http://www.truth-out.org/opinion/item/18072-glass-steagall-now-because-the-banks-own-washington
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Glass-Steagall Now: Because the Banks Own Washington
Friday, 09 August 2013
By Dean Baker, Campaign for America's Future | Op-Ed
A bipartisan group of senators recently put forward a proposal for new Glass-Steagall legislation that would restore a strict separation between commercial banks and speculative trading. Anyone familiar with the ways of Washington knows that such legislation is badly needed. It is the only way to prevent the Wall Street gang from continuing to rip off the public and subjecting the rest of us to the risks of their speculation.
The idea of the original Glass Steagall was to create two completely distinct types of banks. On the one hand there would be the standard commercial banks with which most of us are familiar. These are the banks where people have checking and savings accounts and where they might go to take out a mortgage or small business loan.
Because of the central role that commercial banks play in the day-to-day workings of the economy, the government established the Federal Deposit Insurance Corporation (FDIC) to guarantee the vast majority of accounts in full. The goal was to let people know that their money is safe in the bank.
Since the government guaranteed the money, people need never worry about racing to the bank to get their money before the bank vault is empty. As a result we have not seen the sort of old-fashioned bank-runs that were a mainstay of the pre-FDIC era.
The quid pro quo for having the government guarantee deposits was that commercial banks were supposed to restrict their loans to a limited number of relatively safe activities, such as mortgage loans, small business loans, car loans and other simple and standardized forms of credit. These restrictions are essential, because if customers know their money is guaranteed by the government, they won’t care if their bank is taking enormous risks. The government must act to impose discipline on bank behavior that will not come from the market when deposits are insured.
By contrast, investment banks were set free to engage in whatever risky behavior they liked. Investment banks did not take deposits but rather raised money through issuing bonds or other forms of borrowing. In principle, their potential failure did not pose the same risk to the economy.
The ending of Glass-Steagall removed the separation between investment banks and commercial banks, raising the possibility that banks would make risky investments with government-guaranteed deposits. In principle, even after the ending of Glass Steagall banks were supposed to keep a strict separation between their commercial banking and the risky bets taken by their investment banking divisions, but this depends on the ability of regulators to enforce this restriction.
The Volcker Rule provision in Dodd-Frank was an effort to re-establish a Glass Steagall type separation but the industry is making Swiss cheese out of this regulation in the rule-writing process. Serious people cannot believe that this will keep the Wall Street banks from using their government-guaranteed deposits as a cushion to support their speculative game playing.
If anyone questions how this story is likely to play out in practice, we need only go back a few years to the financial crisis of 2008-2009. At that time, most of the major banks, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley, almost surely would have failed without government support.
In fact, some of the top economic advisors in the Obama administration wanted to let them fail and have the government take them over, as the FDIC does all the time with insolvent banks. However Larry Summers managed to carry the day by arguing that such a move would be far too risky at a time when the financial markets were so unsettled. As a result, the big banks got their government money and were allowed to consolidate so that they are now bigger than ever.
This was primarily a problem of banks that are too big and too interconnected to fail, not just a problem of commercial banks merging with investment banks. But these mergers certainly help banks to reach too-big-to-fail status.
Some may argue that the crisis of 2008-2009 involved extraordinary circumstances. However when banks fail it is generally because the economy faces a crisis. They do not typically fail in good times. And it is a safe bet that there will always be a smart and belligerent Larry Summers on the scene aggressively arguing the case against anyone who wants to subject the banks to market discipline.
What is striking about the argument on re-instating Glass-Steagall is that there really is no downside. The banks argue that it will be inconvenient to separate their divisions, but companies sell off divisions all the time.
They also argue that foreign banks are not generally required to adhere to this sort of separation. This is in part true, but irrelevant.
Stronger regulations might lead us to do more business with foreign-owned banks since weaker regulations could give them some competitive edge. That should bother us as much as it does that we buy clothes and toys from Bangladesh and China.
If foreign governments want to subject themselves and their economies to greater risk as a result of bad financial regulation, that is not an argument for us to do the same. Are we anxious to be the next Iceland or Cyprus?
