Wall Street Reform

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The “Return to Prudent Banking Act” Will Help Protect Us From Another Financial Crash

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The “Return to Prudent Banking Act” Will Help Protect Us From Another Financial Crash

We need strong rules for Wall Street.

When we don’t have them, Americans suffer. It happened with savings and loan association deregulation, which led to a real estate collapse; it happened with the repeal of Glass-Steagall in 1999, which led to the 2008 financial crash.

Now, Rep. Marcy Kaptur (OH-9), has introduced the “Return to Prudent Banking Act.” The bill would restore the “wall” that previously existed under Glass-Steagall, preventing FDIC-insured commercial banks from participating in investment activity.

The Glass-Steagall Act of 1933 was designed to keep commercial banks, which traditionally make relatively safe decisions in pursuit of long-term profits, from taking on short-term speculative behavior that carries high risks. For decades, Glass-Steagall worked, and it worked well.

But then in 1999, the statute was repealed. During an era of aggressive deregulation, the commercial bank Citicorp and the insurance company Travelers Group had merged the year before, forming the first “megabank,” known as Citigroup. Since that merger was considered a violation of Glass-Steagall, the law was changed to effectively repeal Glass-Steagall and allow Citigroup’s merger to go through. Effectively, megabanks formed on Citigroup’s model, now able to become supersized through mergers, were also then able to gamble with taxpayer-backed deposits. The results were calamitous.

Within a decade, the 2008 financial crash brought our economy to shambles and cost Main Street heavily. Foreclosure rates skyrocketed and home values plummeted. Many prudent savers saw their long-term retirement savings vanish into thin air. Already marginalized communities like people of color and people with disabilities were hit particularly hard, and many communities have still not completely recovered from the Great Recession. And of course, taxpayers paid trillions to bail out the failed megabanks. Had Glass-Steagall not been repealed, perhaps the crash would not have happened at all, because banks would not have been allowed to take massive risks that inflated a housing bubble whose rupture collapsed the economy.

Even industry veterans, like John Reed and Sanford Weill, who founded Citigroup and in doing so effectively helped repeal Glass-Steagall, now recognize that doing away with Glass-Steagall’s protections was a mistake.

Reed has written about the “culture clash”  that developed at banks and how investment and traditional bankers tend not to mix well. In this clash of views that happened post-Glass-Steagall, investment bankers won out and steered the banking industry toward a riskier, short-term oriented culture.

Unfortunately, the Volcker Rule put in place through the Dodd-Frank Act didn’t solve this problem. That rule prohibited banks from doing proprietary investment trading—trading on their own behalf—but allowed banks to still do it on behalf of clients. The Volcker Rule didn’t solve this issue partly because of the loopholes in the law, but also because of its complexity and lack of transparency. Many financial industry professionals including Reed and Weill now call for a return to Glass-Steagall’s clear rules.

We cannot let a financial crash happen again. For the health of our economy and the security of our savings, we must prevent greedy investors from gambling with the fate of our financial system to make a quick buck. Without stronger rules on Wall Street like the Return to Prudent Banking Act, it could happen again.

Tell your members of Congress to cosponsor the Return to Prudent Banking Act and send a clear signal that if banks are “too big to fail,” then they’re too big to exist.

Photo Credit: David Shankbone [CC BY 3.0 (https://creativecommons.org/licenses/by/3.0)]

Caught in the Crosshairs of Corporate Power. Part 5: Predatory Mortgage Lending

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This is part five of a five part series.

When political candidates spend their time begging for cash from wealthy interests and legislating to prioritize private profits over the public good, regular people lose out. The corporations and superrich donors that dominate our elections have an outsized influence over who wins, what gets discussed in campaigns and what legislative ideas receive serious consideration.

The sweeping legislative package known as the For the People Act (H.R. 1) contains ethics, campaign finance and voting rights reforms that are essential to make our government work effectively and fairly.

To illustrate the need for reforms that reduce corporate influence and redistribute power to the people, Public Citizen compiled stories of five regular Americans whose lives have been impacted by corporate political power.

Corporate Power Spotlight: Predatory Mortgage Lending

“I didn’t realize that I myself had become a victim of subprime lending.”

Douglas Coleman, 53, Washington, D.C.

Douglas Coleman still has fond memories of buying his two-bedroom condominium with a skylight and a fireplace in Washington, D.C.

After getting the keys to the $220,000 condo on a snowy February day in 2007, he grabbed his dog, a portable stereo and an inflatable mattress and spent the night there — even before bringing in his furniture.

