But not all members of the financial industry are against the Volcker rule. In fact, former Citigroup CEO John Reed submitted a letter to the Securities and Exchange Commission saying that the rule does not go far enough in preventing the banks from engaging in risky trading with deposits:

When a firm is focused on market gain, it will employ every available device to achieve those gains – including taking advantages of clients and putting the firm at risk. And. when it is large enough to be a threat to systemic stability, it is able to avoid the constraints of market discipline which apply to smaller actors In short, little will stand in the way of it becoming a threat to systemic stability.

The Volcker Rule is a critical response to this problem. and the proposed rule takes an important step forward in pulling into place the prohibition on proprietary trading and positions in private funds. However, I am concerned it docs not offer bright enough lines or provide strong enough penalties for violation.

Reed called for “specific and vigorous penalties” for traders who break the Volcker rule, as well as a provision requiring banks’ senior officers to sign forms attesting to their firms compliance with the rule.

Reed is no saint when it comes to regulatory matters, as he was instrumental in bringing down the barrier between investment banking and commercial banking in the 1990s, which laid the groundwork for today’s mega-banks and the financial crisis of 2008. However, he has since acknowledged that his position then was a mistake, and has pushed for strong financial reform, including breaking up the biggest banks. (HT: Huffington Post)

Rep. Kline’s bill would go a long way toward turning the law’s largest program, Title I — which provides federal funding for high-poverty elementary and secondary schools — into a block-grant program by dispensing with Title I’s “maintenance-of-effort” provision. Title I maintenance of effort requires that in a given year states and districts receiving Title I funds spend 90 percent of what they spent from nonfederal sources in the previous year. This ensures that states and school districts do not shortchange high-poverty schools by shifting federal funds toward other purposes.

Rep. Kline’s Student Success Act has other shortcomings, too, but the idea of dropping the maintenance-of-effort provision is particularly ill advised. It would be one more step advocated by House Republicans toward dismantling longstanding federal provisions that ensure equitable education for all of our children. House Republicans claim they are taking this action to help states cope with budget shortfalls and to restore states’ rights over education spending. But the results would harm our poorest children and squander federal taxpayer dollars to boot.

As Miller laid out, the arguments that the GOP use to push for dismantling Title I are essentially bunk. Essentially, the GOP wants to allow states to take money meant to aid the most disadvantaged students and slush it around into different areas, defeating the whole purpose of having Title I in the first place.

Schools around the country are already having to deal with the debilitating effects of budget cuts that followed the Great Recession. The last thing they need are fewer dollars going to the students who need them the most. But perhaps we should be thankful that the GOP has, for now, abandoned its effort to cut Title I outright, as it proposed doing last year.

But it isn’t increasing demand for oil that is driving the recent price increase. In fact, demand is the lowest it’s been since April, 2007, according to the Oil Price Information Service (OPIS). Instead, OPIS points to speculators as the party responsible for driving up prices:

Strangely, the current run-up in prices comes despite sinking demand in the U.S. “Petrol demand is as low as it’s been since April 1997,” says Tom Kloza, chief oil analyst for the Oil Price Information Service. “People are properly puzzled by the fact that we’re using less gas than we have in years, yet we’re paying more.”

Kloza believes much of the increase is due to speculative money that’s flowed into gasoline futures contracts since the beginning of the year, mostly from hedge funds and large money managers. “We’ve seen about $11 billion of speculative money come in on the long side of gas futures,” he says. “Each of the last three weeks we’ve seen a record net long position being taken.”

A multitude of experts, from academics to government agencies, have pinned the 2008 gas price spike on oil speculators. Of course, a big increase in gas prices could doom the slow but steady economic recovery.

