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This 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.
Americans of whatever stripe ― from Tea Partiers on the right to Occupiers on the left ― continue to hold Wall Street at least partly responsible for the nation’s continuing misery. With good reason.
After the banks made wildly risky bets with our money, we bailed them out. Congress enacted financial reform (the Dodd-Frank law). But Wall Street lobbyists immediately set about diluting it, along with its regulations. Dodd-Frank is now riddled with so many exemptions and loopholes that the largest banks are back to many of their old tricks.
For example, it’s impossible to know the Street’s real exposure to the European debt crisis. To stay afloat, several of Europe’s banks may be forced to sell mountains of assets ― among them, derivatives originating on the Street ― and may have to renege on or delay some repayments on loans from Wall Street banks.
Executives on the Street say they’re not worried because their assets are insured. But remember AIG? The fact that Morgan Stanley and other big U.S. banks have taken a beating in the market suggests investors don’t believe the Street. This itself proves financial reform hasn’t gone nearly far enough.
For more evidence, consider the fancy footwork by Bank of America in recent weeks. Hit by a credit downgrade in September, BofA 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 in 1999. (For the record, I was no longer in the Clinton administration.)
The so-called “Volcker rule” in the new Dodd-Frank Act was designed to remedy this. But under the pressure of Wall Street’s lobbyists, the rule has morphed into almost 300 pages of regulatory mumbo-jumbo, riddled with loopholes.
It would have been far simpler simply to ban proprietary trading altogether. 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!
And break up the big banks. In the wake of the bailout, they’re bigger than ever. Twenty years ago, the 10 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.
I doubt the president will be condemning the Street’s post-bailout 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.
By Robert Reich
Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of “Aftershock: The Next Economy and America’s Future.” He blogs at www.robertreich.org. ― Ed.
(Tribune Media Services)
I’m kidding. But it would be a smart move.
Americans of whatever stripe ― from Tea Partiers on the right to Occupiers on the left ― continue to hold Wall Street at least partly responsible for the nation’s continuing misery. With good reason.
After the banks made wildly risky bets with our money, we bailed them out. Congress enacted financial reform (the Dodd-Frank law). But Wall Street lobbyists immediately set about diluting it, along with its regulations. Dodd-Frank is now riddled with so many exemptions and loopholes that the largest banks are back to many of their old tricks.
For example, it’s impossible to know the Street’s real exposure to the European debt crisis. To stay afloat, several of Europe’s banks may be forced to sell mountains of assets ― among them, derivatives originating on the Street ― and may have to renege on or delay some repayments on loans from Wall Street banks.
Executives on the Street say they’re not worried because their assets are insured. But remember AIG? The fact that Morgan Stanley and other big U.S. banks have taken a beating in the market suggests investors don’t believe the Street. This itself proves financial reform hasn’t gone nearly far enough.
For more evidence, consider the fancy footwork by Bank of America in recent weeks. Hit by a credit downgrade in September, BofA 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 in 1999. (For the record, I was no longer in the Clinton administration.)
The so-called “Volcker rule” in the new Dodd-Frank Act was designed to remedy this. But under the pressure of Wall Street’s lobbyists, the rule has morphed into almost 300 pages of regulatory mumbo-jumbo, riddled with loopholes.
It would have been far simpler simply to ban proprietary trading altogether. 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!
And break up the big banks. In the wake of the bailout, they’re bigger than ever. Twenty years ago, the 10 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.
I doubt the president will be condemning the Street’s post-bailout 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.
By Robert Reich
Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of “Aftershock: The Next Economy and America’s Future.” He blogs at www.robertreich.org. ― Ed.
(Tribune Media Services)
