Ever since it was first proposed, the financial services industry has launched a withering assault on the Volcker rule, a regulation meant to rein in the ability of banks to gamble with their customers’ deposits. The banks were able to water the rule down before it was passed into law — thanks in no small part to Sen. Scott Brown (R-MA) — and have now submitted a heap of comments to the regulators charged with implementing the rule, in hopes of watering it down even further.

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)

One of the most important pieces of the Dodd-Frank financial reform law is the Volcker Rule, aimed at preventing federally-insured banks from engaging in risky proprietary bets and counting on taxpayers to bail them out if those bets go wrong. The deadline for regulatory comment on the rule was Monday night, and it didn’t go quietly. Outside groups submitted 170,000 words worth of comments, most of them (though not all) aimed at weakening the rule before it takes effect in July.

The industry threw “one last roundhouse punch at the law,” and most of the letters from across the financial industry were negative. Among the rule’s most vocal opponents: JPMorgan Chase CEO Jaime Dimon and the U.S. Chamber of Commerce, according to the Wall Street Journal:

Opponents minced few words. J.P. Morgan Chase & Co. said the proposed rule “appears to take the view that banking entities, their customers, and the economy must pay almost any price in order to ensure absolute certainty that there can never be an instance of prohibited proprietary trading.” [...]

“In short, the American engine of economic growth will be deprived of the fuel needed to operate,” the U.S. Chamber of Commerce wrote.

What the industry doesn’t mention in its effort to weaken the rule is just how successful it has been in watering it down already. With the help of Massachusetts Sen. Scott Brown (R), the industry weakened the rule even before it became law, and it has spent the last year lobbying to make it even weaker. By the time it was unveiled, it was so weak that former Fed Chair Paul Volcker, for whom it is named, said he didn’t like it.

And while opponents of the law continue to argue that it will cost the nation’s largest banks substantial sums of money, that is precisely how the law aims to create the long-term economic stability that didn’t exist prior to the financial crisis. As Reuters’ Felix Salmon wrote today, the proprietary trading prohibited by a strong Volcker rule “doesn’t just disappear.” Instead, it moves to hedge funds, brokers, and other “small-enough-to-fail institutions” that aren’t backed by taxpayers:

In other words, there is a list of institutions which will be harmed by the Volcker Rule. Here it is: JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley. These institutions should get smaller. These institutions should be less profitable. There’s no reason to believe that when that happens, the economy as a whole will suffer.

Like with the Dodd-Frank law as a whole, banks and their lobbyists aren’t satisfied with watering down the Volcker rule before it passed. The industry continues to push back against regulations aimed at preventing the sort of crisis that drove the country into a deep recession four years ago, all under the false premise that what is bad for Wall Street’s balance sheet has to be bad for the American economy as a whole.

After Republicans took over the House of Representatives in November 2010, the incoming House Financial Services Chairman, Rep. Spencer Bachus (R-AL), said he believes Washington’s role is to “serve the banks.” And the GOP has done its best this year to follow that directive, by denying regulators the money they need to implement the Dodd-Frank financial reform law, trying to repeal or water down some of the law’s key provisions, and blocking Obama administration nominations to regulatory posts.

In the budget deal that averted a government shutdown last week, the GOP kept it up. While the Securities and Exchange Commission was granted a desperately needed increase in funding, the Commodity Futures and Trading Commission, which is given the Herculean task of policing the derivatives market by Dodd-Frank, was not so lucky:

Under the new deal, the Commodities Futures Trading Commission will get $10 million more for staffing, thus making layoffs for the agency less likely in 2012. But that money won’t come through a funding increase: In the end, Republicans refused to budge on the overall funding level for the agency, which will stay at $205 million. Instead, $10 million for staffing will be shifted out of the agency’s budget for information technology. The overall level of funding falls significantly short of President Obama’s own request for the CFTC — $308 million, which would be an increase of almost 50 percent — as well as the Senate Democrats’ request for $240 million.

