Tuesday, April 19, 2016

The Wolf of Wall Street and Regulatory Capture in Finance

Over the weekend my husband and I watched The Wolf of Wall Street. I thought the acting was excellent. The ending was of course na├»ve given the real world realities of Wall Street’s sustained and routine disregard for risk and externalizations of their myriad costs.

Wall Street culture has been explored effectively in books, news coverage, blogs, and film. No surprises there.

What is surprising to me that nothing is done to fix the problems since Wall Street effectively runs the US economy and much of the global one through its ownership of stocks and bonds and overlapping corporate board-membership.

Did you read that Goldman agreed to pay $5 billion to settle charges made by the Justice Department regarding securities fraud? 

Aruna Viswanatha (2016, April 12). New details disclosed in Goldman mortgage pact. The Wall Journal, C1, C4.
“Under the agreement, the bank acknowledged it sold tens of billions of dollars in risky mortgage securities, and didn’t screen out questionable loans from some of the bonds in the way it told investors it would, authorities said… The pact, which mirrors past agreements other banks have reached tied to the crisis and doesn’t specifically name any allegedly culpable executives, includes a $2.3 billion federal penalty levied by the Justice Department. It also contains $875 million to end claims by serval other federal agencies and states, including New York, and $1.8 billion in help to struggling borrowers….”

The “pact” does NOT NAME ANY CULPABLE EXECS. So, the corporation pays fines and the people who created the culture of disregard for clients and ethics get off with no consequences.

Recently, the Wall Street Journal reported that the Government Accounting Office is going to “Study Wall Street’s Sway at the Fed” (text below paraphrased with excerpts in quotation marks):

Rubin, Gabriel (2016, March 7). “GAO [Government Accounting Office] to “Study Wall Street’s Sway at the Fed.” The Wall Street Journal (print ed): C3.
California Rep. Maxine Waters (Democrat) and Texas Rep. Al Green (Republican) requested the GAO investigate the Fed’s influence, with a “particular focus on the Federal Reserve Bank of New York.” (C3). The investigation represents the “first time the GAO has examined the notion of ‘regulatory capture’ at the Fed—when regulated companies co-opt the regulators, giving them great influence over rules and enforcement.”

The article notes that a 2014 Senate Banking subcommittee that was at the time led by Ohio Sen Sherrod Brown, addressed whether the New York Fed had suppressed dissent within its own ranks after former employees complained of censorship, including Carmen Segarra who alleged it fired her for refusing to temper her regulatory approach toward Goldman Sachs.

This story illustrates the regulatory capture that prevents reform of Wall Street’s externalizing and extractive ways.

Likewise, Federal prosecutors recently charged two former State Street Corp. with “running a scheme to defraud clients by secretly charging commissions on billions of dollars in securities trades."  The March 31 indictment accuses Ross McLellan, former president of State Street's US broker-dealer unit, and Edward Pennings, of the bank's London office, of securities and wire fraud. 

Apparently, prosecutors did not directly name State Street in the indictment referring to it instead as a Boston-based financial services company, described in the indictment as “one of the world’s largest asset managers and custody banks.” 

Kate O’Keefe (2016, April 6). Former State Street executives charged with client fraud. The Wall Street Journal, C4.

The Federal Reserve is too often aligned with Wall Street’s interests, precluding policies that create sustainable and just economies.

The Department of Labor has stepped up where the Fed has failed by proposing a new rule that would require those giving financial advice to act as fiduciaries, meaning to act in the best interest of their client rather than their personal or firm’s best interest:

Department of Labor Proposes Rule to Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html

As you can imagine, this new rule is not popular with Wall Street, which will no doubt find a work-around if the rule is implemented. Indeed, the Wall Street Journal reported that “the financial industry has mounted a fierce campaign against the government’s new rule imposing stricter standards on retirement advisers, saying burdensome requirements will crimp the sector.” 

Michael Wursthorn, Sarah Krouse, and Leslie Scism (2016, April 6). Retirement-Saving Rule: Who Wins? The Wall Street Journal, C1.

The work-around for avoiding having earnings “crimped” appears to be an acceleration toward recurring fees rather than commissions for trading, according to the article by Wursthorn et al cited above.

I would prefer to avoid investing the stock market altogether. However, the move toward negative interests rates will accelerate individuals' loss of savings already occurring with inflation in key sectors (health, education, and housing). Ellen Brown has covered these issues very thoroughly https://ellenbrown.com/

My new book Crisis Communication, Liberal Democracy, and Ecological Sustainability: The Threat of Financial and Energy Complexes in the Twenty-First Century (Lexington here) makes this argument empirically, drawing upon a variety of evidence forms including governmental reports, academic analyses, investigative journalism, and routine reporting in major news media and blogs. I recommend asking your library to order it (Lexington is pricing the book rather high).


Netc has not indicated worrying radiation levels in Kyushu. After 400 quakes on the island, the LDP is insane not to shut down the Sendai NPP. 


Whatever was going on yesterday with the flashing lights has ceased. However, emissions are up in comparison to when TEPCO first activated: e.g., April 14, 2016 see post here

Screenshots from today: