WASHINGTON – Now that financial reform legislation has been signed into law, the focus is shifting to ensure that the legislation works as intended.
In the minds of financial reform proponents, that means adopting strong rules that allow government agencies to carry out their now-mandated watchdog role, protect average people in their financial transactions and end the casino mentality they say dominated markets before the worldwide economic free fall started in late 2007.
Michael Masters, portfolio manager for Master Capital Management, and Oblate Father Seamus Finn, director of social justice for the Missionary Oblates of Mary Immaculate and a leader within the Interfaith Center on Corporate Responsibility, are planning to take a simple message to the rule-makers in government and to leaders in the financial sector: Markets must work for everyone.
“You don’t need some crafty Wall Street lawyer … to eviscerate what Congress intended to do,” Masters told Catholic News Service.
Both Masters and Father Finn were part of a coalition of 450 organizations that included consumer groups, social justice advocates and various industry trade organizations that pushed for the reform measures. In the end, they were pleased by the law’s final language.
One of the major reforms in the 2,330-page Dodd-Frank Wall Street Reform and Consumer Protection Act requires greater transparency in the trading of derivatives, a financial instrument whose value is linked to the expected future price movements of the asset to which it is linked.
The opaqueness of the derivatives market before reform is widely blamed for the near collapse of the banking industry in 2008.
Masters, a Catholic, advocated for reforms during several congressional hearings that led to the most sweeping overhaul of the financial industry since the Great Depression. He likened the regulations governing banking and financial deals to traffic lights and stop signs on the highway.
“At a holistic level, financial reform represents the idea that markets, left to themselves, aren’t a good thing, that there needs to be regulations in the market just like there are regulations in other areas of life,” Masters explained.
“We basically made an idol of the markets. The thought was if you don’t touch them, they’ll work for everybody. But they don’t work for everybody,” he said.
“They are not some creation by God. They are a human creation and are not perfect. Therefore, let’s put in some balance for everyone,” he added.
Father Finn, who was part of an ICCR delegation that presented shareholder resolutions calling for openness and accountability in the trading of derivatives to some of the country’s biggest banks in May and June, expects the legislation to stabilize financial markets.
Financial stability will allow governments around the world – especially in developing countries – to better allocate funds for education and development without having to make drastic cuts because revenues suddenly decline.
In addition, government-issued bonds will become more attractive to investors because they will no longer be seen as risky and will not be overlooked in favor of the fast-buck mentality promoted by speculators in recent years, he explained.
The end result is that people living on the margins of society will not be overlooked at the expense of a limited number of investors seeking greater riches, Father Finn said.
“The heart of it comes to peace of mind,” he told CNS. “They’re not going to be living from hand to mouth day to day.”
Despite the new law’s positive aspects – including the creation of a council of financial industry regulators, the formation of the Consumer Financial Protection Bureau to regulate mortgages, credit cards and consumer products and new guidelines for mortgage borrowers and lenders – it’s not perfect, explained David Kane, a staff member at the Maryknoll Office for Global Concerns in Washington.
Specifically, Kane said, the law omits any regulation of passive investments in commodity futures. Passive investments are tools used by many pension funds and endowments to buy and hold commodity futures for long periods of time.
What the law does, however, is rein in excessive speculation in the commodity markets. The danger of excessive speculation comes when huge sums of money from a relatively small number of sources dominate the market for a specific commodity, such as food, energy or precious metals. For example, in late 2007 and early 2008, speculators cornered wheat futures, causing prices to triple in a matter of months. Food riots erupted in 15 developing countries when people protested the high cost of food.
Just as quickly, prices fell when the investors dumped the futures on the market. The rapid drop in rice prices caused small farmers around the world to lose money on their already harvested crops.
Regulating excessive speculation in commodity futures will be the next big push for advocates. Kane said a coalition of social justice and faith-based groups are working around the world to get similar standards overseeing commodity futures trading implemented around the world.
“By having parallel rules, we would resolve most of the problems,” he said.
Within the United States, Kane disclosed plans for a three-pronged campaign to educate large-scale investors on the dangers posed by excessive speculation.
One step will involve surveying investor members of the ICCR and other socially responsible investor groups to see what commodities they might be holding and convince them to divest.
The second will educate student groups and staff at colleges and universities around the United States about the issue and urge them to push their institution’s endowment funds to divest of such holdings.
The third will involve approaching major pension funds across the country to explain the dangers of excessive speculation and with the goal of seeking divestment.