Deregulation and the Triumph of Wall Street

With most of the media focused on Obama's speech about health care on Wednesday, this item got largely overlooked.

Sweeping regulatory reform of the financial sector-thought to be a 2009 legislative given just four months ago-may now come down to a piece-meal approach, with the White House and its allies happy to see a couple prized components signed into law this year.
"I think it's unraveling,' says former FDIC Chairman William Isaac. "It is hard for me to see how this legislation gets done this year."

One year removed from a catastrophic, global, economic meltdown, and 26 months removed from the start of the credit crisis, our political establishment is either unwilling or unable to reform the system and punish the perpetrators of this debacle. The situation is so far beyond the pale that it makes one wonder if another catastrophe is even avoidable.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."
- Sen. Dick Durbin

The proposals also challenged the status quo of the financial services industry, which publicly supported the reforms in general but lobbied against many of the particulars behind closed doors.
"There's a lot of problems with this regulatory reform, so it could easily slip to next year," says one knowledgeable industry representative.

In fact the proposed changes are extremely mild in comparison to the deregulations that preceded them in the previous decades. But Wall Street simply can't wait to return to the speculative frenzy of the recent credit bubble, and now that most of the risk has been offloaded onto the American taxpayer, Good Times Are Here Again.

The all-consuming debate over health care has damped enthusiasm for tackling such complex legislation. Meanwhile, major U.S. banks have regained their footing, and some of their swagger.
Companies are selling exotic financial products similar to those that felled markets and the world economy last fall. And banks' appetite for risk has grown: The nation's top five banks collectively stood to lose more than $1 billion on an average day in the second quarter of 2009 should their trading bets go sour, a record level. Now, the federal government is locked in a kind of regulatory limbo. U.S. officials say they are committed to preventing history from repeating and have pleaded for fresh powers to do so. But today, they have few new options -- excepting another bailout -- should financial markets seize up again or a large institution totter.
"There's no fundamental change in the way the banks are run or regulated,"
said Peter J. Solomon, a former Lehman vice chairman who runs an eponymous investment bank in New York. "There's just fewer of them."
Perhaps the best indicator of Wall Street's revived exuberance is its continued pursuit of exotic financial engineering. The market for credit derivatives, widely blamed for helping destabilize markets, remains vast....Total return swaps -- a type of derivative that lost favor during the crisis -- are among the instruments regaining popularity, bankers and investors say....Even collateralized debt obligations, perhaps the biggest money-loser in Wall Street history, are staging a comeback of sorts.

So after trillions of bailouts and guarantees at the taxpayer expense, banks have used that taxpayer money to thwart any reform legislation, while returning to risky investment practices at an even greater level than ever. And when things blow up again, we can expect an even larger bailout than before. Or another Great Depression. Or both.
Nothing has been fixed. Nothing has been changed, because we gave money to the people that caused the problems and demanded nothing in return.

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"The abatement of financial tensions has led some financial institutions to imagine they can return to the same modes of action prevalent before the crisis."
- British Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel, September 3

So what has Wall Street done with all that TARP bailout money? Well, they bough Ginnie Mae bonds because they are backed by taxpayers.
Wall Street also used the TARP money to give themselves huge bonuses. More than anything else, Wall Street has used the bailouts to speculate on stocks and bonds.

What the Wall Street banks haven't done is lend money to businesses so that they can hire employees.

"The pace of bank credit tightening has become draconian in scope and now stands at the recessionary levels last seen in 1991 and 2002," credit analyst Christopher Garman said in a report. "This promises a rapid increase in default rates over the next few quarters."

What the Wall Street banks haven't done is lend money to consumers so they can pay their bills.

About 65 percent of domestic banks -- up notably from about 30 percent in the April survey -- indicated that they had tightened their lending standards on credit card loans over the past three months, and about the same fraction of respondents -- up from roughly 45 percent in the April survey -- reported having tightened standards on consumer loans other than credit card loans.

