Tag: Dodd–Frank Wall Street Reform and Consumer Protection Act

The Bailouts and the Risk

It’s Bank Bash time again here at RTFLC. Presented for your consideration: the Atlantic’s expose on how tenuous the banks hold on sanity really is:

The financial crisis had many causes—too much borrowing, foolish investments, misguided regulation—but at its core, the panic resulted from a lack of transparency. The reason no one wanted to lend to or trade with the banks during the fall of 2008, when Lehman Brothers collapsed, was that no one could understand the banks’ risks. It was impossible to tell, from looking at a particular bank’s disclosures, whether it might suddenly implode.

Note that they are talking specifically about the banking crisis, not the mortgage crisis that precipitated it. That’s another issue entirely.

For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.

It’s a very long read, but worth it. The go through the recent LIBOR and JP Morgan scandals and points out just how deceitful and opaque the banks have been on these subjects. The note how hesistant investors and the public are of investing in banks or entrusting their money to banks. They go through the books at Wells Fargo and discover just how opaque their investments are. In most cases, the value of trillions of dollars in assets is a guess. At best.

The solution they point to is not more Dodd-Frank or Sarbanes-Oxley complexity. No, it’s straight-forward disclosure to investors and to the general public who have, through TARP and the Federal Reserve, become the ultimate fiscal backstop:

The starting point for any solution to the recurring problems with banks is to rebuild the twin pillars of regulation that Congress built in 1933 and 1934, in the aftermath of the 1929 crash. First, there must be a straightforward standard of disclosure for Wells Fargo and its banking brethren to follow: describe risks in commonsense terms that an investor can understand. Second, there must be a real risk of punishment for bank executives who mislead investors, or otherwise perpetrate fraud and abuse.

These two pillars don’t require heavy-handed regulation. The straightforward disclosure regime that prevailed for decades starting in the 1930s didn’t require extensive legal rules. Nor did vigorous prosecution of financial crime.

Since [the 1980’s], however, the rules have proliferated, the arguments about compliance have become ever more technical, and the punishments have been minor and rare. Not a single senior banker from a major firm has gone to prison for conduct related to the 2008 financial crisis; few even paid fines. The penalties paid by banks are paltry compared with their profits and bonus pools. The cost-benefit analysis of such a system tilts in favor of recklessness, in large part because of the complex web of regulation: bankers can argue that they comply with the letter of the law, even when they violate its spirit.

The Basel I agreement was 18 pages long. Basel III is 616 pages long. And the current financial disclosure agreements can mean thousands of columns of numbers. Dodd-Frank may be end up being 30,000 pages long. Does that sounds like a transparent banking system to you?

Our government, of course, loves this situation because it means they can employ lots of regulators and gets lots of lobbyists genuflecting to them. But the result is that banks that don’t even know how much money they have.

This isn’t a fix. This is a system that employees zillions of regulators and lobbyists while our banking system becomes more complex, more opaque and more vulnerable. It makes bankers rich and unaccountable while leaving the taxpayers holding a bag that might be trillions of dollars deep.

And we really shouldn’t be surprised that this situation has only gotten worse under supposed communist Barack Obama. Matt Taibbi also has an article out detailing some of the chicanery behind TARP, particularly the way the Obama administration retasked it, lied about the use of TARP, lied about the health of the banks and allowed them to find ways to pay out gigantic bonuses despite the provisions that supposedly prevented it. He eventually reaches an identical conclusion: TARP has created a banking system that is more centralized, more complex and more at risk than ever before.

It’s not just the politicians, of course. What jumps out at you from the Taibbi article is the overweening sense of entitlement that emanates from the big banks: a sense of entitlement so profound, AIG (not a bank but it pretends to be one) is considering suing the government that loaned it $180 billion because its stock crashed.

(The Rolling Stone Article is a tough read because of Matt Taibbi’s famous bullshitedness. According to him, the only people who opposed TARP and stood in the way of this crony capitalist juggernaut were progressives. The battle over the bailouts is seen entirely in those terms. He completely ignores the deep conservative opposition to it. He says that TARP initially died because “95 democrats lined up against it” ignoring that 133 Republicans lined up against it too and that a majority of Republicans opposed in the eventual passage of the bill. Here’s the fucking roll call.)

We are not safer than we were five years ago. Our banking system is not more secure or more regulated. And, at some point, this is going to blow up on us.

John Huntsman was one of few in Election 2012 who tried to alert us to the danger we face. Ron Paul and Gary Johnson have also warned us about the danger of handing out large sacks of Federal Reserve funny money. But no one in power has picked it up. They’re too busy fighting each other over self-created crises like the fiscal cliff. And while they’re fighting over that cliff, we’re in danger of the whole fucking mountain falling out from under us.

This is being spun as an issue for “progressives” but it’s just as critical to conservatives and libertarians who value a sound banking system and straight-forward laws (also, you know, a functioning economy). We have to realize that this mess is bipartisan. Republicans may have opposed Dodd-Frank, but they haven’t exactly been proposing a new regime of better law. And Democrats may bash the big banks, but they take their campaign contributions and make sure no one knows what’s going on behind the doors.

No, it’s going to have to come from outside Washington, from the hundreds of millions of Americans who loaned the banks trillions and are still holding the bag four years later. I just fear that we won’t do anything about it until the next financial collapse plunges us into a dark age.