Econintersect: The AFR (Americans for Financial Reform), a non-profit public policy organization with backing from consumer activists, labor unions and liberal political action organizations, has taken a position in opposition to HR 3283, the Swap Jurisdiction Certainty Act. The point of the organization is that the proposal would exempt foreign affiliates of U.S. banks and from all the major protections against derivatives risks contained in Title VII of the Dodd-Frank Act when dealing with non-U.S. persons. The definition of non-U.S. person would include foreign affiliates of United States banks and insurance companies. AFR argues that U.S. financial institutions would be able engage in otherwise prohibited risky activities by funneling such transactions through foreign affiliates, thus gutting the effectiveness of the Dodd-Frank legislation.
The following is the complete statement issued by AFR which starts with a position letter that they have asked their members and supporters to send to members of Congress:
February 8, 2012
Dear Representative,
On behalf of Americans for Financial Reform, we are writing to express our opposition to HR 3283, the Swap Jurisdiction Certainty Act, which is the legislation being considered in subcommittee today. Americans for Financial Reform is an unprecedented coalition of over 250 national, state and local groups who have come together to reform the financial industry. Members of our coalition include consumer, civil rights, investor, retiree, community, labor, faith based and business groups.
The financial crisis of 2008 cost the U.S. economy trillions of dollars and millions of jobs, and led to millions of families losing their homes. Globally, economists have estimated that the total cost of the financial crisis could exceed $60 trillion. Lack of accountability on Wall Street was a created these enormous costs. According to recent polling data, almost 70 percent of Americans favor stronger regulations and oversight on big Wall Street banks and the financial services industry. A large majority also favor the recently passed Dodd-Frank Wall Street Reform Act.
In light of the clear need to address accountability in the financial sector, there has been little support for any attempt to repeal Dodd-Frank outright. So the big banks lobbying against increased oversight have turned to behind-the-scenes attempts to create complex loopholes in key parts of new regulations. This bill is a good example of a truly significant loophole buried in a seemingly technical piece of legislation.
HR 3283 would exempt foreign affiliates of U.S. banks and from all the major protections against derivatives risks contained in Title VII of the Dodd-Frank Act when dealing with non-U.S. persons. Because the definition of non-U.S. person would also include foreign affiliates of United States banks and insurance companies, large U.S. financial firms would also be able to avoid Title VII requirements simply by dealing through their foreign affiliates.
This is a major exemption. Major Wall Street banks have at minimum hundreds of subsidiaries in dozens of countries, and the largest can have thousands. As of 2007, for example, Citibank had over 2,400 different subsidiaries in 84 countries. A smaller institution, JP Morgan Chase, had over 800 subsidiaries in 36 countries.1 Even more important, major banks manage the cash flow from these entities on a consolidated basis, so that money can flow at the touch of a computer keyboard from any one entity to any other. Professor Richard Herring of the Wharton School has described the situation at Lehmann Brothers2:
“But the fundamental problem was that LB [Lehman Brothers] was managed as an integrated entity with minimal regard for the legal entities that would need to be taken through the bankruptcy process. LBHI [Lehman Brothers Holdings, Incorporated] issued the vast majority of unsecured debt and invested the funds in most of its regulated and unregulated subsidiaries. This is a common approach to managing a global corporation, designed to facilitate control over global operations, while reducing funding, capital and tax costs. LBHI, in effect, served as banker for its affiliates, running a zero balance cash management system. LBHI lent to its operating subsidiaries at the beginning of each day and then swept the cash back to LBHI at the end of each day. The bankruptcy petition was filed before most of the subsidiaries had been funded on September 15th and so most of the cash was tied up in court proceedings in the US. Lehman also centralized its information technology so that data for different products and different subsidiaries were comingled.”
In other words, at Lehman Brothers, like most sophisticated global corporations, the total cash balances from all countries were moved in and out of the central corporate treasury on a daily basis. Thus, the total resources of the global operation were available to the parent company at all times. The last sentence points out that the organization was so integrated that the lines between the assets held by different subsidiaries were blurred in the company’s data management system.
