WASHINGTON — When President Obama last spoke at New York’s Cooper Union as a presidential candidate two years ago, he called for an overhaul of the “balkanized” regulatory system for the financial markets and blamed the credit crisis on Washington lobbyists and politicians who engineered deregulation in the late 1990s.
Obama returned to the private college in lower Manhattan as president yesterday, urging Wall Street to call off its “battalions of financial industry lobbyists” and embrace a regulatory restructuring measure poised to be voted on in the Senate that he hopes will soon be signed into law. A separate bill already cleared the House in December.
Obama’s final nudge on financial regulatory reform, coming just two miles from Wall Street, appeared to ratchet up the growing momentum behind the legislation, as administration officials and Democratic lawmakers aggressively pushed it forward in the past week, rejecting calls to take more time to work out compromises with Republicans.
“We have seen battalions of financial industry lobbyists descending on Capital Hill, firms spending millions to influence the outcome of this debate,” he said. “We’ve seen misleading arguments and attacks that are designed not to improve the bill but to weaken or to kill it. We’ve seen a bipartisan process buckle under the weight of these withering forces, even as we’ve produced a proposal that by all accounts is a common-sense, reasonable, non-ideological approach to target the root problems that led to the turmoil in our financial sector and ultimately in our entire economy.”
Speaking directly to top industry officials who attended the noontime speech, Obama added: “I want to urge you to join us, instead of fighting us in this effort. I’m here because I believe that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.”
Obama noted that he was pleased that at least one Republican, Sen. Charles Grassley of Iowa, voted for a stronger-than-anticipated regulatory scheme for derivatives in a bill that was approved by the Senate Agriculture Committee Wednesday. The bill is expected to be merged with separate financial regulatory legislation that cleared the Senate Banking Committee last month.
Some muni market participants expressed concern with the derivatives language, fearing that it would have the unintended effect of ending the ability of states and localities to hedge against interest rate changes.
Specifically, a provision in the legislation would impose a fiduciary duty on swap dealers that would require them to hold the interests of their clients ahead of their own when they pitch, advise, or enter into swaps with public entities. Industry groups have said it would be legally unworkable.
Peter Shapiro, managing director at Swap Financial Group in South Orange, N.J., estimated that the fiduciary duty would cost states and localities $10 billion to $20 billion each year, “by inadvertently making it so that the vast majority of sophisticated state and local government agencies wouldn’t be able to use swaps to lower costs and to manage risks.”
The fiduciary standard needs to be flipped exactly upside down, he said, to require that swap dealers clearly state they are not fiduciaries and have interests that directly conflict with the interest of the state and local government agencies.
“The fox in the henhouse should be required to post a sign saying 'I am a fox,’ and not to be asked to pretend they are just another hen,” Shapiro said.
But Senate Agriculture Committee chairman Blanche Lincoln, D-Ark., earlier this week contended some municipalities are being misled by dealers into entering into swaps they don’t understand, when she was asked why the fiduciary provision is needed.
“Maybe you ought to ask the people of Alabama,” she said, a reference to the muni-related scandals in Jefferson County.
The county, home to Birmingham, has teetered on the edge of bankruptcy for well over a year while officials have tried unsuccessfully to negotiate a restructuring of $3.2 billion of variable-and auction-rate sewer warrants after interest rates skyrocketed.
Meanwhile, the Justice Department and the Securities and Exchange Commission have taken enforcement action against former county officials and participants in its swap transactions, charging that former dealers made payments and gifts to county official in exchange for its business.