Senate Republicans have also put a hold on a slew of nominations to fill financial regulatory positions, ostensibly to ensure that President Obama doesn’t make recess appointments:

Several of Obama’s picks are waiting to be confirmed by the Senate, including Martin Gruenberg to be chairman of the Federal Deposit Insurance Corp, Thomas Hoenig to be the FDIC’s vice chair and Thomas Curry to lead the Office of the Comptroller of the Currency.

But Republicans refused to sign off on the list, complaining that the White House did not give them assurances Obama would not use a long congressional recess to make temporary appointments.

These kinds of actions have the effect of undermining Wall Street reform and preventing regulators from ensuring that the 2008n financial crisis doesn’t have a sequel. The end result is that Bachus’ marching order gets fulfilled, as the GOP helps the banks go right back to the same practices that brought down the economy in the first place.

Last week, Senate Republicans filibustered the nomination of former Ohio Attorney General Richard Cordray to be the first director of the Consumer Financial Protection Bureau. The GOP’s plan to justify their filibuster seems to be portraying the CFPB director as a “czar” — a favorite way for Republicans to deride federal officials they don’t like — and falsely claiming that the position has some obscene amount of power.

For instance, Sen. Orrin Hatch (R-UT) last week said that the CFPB director would be akin to an “almighty god” with no oversight. Senate Minority Leader Mitch McConnell (R-KY) continued this narrative yesterday during an interview with Fox News’ Chris Wallace:

WALLACE: What’s your problem with an agency that would protect consumers from mortgage lenders, from debt collectors and student lenders?

MCCONNELL: Yes, here’s the problem: this new agency answers to no one, absolutely no one — another unelected czar. We’ve got a bunch of those in the White House. We don’t need any more of them. And the only way we can incentivize the administration to change this agency which isn’t subject to oversight by Congress, doesn’t get its money from Congress, answers to literally to no one — it’s one individual who could bring down the banking system in this country if he chose to, has unlimited power. No one has that kind of power.

Watch it:

The GOP may have decided this is a clever line of attack, but that doesn’t make it any more true. For starters, the CFPB was created by an act of Congress, which mandated that the agency have a director. By McConnell’s logic, the head of every cabinet or regulatory agency is “another unelected czar.”

Moreover, it’s simply a lie to say that the CFPB director has unlimited power and is subject to no oversight. As we explained last week, the CFPB, unlike any of the other federal financial system regulators, can have it’s rules struck down by a vote of the Financial Stability Oversight Council (FSOC), a panel composed of the heads of the bank regulatory agencies, the Treasury Secretary, and the Federal Reserve Chairman. No other financial regulator is subject to this sort of check. Theoretically, the FSOC could veto each and every rule that the CFPB makes.

Finally, McConnell has a dim view of the banks in this country if he believes that consumer protection rules would bring the whole banking system down. Implicit in that argument is the belief that banks must rip people off in order to make a profit. McConnell’s rhetoric leads to the conclusion that the GOP not only believes banks must hose consumers to survive, but that Republicans are only too happy to help the banks achieve that end.

2012 GOP presidential contender Mitt Romney has joined the chorus of Republicans saying that Dodd-Frank, the financial reform law signed by President Obama last year, needs to be repealed. “The extent of regulation in the banking industry has become extraordinarily burdensome following Dodd-Frank,” Romney has said.

One of the key parts of Dodd-Frank is known as resolution authority, which gives the government the ability to dismantle failed financial firms without resorting to the ad hoc bailouts of 2008. Obviously, repealing the law would take away this power, and in an interview with the conservative Washington Examiner, Romney admitted that he doesn’t really have a plan for resolving failed banks that he would replace it with, other than something that looks a lot like the reviled 2008 bailout, TARP:

Q: Do you have provisions, plans to prevent there from being a push for a bailout? Jon Huntsman, for instance, wants to cap the size of banks because he thinks that if they’re big enough, the only advantage they get is an implicit bailout. What do you have as far as bailout prevention measures?

ROMNEY: I can only tell you that I think it’s an enormous mistake for us to bail out individual institutions. And even large institutions can go through a reorganization. It’s been the history of this country that that is the case. What we have assumed as a nation is the risk of a run on the banks, collectively…So our effort has been, and appropriately so, has been to protect the system from a run on the banks. But it is not to protect individual institutions from failure.