Only the healthiest borrowers, the ones who need it the least, have access to credit these days. We could have let the Wall Street banks fail and have gotten into that situation at a much cheaper price.

All things considered, you have to wonder if the Green Shoots and Recovery talk has any validity if the bank's lending patterns don't reflect it. On the other hand, the Green Shoots talk has been very effective in reducing the political pressure for banking reforms.

Which brings us back to the proposed banking system reforms.
The first thing that jumps out at you is all the ways that the Federal Reserve would be entrusted in regulating and reforming the financial system. The Fed would be in charge of detecting and thwarting systemic risk.

The irony could not be greater because the Federal Reserve was the leading advocate of deregulation in the financial system over the last two decades, believing that the financial markets are self-regulating.
Not only that, the Fed was caught flat-footed by the economic meltdown. They completely failed to detect the credit bubble, despite repeated warnings from outside the Federal Reserve, and then failed to understand the magnitude of the situation until the system was on the verge of collapse.
What's more, the Fed has shown no signs of a change in attitude. They continue to view their role as janitor of disasters, not a preventer of them. Their only accomplishment so far has been a massive transfer of bad debt from private hands to public hands.

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"Nothing has changed except that we have larger players who are more powerful, who are more dependent on government capital and who are harder to regulate than they were to begin with. We’re in a far less stable environment."
- Nomi Prins

Then there are the things mostly missing from the proposed reforms. For instance, limits on executive compensation, an idea that America is fighting on a global scale.
Then there is the half-hearted attempt are regulating the rating agencies, the people who got paid to say that subprime mortgages were "safe".
Basically, even if all these proposals were implemented, which isn't going to happen, it still wouldn't be nearly enough.

"The American regulatory structure is in total disarray and what has been proposed to fix it is partial, and even then there is heavy resistance," said Hal Scott, Nomura Professor on International Financial Systems at Harvard Law School.
"I don't see us coming out with any significant change to the structure."

“Their answer is basically a permanent TARP.”
- Philip L. Swagel

What I find to be most interesting from the reform proposals, and from the political debate, is the complete absence of discussion concerning the most obvious of suggestions - rolling back the deregulations.
I think the reason this isn't being discussed is because any debate about past regulations would illuminate just how pathetic the proposed reforms are.

Regulating casino capitalism

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“America’s economic system is where it is today because gambling became the financial sector’s principal preoccupation. The pile of chips grew so big that the Money Industry displaced real businesses that provided real goods, services and jobs.”
- Harvey Rosenfield

Did you know that Bank of America, J.P. Morgan Chase, and Wells Fargo are currently in violation of federal banking law, but the government won't enforce that law?
The law in question is the Riegle–Neal Interstate Banking and Branching Efficiency Act of 1994, passed by a Democratic Congress and signed by a Democratic President.

Prior to passage of this act, banks were restricted from operating widespread, multi-state branching networks. Plus, many states had their own restrictions on banks. These restrictions dated all the way back to the National Bank Act of 1864. The result was a nation full of relatively small banks. The idea was that competitive equality was good for the industry. Local banks invested their money locally, while large banks drained funds from rural areas and directed them to large cities.

The Riegle-Neal Act deregulated this limitation on the financial industry. Now banks could go national almost without restriction. The result has been a dramatic decrease in the number of small banks in the country.
However, there was one caveat built into the bill - no single bank could have more than 10% of all the deposits in the country.

The 10% limit remained in effect for a little over a decade. When the crisis struck in 2008, the Treasury and Fed encouraged the consolidation of the banking industry between the weak and the strong. The 10 percent cap became the victim of the crisis in the same way that laws against torture were also ignored.

"The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money."
- Louis D. Brandeis, 1913

One of the primary means for Wall Street banks to bring in revenue these days is charging fees for pretty much everything. They will haul in 38 Billion dollars on overdraft fees this year, with a median APR of 4,547%. That's enough to make a loan shark blush. They will rake in another $48 Billion from credit card swipe fees.
The best example of predation by the banks is in the form of payday loans. The major banks have always been silent owners behind this loan shark filth that suck the life blood out of the poorest, but lately they have come out into the open.