• President Obama met for the first time yesterday with Xi Jinping, widely expected to be the next leader of China. [Wall Street Journal]

• Congressional negotiators say they’ve struck a tentative deal to extend the soon-to-expire payroll tax cut, as well as unemployment benefits. [New York Times]

• The Obama administration is pushing a new $5 billion plan to pay teachers according to performance, rather than seniority. [Bloomberg]

• The Eurozone’s economy shrank by 0.3 percent last quarter, putting it one more bad quarter away from recession. [Washington Post]

• A Goldman Sachs analyst is under federal investigation for leaking inside information to hedge funds. [Reuters]

• California’s economy should see a slight improvement this year, according to a report from the Los Angeles County Economic Development Corporation. [Reuters]

• For the first time since 2007, a full funding bill for the Federal Aviation Administration has been signed into law. [The Hill]

• What New York Knicks phenom Jeremy Lin shows about U.S. competitiveness. [Businessweek]

Tax law says that if a corporation issues options for employees to buy the company’s stock in the future for its price when the option issued, then if the stock has gone up in value when employees exercise the options, the company gets to deduct the difference between what the employee bought it for and its market price.

When, as Facebook expects, the 187 million stock options are cashed in this year, Facebook will get $7.5 billion in tax deductions (which will reduce the company’s federal and state taxes by $3 billion). According to Facebook, these tax deductions should exceed the company’s U.S. taxable 2012 income and result in a net operating loss (NOL) that can then be carried back to the preceding two years to offset its past taxes, resulting in a refund of up to $500 million.

Facebook’s filing papers with the Securities and Exchange Commission confirm as much:

Option exercise activity would generate a corporate income tax deduction [that] exceeds our other U.S. taxable income [and] will result in a net operating loss (NOL) that can be carried back to the preceding two years to offset our taxable income for U.S. federal income tax purposes, as well as in some states, which would allow us to receive a refund of some of the corporate income taxes we paid in those years. Based on the assumptions above, we anticipate that this refund could be up to $500 million.

“Due to the stock option loophole, Facebook may not pay any corporate income taxes on its profits for a generation,” said Sen. Carl Levin (D-MI). “It isn’t right, and we can’t afford it.” The Treasury Department estimates that it loses about $2 billion per year due to companies using this stock option loophole to avoid taxes.

One of the big factors helping corporations avoid taxes is their ability to report profits earned all over the world in low- or no-tax jurisdictions like Bermuda or the Cayman Islands. As Center for American Progress Director of Fiscal Reform Seth Hanlon noted, corporate profit shifting costs the U.S. more in revenue every year than the country spends on the entire Department of Education or Department of Homeland Security:

Profit shifting erodes the corporate revenue base, draining the United States of tens of billions of dollars in revenue every year. And it is getting worse. The U.S. government was estimated to have lost about $90 billion in revenue in 2008 from profit shifting, up from $60 billion in 2004. To put that figure in perspective, the corporate income tax only raised an average of $300 billion per year during the 2004-08 timespan, suggesting that profit shifting is draining the U.S. Treasury of a significant share of corporate tax revenues.

The U.S. currently has the second lowest effective corporate tax rate in the developed world. In the last three years, at least 30 major corporations paid no federal corporate income tax at all, despite making $160 billion in profits. In his State of the Union address, President Obama called for a minimum tax on corporations, saying, “no American company should be able to avoid paying its fair share of taxes by moving jobs and profits overseas. From now on, every multinational company should have to pay a basic minimum tax. And every penny should go towards lowering taxes for companies that choose to stay here and hire here.”

However, Wisconsin Gov. Scott Walker (R) — whose high profile assault on workers’ rights has prompted a recall effort against him — isn’t planning to use the money to help homeowners. Under the terms of the settlement, Wisconsin is set to receive $140 million, $31.6 million of which comes directly to the state government. And Walker is planning to use $25.6 million of that money to help balance his state’s budget:

Of a $31.6 million payment coming directly to the state government, most of that money – $25.6 million – will go to help close a budget shortfall revealed in newly released state projections. [Wisconsin Attorney General J.B. Van Hollen], whose office said he has the legal authority over the money, made the decision in consultation with Walker.

“Just like communities and individuals have been affected, the foreclosure crisis has had an effect on the state of Wisconsin, in terms of unemployment. … This will offset that damage done to the state of Wisconsin,” Walker said.

