Is it just me, or does the current proposed financial reform sound somehow engineered by the very banks that caused this mess? It feels a lot like the suspicions I had around the distribution of TARP funds. We give these financial geniuses billions of our tax dollars to cover their bad bets—but heaven forbid we demand an accounting for what they do with it. I guess you can just add the phrase “political transparency” to your list of oxymorons, eh? So much for hope and change …
So let’s talk about “too big to fail” for a moment and examine the stakes involved here. Of the more than 8000 banks we still have left in the country, just four control nearly 40 percent of our country’s deposits: Wells Fargo, Bank of America, Chase, and Citibank. Now add everyone’s favorite, Goldman Sachs, and let’s talk about that nasty unregulated derivatives market. These five institutions have 97 percent of the industry’s notional derivative exposure (nearly $200 trillion1 still). If ever there was a case to be made for breaking up and compartmentalizing an industry into smaller parts, this one screams for intervention on the public’s behalf. You would think that would be particularly clear, given the fact that these very derivatives exposures (read as huge potential capital shortfalls) nearly just caused worldwide financial collapse. So clear, in fact, that even John Reed, the former head of Citicorp, apparently now agrees.
For those of you who don’t know, it was John Reed and Sandy Weill, CEO of the Travelers Group, who in 1998 arranged the $76 billion merger between Citibank and Travelers. Travelers owned the investment house Salomon Smith Barney, and combining all these together made Citigroup the world’s largest financial services company. However, this deal would not have been possible without the repeal of the Depression Era Glass Steagall Act in 1999. The Glass Steagall Act of 1933 expressly outlawed combining insurance underwriting, securities underwriting, and commercial banking together. You see, the first Great Depression had something to do with the financial sector being grossly over leveraged and operating in an environment laden with conflicts of interest and fraud. Talk about your déjà vu, huh? Oh, and did I mention the Glass Steagall Act would have also prevented this unregulated derivatives market from ever forming? So there’s that.
But wait, you ask, “These dates aren’t right!? How did a deal that violated federal law get done in 1998, if the law wasn’t repealed until over a year later in 1999?” Well, children, that it what my people call a successful “lobbying effort.”
For those of you without a proper legal background, “lobbying” is the legal form of bribery we allow of our public officials, by large commercial entities. These same officials justify this form of bribery as the “lobbyist’s right to free speech.” The practical form this “free speech” takes is, of course, as enormous campaign contributions. Those contributions are deposited directly to the personal campaign fund of the given public official, to squander as lavishly as he or she sees fit.2
Anyway, Mr. Weill and Mr. Reed made a bet that they had enough “free speech” on their balance sheets to get this Glass Steagall law repealed. They quickly added Gerald Ford (former U.S. President) and Robert Rubin (former Secretary of the Treasury under President Clinton) to their Board of Directors. So with both sides of the political isle covered and even more “free speech” to pass around, it only took a year and a half to take down this 66-year-old law that had served us all so well. President Clinton himself signed the repeal into law. So now you can all fully appreciate how ironic it is that John Reed now thinks: “As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense. This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.”3 Gee, Mr. Reed, what a keen grasp of the obvious you have.
Okay, so with the likes of Paul Volcker, and even our own Mr. Reed, singing the praises of breaking up these “too big to fail” banks, why does the current Administration’s reform effort appear headed in the opposite direction? After making Mr. Volcker head of his Economic Recovery Board, you would think it was because President Obama thought he might have some sense about how to fix this mess we are in. Well, not so much it seems. Both the senate and house versions of financial reform legislation create new super regulators and/or new government agencies, possibly funded with mandatory contributions from the “too big to fail” banks. This fund would then be used in the event the “too big to fail banks” pull this stunt again. But by doing so, this “too big too fail” notion is memorialized and codified into law. In other words, under these proposed reform measures, we accept having institutions large enough to pose a systemic risk, but we create an insurance policy for when it happens again. So you tell me, how would you ever know the fund was adequate and who would oversee the safety of such a large fund? Mmm … I seem to recall another large fund set up for insurance purposes. I believe they called it Social Security, but no one seems to know where all that money went either. And whose idea is this again? Well, I don’t know about you, but it sure sounds like a lot of “free speech” to me.
My advice for you? Use some real free speech and contact your representatives to demand some kind of common sense reform. In the meantime, mortgage rates won’t likely be this low again next year. So, if you are going to do anything with real estate, do it sooner rather than later.
1 According to the Office of the Comptroller of Curreny’s quarterly report on Bank Trading and Derivatives Activities 4th quarter 2008.
2 Feel free to Google “Keating Five” for further case studies in these sorts of effective lobbying efforts.
3 The New York Times, in a letter to the editor, published Oct. 22, 2009.
