US Politics Mega-thread - Page 4789

...As the distribution of political power shifted in the 1970s and 1980s, the financial industry began reprivatizing systems of law and finance. They invented new strategies of financial speculation to which regulators gave their blessing. Leverage buyout artists began acquiring entire companies using almost none of their own money, with the target company’s stock as collateral. In the new, pro-market environment, regulators concluded that this was legal.

The LBO business mutated into private equity, in which trillions of dollars of transactions were outside the system of securities regulation on the premise that these were not public offerings of shares. What had been a very small loophole in the structure of New Deal securities law metastasized into a largely unregulated multitrillion-dollar industry. Complex layers of derivatives securities were invented, in which immense and largely hidden multiples of leverage were possible. When some regulators expressed an interest in taking a closer look, a Congress newly beholden to the financial industry acted in 2000 to expressly prohibit regulation of derivatives, either as insurance, securities, or as gambling.

In the same period, public agencies delegated regulation to regulated industries via more than a dozen industry-controlled entities known as self-regulatory organizations (SROS). The original self-regulatory organization was the New York Stock Exchange, created in 1792. Prior to the New Deal, the Stock Exchange functioned as a private club, and its failure to enforce transparent and fair dealing had vast consequences for the public well-being when markets periodically crashed.

From the inception of securities regulation in 1933, there was bitter contention over how much enforcement would be the direct province of the new sec and how much would be delegated to the privately operated stock exchange. It is a testament to the residual power of capital that even at the nadir of its disgrace, the New York Stock Exchange won many of these initial skirmishes, setting an unfortunate pattern to be exploited once FDR was gone. Against the wishes of the sec’s original architects, the stock exchange was permitted to supervise many of its own activities with the sec relegated to watchdog, supervising at one remove. In 1939, the sec allowed the first explicitly recognized SRO, the National Association of Securities Dealers, to govern the system of over-the-counter (off-exchange) stock trades. This was just the beginning of a vast reversion.

After Wall Street invented financial derivatives in the 1980s, the whole field of derivatives creation and trading came to be governed by rules established by the industry trade association, the International Swaps and Derivatives Association (ISDA). At its simplest level, a financial derivative is analogous to an insurance policy against a bond or other security failing to pay back interest or principal. But ISDA, not a government agency, gets to decide how derivatives work and under what circumstances that obligation must be paid. This is neo-feudalism, par excellence. The democratic state plays no role whatever, except to bless the privatized realm of law.

In the area of accounting standards, the sec expressly delegated monitoring and enforcement to the industry trade association, the American Institute of Certified Public Accountants (AICPA). When self-regulation failed and accounting frauds led to the Enron scandal and kindred abuses, Congress restored some direct regulatory standards via the Sarbanes-Oxley Act of 2002. However, that same legislation created a new body, the Public Company Accounting Oversight Board (PCAOB), that enabled industry self-regulation to persist in a different form. PCAOB was created as a dot-org, not a government entity. Its president is paid over $670,000 a year. It is dominated by the Big Four accounting firms. The sec delegated a great deal of regulatory enforcement to it, as well as to another industry private association, FINRA, the Financial Industry Regulatory Authority (which used to go under its original and more accurate name, the National Association of Securities Dealers). By definition, the self-interest of securities dealers is not identical to that of the investing public.

SIFMA, the Securities Industry and Financial Markets Association, is a lobbying and trade association. But with the approval of the government, SIFMA also sets the regulatory standards for repos (overnight loans) and money-market and securities lending transactions through its “master templates.” There are similar industry groups that “regulate” the terms of municipal bond underwriting and sales (the Municipal Securities Rulemaking Board); the terms for creation and trading of futures (the National Futures Association); as well as the Financial Accounting Standards Board (FASB).

All of these industry self-regulatory bodies have their own systems of jurisprudence, far less transparent or committed to the public interest than the direct public regulation of the New Deal schema. Roosevelt’s original alphabet soup of new public agencies has mutated into a toxic stew of self-regulatory and self-interested organizations. It is one giant conflict of interest.