Q: And you think that was true of TARP?

ROMNEY: I think the purpose of TARP was to prevent a run on all of the banks. And I mean all of them.

Romney has tried to walk a fine line between his support for TARP in 2008 and the GOP’s current anti-bailout yet anti-financial reform mania. He hasn’t backed down from saying that something like TARP was necessary in 2008, but has since derided TARP as a “slush fund.”

The resolution authority in Dodd-Frank is the opposite of the shotgun approach to which the government was limited in 2008, laying out a process for unwinding a bank and forcing banks to lay out their own “living wills,” detailing their entanglement with the rest of the financial system. Romney wants to take that all away, and he freely admits that he doesn’t want anything to replace it, thus leaving the government in the same exact position in which it found itself in 2008: needing to throw billions at the banks to prevent a complete financial meltdown.

2012 GOP presidential contender and Texas Gov. Rick Perry has been plummeting in the polls recently, with the latest numbers showing him at 8 percent in South Carolina and just 2 percent in Florida. In an apparent attempt to revive his campaign, Perry has decided that espousing anti-bank populism is the right approach. Perry said in a speech in New Hampshire today that the bankers who wrecked the economy should be thrown in jail and that he opposes executives at bailed out banks receiving bonuses.

However, his solution to the problem of banks’ undue influence in the economy is to simply promise “no more bailouts” and then have Congress pass a Balanced Budget Amendment to the Constitution:

Not the large banks that were overleveraged. Not the insurance company that took on too much risk. Not even executives who continued to get these huge bonuses even after the walls had crumbled down. No, the people that are paying the price are average Americans. Main Street businesses. It’s our children who stand to inherit the worst fiscal mess in the history of this country. It is wrong, it is unfair, it is unjust. We shouldn’t be awarding taxpayer funded bonuses to Wall Street executives who defrauded those very same taxpayers. We ought to be locking ‘em up.

Mr. Speaker, when I’m the President of the United States, we will clean up corruption from K Street to Wall Street so that they can not gamble with our childrens’ future again. And it starts with a simple promise. No more bailouts, whether we’re talking about bailing out bankers in America or we’re talking about bankers in Europe. No more bailouts. It continues with my pledge to end wasteful earmarks. And I won’t stop until Congress and the American people pass a Balanced Budget Amendment to the United States Constitution.

Watch it:

It’s entirely unclear how Perry thinks that a BBA — one of the worst ideas in Washington, for a whole host of reasons — would help rein in the biggest banks. Perhaps he thinks it will prevent the government from spending money in a TARP-like fashion? And for someone professing such a concern for the power of Wall Street, Perry is on record calling for the repeal of the Dodd-Frank financial reform law. “This president does not understand how to free up the small businessmen and women or, for that matter, Wall Street,” Perry has said.

This isn’t the first time that Perry has gone populist when it comes to Wall Street, saying in 2008 that the banking industry “has too often been run on greed.” But when it comes to solutions, Perry suggests a favorite GOP budget gimmick that has nothing to do with the problem at hand.

For months, Republicans have been trying to undermine the Dodd-Frank financial reform law — passed in an attempt to prevent a repeat of the 2008 financial crisis — by cutting budgets for market regulators, obstructing nominees, and advancing bills that would weaken the law’s key provisions. But sometimes efforts to dismantle the law take on a more bipartisan flavor.

One of the key sections of the Dodd-Frank law has to do with swaps, the complex financial instruments that felled, among others, insurance giant American International Group. Before the 2008 financial crisis, the swaps market was totally opaque, giving neither customers nor regulators any sense of what the instruments actually cost or how much risk was building up in the financial system.

Dodd-Frank brings transparency to this market by forcing swap trades onto open exchanges — where they can be seen by everyone — rather than allowing backroom wheeling and dealing in the instruments to continue. But a bill authored by Reps. Scott Garrett (R-NJ) and Carolyn Maloney (D-NY), as the New York Times’ Gretchen Morgensen explained, would take these bits of the bill out at the knees:

Representative Scott Garrett , a New Jersey Republican, has teamed up with Representative Carolyn B. Maloney, a New York Democrat, to introduce the Swap Execution Facility Clarification Act. It would bar the Securities and Exchange Commission and the C.F.T.C. from requiring swap execution facilities to have a minimum number of participants or mandating displays of prices. Both mechanisms promote transparency.

