Commodity Futures Trading Commissioner Mark Wetjen

Three years after Congress passed sweeping reforms of Wall Street, the industry has successfully widened a variety of cracks in the Dodd-Frank law. But credit for the industry’s success at watering down the landmark legislation doesn’t just go to well-heeled lobbyists – regulators and lawmakers are helping.

The New York Times’s Dealbook blog reports this morning on the most predictable sort of industry subversion of the law’s intent: Citigroup essentially wrote a bill that would keep taxpayers on the hook for banks’ bets on the complex, high-stakes financial products known as derivatives. The derivatives market was central to the financial collapse. Added together, the total on-paper value of the derivatives bets outstanding in 2010 was roughly 23 times greater than the entire world’s economic output. Dodd-Frank included a requirement that financial institutions take their derivatives gambling to separate institutions not backed by federal deposit insurance.

But the House Financial Services Committee passed a bill undoing that reform in early May. “Citigroup’s recommendations were reflected in more than 70 lines of the House committee’s 85-line bill,” Dealbook reports, and “two crucial paragraphs” were taken wholesale from the industry.  While the change is supported by such heavyweights as Federal Reserve Chairman Ben Bernanke and Dodd-Frank namesake Barney Frank, Americans for Financial Reform director Marcus Stanley notes that it “restores the public subsidy to exotic Wall Street activities.”

While bank lobbyists exist to advocate for bank interests, legislators and financial regulators work on the taxpayer’s behalf. But with battles over Dodd-Frank ongoing, the House Financial Services Committee is a plum assignment for legislators because of the industry cash the seats invite. In the case of the Citigroup-penned derivatives bill, supporters “received twice as much in contributions from financial institutions compared with those who opposed” the proposal, Dealbook notes.

Elected officials aren’t the only public servants using positions critical to Dodd-Frank’s survival to weaken its protections for taxpayers. And as financial reporter David Dayen wrote in The American Prospect on Tuesday, some regulators are instead working to protect Wall Street. Dayen’s prime example is a Commodity Futures Trading Commission member named Mark Wetjen, who forced the CFTC into a compromise that undermines Dodd-Frank’s effort to bring transparency to the derivatives market. Instead of big reform, like forcing banks to make derivatives trades publicly or requiring actual competition in that market, Wetjen ensured the absolute minimum change to how derivatives get originated. As a result, the law that was supposed to dramatically reshape the derivatives market and mitigate its risks to the real economy will instead impose only “the smallest possible increase” in competition and transparency, Dayen noted.

Wetjen, who is rumored to be the next head of the CFTC, has been hard at work watering down other Dodd-Frank reforms as well:

He asked for several bank-friendly changes to planned derivatives rules, delayed rules by refusing to commit to voting for them, advocated giving Wall Street additional time to comply, publicly announced concerns with [Chairman Gary] Gensler’s proposed regulations in a speech to the main trade lobby for the industry (the International Swaps and Derivatives Association), and generally took Wall Street’s side, both in public and behind the scenes. In February, word leaked that Wetjen wanted to weaken the RFQ proposal. He has become the key swing vote on the panel, threatening to side with Republicans and vote down rules unless his changes are implemented.

Between lobbying dollars and industry-friendly regulators, the financial industry is succeeding at undermining the government’s response to the biggest economic collapse since the Great Depression.

The biggest banks were already huge before the financial crisis, and concentration in the banking industry was in fact one of the causes of the crash. Yet they have gotten even bigger since then. Just 12 banks, 0.2 percent, control nearly 70 percent of total bank assets, and the 20 biggest hold assets equal to nearly 85 percent of the country’s entire economic output.

This has many concerned that the problem of too big to fail still hasn’t been resolved since the passage of the Dodd-Frank financial reform act. Worse, banks may now be too big to jail, as the Justice Department has warned that going after potentially illegal behavior could have negative economic consequences.