“I was so excited to move into the place,” he said.

More than a decade later, Coleman, 53, is still dealing with the financial aftermath. He had purchased his home by taking out a risky, no-money-down loan – the kind of loan that was common in the mid-2000s and led to the nationwide foreclosure crisis and Great Recession.

A New York City native and graduate of Howard University, Coleman worked as an information technology specialist for the Department of Housing and Urban Development. After going through a divorce, Coleman was skeptical about his ability to qualify for a loan. A friend connected him with a mortgage broker. Before he knew it, he was a homeowner.

“I was just so eager to get the property,” he said. “I thought I was never going to qualify.” In retrospect, he said, the lender asked for “very limited documentation, not nearly what enough for what I should have needed to qualify.” Despite working at HUD at the time, “I didn’t realize that I myself had become a victim of subprime lending,” Coleman said.

Coleman’s loan changed hands shortly after it was originated, and wound up being handled by Countrywide Financial, the infamous subprime mortgage lender. “I started seeing them on the news. That’s when I was like, OK, I think I’m in a very bad situation,” Coleman said.

At HUD, Coleman earned a six-figure salary. But after both his father and his sister became ill, Coleman wound up traveling back and forth between Washington and New York to take care of them. Coleman missed a lot of time at work and ultimately resigned from his position so he could take care of his family members, both of whom have since died.

A father of two, Coleman tried to get by on a patchwork of jobs, including a food truck business. But due to the reduction in income and his need to pay child support, he could not make ends meet. He wound up in foreclosure. “I was embarrassed to talk about it,” he said. “I didn’t really want to say anything. I watched many a friend lose their properties a result of similar loans.”

Coleman’s struggle highlights how African American communities were targets of predatory lending practices in the 2000s and suffered disproportionately from the foreclosure crisis. The black homeownership rate, which is well below that of other ethnic groups, has now fallen to about 43 percent from a mid-2000s peak of nearly 50 percent.

Around 12 years after getting his loan, Coleman still isn’t sure whether he can stay in his home.

With the assistance of lawyers from the Legal Aid Society of the District of Columbia, Coleman received a loan modification, but has not been able to restore his prior income. He now works as a customer support representative for a contractor that provides building services to an international development organization, where he earns about $45,000 a year.

Coleman supplements that modest income by driving an Uber, doing product demonstrations at health-food stores and working for an educational travel company. “I’m working four jobs just to try to make up for the income of the one that that I had before.”

Still struggling to get by financially, Coleman is behind on his mortgage, contemplating filing for bankruptcy and thinking about giving up his home.

“I would love to hold onto that property because that was always my dream to move in there,” he said. However, he said, “between the constant legal battles, dealing with everything and the emotional stress, it’s almost to the point where you’re like …I don’t know if it’s worth it to continue the fight.”

CORPORATE INFLUENCE AT WORK

The mortgage crisis could have been prevented. Despite numerous warnings about rampant predatory practices in the mortgage industry, lawmakers and bank regulators failed to crack down on predatory lending due an intense pushback from lenders.

In the late 1990s and early 2000s several lawmakers in Congress tried to stop subprime lending abuses but these reforms stalled. At the state level, tough predatory lending legislation in Georgia passed in 2002 but was rolled back a few months later amid an industry outcry. Corporate-friendly bank regulators appointed by the Bush administration failed to crack down on predatory lending. Several of the most-troubled institutions, including Countrywide Financial, IndyMac Bancorp and Washington Mutual, were supervised by the federal Office of Thrift Supervision, which failed to regulate those lenders and wound up being merged into another bank regulator. Federal regulators who tried to sound the alarm bell found themselves stymied.

Even after Wall Street and the big banks crashed the financial system with abusive mortgage loans, the industry’s influence persisted. The industry fought hard, though unsuccessfully, against the creation of an independent consumer protection agency, the Consumer Financial Protection Bureau. Once the CFPB was created, industry critics then worked to attack and undermine the CFPB through corporate-friendly lawmakers in Congress.

The Obama administration failed to fight aggressively for industry-opposed legislation that would have allowed borrowers to reduce their debts in bankruptcy. It also said no to other alternatives, such as a revival of a federal mortgage refinancing program from the 1930s. Instead, the federal government program that responded to the mortgage crisis helped far fewer homeowners avoid foreclosure than initially promised. Then, the Obama administration’s Department of Justice largely shied away from aggressively prosecuting Wall Street banks or executives and failed to break up the largest Wall Street institutions, leaving megabanks in place despite their threat to financial stability.