Mr. Garrett said the bill directed regulators “to provide market participants with the flexibility” they need to obtain price discovery. This means maintaining the old system that can keep prices in the shadows.

On Nov. 15, a House subcommittee approved the bill by a voice vote.

As Commodity Futures Trading Commission Chairman Gary Gensler — whose agency is charged with regulating swaps under Dodd-Frank — explained, “economists for decades have shown that transparency lowers margins, leads to greater liquidity and more competition in the marketplace.” “Transparent pricing is also a critical feature of lowering the risk at the banks, and at the derivatives clearinghouses as well,” he said.

As David Min and I explained back in April, 2010, opacity in the swaps market “means that no one — regulators, investors, or even the dealers themselves — has a good handle on the systemic risk these instruments pose, or who is bearing the risk. This prevents regulators from being able to take steps to reduce systemic risk and creates the conditions for financial panics.” Dodd-Frank did a lot to deal with this problem, but Congress now seems to be aiming to undo that progress.

In the lead-up to the financial crisis that crippled the American economy and plunged the country into a recession, the Federal Reserve made trillions in undisclosed loans to struggling banks and financial institutions, according to official documents obtained by Bloomberg News. Banks then turned those loans into more than $13 billion in previously undisclosed profits.

The total commitment of the Fed loans amounted to $7.77 trillion, and unlike the funds made available by the Troubled Asset Relief Program (TARP), the loans came with virtually no strings attached for the banks:

The amount of money the central bank parceled out was surprising even to Gary H. Stern, president of the Federal Reserve Bank of Minneapolis from 1985 to 2009, who says he “wasn’t aware of the magnitude.” It dwarfed the Treasury Department’s better-known $700 billion Troubled Asset Relief Program, or TARP. Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

“TARP at least had some strings attached,” says Brad Miller, a North Carolina Democrat on the House Financial Services Committee, referring to the program’s executive-pay ceiling. “With the Fed programs, there was nothing.”

In one month, Morgan Stanley — one of the most vulnerable financial companies at the time — took $107 billion in secret loans, enough to pay off a tenth of the nation’s delinquent mortgages. The loans, like those made to other institutions, were never reported to Morgan Stanley’s shareholders or the taxpayers who subsidized them.

Other banks drew similar loans without disclosing them. Bank of America, for instance, held $86 billion in public debt on the day then-CEO Ken Lewis declared his company “one of the strongest and most stable major banks in the world.” Bank of America’s Fed borrowing peaked at $91.4 billion in February 2009; at the same time, it benefited from $45 billion in TARP loans.

And even while members of Congress were working to overhaul the nation’s financial regulatory system, the banks and the Fed kept them in the dark about the loans. Rep. Barney Frank (D-MA), one of the architects of the Wall Street reform act that eventually became law, and former Sen. Judd Gregg (R-NH), the GOP’s lead negotiator on TARP, told Bloomberg they were unaware of the specifics of such loans.

Had Congress had such information, members of both parties would have changed their votes to favor Wall Street reform, Sen. Sherrod Brown (D-OH) said. Former Sen. Byron Dorgan (D-ND), meanwhile, said knowledge of the loans could have led to a push to reinstate the Glass-Steagall Act, which prohibited banks from owning investment companies and vice versa, thereby limiting their size and vulnerability to such crises.

The secret nature of the loans, however, instead helped Wall Street work to “preserve a broken status quo” that allowed its biggest banks to grow even larger than they were before the crisis. The nation’s largest banks have turned more in profit in the last 30 months than they did in nearly eight years preceding the crisis, all while spending millions to derail significant reform legislation. And since the Dodd-Frank Act became law, they have spent millions more to weaken its rules and prevent certain regulations from taking effect. Bank lobbying, in fact, is now on pace to reach a record high this year.