These problems led Sen. Elizabeth Warren (D-MA) to grill Treasury Secretary Jack Lew at a Senate banking committee hearing on Tuesday about whether the time has come to cap the size of banks and/or break them up:

As she noted, the four biggest banks, which were already considered too big to fail before the crisis, are now 30 percent larger. “When we see the largest financial institutions getting bigger and bigger…it tells us that we are clearly not on the path to resolving too big to fail,” she noted. This is potentially putting the economy at risk. Later she cautioned that “we’re playing with the U.S. economy here, the worldwide economy.”

Yet no action has been taken to address this specific problem. “How big do the biggest banks have to get before we consider breaking them up?” she asked Lew. “Do they have to double in size? Triple in size? Quadruple in size?” While Dodd-Frank is in the process of being implemented and these changes to the law may mean some changes, the continuing stream of scandals in the sector show that “they have not changed their risk bearing practices nor have they decided that they’re suddenly going to start following the law,” she said.

Warren is not alone in cautioning that too big to fail is still a potential problem. Federal Reserve Chairman Ben Bernanke recently agreed that something needs to be done. Sens. Sherrod Brown (D-OH) and David Vitter (R-OH) also introduced legislation in April to rein in megabanks by imposing strict capital requirements, among other changes.

A week after a bipartisan group of lawmakers on the House Financial Services Committee overwhelmingly approved a rollback of certain financial reforms contained in the Dodd-Frank Wall Street Reform Act, one of the Senate’s biggest consumer advocates is pushing back.

Massachusetts Sen. Elizabeth Warren (D) came out swinging against the repeal of new rules meant to regulate derivatives, the complex financial instruments that were at “the center of the storm” that caused the financial crisis. The rules shouldn’t be weakened or repealed just because big banks want to see them eliminated, Warren argued Thursday, The Hill reports:

“The big banks won some battles and lost some battles during the financial regulatory debate in 2009 and 2010, but their tune never changed and their lobbying never let up,” she said. “It is dangerous for Congress to amend the derivatives provisions of the Dodd-Frank Act without at the same time taking accompanying steps to strengthen reform and maintain the law’s equilibrium.”

One rule the package of legislation advanced by the House committee would eliminate is a “push out” provision that would limit derivatives trading at banks that receive federal backing. Similar to the Volcker Rule, another provision Wall Street largely opposes, it is aimed at making taxpayer-backed banks safer to avoid crises similar to the one that thrust the United States into a recession and led to a bailout of major banks in 2008.

Warren isn’t alone in her opposition to the rollback. The Obama administration has long opposed the repeal of the derivatives rules, and former Federal Deposit Insurance Commission chair Sheila Bair has said the swaps and derivatives rules need to be strengthened rather than weakened. Whether the rules will face a repeal vote in the Senate isn’t clear: the House passed similar legislation in 2012, only to see it die in the Senate without a vote.

Massachusetts Sen. Elizabeth Warren (D) isn’t letting regulators off the hook for their lack of prosecutions of Wall Street banks in the wake of the financial crisis. After using her initial Senate Banking Committee hearing to press regulators about whether big banks are “too big to trial,” Warren is doing so again — this time in a letter to the Securities and Exchange Commission, the Justice Department, and the Federal Reserve.

The letter questioned regulators’ willingness to pursue settlements instead of prosecutions, and asked them to provide any analysis to justify that practice, The Hill reports:

“I believe strongly that if a regulator reveals itself to be unwilling to take large financial institutions all the way to trial — either because it is too timid or because it lacks resources — the regulator has a lot less leverage in settlement negotiations,” Warren wrote in the letter.

“If large financial institutions can break the law and accumulate millions in profits and, if they get caught, settle by paying out of those profits, they do not have much incentive to follow the law.”