A memo from Wisconsin’s Legislative Fiscal Bureau released yesterday notes “it is anticipated that Wisconsin will receive $31.6 million. Based on discussions between the Attorney General and the administration, of the amounts received by the state, $25.6 million will be deposited to the general fund as GPR-Earned in 2011-12, and the remaining $6 million will be retained by the Department of Justice to be allocated at a later date.”

Milwaukee Mayor Tom Barrett (D) criticized Walker’s move, saying “not one dime [of the settlement] should be used to fund the unbalanced state budget.” Adding insult to injury, Walker has previously criticized using one-time settlement money to fill budget holes.

The settlement money already doesn’t come close to addressing the depths of the nation’s housing problem, though it will provide real relief to the people whom it does reach. But the money was certainly not intended to paper over state budget problems, particularly in a state whose governor assured everybody up and down that busting his state’s public unions was the key to fiscal solvency. (HT: Jessica Arp)

But new work shows that this perhaps isn’t the most troubling education gap, as the difference between the educational achievement of affluent and low-income students has grown significantly larger than the gap between white students and black students:

[Stanford Professor Sean Reardon] is the author of a study that found that the gap in standardized test scores between affluent and low-income students had grown by about 40 percent since the 1960s, and is now double the testing gap between blacks and whites.

In another study, by researchers from the University of Michigan, the imbalance between rich and poor children in college completion — the single most important predictor of success in the work force — has grown by about 50 percent since the late 1980s.

These studies didn’t even take into account the effects of the Great Recession, which likely exacerbated the gap. “We have moved from a society in the 1950s and 1960s, in which race was more consequential than family income, to one today in which family income appears more determinative of educational success than race,” said Reardon, who found that “the income achievement gap is large when children enter kindergarten and does not appear to grow (or narrow) appreciably as children progress through school.”

• Greece’s major unions launched a 48 hour strike today to protest new austerity measures. [Wall Street Journal]

• House Financial Services Chairman Spencer Bachus (R-AL) is being investigated by the Office of Congressional Ethics for possible insider trading violations. [Washington Post]

• Many banks across the country are charging customers who want to close their accounts. [Boston Globe]

• Congressional Republicans claim negotiations over extending the soon-to-expire payroll tax cut are going so poorly that the tax break might not be extended. [New York Times]

• House Republicans plan to keep refusing to fund the agencies implementing the Wall Street reform law. [CNN Money]

• Bank of America shares are a favorite for high frequency traders. [Associated Press]

• It’s looking less likely that anyone will face criminal charges in the collapse of the investment house MF Global and its loss of $1.2 billion in investor funds. [Reuters]

• The White House is backing the Senate’s transportation bill over the version offered by House Republicans. [The Hill]

After all, Romney made his fortune via investments made by Bain Capital, the private equity firm that he ran. And Bain’s investments between 1984 and 1999 “occurred when capital-gains rates were much higher than they are today. Yet Bain consistently attracted massive amounts of private capital, and thrived”:

Bain’s haul is further evidence that fair tax rates don’t hold back profit-seeking capitalists, at least until those rates reach a point that no one is proposing. From 1984 until 1999, the top rates on capital gains — the profit from investments as opposed to compensation for work — were often at 28 percent, and never lower than 20 percent. Indeed, in 1987, under President Ronald Reagan, the 20 percent rate rose to 28 percent — a 40 percent increase in potential taxation of Bain investment profit. (Yes, Reagan did raise taxes, even on capital.)

An analysis by the Wall Street Journal of 77 Bain deals in that time period showed that the firm “produced about $2.5 billion in gains for its investors,” on about $1.1 billion invested. Clearly, even with capital-gains rates almost double those today, fund managers such as Romney didn’t lack investors.

As billionaire investor Warren Buffett put it, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital-gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain.” It’s worth remembering that it was conservative icon Ronald Reagan who completely equalized the tax treatment of investment and wage income, rejecting the argument that a lower capital gains rate was necessary to incentivize investment.

