Politics & Law

Wall Street is still out of control; break up the banks

Robert Reich

Next week President Obama travels to Wall Street where he’ll demand – in light of the Street’s continuing antics since the bailout, as well as its role in watering-down the Volcker rule – that the Glass-Steagall Act be resurrected and big banks be broken up.

I’m kidding. But it would be a smart move — politically and economically.

Politically smart because Mitt Romney is almost sure to be the Republican nominee, and Romney is the poster child for the pump-and-dump mentality that’s infected the financial industry and continues to jeopardize the American economy.

Romney was CEO of Bain & Company— a private-equity fund that bought up companies, fired employees to save money and boost performance, and then resold the firms at a nice markups.

Romney also epitomizes the pump-and-dump culture of America’s super rich. To take one example, he recently purchased a $3 million mansion in La Jolla, California (in addition to his other homes) that he’s razing in order build a brand new one.

What better way for Obama to distinguish himself from Romney than to condemn Wall Street’s antics since the bailout, and call for real reform?

Economically it would be smart for Obama to go after the Street right now because the Street’s lobbying muscle has reduced the Dodd-Frank financial reform law to a pale reflection of its former self. Dodd-Frank is rife with so many loopholes and exemptions that the largest Wall Street banks – larger by far than they were before the bailout – are back to many of their old tricks.

It’s impossible to know, for example, the exposure of the Street to European banks in danger of going under. To stay afloat, Europe’s banks will be forced to sell mountains of assets – among them, derivatives originating on the Street – and may have to reneg on or delay some repayments on loans from Wall Street banks.

The Street says it’s not worried because these assets are insured. But remember AIG? The fact Morgan Stanley and other big U.S. banks are taking a beating in the market suggests investors don’t believe the Street. This itself proves financial reform hasn’t gone far enough.

If you want more evidence, consider the fancy footwork by Bank of America in recent days. Hit by a credit downgrade last month, BofA just moved its riskiest derivatives from its Merrill Lynch unit to a retail subsidiary flush with insured deposits. That unit has a higher credit rating because the Federal Deposit Insurance Corporation (that is, you and me and other taxpayers) are backing the deposits. Result: BofA improves its bottom line at the expense of American taxpayers.

Wasn’t this supposed to be illegal? Keeping risky assets away from insured deposits had been a key principle of U.S. regulation for decades before the repeal of Glass-Steagall.

The so-called “Volcker rule” was supposed to remedy that. But under pressure of Wall Street’s lobbyists, the rule – as officially proposed last week – has morphed into almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.

It would have been far simpler simply to ban proprietary trading from the jump. Why should banks ever be permitted to use peoples’ bank deposits – insured by the federal government – to place risky bets on the banks’ own behalf? Bring back Glass-Steagall.

True, Glass-Steagall wouldn’t have prevented the fall of Lehman Brothers or the squeeze on other investment banks in 2007 and 2008. That’s why it’s also necessary to break up the big banks.

In the wake of the bailout, the biggest banks are bigger than ever. Twenty years ago the ten largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent. And the biggest four have a larger market share than ever – so large, in fact, they’ve almost surely been colluding. How else to explain their apparent coordination on charging debit card fees?

The banks aren’t even fulfilling their fiduciary duties to investors. Last summer, after Groupon selected Goldman Sachs, Morgan Stanley, and Credit Suisse to underwrite its initial public offering, the trio valued it at a generous $30 billion. Subsequent accounting and disclosure problems showed this estimate to be absurdly high. Did the banks care? Not a wit. The higher the valuation, the fatter their fees.

Just last week Citigroup settled charges (without admitting or denying guilt) that it defrauded investors by selling them a package of mortgage-backed securities rife with mortgages it knew were likely to default, but didn’t disclose the hazard. It then bet against the package for its own benefit – earning fees of $34 million and net profits of at least $126 million. So what’s Citi paying to settle this outrage? A mere $285 million. Its CEO at time (Charles Prince) doesn’t pay a dime.

I doubt the President will be condemning the Street’s antics, or calling for a resurrection of Glass-Steagall and a breakup of the biggest banks. Democrats are still too dependent on the Street’s campaign money.

That’s too bad. You don’t have to be an occupier of Wall Street to conclude the Street is still out of control. And that’s dangerous for all of us.

Cross-posted from Robert Reich’s blog.

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Comments to "Wall Street is still out of control; break up the banks":
    • Xinghu

      “[Obummer &] Wall Street is still out of control; break up the banks ”

      corrected your faux pas there RR. Obummer is the leader of the pack. He talks a good game but decieves the masses by robbing the poor and giving to his rich Steeters! You are the top 1%, and occupy needs to be in your office and classroom. Your old boss, Billy the liar Clinton has $100,000,000 in his bank account, must be nice robbing the poor and giving it to a McCheese Head Clintonian goofy intellect.

      But the rich and filthy rich are your ilk blood, no escaping facts. ;)

      [Report abuse]

    • K jung

      Three comments: What happenened to the Gold when Nixon changed our monitary standard whoe’s benefitting from it now.
      STOP NAFTA NOW AND BRING BACK OUR JOBS THAT’S THE BACKBONE OF THIS COUNTRY.
      wHY DO MOTHERS HAVE TO PAY FOR HAVING BABIES WHEN THEI PLACENTAS AND UMBILICAL CORDS ARE SOLD FOR BIG MONEY TO PHARMICUTICAL COMPANIES AND COSMETIC COMPANIEIS FOR $50.00 an oz. circa 1970. My placenta bought my doctor a new yaught,
      Listen to this. WE WANT OUR JOBS BACK HOME WHO DOESN’T GET THAT?

      [Report abuse]

    • Victor S. Reuther

      Not until we have campaign finance reform, will America be returned to Americans. It’s a necessary precondition for the most essential changes our society requires. It is time for politicians to leave the pockets of corporate businessman. Will this election cycle even give lip service to this pertinent matter?

      Of, By, and For the People — not Corporation. It’s strange how these sentiments can be spun into an assault on liberty. Our society is on life support, and there is not a doctor to be seen.

      BTW — I recently finished reading “Locked in the Cabinet”, it was a very enjoyable and provided a great look into our dysfunctional political system.

      Thanks Mr. Reich for your clairvoyant prose.

      [Report abuse]

    • Anthony St. John

      Indeed “And that’s dangerous for all of us.”

      Congratulations Bob, you keep proving in every post that we are following in the footsteps of every civilization before ours that has always ended up with avaricious, corrupt people in control of our destiny who don’t give a damn about anyone but themselves, much less the long term future of humanity.

      You ought to get some kind of award for this, because if our politicians and intellectuals fail our civilization as they have all others you should at least be awarded a Nostradamus Prize.

      [Report abuse]

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