Warren isn’t alone in her criticism: Ohio Sen. Sherrod Brown (D) and Iowa Sen. Chuck Grassley (R) pushed the Justice Department over the notion that big banks have become “too big to jail” in January, and Grassley accused regulators of giving banks a “get out of jail free card” for their involvement in the crisis.

Prosecutions for financial fraud hit a 20-year low in 2011, and regulators largely turned to settlements to punish big banks after the crisis. But various settlements have allowed them to avoid admissions of wrongdoing, and the largest of the settlements — the mortgage and foreclosure fraud settlements — have been rife with problems that have allowed banks to game their requirements while homeowners have struggled to access required assistance.

Campaign contributions by high-frequency trading firms have skyrocketed 673 percent since 2008, according to a new report focusing on 48 companies. These traders contributed $16.1 million during the 2012 election cycle, up from just $2.1 million in 2008. That’s not including the 93 percent spike in funds spent on lobbying Congress, the Securities and Exchange Commission, and the Commodity Futures Trading Commission since the recession.

The biggest single-year jump in spending occurred between 2009 and 2010, as traders attempted to kill the beefed up regulations in the Dodd-Frank Wall Street Reform Act. While the law cracked down on risky trading by banks, it only mentioned high-frequency trading once, and left hedge funds and trading firms largely unregulated.

The report details how high-speed traders successfully ducked the bulk of Dodd-Frank’s regulations after the financial crisis:

“Unsurprisingly, high frequency traders upped their campaign contributions and lobbying spending at the same time Congress was debating a new law to crack down on the excesses of Wall Street,” said CREW Executive Director Melanie Sloan. “Despite all of the new regulations put forth in Dodd-Frank, these firms managed to come away unscathed. If lobbying and campaign contributions don’t directly buy influence in Washington, they certainly don’t hurt.”

Unregulated high-speed trading, which prioritizes quick profits without the burden of investment, renders the market extremely volatile and subject to major fluctuations. So-called “flash crashes,” like the Dow’s 1,000-point plunge in 2010 caused by an automated high-speed trading program, expose the risk these trades pose to the entire economy. Despite the lack of greater economic benefit, high-frequency trading has come to dominate the stock market since the financial crisis.

In response to the 2010 flash crash, the SEC approved a plan to limit high-speed trading in the event of major price swings. The agency is planning to further tighten regulations on the industry, while lawmakers may also consider a financial transactions tax to make such trades more costly.

The House Financial Services Committee advanced a package of bills Tuesday that would weaken major regulations included in the 2010 Dodd-Frank Wall Street Reform Act, doing so over the objections of the Obama Administration with bipartisan support.

The legislative package, which has been criticized by both current Treasury Secretary Jack Lew and his predecessor, consisted of six bills that would weaken the regulation of derivatives. Derivatives are the the financial instruments that were at the “center of the storm” that caused the financial crisis, according to the Financial Crisis Inquiry Commission. Nevertheless, those regulations have emerged as a key target for opponents of reform and the financial industry.

One of the most significant rules the package would weaken is the so-called “push-out” provision that would limit derivatives trading at banks and financial institutions that are insured by the federal government. But rather than weaken the push-out rules, Congress should be making them even stronger, former Federal Deposit Insurance Commission chair Sheila Bair told Bloomberg:

“If Congress wants to re-open Dodd-Frank on this question, if anything, they should push all derivatives activities (other than the banks’ own hedges) into affiliates outside of the insured bank,” Bair said in an e-mail. “This would force market funding of derivatives thus providing substantially greater market discipline than permitting them to be funded with insured deposits.”

Like the Volcker Rule, which would limit forms of risky trading at federally-insured banks, the push-out rule is meant to make the large institutions that were at the center of the financial crisis safer. But the Financial Services Committee, chaired by noted Dodd-Frank opponent Rep. Jeb Hensarling (R-TX), has repeatedly passed legislation weakening derivatives reforms since the law passed. At one point in 2012, there were nine separate pieces of legislation aimed at the regulation of derivatives pending in Congress. “These proposals threaten to create large oversight-free zones that could allow risky behaviors to flourish,” advocacy group Public Citizen wrote of such legislation in 2012.

