Examples of Ineffective Legislation
The STOCK Act, signed April 4th, 2012, disallows federal officials from insider trading, but it allows inside information to continue to flow to hedge funds that profit significantly from the information (WSJ: Inside Capitol, Investor Access Yields Rich Tips). The STOCK Act gives the appearance of correcting the issue when in fact it simply allows the much larger issue of insider trading by proxy to continue through hedge funds.
The JOBS Act, signed April 5th, 2012, provides important streamlining benefits for business; however, buried within it is the removal of a required division between Wall Street analysts and investment bankers (NYT: Wall Street Examines Fine Print in JOBS Act). This change allows bank analysts to promote companies at the same time their investment-banking group is taking them public, creating the potential for banks and companies to reap additional profit at the expense of investors.
The Volcker Rule within Dodd-Frank bans proprietary trading by banks. A pure implementation of the rule would prevent banks from taking undue speculative risks, such as the synthetic instruments underlying the 2008 financial crisis. However, lobbying by banks effectively bypassed the Volcker rule by embedding loopholes that allow broad latitude in risky investments through “portfolio hedging”. Traditional hedging, on a per-security basis, can provide stability by allowing the bank to protect itself from negative market movement against a position. Portfolio hedging, however, does not provide protection and introduces significant risk because it requires very large investments to counterbalance an entire portfolio and because there is no safe hedge when portfolios are composed of a large number of assets. JPMorgan was among the most vocal proponents for the broad hedging exceptions in the Volcker rule and their multi-billion dollar loss that came to light in May 2012 was a direct result of taking large bets in the name of hedging. JPMorgan’s initial $2 billion dollar loss estimate was based upon price movement of only 0.25 percent. As of July 2012, the loss is estimated to be $5b with some predicting that it could be much higher. The large loss in relation to modest market movement is an indication that what is billed as a hedging strategy does not provide safety, yet risky actions such as these remain legal under the weakened Volcker rule (NYT: JPMorgan Sought Loophole on Risky Trading).
Examples of Counter-Productive Government Actions
In September 2011, Congress cut the budget of the Government Accountability Office (GAO) despite the fact that the GAO returned $87 for every dollar spent in 2010 (Huff: GAO Faces $50 Million Cut After Saving Government $50 Billion). The GAO is now on track to have fewer than 3,000 employees for the first time in 75 years (Wash Post: GAO Scales Back to under 3,000, First Time in 75 Years). Given the critical need to reduce the debt, accountability and savings are needed now more than ever, yet Congress chose to reduce accountability in a move that will also reduce savings.
In mid 2011, Congress put politics ahead of the country’s fiscal well-being by delaying raising the debt ceiling (for money already spent). This action was similar to an individual threatening his or her bank to withhold the minimum payment on a credit card (Huff: Debt Ceiling Explained). This type of threat tends to have ill effects on credit rating. This was a policy of avoidance that created unnecessary risk for a country already in $16b in debt and running a $1.3b deficit. Even the plans born out of the debt ceiling standoff – the “Super Committee” – failed to provide any results.
The above are newly minted examples of the larger problem: Our system is simply broken to the point that even well-intentioned federal officials cannot fix it.