A few of the nation's largest banks -- including Minneapolis-based U.S. Bancorp, Wells Fargo & Co. of San Francisco, and Fifth Third Bancorp of Cincinnati -- are now marketing payday loan-type products, with triple-digit interest rates, to their checking account customers.

Would it surprise you that as recently as 1979 this sort of usury was regulated and illegal? Would it also surprise you that it was a Democratic Congress and a Democratic President that revoked those laws?

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The law in question was the Depository Institution Deregulation and Monetary Control Act of 1980. William Greider explained in his book Secrets of the Temple, "Passage of the Monetary Control Act had very little to do with how effectively the Federal Reserve could control the supply of money. It's purpose was to protect the Federal Reserve's political base."
The law did a lot of things such as requiring banks to operate under the Federal Reserve umbrella (commercial banks were leaving the Fed at the time), gave banks more opportunities to merge and consolidate, raised deposit insurance levels, and, oh yeah, allowed S&L's to speculate in commercial real estate. But it also did one other thing that seems very relevant today.

Eliminates State mortgage usury ceilings and restrictions on discount points, finance charges and other charges...

The most important part of the Glass-Steagall regulation of the New Deal was Regulation Q. This law regulated the amount of interest and fees that banks could charge for over 47 years.
The Monetary Control Act gutted Regulation Q, and all state usury laws were unilaterally suspended. The law was a political trade-off. The Federal Reserve became stronger at the banks expense, but the banks endorsed the law because they got the most prized gift of all - a free pass to prey on the most vulnerable in American society, and they got a multi-billion dollar tax cut to boot.
It seems rather ironic that the give-aways to the wealthy that Reagan and the Republicans of the 1980's were famous for started entirely with the Democrats.

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010. I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."
- - Senator Byron L. Dorgan, Democrat of North Dakota, 1999

"The concerns that we will have a meltdown like 1929 are dramatically overblown."
- Senator Bob Kerrey, Democrat of Nebraska, 1999

Much ink has been spilled over the demise of Glass-Steagall in 1999. In fact many of the ills that plague the financial world today go back further and are not being discussed today. Reviving Regulation Q would be the most moral and Christian act we could do today, but it is not being discussed. Rolling back the Riegle-Neal Act would permanently fix the problem of banks being "Too Big To Fail", and thus saving the taxpayer of ever having to do another disastrous bailout of these crooks.
In the meantime, even before any reforms are voted on, it would be nice if the government would simply enforce the laws already in place, such as the 10 percent cap rule.



And it was a Democrat that signed Gramm Leach Bliley

Pres. Clinton signed the Financial Services Modernization Act of 1999. And who is the common player between Clinton and the current administration: Larry Summers. Larry Summers backed GLB and Commodity Futures Modernization Act (also signed by Clinton).

The Obama Administration has endorsed the concept of "Too Big to Fail".

We have to break up these TBTF institutions. - Financial Information for the Rest of Us.

And it was a Demoncrat that signed the Graham Leech Bliley

What difference does it make to whether it was a demoncrat or a wicked republicant !!?? These guys are destroying our economy and will be successful in destroying 100's of millions of Americans and put us into their slave and FEMA camps!!

Lehman Monday Morning Lesson Lost on Obama Admin.

Just spotted this article an hour ago

I'll probably update my article with the Bloomberg article once I've read it closely.

this should be job #1

and tell me people don't want major reform on executive compensation as well as corporate governance as well!

I'm sorry, considering we had this supposed Economic Armageddon which brought down the world economy, this should be before health care.

Isn't it interesting that this is falling by the wayside, any financial and regulatory reform dying on the we have the MSM going on and on about the heckler and trying to deny the House Health care bill will give benefits to illegal immigrants. I mean what a stupid argument and putting the entire public option at risk on top of it.