The package of legislation isn’t expected to move forward in the Senate, according to Rep. Jim Himes (D-CT), one of the sponsors. But Congress isn’t just taking aim at the rules: in recent years, it has gutted the budget for the Commodity Futures Trading Commission, the agency tasked with enforcing the new derivatives rules.

ELKHORN WI — At a Wisconsin town hall last week, Rep. Paul Ryan (R-WI) offered his strongest endorsement yet of a key financial reform generally pushed by Democratic lawmakers.

In the past, Ryan held a more lukewarm position on the Volcker Rule, where he endorsed the concept in theory but not in name.

By banning federally insured banks from risky proprietary bets, the Volcker rule is a key component of Dodd-Frank Wall Street Reform Act and is meant to protect taxpayers from bank speculation. Ryan’s words put him at odds with conservatives in the House and Senate who have repeatedly worked to delay and weaken the bill. He cited Volcker at two different town halls, as well as Sens. Sherrod Brown (D-OH) and David Vitter’s (R-LA) bill to rein in big banks:

RYAN: I have concerns about the Vitter bill. The idea is one I find very appealing. I also believe in what we call the Volcker rule, which mean if you’re going to act like a hedge fund then be a hedge fun. If you’re going to be a bank, then you have to be regulated like a bank. Meaning separate the ability of banks to take the implied subsidy of insured deposits and leverage that. I think that was one of the mistakes that was made.

Watch the video:

Although he says he supports consumer protections in theory, Ryan is still lockstep with Republicans on demanding the repeal of Dodd-Frank.

House and Senate Republicans are responsible for repeatedly delaying the Volcker rule after their unsuccessful attempt to cut it from Dodd-Frank. For instance, Reps. Spencer Bachus (R-AL) and Jeb Hensarling (R-TX) have done their best to ensure it does not take effect anytime soon. “While the Volcker Rule promises little if any benefit, what little benefit it does promise will not be realized if regulators further fragment financial markets and ratchet up the costs of compliance for market participants by issuing multiple versions of the Volcker Rule,” Bachus and Hensarling wrote. Even now, the expected date of the final rule was moved from the beginning of 2013 to sometime this year.

While bank industry lobbying has not managed to eliminate the rule in its entirety, Republicans have successfully watered it down to the point where even Paul Volcker has said he doesn’t like it. But a strong Volcker Rule like the one originally proposed is still necessary, and it has garnered support from many former bankers and industry insiders. As one former Merrill Lynch banker said, the Volcker Rule is “necessary to correct a mistake that poses a danger to our economy.”

Ohio Sen. Sherrod Brown (D) and Louisiana Sen. David Vitter (R) Wednesday introduced legislation aimed at reining in “too big to fail” megabanks by imposing strict capital requirements and preventing them from structuring themselves to elude existing regulations.

The largest Wall Street banks are even bigger today than they were before the crisis, Brown noted in a floor speech in February when he renewed calls to break up large banks. In a new video explaining why he and Vitter introduced the legislation, Brown said the industry hasn’t learned its lesson from the crisis and that taxpayers shouldn’t be on the hook for banks’ risky practices again as they were when the financial system nearly collapsed in 2008:

BROWN: Did we learn our lesson after taxpayers had to bailout the megabanks in 2008? Well, since then, our banking industry has become even more — not less — consolidated. Ten large financial institutions merged into just four. These four behemoths are nearly $2 trillion dollars…larger than they were the last time we determined they were “too big to fail.” This growth didn’t come from innovative new products and services…it was built by the perception that these banks aren’t just backed by their investors, they’re also, unfortunately, backed by every American taxpayer.

