Occupy the regulatory system!
NEW YORK — Occupy Wall Street has moved. Its new address: 60 Wall Street.
There, inside a soaring public atrium, dreadlocked teens trade shoulder massages near the evening meditation circle. A young man holds up a sign: “You’re a Federal Reserve $lave.” The dinnertime crowd buzzes over free plates of rice and beans while listening to an improvised, profanity-laden operetta about the evils of agro-giant Monsanto. But amid the din, there’s a small group holding a quieter, and far wonkier, conversation.
“What are the restrictions? Does it let anyone call themselves a clearing agency? It seems like there’s a rigorous definition, but maybe there’s not,” Caitlin Kline says. “What if all you’re taking on is counterparty risk for all of these banks, but you don’t ever take any other exposure? It seems to be covered by several exemptions.”
Kline, a former Wall Street trader-turned-Occupier, is a member of Occupy the SEC, an offshoot of the large movement that has burrowed deep into the regulatory process. At this moment, she’s trying to figure out if the drafting of the Volcker Rule — a provision of President Obama’s Wall Street overhaul that would restrict commercial banks from making speculative investments that do not benefit their customers — is tight enough to keep banks in check.
After much discussion, the group agreed that the Volcker Rule’s earlier definition of clearing agencies, which banks use for exchanging futures contracts, was “clear and tough and good,” but decided that it was worth double-checking section 17(a) of questions that the Commodity Futures Trading Commission raised about it.
It may sound like technical gobbledygook to an outsider, and, indeed, a few newcomers to Occupy the SEC seem befuddled by the group’s headlong dive into the finer distinctions between proprietary trading and market-making. But the meeting is a glimpse into one of the most surprising iterations of the free-wheeling, anarchic movement: fighting the man through the tedious and Byzantine regulatory process.
In its heyday, the tea party turned to elections to enact change, rallying supporters to primary incumbents and helping the GOP retake the House. Occupy Wall Street, by contrast, has largely eschewed the traditional political process. Instead, as protesters have moved off the streets, a small minority of Occupiers has waded deep into the weeds of the federal regulations, legal decisions and banking practices that make up the actual architecture of Wall Street. And they’re drawing on the technical expertise of the financial industry’s own refugees, exiles and dissidents to do so.
Many of the Occupy wonks once worked on Wall Street, and some of them still do. They’re former derivatives traders, risk analysts, compliance officers and hedge fund quants. They hail from Morgan Stanley, Deutsche Bank, Bear Stearns, D.E. Shaw, Merrill Lynch and JPMorgan Chase — and at least one is a former Securities and Exchange Commission regulator. They’re more likely to use a flowchart than protest signs to fight big banks. But they identify with the movement’s animating belief that America’s financial heavyweights wield too much power, and that its political leaders are too eager to do their bidding.
As the more visible signs of the movement fade, with their encampments all but cleared from the country’s public spaces, the Occupy wonks have doubled down on their policy work behind the scenes. They’re slowly gaining attention for their efforts — not just from the news media, but also from the some of the financial rulemakers and gatekeepers they’re hoping to influence.
Most of the wonks in New York jumped into the movement like everyone else: They showed up at Zuccotti Park last fall, curious about the gathering, sympathetic to its cause and uncertain what would happen next. But as Occupy Wall Street evolved and branched off in different directions, they found themselves gravitating to the “working groups” that aimed to reform big finance from the inside out. And some saw an opportunity to make change in a very unlikely place: the regulatory process.
While the Dodd-Frank act of 2010 provides a blueprint for the new regulations on Wall Street, it’s up to federal regulators to determine precisely how these guidelines will be put into effect. The regulatory process is intended to provide transparency into this process: Regulators will typically issue a preliminary version of a new rule and then allow for outside feedback during a public comment period.
Anyone is allowed to weigh in. But industry groups, lawyers and lobbyists issue an overwhelming number of formal comment letters to regulators, as they tend to have the most money, resources and technical expertise. The immense complexity of the Volcker Rule has proven daunting even to the country’s biggest banks and lobbying groups, which have devoted teams of lawyers and number-crunchers to puzzle out its impact on the industry.
Occupy the SEC aims to be a counterweight to this deep-pocketed lobbying push. Over the past six months, the Occupiers have slogged through the 300-plus pages of the Volcker Rule to figure out how the regulation would work in practice and whether it would — or could — come anywhere close to what its authors had intended.
The group began meeting in late October on a bench near Zuccotti Park. Then they moved to a nearby diner, until the waitstaff got fed up with their lingering, hours-long debates. Now they convene weekly at 60 Wall Street.