It's basically two amendments, that already exist in Medicaid, and then people arguing magically no one has birth certificates, valid social security numbers and so on in the U.S., well, plain fix that problem too, if they can document it's such an issue! (as if every county doesn't have the original on file for people to get?)

It was only mentioned in the 9/11 commission.

So, simply just add the amendments which make it like a host of other social services, including Medicaid already and be done with it. End of story. but no....this has to be a war which will put the entire thing at risk...

so they are arguing over nothing which threatens any real reforms.

So, in other words, it's like we have an "artificial war" going on that doesn't even need to exist over health care....that is clearly diverting the public attention from any financial systemic and regulatory reforms....

another thing to note over the "artificial war" on health care is they also buried in the noise all of those who want universal single payer, again by amplifying the "artificial war" that doesn't need to exist, very easy to put out these fires...very minor changes to the bill. Instead the flames are fanned.

One little quibble did an analysis of Obama's speech. You're right on most things, but not the illegal immigrants:

Obama said that his proposal would not cover illegal immigrants, a remark that prompted Republican Rep. Joe Wilson of South Carolina to shout "You lie!"
Obama: "There are also those who claim that our reform effort will insure illegal immigrants. This, too, is false – the reforms I’m proposing would not apply to those who are here illegally."
The president is correct: The House bill contains a section (Sec. 246) titled "NO FEDERAL PAYMENT FOR UNDOCUMENTED ALIENS," which states: "Nothing in this subtitle shall allow Federal payments for affordability credits on behalf of individuals who are not lawfully present in the United States."
However, conservative critics object to a lack of specific enforcement measures in the bill. They argue that the lack of a specific verification mechanism constitutes a loophole that would allow illegal immigrants to get benefits despite the legal prohibition. Republican Rep. Dean Heller of Nevada proposed an amendment to the bill that would have required the use of the Systematic Alien Verification for Entitlements program to check the citizenship of anyone applying for federal coverage or affordability credits. SAVE is the program used by Medicaid and similar entitlement programs. That amendment was voted down along party lines by the House Ways and Means Committee.
Republicans have a point here: More could be done to enforce the ban. But it’s worth remembering that, as a spokesperson for the American Immigration Lawyers Association told us, attempting to get a health care credit would have legal repercussions. "Making a fraudulent claim to an entitlement program when you’re not actually entitled to it would have serious consequences for any person," the spokesperson told us, "but especially if it’s considered a false claim to citizenship, that would have serious immigration consequences that could ultimately lead to deportation." And Rep. Wilson certainly was out of bounds to call the president’s statement a "lie." He later issued a statement apologizing for his "inappropriate and regrettable" comments.

Maximum jobs, not maximum profits.

Maximum jobs, not maximum profits.

that's false

and as usual Seebert, you have to argue over the very thing I am pointing out is "not an argument" and a diversionary tactic away from financial regulatory reform.

What a surprise.

Firstly, here is the entire statement and they mention enforcement and how amendments to enforce it were voted down in committee.

You know, instead of arguing, how about reading the actual Congressional Research Service report.

Thus, it would appear that unauthorized aliens who meet the substantial presence test would be required under H.R. 3200 to have health insurance.

H.R. 3200 does not contain any restrictions on noncitzens—whether legally or illegally present, or in the United States temporarily or permanently—participating in the Exchange.

Thus, it appears, absent of a provision in the bill specifying the verification procedure, that the Commissioner would be responsible for determining a mechanism to verify the eligibility of noncitizens for the credits.

i.e. no verification and up to the commissioner to determine who gets credits, i.e. health care paid for by the state...or not.

Illegals can also obtain Emergency Medicaid coverage. Which one can debate or not, a moral issue.

But the above, report, by a simple research service used by Congress, clearly shows the loopholes and methods.

Now, considering how many loopholes there are in using guest workers to displace U.S. workers legally, I strongly recommend checking out legislation oneself and not quote "because some website said so".