KEY FACTS:

The for-profit college industry has:

  • Spent more than $168 million on lobbying in Washington over the past decade.
  • Contributed nearly $45 million in campaign money to Congress over the past 30 years, with money coming from PACs and individuals tied to the industry.
  • Contributed 55 percent to Congressional Republicans and 45 percent to Democrats.

SOURCE: Center for Responsive Politics.

LOBBYING AND CAMPAIGN CONTRIBUTIONS:

Top recipients of mortgage industry donations, excluding presidential candidates, include Rep. Spencer Bachus (R-Ala,) the former chairman of the House Financial Services Committee, with more than $370,000 during his career, followed by two former chairmen of the Senate Banking Committee, former Sen. Christopher Dodd (D-Conn.), who received $345,000 and Sen. Richard Shelby (R.-Ala.), who received $336,000.

 

ACKNOWLEDGEMENTS

The authors wish to thank the Center for Responsible Lending, Legal Aid of the District of Columbia, Alex Shebanow/Fail State and T1International for helping to recruit the people featured in this report. All photos are courtesy of those featured.

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Caught in the Crosshairs of Corporate Power. Part 2: Payday Lenders

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This is part two of a five part series.

When political candidates spend their time begging for cash from wealthy interests and legislating to prioritize private profits over the public good, regular people lose out. The corporations and superrich donors that dominate our elections have an outsized influence over who wins, what gets discussed in campaigns and what legislative ideas receive serious consideration.

The sweeping legislative package known as the For the People Act (H.R. 1) contains ethics, campaign finance and voting rights reforms that are essential to make our government work effectively and fairly.

To illustrate the need for reforms that reduce corporate influence and redistribute power to the people, Public Citizen compiled stories of five regular Americans whose lives have been impacted by corporate political power.

Corporate Power Spotlight: Payday Lending

“What seems initially like help turns out to be nothing but hurt.”

– Wayne Wright, 59, Jacksonville

Starting about a decade ago, Wayne Wright, 59, of Jacksonville, Fla., started using payday loans. He had already drained his savings and destroyed his credit score after being laid off from a computer programming job.

Wright was raising two teenagers on a single income and had switched careers, but there were times when money wasn’t lasting from one month to the next. “I had more month than I had money,” he said.

Wright, who was living in Nashville, Tenn. at the time, took out loans from storefront and internet lenders to make it from one month to the next, but quickly found himself stuck in a debt trap, repeatedly borrowing money to pay back the last loan, plus fees.

“What seems initially like help turns out to be nothing but hurt,” Wright said. “Unless something happens in your life to break that cycle, you’re stuck.”

These days, Wright works as a home health care nurse in Florida and is on far more solid ground financially. He was able to get out of the payday loan cycle after his sister loaned him $2,600 and let him pay back that money gradually.

“It took outside intervention to help me totally just get free from them and then I never got another,” Wright said.

Though he hasn’t taken out a payday loan since 2015, Wright said he’s still getting calls from online lenders aggressively pushing out loans with lines like “your first one can be free” and “you have a good record with us.”

Payday lenders, which often target low-income borrowers, are effectively banned in states that with firm caps on the interest rate that lenders can charge borrowers.

But this kind of lending remains legal in much of the country.

Wright believes there should be limits on the number of times borrowers can renew payday loans, which typically last two weeks.

Once that limit is reached, the loan can be converted into a loan that can be paid off in a fixed number of installments rather than renewed in perpetuity.

His advice to people who are considering taking out payday loans?

“Just don’t. Do whatever you got to do. Sell your couch instead. You can always buy another one.”

CORPORATE INFLUENCE AT WORK

Under Trump, high-rate payday lenders have been hard at work pushing to roll back safeguards for consumers, undoing regulations established during the Obama administration and curtailing investigations of the industry. The payday lending industry’s main trade group has held its annual conference– and a golf tournament – at the Trump National Doral Golf Club near Miami. The Consumer Financial Protection Bureau has proposed to eliminate safeguards for consumers seeking payday or auto title loans that require lenders to assess whether borrowers have the ability to repay their loans. The Washington Post reported that a payday industry lawyer seeking to get rid of regulations on the industry worked closely with an academic researcher to publish a study claiming that taking out repeated loans doesn’t harm borrowers. Though the CFPB spent more than five years of research and study on its payday-lending rules, the bureau has indicated that it may not fully defend the rule against a lawsuit from payday lenders and has done the industry’s bidding by formally proposing to roll back the Obama-era protections that would help people avoid getting caught in cycles of ever-increasing debt.