For such integrated financial companies, losses in foreign subsidiaries can be disastrous to the parent company. Recall that the failure of Barings Bank after over 230 years of operation was due to actions by a single rogue derivatives trader in a Singapore subsidiary of the British bank. Recall also that AIG was exposed to massive derivatives losses through an affiliate located in London, AIG Financial Products. These were obviously extreme cases, but it is clear that large American banks organized on a global basis do routinely rely on cash flows from their foreign subsidiaries, and routinely fund losses at these subsidiaries. For reputational reasons it can be difficult for a parent company to simply refuse to honor debts incurred at a subsidiary, even if the parent has not explicitly guaranteed subsidiary debt (as often occurs).
This means that the stability of the U.S. financial system can certainly be affected by losses at foreign subsidiaries of U.S. banks. The blanket exemption from Title VII requirements would substantially increase the risk of such losses. It would include an exemption from any requirement for the derivatives dealer to hold margin against uncleared derivatives contracts. This means that foreign affiliates of a U.S. bank would be directly exposed to counterparty credit risk from the failure of counterparties who were speculating in the markets. Capital requirements would also be eliminated for non-bank derivatives dealers and likely weakened for bank-affiliated dealers. In addition, this legislation would effectively repeal the Title VII prohibition on Federal government bailouts of derivatives dealers. Any such bailout could be channeled through a foreign affiliate and it would be received by the parent company.
In addition to the broad Title VII exemption, foreign derivatives subsidiaries of U.S. banks would also be permitted to substitute the capital requirements of their local (foreign) regulator instead of their U.S. regulator, so long as they were located in a jurisdiction that had signed the Basel accords. As the world now knows, European banks are systematically undercapitalized, and many European banking regulators are considered to be more lenient than U.S. regulators. Thus this provision could easily result in a weakening of effective capital standards for bank-affiliated derivatives dealers as well.
These radical steps are justified by the supposed need to preserve competitiveness for foreign derivatives subsidiaries of major U.S. banks in overseas derivatives markets. This is precisely the same argument that was used to prevent regulation of the over-the-counter derivatives markets a decade ago, when adoption of tough regulations could have helped prevent the catastrophic damage of the latest financial crisis. While there may be a connection between such competitiveness and the profitability of our largest Wall Street banks, the relationship to American jobs is less clear and may be negative. This legislation would create significant incentives for U.S. banks to channel derivatives business through foreign subsidiaries in order to evade regulation. It is likely that expansion of these operations would mostly create jobs overseas, and might even lead to the relocation of some U.S. jobs to foreign subsidiaries. It is certain it would increase the risk of yet another job-killing financial catastrophe.
Another unfortunate effect of the legislation would be to create incentives for a “race to the bottom” in financial regulatory standards among foreign countries, since countries with lower regulatory standards could attract derivatives dealers seeking lax regulation. This would undermine the process of global harmonization that is currently taking place in world derivatives markets. The U.S. has reached broad agreement with the G-20 on the need for capital, margin, and clearing protections in the world’s major derivatives markets. The U.S. is leading the way globally on implementation of these protections. The blanket exemption proposed in this legislation would actually undermine this process of harmonization by creating a powerful incentive for a country to set itself up as a haven from international regulation. Geographical exemptions from regulation fuel such “race to the bottom” outcomes and weaken incentives to coordinate.
Historically, the U.S. financial sector gained its international reputation due to our global leadership in creating stable and transparent markets. Indeed, it was over 150 years ago that the U.S. pioneered the derivatives clearinghouse. This was a major positive innovation in establishing robust and valuable marketplaces for commodities as well as key financial markets. The US economy will benefit from having transparent, sound and reliable capital markets, and global industry will participate in our capital markets to the extent that they are transparent, sound and reliable. Although permitting regulatory loopholes may create short-term profits, in the long run the greater threat to the U.S. competitive edge is a repetition of the deregulation that led to the disastrous financial crisis of 2008. HR 3283 should be rejected.