Its covered atrium is a “privately owned public space,” according to signs posted in the marble-lined space. Ironically enough, both Deustche Bank and JPMorgan once owned the property, and both still have U.S. headquarters there. Every Monday, Occupy the SEC pulls some chairs around an empty table to meet, working alongside fellow Occupiers planning everything from “cracking” empty buildings in the city to “squat-ins” to a summer music festival called Occupalooza (“I’d like to see a rapper — why can’t we get a rapper?”).
Listening to Occupy the SEC discuss Volcker, you would have thought that a few jaded Wall Street traders were talking shop on their coffee break — which, in fact, wasn’t far from the truth.
Kline, one of the group’s resident wonks on financial transactions, is a former credit derivatives trader. Alexis Goldstein, another core member, was a business analyst for Deutsche Bank’s equity derivatives desk until 2010. Akshat Tewary, a lawyer in private practice, had come to the meeting straight from work, still dressed in a white button-down and dark dress slacks. The group also includes a few newbies who’ve gotten a crash course in banking regulation, including Corley Miller, a young aspiring novelist, and Eric Taylor, an unemployed anthropologist and part-time military officer.
“I felt I wasn’t doing anything to help the wider world,” Goldstein says. “I don’t think it’s a contribution to be making wealthy people wealthier.”
Taylor sees it this way: “What unites us with the Occupy movement is a strong belief in direct action. Direct action can take many forms — you can have protests, but you can also look at the devil that’s in the details.”
Just a few weeks earlier, Occupy the SEC had submitted its first official letter on Volcker to the SEC, holding marathon 12-hour meetings through the weekends to finish the response before the agency’s Feb. 13 deadline for comment. Now they’re trekking to Washington to present their 325-page treatise before federal regulators in official meetings with the FDIC, the Federal Reserve, the Office of the Comptroller of the Currency, and, yes, the SEC.
Last week, they met with 60-odd congressional staffers, including some Republicans, to give them a closed-door briefing on the regulation. And at the end April, the group is slated to sit down with Paul Volcker himself, the former Federal Reserve chair and namesake of the regulation.
The group has also worked on responses to scores of questions that the CFTC has raised about the Volcker Rule, which falls under the jurisdiction of multiple federal agencies — yet another source of regulatory headaches that the Occupy wonks are trying to sort out. Next up? Probably a comment letter on the Federal Reserve’s guidelines for determining which banks will be considered “systemically important” and thus subject to additional oversight.
Occupy the SEC is, in other words, working the system. And that can cause tension within a movement with members who would prefer to blow the system up.
Even among the Occupy’s wonky set, some remain highly skeptical that any iteration of Dodd-Frank can make a meaningful difference. “I don’t believe you can appeal to Washington to reform the system. The grip of lobbyists on Washington is so great,” says Carne Ross, a former British diplomat who now lives in New York. “And given the pressures that exist in the industry, the banks are just going to innovate some kind of financial product that cannot be foreseen, and that won’t be affected by a piece of legislation like Dodd-Frank.”
Ross has helped establish another Occupy offshoot that is aiming to create an alternative banking system — a national “people’s bank” owned by its customers and employees that’s “accessible to everyone, including the poorest,” he says. Like Occupy the SEC, the Occupy Bank group emerged from an ad hoc gathering last fall as the movement was gaining broader appeal. Ross left a sign-up sheet on a table in Zuccotti Park for those interested in discussing bank reform, and Occupiers showed up in droves for the first meeting in his Union Square office.
Unlike many Occupy wonks, Ross had come from the world of diplomacy, not finance, but he found himself similarly disillusioned with the establishment: He had resigned from the British foreign service in 2004 after concluding that his country had gone to war in Iraq on false pretenses. But the financial meltdown had turned his attention to the banking system — and the possibility of creating a new one from scratch rather than trying to fix the flaws in the current system.
Meeting weekly at Ross’s Manhattan office, the Occupy Bank has since shrunk to a core of a dozen dedicated members, most bona fide experts in their fields, including a former SEC regulator and the former head of a community bank in Chicago. After months of research, however, the group is still grappling with the best way to structure a bank that not only conforms to their ideals, but is also commercially viable.
The group has looked to credit unions, community banks and co-ops for inspiration. Obtaining a bank charter from the FDIC is a long, complicated process, so members are considering a gradual ramp-up instead, setting up what’s known as a benefit corporation that would allow the Occupy Bank to offer basic banking services. To that end, the group has been talking to existing banks, which Ross declines to name, about forming such a corporation within their auspices to help get the Occupy Bank off the ground.
In other words, this isn’t just a political or intellectual exercise: Like Occupy the SEC, the group believes in going beyond the protest rhetoric, channeling the energy behind the populist movement to push for more concrete, pragmatic solutions. “There is a real limit to the effectiveness of protest,” Ross says. “It is more practical and more plausible to build up something, to build a new system to replace it.”