KEY FACTS:

The payday loan industry has:

  • Spent nearly $57 million on lobbying in Washington since 2008.
  • Contributed nearly $11.8 million in campaign money to Congress over the past 30 years, with money coming from PACs and individuals tied to the industry.
  • Contributed 64 percent to Congressional Republicans and 36 percent to Congressional Democrats.

SOURCE: Center for Responsive Politics.

Republicans and Democrats alike have been recipients of payday industry donations, and have both used their positions of power to benefit the industry. Former Rep. Kevin Yoder (R-Kan.) received nearly $324,000 from individuals and political action committees tied to the industry over his career. Sen. Richard Shelby (R-Ala.), the former chairman of the Senate Banking Committee, has received more than $218,000 in payday contributions. Former Rep. Jeb Hensarling (R-Texas), the former chairman of the House Financial Services Committee, received $202,000. Other notable recipients of payday contributions include Rep. Alcee Hastings (D-Fla.), Rep Steve Stivers (R-Ohio.) Former Rep. Mick Mulvaney, the current acting White House chief of staff and budget director who also served as acting director of the Consumer Financial Protection Bureau, received nearly $63,000 from payday lenders during his congressional races. As acting director of the CFPB, Mulvaney ended multiple investigations into high-cost lenders, including one involving World Acceptance Corp., a lender from which Mulvaney had received campaign donations.

FTT graphic

The Wall Street Tax Act Would Crack Down on Dangerous High-Speed Trading and Reduce Inequality

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Taxing millionaires and billionaires in order to fund ambitious programs for a more just society with less inequality has been a hot issue in recent weeks. Between high-profile proposals such as Sen. Warren’s proposed wealth tax and Rep. Ocasio-Cortez’s plan to substantially raise the top marginal tax rate, high-profile proposals to correct our unjust inequality have been getting plenty of media attention and have been the topic of much public debate.

Part of the reason for for that is that the list of problems that need tackling in this nation seems to grow by the minute: teachers are protesting the lack of adequate funding in their schools, children are facing the threat of unsafe drinking water and roads in such disrepair potholes are damaging vehicles. Federal tax dollars can and should be part of the solution to addressing these and other obstacles facing Americans and to minimizing economic inequality everywhere. That’s why it’s fantastic to see the huge amount of public support for policies that would sharply increase taxes on millionaires and billionaires. We should be thinking big when it comes to these proposals.

But unrigging the tax system means more than taxing the superrich or undoing the corporate giveaways in the 2017 tax law. The tax debate also must focus on making Wall Street high rollers pay their fair share by putting a sales tax on financial transactions like stock, bond and derivative trades. That’s why Public Citizen applauds Sen. Brian Schatz (D-Hawaii) and Sen. Chris Van Hollen (D-Md.) as well as Rep. Peter DeFazio (D-Ore.) and Rep. Alexandria Ocasio-Cortez and colleagues for today introducing the Wall Street Tax Act of 2019. This brand new legislation proposes a financial transaction tax (FTT) that would apply a 0.1 percent fee (10 cents out of every $100) on the trading of stocks, bonds and derivatives. We were joined by 60 other organizations from faith to labor to climate groups that endorsed the Wall Street Tax Act legislation introduced today.

Passing the Wall Street Tax Act would have the dual benefits of raising revenue to pay for the kinds of ambitious programs we need to create a more just society, and also curbing bad behavior on Wall Street. Specifically, the bad behavior that an FTT would check is high-speed trading.

High-frequency trading is the superfast computer trading that has overtaken the market. It was high-speed trading that contributed to the market instability we have seen over the past few months. Because the profit from high-speed trading comes from being able to make trades a split second faster than the competition, putting a tiny tax on trading will steer activity away from these investment strategies that narrowly chase short-term gains over long-term value creation.

In addition to cracking down on this dangerous high-speed trading, the proposal’s revenue generation is nothing to sneeze at either. According to government estimates, it would raise nearly $777 billion over 10 years. After being in place for a few years, a Wall Street tax at a rate of 0.1 percent would bring in more than $100 billion per year. In one year, that could pay for more than a million teaching, clean energy or infrastructure jobs. It could fund a year of more than 11 million Head Start spaces, health care for more than 42 million low-income kids, or health care for 9 million veterans. Or, that amount could pay the way to four-year colleges for more than 3 million students. Moreover, it could be put toward mitigating climate change or investing in rebuilding the infrastructure our society desperately needs. The list of possible investments is endless.

