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A Times Editorial

Wall Street lessons not learned

If there is one lesson to be drawn from the 2008 financial meltdown, it is that strong regulation is the key to keeping markets trustworthy, transparent and healthy. Financial professionals who enriched themselves by taking outsized risks with other people's money were unleashed by weakened financial regulation to do maximum damage — and they did. Now with the collapse of MF Global, a brokerage firm headed until he resigned by Jon Corzine, a former New Jersey Democratic U.S. senator and governor, it is evident that financial regulators are still being stymied by politically influential Wall Street firms. Only strong financial regulation will save American capitalism from the self-dealing of Wall Street.

It is not surprising that the country's major investment houses have enlisted swarms of lobbyists to weaken the financial regulations promulgated under Dodd-Frank, the financial reform bill passed in the wake of the 2008 financial crisis. But it is disappointing the extent to which these lobbyists are succeeding. Congressional Republicans have mounted sustained attacks against rules that would require greater transparency, higher capital reserves and sharper separations between investment and commercial banking. The pressure from financial lobbyists and politicians is influencing regulators to write less stringent rules.

But it is not just Republicans who are kowtowing to Wall Street's demands. Corzine is a politically connected Democrat and a big donor to President Barack Obama, helping the president raise more than $500,000 this year. This coziness with top leaders certainly didn't hurt as he lobbied against a rule proposed by the Commodity Futures Trading Commission that would have protected brokerage firm clients from unwittingly lending money to the firm for risky investments.

The proposed rule would have prevented MF Global from essentially borrowing money from its own clients for complex transactions known as internal repurchase agreements. It isn't clear that this is what Corzine's firm did as it was making huge and highly leveraged bets on short-term sovereign debt of countries such as Italy, Spain and Portugal. What is clear is that Corzine lobbied most of the CFTC's commissioners and top agency staff to stop the proposed rule, and in the end it was delayed indefinitely. The rule would have also banned the use of customer funds for the purchase of foreign sovereign debt.

Now that MF Global has imploded in bankruptcy and regulators are looking for $630 million in missing client funds, the rule is back on the table. It used to be that banks and brokerage firms couldn't play around with customer funds for these kinds of transactions, but a loosening occurred in 2005 during the height of Washington's deregulation fever.

Regulators should have regained control after 2008's credit crisis. In a rational world, the economic calamity brought on by excess risk-taking would have neutralized the political might of financial firms pushing to ratchet up risk without transparency or external controls. But apparently not here. Wall Street titans are still running things to their benefit, which means the average financial client is the loser, and so is American capitalism.

Wall Street lessons not learned 11/07/11 [Last modified: Monday, November 7, 2011 5:11pm]
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