News

The U.S. Senate gave final approval to the most far reaching reforms of the finance sector since the 1930s.

By a vote of 60-39, the Senate adopted the Wall Street Reform and Consumer Protection Act of 2010 on Thursday, 15 July. The era of reckless deregulation is over. This bill marks a first step to restoring sanity to the global financial system after a thirty year experiment with casino capitalism, which ended when the global financial system nearly collapsed in September 2008.

The legislation addresses the four biggest causes of the financial crisis the erupted in the United States and spread all around the world.

· Consumer protection: The crisis in the United States resulted from a housing price bubble driven by reckless and fraudulent lending in the so-called sub-prime mortgage market. Unregulated mortgage lenders used fraud and deception to foist unaffordable loans on unsuspecting borrowers and worked with Wall Street to bundle the toxic mortgages into safe-looking securities that were sold to unsuspecting investors all over the world.

The new law creates a new federal agency, the Consumer Financial Protection Bureau that will crack down on abusive and fraudulent practices by banks and other financial services companies by issuing and enforcing regulations that protect consumer interests. The CFPB will have the power to set rules on finance sales practices that UNI Finance has championed since the crisis erupted three years ago.

Some special interest groups, such as auto dealers and small community banks, managed to win exemptions from the new agency, but the CFPB is a huge step in the right direction.

· Systemic risk regulation: The global financial crisis was also a crisis of governance as regulators in the United States (and elsewhere) failed to detect the massive risks being taken by major Wall Street banks and other financial institutions with huge amounts of borrowed money. As a result of 30 years of financial deregulation that created in a weak and fragmented system of oversight, the dangerous practices that brought down investment banks like Lehman and Bear Sterns and the insurance giant AIG were ignored.

The new law creates a Council of Regulators that will extend regulatory oversight beyond commercial banks to the shadow banking system and gives the government new “resolution authority” to close down failed financial institutions in an orderly manner – with shareholders and creditors paying the costs, not taxpayers. It also empowers regulators to impose strict limits on risky proprietary trading and investments in hedge funds and private equity firms by large Wall Street firms – the so-called Volcker Rules advocated by former Federal Reserve Chairman Paul Volcker.

The new legislation falls short of imposing size limits on banks, and left the decisions on maximum leverage ratios and increased capital requirements to regulators – who will seek to set them in cooperation with international authorities. The new law also failed to include a Financial Transactions Tax or limits on executive compensation that UNI and the international labour movement believe are essential to reign in dangerous speculation and risk-taking. These are weakness that will have to be addressed in the future.

· Credit rating reform: The damage done by real estate bubbles in the U.S., the U.K, Spain and Ireland were globalized through the sale of mortgage-backed securities (MBS) to financial institutions around the world. And it was the corruption within credit rating agencies like S&P, Moody’s and Fitch that made this possible. Driven by greed to maximize fees from issuers of MBS and lax regulation, these agencies helped Wall Street misrepresent MBSs comprised of toxic subprime mortgages as safe investment grade bonds, with disastrous results.

The new law subjects the previously unregulated credit ratings agencies to regulation by the Securities and Exchange Commission, requires them to disclose their methods and performance records and makes them legally liable for the accuracy of their ratings. Within two years the SEC is required to study and establish a system to remove the inherent conflict of interest within credit rating firms that are paid by Wall Street banks that issue bonds – the regulator is expected to create an independent board to randomly assign the review of asset-backed securities to qualified ratings agencies

· Derivatives trading: The global financial crisis was made worse by the explosive growth in over the counter trading in derivatives, securities whose value is derived from the value of other securities. Collateralized Debt Obligations (CDOs) and Credit Default Swaps (CDS) served to magnify the financial crisis exponentially. CDOs carried risks that even seasoned investors failed to understand. And CDS derivatives were sold as insurance for issuers of risky asset-backed securities and were used by huge European banks to evade capital requirements, raising their leverage and profits – until it all crashed. Today, three years after the crisis erupted, privately traded and unregulated derivatives still carry a notional value of $US 215 trillion – an astounding level of risk.

The new law in the US will subject derivatives trading to regulatory oversight and require most derivatives to be traded openly in a third-party exchange with traders required to post collateral (“margins”) to ensure against defaults. It will bring a measure of transparency to what has been a murky black market. Unfortunately, the final bill watered down a provision in the Senate-passed bill that would have required Wall Street banks to spin off their derivatives trading operations to separately capitalized subsidiaries. But the law represents a vast improvement over the status quo.

The financial overhaul legislation is a huge victory for the US unions and UNI affiliates who created Americans for Financial Reform, coalition of 250 labor and civil society groups that was formed to advocate for comprehensive reform. AFR and its handful of paid staff and a couple of dozen volunteers took on Wall Street and its legions of paid lobbyists who spent more than $600 million to thwart reform. And it won many of the most important battles.

The work is far from finished. The final legislation was riddled with loopholes and failed to completely eliminate the threat from “too big to fail” financial firms. These weaknesses must be addressed in the USA and the fight for regulatory reform must be globalized. UNI Global Union stands at the forefront of that fight and is committed to ensuring that finance workers remain at the center of the reform process.