In short, the senators are on the right track pushing for a new Glass-Steagall. The public should hope that bankers’ lobby doesn’t derail their efforts.
This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.
https://www.facebook.com/pages/The-Panopticon-Review/342702882479366
Glass-Steagall Now: Because the Banks Own Washington
Friday, 09 August 2013
By Dean Baker, Campaign for America's Future | Op-Ed
(Photo: Remis Velisque / Flickr)
A bipartisan group of senators recently put forward a proposal for new Glass-Steagall legislation that would restore a strict separation between commercial banks and speculative trading. Anyone familiar with the ways of Washington knows that such legislation is badly needed. It is the only way to prevent the Wall Street gang from continuing to rip off the public and subjecting the rest of us to the risks of their speculation.
The idea of the original Glass Steagall was to create two completely distinct types of banks. On the one hand there would be the standard commercial banks with which most of us are familiar. These are the banks where people have checking and savings accounts and where they might go to take out a mortgage or small business loan.
Because of the central role that commercial banks play in the day-to-day workings of the economy, the government established the Federal Deposit Insurance Corporation (FDIC) to guarantee the vast majority of accounts in full. The goal was to let people know that their money is safe in the bank.
Since the government guaranteed the money, people need never worry about racing to the bank to get their money before the bank vault is empty. As a result we have not seen the sort of old-fashioned bank-runs that were a mainstay of the pre-FDIC era.
The quid pro quo for having the government guarantee deposits was that commercial banks were supposed to restrict their loans to a limited number of relatively safe activities, such as mortgage loans, small business loans, car loans and other simple and standardized forms of credit. These restrictions are essential, because if customers know their money is guaranteed by the government, they won’t care if their bank is taking enormous risks. The government must act to impose discipline on bank behavior that will not come from the market when deposits are insured.
By contrast, investment banks were set free to engage in whatever risky behavior they liked. Investment banks did not take deposits but rather raised money through issuing bonds or other forms of borrowing. In principle, their potential failure did not pose the same risk to the economy.
The ending of Glass-Steagall removed the separation between investment banks and commercial banks, raising the possibility that banks would make risky investments with government-guaranteed deposits. In principle, even after the ending of Glass Steagall banks were supposed to keep a strict separation between their commercial banking and the risky bets taken by their investment banking divisions, but this depends on the ability of regulators to enforce this restriction.
The Volcker Rule provision in Dodd-Frank was an effort to re-establish a Glass Steagall type separation but the industry is making Swiss cheese out of this regulation in the rule-writing process. Serious people cannot believe that this will keep the Wall Street banks from using their government-guaranteed deposits as a cushion to support their speculative game playing.
If anyone questions how this story is likely to play out in practice, we need only go back a few years to the financial crisis of 2008-2009. At that time, most of the major banks, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley, almost surely would have failed without government support.
In fact, some of the top economic advisors in the Obama administration wanted to let them fail and have the government take them over, as the FDIC does all the time with insolvent banks. However Larry Summers managed to carry the day by arguing that such a move would be far too risky at a time when the financial markets were so unsettled. As a result, the big banks got their government money and were allowed to consolidate so that they are now bigger than ever.
This was primarily a problem of banks that are too big and too interconnected to fail, not just a problem of commercial banks merging with investment banks. But these mergers certainly help banks to reach too-big-to-fail status.
Some may argue that the crisis of 2008-2009 involved extraordinary circumstances. However when banks fail it is generally because the economy faces a crisis. They do not typically fail in good times. And it is a safe bet that there will always be a smart and belligerent Larry Summers on the scene aggressively arguing the case against anyone who wants to subject the banks to market discipline.
What is striking about the argument on re-instating Glass-Steagall is that there really is no downside. The banks argue that it will be inconvenient to separate their divisions, but companies sell off divisions all the time.
They also argue that foreign banks are not generally required to adhere to this sort of separation. This is in part true, but irrelevant.