As Nobel Prize winning economist Paul Krugman has noted, the case for a lower capital gains tax is dubious at best. “Nothing in our history or experience says that unearned income has to be taxed this lightly,” he wrote.

In terms of the size of the housing problem, as Reuters’ Agnes T. Crane and Daniel Indiviglio noted, $26 billion is a “mathematical drop in the bucket,” considering that homeowners are underwater by some $700 billion. As far as being a knock for the banks, Nasdaq.com columnist Daniel Pereira noted that the $26 billion is about half what the four publicly traded banks involved in the settlement made in profits last year:

The $26 billion represents a significant settlement, but it clearly won’t stagger the banks too much. Together, the four banks mentioned above took in a total profit of $47.6 billion in 2011. It’s not as if the banks will be paying the settlements out of pure profits, either; they’ve all set aside a fair amount of capital to pay for their mistakes. Still it’s telling that the banks will be paying just about half of their annual profits to walk away from the foreclosure mess.

Several state attorneys general were hesitant to join the settlement, fearing that the terms were too easy on the banks and that the extent of the banks’ fraudulent activities had not been uncovered. As we noted before, the settlement protects the banks from state and federal lawsuits pertaining to some abuses, such as “robo-signing” foreclosure documents, but doesn’t prevent individuals from moving forward with their own individual actions against the banks.

While it certainly won’t be a panacea for all that ails the housing market, it will certainly help those people who, until this point, had little hope of receiving a principal reduction any other way.

Cuts to mass transit fall hard on low-income people who count on public transportation to get to work, go to school, and go about their lives. And they fall hardest on low-income minorities, who, as the research organization PolicyLink noted, as disproportionately likely to not own an automobile:

As housing and jobs have moved farther apart, the distance has created employment barriers for anyone without unlimited ability to drive. Nineteen percent of African Americans and 13.7 percent of Latinos lack access to automobiles, compared with 4.6 percent of whites. Poverty complicates the problem: 33 percent of poor African Americans and 25 percent of poor Latinos lack automobile access, compared with 12.1 percent of poor whites. Cars owned by low-income people tend to be older, less reliable, and less fuel-efficient. This makes commuting to work unpredictable and more expensive, at best.

“Communities of color, low-income Americans and people with disabilities will be disproportionately impacted since they are the most transit dependent communities and negotiate their daily lives on mass transportation to reach employment, health care, and educational centers,” said the Leadership Conference on Civil and Human Rights. “These funding provisions will impact the millions of Americans who rely on public transit systems to get to work, to school, or to the doctor,” agreed the American Transit Association.

In addition to shortchanging transit and those who depend on it, the bill would also open up nearly all of America’s coastal waters to oil drilling. “It is really just one more attempt to promote the Republicans’ drill-now-drill-everywhere agenda and the interests of their industry patrons,” the Times editorialized.

In the end, neither the House GOP’s nor the Senate’s transportation bills do enough to help the country’s crumbling infrastructure. But for the House in particular, the bill is simply an excuse to drill-baby-drill and make it that much harder for people without cars to go about their lives.

A former Fannie Mae employee told the committee that the mortgage finance company had developed a pilot program for reducing mortgage debt for borrowers who owe more on their house than the property is worth.

The purpose of the plan was to develop “a responsible way to reduce principal balances for underwater mortgage borrowers without creating undue incremental moral hazard,” the employee told the committee.

The pilot had preliminary approvals from officials at Fannie Mae, FHFA, and the Office of the Comptroller of the Currency, a bank regulator, according to the former employee.

In mid-2010, two weeks before its launch, senior Fannie Mae executives cancelled the program because they were “philosophically opposed to writing down principal balances,” according to the former worker, who was quoted in the letter without being identified.

Edward DeMarco — the acting head of the Federal Housing Finance Agency, the regulator for both Fannie Mae and Freddie Mac — has also been, as one former administration official said, a “boulder” in the way of allowing the mortgage giants to reduce principal for troubled homeowners, on the grounds that it would be bad for Fannie and Freddie’s bottom line. Meanwhile, “some economists counter that while principal reductions might lead to a short-term hit for Fannie and Freddie, it would ultimately result in fewer underwater mortgages, fewer foreclosures and a healthier housing market — all good for Fannie and Freddie’s bottom line.”

