The past and future of public tax preparation


The past and future of public tax preparation



JPMorgan Mess: Why Mitt Romney’s Wrong on Dodd-Frank

When financial giant JPMorgan Chase recently revealed that it had lost far more than $2 billion in a credit derivatives trade gone wrong, the news sent a clear message: Opponents of financial reform are wrong. Without the Dodd-Frank Act and the global reforms being led by the United States, the financial sector would go back to its old ways, eventually putting taxpayers and the economy at grave risk of harm.

Yet for the presumed GOP nominee Mitt Romney, the news sent a very different message. He repeated his call to repeal Dodd-Frank, though it made the system stronger, and though JPMorgan’s revelations demonstrated the need for robust rules.

Romney and many Republican lawmakers seem intent on going back to the financial casino that led to the worst economic crisis in 80 years. The financial industry has spent far more than $100 million trying to roll back Wall Street reform. Romney, meanwhile, has been clear about what he wanted to get rid of — a comprehensive financial reform package that passed Congress and was signed by the president. Yet he makes only the vaguest of promises about what he might do instead.

Romney’s reaction is the equivalent of putting out a small fire in your house, then deciding that the lesson is you need to stuff your house with matches, throw out your fire extinguisher and cancel your fire insurance. And doing all this after the house nearly burned to the ground less than four years ago.

The system of rules under which the financial industry operated in the lead-up to the financial crisis was broken. Financial institutions took on too much risk with too little capital. Financial companies could escape meaningful supervision by calling themselves investment banks or insurance conglomerates rather than commercial banks, and all institutions could move assets and liabilities off the balance sheet and out of regulatory purview in the shadow banking system.

Derivatives were traded in the dark; conflicts of interest were rife; securitizations and synthetic products hid real risks; and there was no way to wind down a major firm like Lehman Brothers without causing widespread harm. Consumers and investors lacked adequate protections, which too often meant that the financial industry could take advantage of them.

These flaws blew up the financial system, crushed the economy and cost millions of Americans their jobs. They wiped out families’ savings and put homes at risk. These flaws lined the pockets of Wall Street bankers while making taxpayers the fall guy for their failures. This is what we would get back if we followed Romney’s advice and repealed Dodd-Frank.

The Dodd-Frank Act, once fully implemented, can change all that. It has already increased capital requirements and created the authority to regulate Wall Street firms that pose a threat to financial stability, without regard to their corporate form. It enacted a resolution authority to wind down these major firms in the event of a crisis — without feeding a panic or putting taxpayers on the hook, putting an end to Too Big to Fail; restricted risky activities by firms with taxpayer-insured deposits, including through the “Volcker rule”; imposed a cap on the relative size of the largest firms; and required transparency, central clearing, exchange trading and margin for the derivatives market. It established a new Consumer Financial Protection Bureau to look out for the interests of American households.

Key provisions of reform are already working. For example, measures requiring large banks to hold more capital have helped make financial institutions more resilient. And if a big firm got itself into deep trouble today, the government now has the tools to wind it down, with shareholders and creditors taking their losses.

Rules under other parts of the Dodd-Frank Act are still being drafted by regulators and must be completed to protect taxpayers and the economy. We need a strong Volcker rule to prevent banks from making risky bets with taxpayer-insured deposits and strict limits on counter-party exposures among the largest financial firms to limit systemic risk. We need robust rules for derivatives clearing and trading, and adequate funding for the Commodity Futures Trading Commission and Securities and Exchange Commission to enforce them. We need strong consumer and investor protections to keep the market fair and open.

Yet Romney and many Republicans in Congress are determined to forget the lessons of the crisis by repealing rules that could address the weaknesses in our regulatory system that allowed the financial crisis to happen. Romney suggested last week that he wasn’t even concerned by the JPMorgan losses.

But for those of us who remember how Wall Street reacted after the 2008 financial collapse, the losses reminded us why regulators need to finish the job of implementing these and other key provisions as quickly and robustly as possible; w hy Congress should stop trying to cut necessary budgets and block agency nominees; and why Romney should take a cold hard look at the ways in which his support for Wall Street’s lobbying exposes taxpayers and the economy to enormous risk of another crisis.