Why Obama Must Take On Wall Street
By Robert Reich
January 13, 2010
It has been more than a year since all hell broke loose on Wall Street and, remarkably, almost nothing has been done to prevent all hell from breaking loose again.
All could be forgiven if the House and Senate committees with responsibility for coming up with new regulations were about to come down hard on the Street and if the Obama administration were pushing them to. But nothing of the sort is happening. Yes, the White House has indicated interest in charging banks for the cost of the bailout, but this is not real reform; it’s just making up for some of the direct costs of cleaning up the mess.
The bill that has already emerged from the House is hardly encouraging. Dubbed the “Wall Street Reform and Consumer Protection Act”, it effectively guarantees future Wall Street bail-outs. The bill authorises Fed banks to provide up to $4,000bn in emergency funding the next time the Street crashes. That is more than twice what the Fed pumped into financial markets last year. The bill also enables the government, in a banking crisis, to back financial firms’ debts – a wonderful insurance policy if you are a bondholder. To be sure, the bill authorises the Fed and Treasury to spend these funds only when “there is at least a 99 per cent likelihood that all funds and interest will be paid back,” but predictions about pending economic disasters can be conveniently flexible, especially when it comes to bailing out the Street.
If this were not enough, the House bill creates regulatory loopholes big enough for bankers to drive their Ferraris through. Consider derivatives. Last year, as taxpayers threw money at the Street, congressional leaders promised to put derivative trading on public exchanges. The prices of derivatives could be disclosed and margin requirements imposed, making it more likely that traders would make good on their bets. Yet the House bill exempts nearly half the $600,000 billion of outstanding derivatives trades.
The bill also allows – but, notably, does not require – regulators to “prohibit any incentive-based payment arrangement”. This makes fat bonuses the norm unless a regulator has reason to prevent them. And as we witnessed last year, bank regulators tend not to disturb the status quo. The House bill does not even make an attempt to unravel the conflict of interest that led credit ratings agencies to turn a blind eye to the risks the Street was taking on.
What is truly remarkable is what Congress and the administration have shown no interest in doing. Large numbers of Americans have lost their homes to bank foreclosures or are in danger of doing so. Yet American bankruptcy law does not allow homeowners to declare bankruptcy and have their mortgages reorganised. If it did, homeowners would have more bargaining power to renegotiate with banks. But neither Congress nor the administration has pushed to change the bankruptcy laws. Wall Street opposes such change and was instrumental in narrowing the scope of personal bankruptcy in the first place.
Nor have lawmakers shown any enthusiasm for resurrecting the wall that used to exist between commercial and investment banking. The Glass-Steagall Act, passed in the wake of the Great Crash of 1929, separated the two after it became obvious that commercial deposits needed to be insured by government and kept distinct from the betting parlour of investment banking. But Wall Street forced Congress to take down the wall in 1999, enabling financial supermarkets such as Citigroup to use its deposits to make all sorts of bets. Even Obama adviser and former Fed chief Paul Volcker has argued that the two functions should be separated again.
Nor is anyone talking seriously about using antitrust laws to break up the biggest banks – the traditional tonic for any capitalist entity that is “too big to fail”. Five giant Wall Street banks now dominate US finance. If it was in the public’s interest to break up giant oil companies and railroads a century ago, and the mammoth telephone company AT&T, it is not unreasonable to break up the almost infinitely extensive tangles of Citigroup, Bank of America, JPMorgan Chase, Goldman Sachs and Morgan Stanley. No one has offered a clear reason why giant banks are important to the US economy. Logic and experience suggests the reverse.
Please read the full article at:
http://robertreich.org/post/331917854/why-obama-must-take-on-wall-street
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