The opposition to principal reductions within Fannie Mae, according to Bloomberg, seems to be much more pernicious, in that they think mortgage writedowns are an unfair bailout for homeowners. But this ignores the fact that many homeowners are underwater — owing more on their mortgage than their home is currently worth — not due to anything they did but because of the 2008 bursting of the housing bubble and the foreclosure epidemic that followed, which dragged home values down to a point from which they have yet to recover.

Here are some of the key numbers in the settlement, which is being officially announced at 10 a.m.:

49: States that have reportedly signed onto the settlement. The lone holdout is Oklahoma, as Attorney General Scott Pruitt (R) feels that the terms are too hard on the banks. Attorneys General Eric Schneidermann (D-NY), Kamala Harris (D-CA), and Beau Biden (D-DE) have thrown their support to the agreement, after opposing earlier versions for being too easy on the banks.

5: Banks covered by the settlement: Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial.

$26 billion: The amount of the settlement. About $5 billion will be direct cash penalties, $1.5 billion of which will go directly to homeowners foreclosed upon between September 2008 and December 2011.

$17 billion: The amount of settlement money going toward reducing loan principal (the amount homeowners have outstanding on their mortgages) and mortgage modifications. Banks will not get dollar-for-dollar credit for every principal reduction, so HUD Secretary Shaun Donovan believes the deal will ultimately result in $30-$40 billion in real principal reduction.

$1,800 to $2,000: The amount going to homeowners who qualify for direct cash payments.

1 to 2 million: Homeowners expected to be aided by the settlement money, with one million receiving reduced loan balances or loan modifications and 750,000 receiving direct payments.

4 million: Americans who have been foreclosed upon since 2007.

The deal protects banks from state and federal lawsuits pertaining to some foreclosure fraud abuses, including robo-signing. However, Schneidermann’s lawsuit against three big banks for allegedly fraudulent use of a mortgage database will go forward. In addition, “individual homeowners retain private rights of action to sue over foreclosure fraud and other abuses.”

• Federal and state government officials have reportedly finally agreed to a $26 billion foreclosure fraud settlement, with the money going to aid as many as two million homeowners. [New York Times]

• Completed foreclosures fell 24 percent in 2011, according to the latest data from CoreLogic. [HousingWire]

• Greek leaders still have not come to an agreement on austerity measures demanded by the EU in return for another infusion of funding. [Reuters]

• Will Facebook’s IPO boost California’s housing market? [New York Times]

• A top Federal Reserve official said yesterday that the central bank may need to buy more bonds to bolster the fragile economy. [Reuters]

• The Obama administration is expected to announce this week that it is granting 10 states waivers from requirements in No Child Left Behind. [Wall Street Journal]

• Federal securities regulators are planning to sue several major banks for their role in selling subprime bonds before the financial crisis. [Wall Street Journal]

• The percentage of young adults who have jobs has hit its lowest point on record. [CNN Money]

The House Republicans’ version of the bill, however, does not include Grassley’s provision. In fact, the House version, crafted by House Majority Leader Eric Cantor (R-VA), is significantly weaker than the Senate version, leading Grassley to slam his own party for granting “Wall Street’s wishes” on the legislation:

It’s astonishing and extremely disappointing that the House would fulfill Wall Street’s wishes by killing this provision. The Senate clearly voted to try to shed light on an industry that’s behind the scenes. If the Senate language is too broad, as opponents say, why not propose a solution instead of scrapping the provision altogether? I hope to see a vehicle for meaningful transparency through a House-Senate conference or other means. If Congress delays action, the political intelligence industry will stay in the shadows, just the way Wall Street likes it.

The House is planing to vote on its version of the STOCK Act this week. It’s worth remembering that, before he introduced this weak tea version of the legislation, Cantor blocked his own party from moving an insider trading bill at all.