Watch it:

The Brown-Vitter legislation would rein in banks by increasing capital standards — that is, the amount of money they have to keep on hand to manage the risk they take through investments and lending. The largest banks, those with more than $500 billion in assets, would be subject to a 15 percent capital requirement. That provision, which would apply to JP Morgan Chase, Citibank, and Bank of America, would force large banks to either hold more money to cover their risks or to reduce in size to avoid the capital requirements. Those standards are even stronger than the Basel III requirements sought by international regulators.

The legislation would also limit the taxpayer guarantee to traditional banking practices, leaving banks to rely on their own capital to insure the riskier practices in which they engage. That, Brown said, would prevent taxpayers from subsidizing the riskiest lending and trading practices that helped spark the financial crisis. “If megabanks want to be large and complex, that’s their choice,” Brown said. “But taxpayers shouldn’t have to subsidize their risk-taking.”

JP Morgan Chase accepted a “crisis management” award at an event Thursday night that rewarded the bank for the way it handled the London Whale trading crisis that cost the bank at least $6 billion. The trade set the financial world ablaze when the firm’s chief executive, Jamie Dimon, announced it, considering JP Morgan had been the strongest megabank throughout the financial crisis and Dimon often bragged of its “fortress balance sheet.”

But the firm handled the crisis with flying colors, at least according to award presenters, the Wall Street Journal reports:

“J.P. Morgan Chase is winning for its handling of the $6.2 billion trading loss by the London Whale last year,” the event’s host, CNN anchor Ali Velshi, said. “I would say that’s what you call making lemonade out of lemons.”

Kathy Hu, an executive director in J.P. Morgan’s investor relations department, accepted the award and quipped: “Can I just say, ‘Crisis? What crisis?’”

The United States Senate took a slightly different view. In a bipartisan report from the Senate Permanent Subcommittee on Investigations issued last week, senators blasted the bank for misleading regulators and sidestepping regulations that should have banned the type of trades that kept the loss from occurring.

JP Morgan has been among the fiercest lobbyists against regulations like the Volcker Rule, which was meant to keep financial institutions that have the backing of taxpayers from engaging in risky forms of trading that result in large losses that could pose a risk to the overall economy. As U.S. News and World Report’s Pat Garofalo explained, this should have been a lesson in why the Dodd-Frank Wall Street Reform Act and the rules it contains should be strengthened. Instead, it won JP Morgan an award.

Amid rising concerns about large banks from senators, Federal Reserve Chairman Ben Bernanke said Tuesday that “too big to fail” banks still pose a major risk to the American economy. Massachusetts Sen. Elizatbeth Warren (D) grilled Bernanke over the persistence of Too Big To Fail institutions during a Senate hearing last week, and at a press conference yesterday, Bernanke made it clear that he agrees with Warren that such banks are still a “major issue” that need to be addressed:

BERNANKE: I certainly never meant to say to Senator Warren, and I share her concern about Too Big To Fail, it’s a major issue. I never meant to imply that the problem was solved and gone. It is not solved and gone. … I hope that we’ll make progress against Too Big To Fail, because I agree with her 100 percent that it’s a real problem and needs to be addressed if at all possible.

Warren’s reputation as a critic of Wall Street followed her to the Senate, where she has questioned regulators over bank prosecutions and whether large financial institutions were “too big for trial.” But Warren isn’t alone: Ohio Sen. Sherrod Brown (D) and Louisiana Sen. David Vitter (R) are prepping legislation to reduce the size of large banks, and Brown and Iowa Sen. Chuck Grassley (R) have also pressed regulators and the Justice Dept. over the lack of prosecutions that creates the perception that banks have a “get out of jail free” card.

The largest banks, as this chart Brown displayed on the Senate floor last month shows, have only grown larger since the financial crisis:

The key focus for Bernanke right now, he said, was ensuring that rules included in the Dodd-Frank Wall Street Reform Act and other international guidelines meant to reduce the risk of Too Big To Fail banks were instituted properly.