Unlike credit unions, which have restricted lending limits to businesses and typically target a specific community, the Occupy Bank would offer a full range of banking services to all customers; unlike community banks, it would ultimately have a national reach. “I personally think there is enormous market potential for a bank of the kind we described,” Ross says. “If you get it right, it could potentially change the system, which is not only politically but commercially ripe for revolution.”
In fact, Occupy Wall Street already has a track record of persuading the broader public to consider alternatives to the financial system’s status quo. On Nov. 5 — Guy Fawkes Day, inspired by a 16th-century English revolutionary — the movement was among the groups supporting “Move Your Money Day,” a grassroots campaign to persuade customers of the country’s big banks to transfer their funds to smaller institutions. Over $50 million was transferred that weekend, while new accounts cropped up in credit unions and community banks across the country.
In the grand scheme of the U.S. banking system, $50 million is pocket change. But Occupiers believe the campaign is yet another sign that it’s possible to direct the public’s simmering anger against Wall Street into concrete, if gradual, change within the existing financial system. That’s the focus of the Alternative Banking Group, another Occupy working group that spun off from the original Occupy Bank meeting in Carne Ross’s office last fall.
The Alternative Banking Group is less narrowly focused than the two other Occupy groups. The membership, too, is a hodgepodge: Those attending a meeting in early March included Michael Hudson, an economic adviser for Rep. Dennis J. Kucinich; a black-clad activist wearing fingerless gloves; a mathematics doctoral student; a former trader from Bear Stearns; and Manny Manhattan, who hosts an eponymous public-access TV program (“Make sure you mention my show,” he said repeatedly).
Perhaps because of its eclectic membership, Alt. Banking, as it is known, has focused more on educating its members and the public about the basic workings of the U.S. financial system. Cathy O’Neil, one of the group’s organizers, became involved in the movement by holding teach-ins on Wall Street — and she spoke from personal experience. A self-described quant who once worked at D.E. Shaw, O’Neil was inspired to go down to Zuccotti Park to correct an egregious falsehood being spread about the financial system — not by a Wall Street mouthpiece, but by an Occupy activist.
“He said to fix the financial system, we should ban short-selling. I found that to be a really ignorant perspective,” O’Neil said. “But I could either dismiss these guys for being ignorant or help inform them about the financial system.” In the first few months, the Alt. Banking group did just that, laying out how Wall Street worked, who the players were. “We think that only experts are allowed to have opinions,” O’Neil adds. “But you don’t have to understand a system completely to understand that it’s not working for you.”
The group has since tried to put its ideas about reforming the system into action, but its efforts have mostly been scattershot. It’s dabbled in the regulatory process, sending a comment letter to the Consumer Financial Protection Bureau to push for stronger oversight of credit bureaus. It’s putting together an amicus brief for a securities fraud case against Citigroup, a Web app to help people locate credit unions and a deck of playing cards illustrating the “top 52 villains of the financial crisis.” Last week, it wrote a letter to Citi CEO Vikram Pandit, urging him to engage in a public conversation about executive pay.
But the group’s comparatively broad mission points to some of the challenges facing the Occupy movement as a whole: How can a leaderless, consensus-driven movement survive when there are such diffuse interests and major disagreements about the best way forward? Can the chart-wielding wonks and the sign-wielding activists really get along?
In the eyes of some Occupiers, after all, the bankers are still the enemy. One discussion group at last month’s Alt. Banking meeting was devoted to “Psychopathy and Finance.” One participant referenced a Polish study that showed that those who lead our society — corporate executives, financiers and the like — tend to exhibit psychopathic personalities, as the system rewards them for being ruthless.
“Yeah, they’re all psychopaths, so what are you going to do about it?” said the former Bear Stearns and Barclays trader, a Russian immigrant in her late 30s who came to New York over a decade ago and who’s been unemployed since 2009. “There’s such a vast gap, so much hostility . . . It’s counterproductive, not understanding them. It’s important to develop that understanding,” she said, fiddling with her BlackBerry.
But like many Occupy wonks, the ex-trader — who declined to be named for fear that word would get back to her old bosses — sees herself as an emissary of sorts between Occupy and Wall Street. Last month, she brought a flow-chart to the Alt. Banking meeting that broke down the details of February’s $25 billion mortgage fraud settlement and proceeded to explain how mortgage servicing worked to a handful of skeptical activists.
Goldstein, for one, ultimately hopes that her group’s immensely technical undertaking can gain a broader grassroots audience. Occupy the SEC’s Volcker letter has garnered mention in the Financial Times, Reuters, and Businessweek, among other major financial news outlets. But Goldstein has been most heartened to hear about a supporter who printed out all 325 pages of Occupy’s comment letter on the regulation and hand-delivered it to a member of the Fed making a public appearance.
During last month’s meeting, she put it another way: The highest praise would be to hear that “they’re making bureaucracy sexy.”