Ed's Blog

Wall St. Computers Run Amok and More Friday Financial Follies

By Ed Mierzwinski
Consumer Program Director

Will the blowback from Wednesday's Wall Street high-speed trading crash caused by the firm Knight Capital's computers running amok revitalize efforts to enact a PIRG-backed small tax on stock transactions? From the New York Time story "Errant Trades Reveal a Risk Few Expected:"

Excerpt: "In its debut Wednesday, the software went awry, swamping the stock market with errant trades and putting Knight’s future in jeopardy. The fiasco, the third stock trading debacle in the last five months, revived calls for bolder changes to a computer-driven market that has been hobbled by its own complexity and speed. Among the proposals that gained momentum were stringent testing of computer trading programs and a transaction tax that could reduce trading [...] , which would force firms to pay a small levy on each trade. At the right level, this could pare back high-frequency trading without undermining other types, supporters say. [...] Opponents of such a levy say that it could hurt the markets and even make it more expensive for companies to raise capital. But Representative [Peter] DeFazio [OR], who favors a levy of three-hundredths of a percentage point on each trade, says he thinks the benefits of high-frequency trading are overstated. “Some people say it’s necessary for liquidity, but somehow we built the strongest industrial nation on earth without algorithmic trading,” he said.

The financial transactions tax, of course, would not only attenuate these technical risks in high-speed trading, it would have other benefits, as Wally Turbeville, Senior Fellow at Demos explained at a recent Americans for Financial Reform event:

The whole purpose of the speculation tax is to charge a very very small amount on a huge – $125 to 150 trillion per year – volume of activity. It is not the kind of additional cost that is going to materially affect any firm’s behavior in terms of where they locate their business. But the tax will curb some behaviors in ways that could be very helpful for the entire economy, including spurring job creation and limiting income disparity. The real effect is going to be on banks that make trades in millisecond time periods that are only on the books for a short period of time. These kinds of transactions are not designed in any way to help businesses and governments raise money for pension funds and endowments.  They are not sources of capital that can fund new projects that contribute to the productivity of the economy. They are designed merely to generate profits from the process of the capital markets. A tax on these types of trades will curb the extraction value from the markets while making them more stable in the process.

Meanwhile, here are some more toplines on the rest of the week's financial follies.

No Principal Reductions for Foreclosure Relief this week: Rep. Barney Frank (MA), Treasury Secretary Tim Geithner, the National Council of La Raza, Nobelist Paul Krugman ("Fire Ed DeMarco"), The New Bottom Line coalition and many others are among those criticizing or even calling for the head of Fannie/Freddie overseer Ed DeMarco, the Federal Housing Finance Agency (FHFA) acting director, over his announced refusal to allow principal reductions as a tool to help families stay in their homes and boost the economy.

But Some Help Against Foreclosure Relief Scams: Well, at least there is some relief for families already threatened with being thrown out of their homes being further victimized by foreclosure rescue scams. This week, the CFPB's first foreclosure relief enforcement action (WSJ blog) was unsealed by a court. Here is a copy of the complaint against a web allegedly run out of the Gordon Law Firm by attorney Chance Gordon and (from the WSJ blog):

"his business partner, Abraham Pessar, and two of Mr. Pessar’s companies, Division One Investment and Loan Inc. and Processing Division LLC. Messrs. Gordon and Pessar “used consumers’ last dollars to fund a lavish lifestyle, including expensive cars, dinners, and nightclubs,” the bureau said in court documents."

The Benefits of Wall Street Reform are featured in a new deck of charts from the U.S. Treasury Department, which includes several slides on the CFPB.

Was He In A Funk #49? Finally, at the latest of too many House hearings looking for fault with the CFPB, this one in the Small Business Committee, Rep. Joe Walsh (IL) appeared to have what his namesake, rock star Joe Walsh, might call a Funk #49 (here's the other Joe Walsh live w/ Booker T and the MGs, doing Funk #49 with a long blues intro), when he repeatedly (but thankfully not 49 times) asked CFPB director Richard Cordray about absolutely non-existent CFPB examination requirements: First, he asks, won't his constituent small banks and small mortgage firms be summoned to Washington, DC merely to be notified of pending examinations? Second, he asks, isn't it also true that either director Cordray or deputy director Raj Date must be in the room for all those (non-existent) DC examinations or notices thereof? Cue this hearing video to minute 39:55; watch for next few minutes. Yikes. Where exactly do these CFPB myths come from and when will the House simply saddle up and move on?

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