Given the many benefits from taxing financial transactions, it’s not surprising that around 40 other countries have them in place. In fact, the U.S. already has an (albeit very small) trading fee in place that funds some of the operations of the U.S. Securities and Exchange Commission. This would just put in place a more robust, expanded version of an existing tax.

It was more than a decade ago when Wall Street recklessness crashed the economy, but some hardworking families are still struggling to regain their footing. Yet banks are making record profits and cashing in from the generous tax cuts they received—all while buying back their own stock.

Standing up to the financial industry will take vision and commitment. Hopefully, all members of Congress will see the potential and join Sen. Schatz, Sen. Van Hollen, Rep. DeFazio, Rep. Ocasio-Cortez and their colleagues in calling to use Wall Street’s dime to rebuild Main Street.

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Too Big to Fail, Too Big to Exist

As America takes stock of Wall Street 10 years after it crashed the economy, one glaring fact flashes red and demands reform: The megabanks remain too big.

On Oct. 3, 2008, Congress approved the largest bailout in the history of any country. Politicians in Washington did so because financial policy experts convinced them that some of these banks were too big to fail.

The bankruptcy of Lehman Brothers, which had about $600 billion in assets, sent tsunamis through the economy – roiling money market funds that held Lehman debt, freezing short-term credit to Main Street businesses and precipitating a collapse of asset value assignments at the likes of JPMorgan, Goldman Sachs, Bank of America, Wells Fargo, Citigroup and Morgan Stanley.

With the likely failures of these institutions staring them in the face, Congress surrendered to the logic of too-big-to-fail and passed the bailout.

Perversely, in addition to bailing them out, regulators arranged mergers between teetering banks greased with government subsidies in an attempt to stabilize them. They married Bear Stearns and Washington Mutual to JPMorgan. They joined Merrill Lynch to Bank of America. They matched Wachovia to Wells Fargo. Now, 10 years later, these banks remain not only too big to fail, but larger than when we bailed them out.

Enter a new bill proposed by U.S. Sen. Bernie Sanders (I-Vt.). He has concluded that if these financial institutions are too big to fail, then they’re too big to exist, and he just introduced legislation to break them up.

His bill would limit the size of a financial institution to 3 percent of Gross Domestic Product, which today means around $580 billion.

Lehman was larger than this, so his bill would have cut it down to size. Today, JPMorgan, Citigroup, Bank of America and Wells Fargo each list around $2 trillion in assets.

Under Sanders’ bill, megabanks would be afforded two years to conform to the size limit. The Federal Reserve would oversee bank restructuring and report to Congress annually on compliance with the law.

When banks are too big to fail, American taxpayers essentially serve as their guarantor of solvency. That alone breeds a moral hazard. Bankers internalize this backstop and take outsized risks, knowing they have a taxpayer-funded safety net.

Even in placid times, a $2 trillion bank threatens the economy. Wells Fargo’s incessant misconduct provides staccato evidence that it’s too big to manage. JPMorgan, once considered the best managed bank in the nation, suffered a $6 billion loss from a few derivatives traders in London.

Moreover, the banks also are too big to jail. All the megabanks engaged in misconduct both before the crash and after, such as through money laundering violations. But these banks have escaped judicial accountability. No senior banker has faced prison time and no megabank has forfeited its license (or deposit insurance) following an acknowledgment of widespread misconduct.

These banks also are way too big in the political arena. In addition to their legions of lobbyists and corrupting campaign contributions, their envoys populate key regulatory positions. Their financial tethers to business, customers and even universities strangle legitimate discourse about how to shape policy. JPMorgan CEO Jamie Dimon, for example, is leading a fight to limit the right of shareholders to raise issues at the companies where they invest.

These banks simply loom too large in our economy. As any flight across our nation reveals, this is a country of vast agriculture. There is no question about the primacy of food to our collective vitality, and farm income stands at the sizable figure of about $66 billion. But the income of just one megabank, JPMorgan, is $24 billion. There is something fundamentally wrong with our economy when it is more profitable to feed off people than to feed people.

Public Citizen is pleased to have worked with Sanders on his important legislation. Passing the “Too Big to Fail, Too Big to Exist” Act must be a priority.

Image courtesy: Michael Fleshman (CC BY-SA 2.0)

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