

     8.       The Risks of Indoor Tanning Get the Attention They Deserve

Enough is enough. Teens, mostly girls, should not continue to tan and essentially fry themselves with reckless abandon. They dramatically increase their risk of cancer. Tanning, like cigarettes and alcohol, is a personal choice, but at present the risks are largely ignored or downplayed by the industry. We’ve said it before and we’ll say it again, indoor tanning causes cancer (click here and here). In moderation, maybe, but we ask simply that the risks are published so that consumers can make an informed decision. Click here for our series on indoor tanning.

9.       Foreclosure Proceedings Gain an Air of Legitimacy and Homeowners are Treated Fairly

The gap between risk and lending simply grew too large. In many cases it just didn’t exist.   What incentive did a bank have to ensure the reliability of its loan if it was simply going to sell the loan the next day as part of a massive securitization? Click here. The still-ongoing mortgage crisis is a microcosm of the irresponsibility, greed, disorganization, and shoddy oversight pervasive in the banking world. Hopefully 2011 will put back the link between risk and lending. (because if we don’t, I fear more bad paper and a huge risk.)

    10.   A Political Climate that Puts the True Needs of Main Street First

With a decidedly angry republican opposition taking power in the House in January, the potential for political stagnation is as high as ever. Sure, deliberation and substantive arguments are what the founders intended for Congress. We simply hope that the interests of Main Street don’t take a backseat to partisan rivalries and that we can continue to move towards respectable reform.

11.   Last, But Certainly Not Least, a Washington Capitals Stanley Cup Victory 

Hey, we’ve got to have some local pride. Life’s good inside the beltway, unless of course you’re a sports fan. McNabb and the ‘skins just didn’t pan out, John Wall’s not going to win a title alone, and it’s not looking like anyone in the NL East has a shot besides Philly. So, put on your Ovechkin jersey because DC’s going to have to be a hockey town. We’re in first place as of today – let’s keep it that way. Maybe you’ll catch me downtown at the Verizon center for a game. I’ll be the guy making sure the refs, the owners, and the league play by the rules – after all, this is The Corporate Observer.

Assisted by Zachary Kady

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David Meister, a former prosecutor from the United States Attorney’s Office for the Southern District of New York will head the CFTC’s enforcement division. Five years ago this would not even be worthy of a news blip. But today, CFTC’s enforcement powers have greatly expanded thanks to the Dodd-Frank financial reform bill. The CFTC is in a prime position to effect positive change. They are counting on Meister and his strong enforcement background to secure a sense of integrity and stability in our sophisticated commodities markets which have evolved well beyond pork belly and soybean futures, but too often have a reputation of functioning more like a poker saloon in the Wild West.

Significantly, the Dodd-Frank financial reform bill increased the types of claims the CFTC can pursue and also broadened the agency’s jurisdictional reach. Perhaps most importantly, the expanded CFTC will have increased powers to govern the multi-trillion dollar derivatives market. A market that almost single handedly pushed us into a second great depression.

Oh how times change. The brave Brooksley Born, former head of the CFTC, tried regulating derivatives (long before the financial meltdown of 2008) and was literally strong armed by Hank Paulsen and Alan Greenspan to keep her mouth shut. The CFTC will now monitor derivatives in the same way that the SEC monitors securities – a major step forward from the old, nearly-deregulated system. Dodd-Frank gives the CFTC broader authority to pursue manipulation in the markets by broadening the definition of “manipulative conduct” and by including swaps in the CFTC’s purview. Finally, the CFTC will have added control over insider trading enforcement, and will set “business conduct requirements” to ensure a minimum level of accountability.

David Meister has commendable experience making tough decisions, investigating complex corporate fraud, and – most importantly – winning at trial. Meister, 47 years old, has over 20 years of white collar litigation experience. He spent time as a prosecutor in the Southern District of New York as a member of the Securities and Commodities Fraud Task Force.  Meister further enhanced his credentials working for one of the world’s largest law firms – Skadden, Arps, Slate, Meagher, & Flom (aka “Skadden”). At Skadden, Meister represented numerous individuals and corporations in matters involving securities litigation, insider trading, and complex accounting. Let’s hope though, in that rarified world of top Wall Street law firms, he hasn’t forgotten the investors on main street. Because as we all know, they are the ones who need protection. The little guys are often left to fend for themselves, Institutions can afford to hire – well – Skadden Arps.  

Assisted by Zachary Kady

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Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices.

Yesterday I responded to Gretchen Morgenson’s New York Times piece, which calls for scrutiny of soaring banking stocks; because the banks’ actual performance (lackluster) hardly match the robust share value manufactured on Wall Street.  Differing a bit from Ms. Morgenson, I am not ready to panic ; I believe heightened enforcement and regulation will hold greed and rampant speculation to a minimum.  In the 8/22 Wall Street Journal, Brian Baskin calls attention to such an instance.

Mr. Baskin describes the effort by the Commodity Futures Trading Commission (CFTC) to curb a new $50 - $100 billion dollar market for paper: derivatives again, this time on commodities.  These securities are called exchange-traded funds (ETFs) and they are all the rage.  The promoters of this newfangled investment vehicle (read Wall Street fees, broker fees, and no actual product being produced) claim these funds are the only way for small investors to access commodities futures markets.  Please.  The market is for professional speculators, who don’t need to hedge the price of a commodity like natural gas, but rather see an opportunity to make some serious money taking positions contrary to the market. 

Not so fast, says the CFTC’s enforcement staff.  They have been placing new and formidable regulatory curbs on ETFs – enough so that operators of ETFs are getting in trouble with their own investors.  Lawsuits have been filed alleging the ETF operators are failing to abide by the disclosures they made to their investors.  (But that’s a subject for another day). 

As Mr. Baskin details, the CFTC is concerned that rampant speculation causes price inflation.  That means higher prices for end consumers.  The CFTC’s goal is not to eliminate ETFs.  Its goal is to protect main street consumers, and for that reason it is to be applauded.  Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices and another bubble that when it bursts—and it will burst—main street pays the freight.

About time.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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