Stronger regulations might lead us to do more business with foreign-owned banks since weaker regulations could give them some competitive edge. That should bother us as much as it does that we buy clothes and toys from Bangladesh and China.
If foreign governments want to subject themselves and their economies to greater risk as a result of bad financial regulation, that is not an argument for us to do the same. Are we anxious to be the next Iceland or Cyprus?
In short, the senators are on the right track pushing for a new Glass-Steagall. The public should hope that bankers’ lobby doesn’t derail their efforts.
This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.
Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research
http://www.truth-out.org/opinion/item/18073-seven-things-about-prosecuting-wall-street-you-wanted-to-know
Seven Things You Wanted to Know About Prosecuting Wall Street
Friday, 09 August 2013
By Richard Eskow
Seven Things You Wanted to Know About Prosecuting Wall Street
Friday, 09 August 2013
By Richard Eskow
Campaign for America's Future | Op-Ed
(Photo: Justin Pickard / Flickr)
President Obama’s Justice Department, under the direction of Attorney General Eric Holder, hasn’t indicted a single bank executive for the massive Wall Street crime wave that devastated the economy. The regulatory reform that followed the 2008 crisis wasn’t nearly enough, and yet Republicans are trying to weaken even that.
And just this week there were several news stories about bank crime. What do they mean? Why haven’t any bankers gone to jail? What’s going on in this country?
Here are seven things about Wall Street crime and Washington “justice” you might have wanted to know, but were probably too depressed to ask. It’s true that there’s a shortage of justice where bankers are concerned. But don’t get depressed. Get serious – about demanding change.
1. Why did Holder say mega-banks are “too big to jail”?
Attorney General Holder recently said the Justice Department can’t indict too-big-to-fail banks because it would endanger the nation’s, and possible the world’s, economy. Those comments were misleading at best, because Holder doesn’t offer any plausible reason not to indict individual bank executives at those institutions.
Criminal indictments against bankers are necessary – both for the cause of justice, and the safety of our economy. And yet no bank executives have faced criminal prosecution.
Why did Holder make these comments? It’s called misdirection. It gets everybody thinking about one question – Why aren’t they indicting banks? – so they won’t think about a more important question: Why aren’t they indicting bankers?
2. If hurting ‘too big to fail’ banks is such a concern, why did the Justice Department and the Securities and Exchange Commission just sue Bank of America? By some measures it’s the biggest mega-bank of them all.
The latest lawsuit against Bank of America describes massive, systematic, and very deliberate fraud against investors who backed residential mortgage-backed securities (RMBS). Those investors included many pension funds, like the one that serves Detroit’s retirees. There’s evidence BofA bankers knowingly sold securities in which up to 40 percent of the mortgages failed to meet underwriting standards. That’s against the law.
Shareholders bear the costs and the consequences of these suits, which are directed against the banks as institutions – even when the suit in question involves fraud against the shareholders themselves. That means the executives who profit from criminal behavior have absolutely no reason not to commit those crimes again and again and again – which, as the record shows, is exactly what they have been doing.
Suits like these do not endanger the institution being sued. The amounts of money involved – $850 million, in this case – sound large. But they’re negligible when compared to the revenue at America’s bloated mega-banks.
The Justice Department’s indictment says things like this: “The Offering Documents contained untrue statements of material fact and omitted to state other material facts required to be disclosed that misled investors.” Note the use of the passive voice: The indictment doesn’t say “Defendants A through E published untrue statements …”
For the first statement to be true, the second statement must also be true. But to hear the Justice Department tell it, it’s as if these frauds committed themselves. Its pattern has been: Sue the bank, but only for amounts it can easily pay. And never hold the individuals who committed the fraud personally responsible.
3. Why sue Bank of America at all, if they’re in the banks’ pockets?
Here we’re getting into the realm of speculation. But Washington officials have multiple constituencies, presumably including wronged investors who want restitution of some kind.
They presumably want to make sure the banks’ exposure is kept manageable – from the bank’s perspective – but don’t want to anger the investors any more than necessary.