Sincerely,
Americans for Financial Reform
1 Cumming, Christine and Eisenbeis, Robert A., Resolving Troubled Systemically Important Cross-Border Financial Institutions: Is a New Corporate Organizational Form Required? (July 1, 2010). FRB of New York Staff Report No. 457.
2 Herring, Richard and Jacopo Carmassi, “The Corporate Structure of International Financial conglomerates: Complexity and Its Implications for Safety and Soundness,” in The Oxford handbook of Banking, ed. by Allen Berger, 2010
Following are the partners of Americans for Financial Reform.
All the organizations support the overall principles of AFR and are working for an accountable, fair and secure financial system. Not all of these organizations work on all of the issues covered by the coalition or have signed on to every statement.
A New Way Forward
AFL-CIO
AFSCME
Alliance For Justice
Americans for Democratic Action, Inc
American Income Life Insurance
Americans United for Change
Campaign for America’s Future
Campaign Money
Center for Digital Democracy
Center for Economic and Policy Research
Center for Economic Progress
Center for Media and Democracy
Center for Responsible Lending
Center for Justice and Democracy
Center of Concern
Change to Win
Clean Yield Asset Management
Coastal Enterprises Inc.
Color of Change
Common Cause
Communications Workers of America
Community Development Transportation Lending Services
Consumer Action
Consumer Association Council
Consumers for Auto Safety and Reliability
Consumer Federation of America
Consumer Watchdog
Consumers Union
Corporation for Enterprise Development
CREDO Mobile
CTW Investment Group
Demos
Economic Policy Institute
Essential Action
Greenlining Institute
Good Business International
HNMA Funding Company
Home Actions
Housing Counseling Services
Information Press
Institute for Global Communications
Institute for Policy Studies: Global Economy Project
International Brotherhood of Teamsters
Institute of Women’s Policy Research
Krull & Company
Laborers’ International Union of North America
Lake Research Partners
Lawyers’ Committee for Civil Rights Under Law
Move On
NASCAT
National Association of Consumer Advocates
National Association of Neighborhoods
National Community Reinvestment Coalition
National Consumer Law Center (on behalf of its low-income clients)
National Consumers League
National Council of La Raza
National Fair Housing Alliance
National Federation of Community Development Credit Unions
National Housing Trust
National Housing Trust Community Development Fund
National NeighborWorks Association
National Nurses United
National People’s Action
National Council of Women’s Organizations
Next Step
OMB Watch
OpenTheGovernment.org
Opportunity Finance Network
Partners for the Common Good
PICO National Network
Progress Now Action
Progressive States Network
Poverty and Race Research Action Council
Public Citizen
Sargent Shriver Center on Poverty Law
SEIU
State Voices
Taxpayer’s for Common Sense
The Association for Housing and Neighborhood Development
The Fuel Savers Club
The Leadership Conference on Civil and Human Rights
The Seminal
TICAS
U.S. Public Interest Research Group
UNITE HERE
United Food and Commercial Workers
United States Student Association
USAction
Veris Wealth Partners
Western States Center
We the People Now
Woodstock Institute
World Privacy Forum
UNET
Union Plus
Unitarian Universalist for a Just Economic Community
List of State and Local Signers
Alaska PIRG
Arizona PIRG
Arizona Advocacy Network
Arizonans For Responsible Lending
Association for Neighborhood and Housing Development NY
Audubon Partnership for Economic Development LDC, New York NY
BAC Funding Consortium Inc., Miami FL