4. The Justice Department has said it’s too hard to get convictions in financial fraud cases. Is that true?
They’ve said it again and again: It’s too hard to win convictions in financial fraud cases. The brief response to that is: How would they know? They’ve never tried.
The longer answer to this question is:
More than 1,000 people were convicted after the much smaller savings and loan scandal of the 1980s. These are the words of law and economics professor William K. Black Jr., who was a regulator during that period:
“In the Savings and Loans crisis, which was 1/70th the size of this crisis, our agency made over 10,000 criminal referrals that resulted in the conviction on felony grounds of over 1,000 elites in what were designated as major cases.”
It wasn’t “too hard” to get a conviction then. But then, in those days they were trying.
It wasn’t hard to get convictions against low-level employees of GE Capitallast year on very complex charges involving bid-rigging fraud against municipalities.
That indictment - United States of America v. Carollo, Goldberg and Grimm – wasn’t brought by the President’s much-touted Mortgage Fraud Task Force, which has yet to produce any criminal indictments. Instead it was successfully prosecuted by local U.S. attorneys.
A rare courtroom victory against Goldman Sachs was achieved just last week. Needless to say, it was not against a Goldman executive, but against a relatively junior employee, trader “Fab” Tourre. It was not a criminal prosecution, but a civil case. And the verdict was won by the SEC, not the Justice Department.
5. Why don’t they want to indict bank executives?
Again, we’re dealing in speculation. But it isn’t hard to come up with a guess. Both Attorney General Holder and his recently departed No. 2, Lanny Breuer, had high-priced jobs defending Wall Street bank executives. Breuer has already cashed out and gone back to Covington & Burling, Holder’s once (and future?) firm, with a special title and position created especially for him.
As for elected officials, let’s face it: Bank executives write very big campaign checks. They also hobnob with powerful politicians. When JPMorgan Chase CEO Jamie Dimon testified before the Senate Banking Committee earlier this year about the “London Whale” scandal, only two of the senators facing him had not received campaign contributions from his bank. Dimon was also called “Obama’s Favorite Banker” for a while.
Another executive with a large financial operation, GE’s Jeffrey Immelt, was named head of the President’s “Jobs Council.” Immelt was responsible for GE Capital while those municipalities were being criminally defrauded in the case which became United States of America v. Carollo, Goldberg and Grimm.
6. Why are they saying that the SEC’s “winding down” its fraud investigations?
The Wall Street Journal ran an article today called “SEC’s Hunt for Crisis-Era Wrongdoing Loses Steam.” The article says that “securities regulators are quietly winding down some of their highest-profile investigations related to the crisis.”
The SEC’s pursuit of lawbreaking Wall Streeters had “steam”? Who knew?
One possible, and flippant, answer to this question: They got “Fab” Tourre. Their work here is done.
Another, more serious answer – the one the SEC prefers – is that the impending statute of limitations makes it more difficult to keep pursuing pre-2008 misdeeds. There’s some truth in that, although it underscores the bitter perception that the Justice Department and SEC chose to “run out the clock” on Wall Street’s crimes.
There is, however, some research being conducted into useful legal avenues that still may be open under national and/or New York state law. Negotiators in civil cases are also able to demand leadership changes, admissions of wrongdoing, and personal liability. They just haven’t done it.
There is no indication that federal authorities have an appetite for either route, however.
7. What can we do about it?
Don’t get depressed; get busy. Let elected officials, from the president on down, know that you want:
A full investigation of Wall Street crimes.
Expanded powers for the Consumer Financial Protection Bureau.
A reinstatement of Glass-Steagall and the breakup of too-big-to-fail banks.
A rejection of the Republicans’ lunatic plans to take already-inadequate bank regulations and weaken or eliminate them.
No more deals where banks “neither admit nor deny wrongdoing.”
You can also let them know that bankers sould personally pay for their misdeeds – with their money, their reputations, and their jobs.
Lastly, you can demand new leadership at the Department of Justice – leadership that takes the word “Justice” a little more seriously when it comes to Wall Street.
This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.