Beech Capital Venture Corporation, Philadelphia PA
California PIRG
California Reinvestment Coalition
Century Housing Corporation, Culver City CA
CHANGER NY
Chautauqua Home Rehabilitation and Improvement Corporation (NY)
Chicago Community Loan Fund, Chicago IL
Chicago Community Ventures, Chicago IL
Chicago Consumer Coalition
Citizen Potawatomi CDC, Shawnee OK
Colorado PIRG
Coalition on Homeless Housing in Ohio
Community Capital Fund, Bridgeport CT
Community Capital of Maryland, Baltimore MD
Community Development Financial Institution of the Tohono O’odham Nation, Sells AZ
Community Redevelopment Loan and Investment Fund, Atlanta GA
Community Reinvestment Association of North Carolina
Community Resource Group, Fayetteville A
Connecticut PIRG
Consumer Assistance Council
Cooper Square Committee (NYC)
Cooperative Fund of New England, Wilmington NC
Corporacion de Desarrollo Economico de Ceiba, Ceiba PR
Delta Foundation, Inc., Greenville MS
Economic Opportunity Fund (EOF), Philadelphia PA
Empire Justice Center NY
Empowering and Strengthening Ohio’s People (ESOP), Cleveland OH
Enterprises, Inc., Berea KY
Fair Housing Contact Service OH
Federation of Appalachian Housing
Fitness and Praise Youth Development, Inc., Baton Rouge LA
Florida Consumer Action Network
Florida PIRG
Funding Partners for Housing Solutions, Ft. Collins CO
Georgia PIRG
Grow Iowa Foundation, Greenfield IA
Homewise, Inc., Santa Fe NM
Idaho Nevada CDFI, Pocatello ID
Idaho Chapter, National Association of Social Workers
Illinois PIRG
Impact Capital, Seattle WA
Indiana PIRG
Iowa PIRG
Iowa Citizens for Community Improvement
JobStart Chautauqua, Inc., Mayville NY
La Casa Federal Credit Union, Newark NJ
Low Income Investment Fund, San Francisco CA
Long Island Housing Services NY
MaineStream Finance, Bangor ME
Maryland PIRG
Massachusetts Consumers’ Coalition
MASSPIRG
Massachusetts Fair Housing Center
Michigan PIRG
Midland Community Development Corporation, Midland TX
Midwest Minnesota Community Development Corporation, Detroit Lakes MN
Mile High Community Loan Fund, Denver CO
Missouri PIRG
Mortgage Recovery Service Center of L.A.
Montana Community Development Corporation, Missoula MT
Montana PIRG
Neighborhood Economic Development Advocacy Project
New Hampshire PIRG
New Jersey Community Capital, Trenton NJ
New Jersey Citizen Action
New Jersey PIRG
New Mexico PIRG
New York PIRG
New York City Aids Housing Network
New Yorkers for Responsible Lending
NOAH Community Development Fund, Inc., Boston MA
Nonprofit Finance Fund, New York NY
Nonprofits Assistance Fund, Minneapolis M
North Carolina PIRG
Northside Community Development Fund, Pittsburgh PA
Ohio Capital Corporation for Housing, Columbus OH
Ohio PIRG
OligarchyUSA
Oregon State PIRG
Our Oregon
PennPIRG
Piedmont Housing Alliance, Charlottesville VA
Michigan PIRG
Rocky Mountain Peace and Justice Center, CO
Rhode Island PIRG
Rural Community Assistance Corporation, West Sacramento CA
Rural Organizing Project OR
San Francisco Municipal Transportation Authority
Seattle Economic Development Fund
Community Capital Development
TexPIRG
The Fair Housing Council of Central New York
The Loan Fund, Albuquerque NM
Third Reconstruction Institute NC
Vermont PIRG
Village Capital Corporation, Cleveland OH
Virginia Citizens Consumer Council
Virginia Poverty Law Center
War on Poverty – Florida
WashPIRG
Westchester Residential Opportunities Inc.
Wigamig Owners Loan Fund, Inc., Lac du Flambeau WI
WISPIRG
Small Businesses
Blu
Bowden-Gill Environmental
Community MedPAC
Diversified Environmental Planning
Hayden & Craig, PLLC
Mid City Animal Hospital, Pheonix AZ
The Holographic Repatterning Institute at Austin
UNET