This is also precisely why I said read the actual bills, do your own research and digging from credible sources and do not listen to the rhetoric in the noise.

The same is completely true for financial regulatory reform...
the way the rhetoric is, one would believe the government actually did something and they have passed nothing and made the system worse. How do we know that? We watch the committees and read the bills!



Even on the EP, an article about banking reform becomes a debate about health care reform. No wonder banking reform can't get any traction.

no shit, sorry

Maybe we should put a temporary ban on the topic. ;)

Ok, now which bills are there even in committee? Last I saw was the say on pay, which basically was passed by the house, does hardly anything, gives a non-binding vote to shareholders on executive compensation and yet even this, is being sworn to be killed by the Senate! (The Senate needs a flush if they would kill this because it doesn't nothing! It's symbolic)

And we have Geithner's proposal which clearly, in terms of a Fed systemic regulator isn't going to happen according to Barney Frank.

So, then we also have Ron Pauls' "audit the Fed" which Frank has promised to pass and also which has a majority of the House as co-sponsors.

But it seems in terms of actual regulatory we even have a bill to grab a hold of yet? It seems it's just a scattered bunch of proposals sitting on the House Financial Services committee's legislative staffers' desks.

Then, to me the Senate is doing nothing except to fight anything the House manages to pass or even get out of committee.

Know of anything else? Is that where we are at in terms of actual Congressional actions?

They both could get done if there was the will and leadership

There is no reason, other than the lack of will or laziness, that banking reform and health reform couldn't get done at the same time.

Banks and private insurance companies own the senate so no serious reforms will leave that chamber.

And this applies to the Administration, as well, Geithner and Summers, don't really want reform. - Financial Information for the Rest of Us.

Outstanding Blog & 1913, the year of the turning

Louis Brandeis's statement in the year of 1913 was certainly ominous: that was the year we got the federal income tax, the oil depletion allowance as well as the federal reserve system.

And to think that in 1912 we had made a giant leap forward when they "allowed" women and children to only work 54 hours per week (men were still required to work at least 60 hours plus, per week).


The illusion that I see in many comments on this matter is the belief that we can trust any government with the job of "regulating" the financial system without being corrupted by the money they hold in their hands through laws they enact.
The government, of corse, has a role to play, and exactly what that role is will be hashed out in the comming years.

The greatest flaw that becomes evident to me in this debacle is that we have not allowed the failures to fail. One example of this can be seen in Freddie and Fannie. The implication that became reality, that no matter how badly they ran their business they were immune from failure and apparently from prosecution. Whether they were leading the pack of bad lending practices or just a cohort, there was not enough fear of failure because of the governments promises i.e. too big to fail.

The pain of collapse would have been extreme. Many would have suffered, but, the lesson learned would have been invaluable. And those who are still running this show would have been crushed under the weight of their own failures instead of continuing the mess.

My proposition is that this mess would have never happened without the influence of our government, they perpetuated a little problem until it became a world altering problem.

And now to top it all off, as others have stated above, the underlying problem still exists. Banks, individuals, and the country itself are in debt to our ears, and we are doing all we can to avoid the inevitable. Failure. Failure is the one thing that stops destructive behavior before it infects everyone else. Risk must be reintroduced into the equation.

Feel free to call me an idiot. I'm just interested to hear, understand, and hopefully learn from the comments that follow.

Agree in part and Disagree in part

Any regulatory scheme will never be perfect simply because of the fact humans are involved - same goes for this notion that "free markets" can solve all problems. Markets are just as imperfect as regulations because of the participation of humans.

The dominate policy regime since 1980 was less regulation. Just look at the graph above (re: wages). One of the basis for de-regulation was this notion of market fundamentalism - leave the markets alone they are self-correcting blah, blah, blah. Bullshit. And one of the leading market fundamentalists, Alan Greenspan, admitted the flaws in this theory in congressional testimony.

As for risk and failure, sadly failure has been introduced into the system but at the bottom - foreclosures and delinquencies are at record highs. But the financial oligarchy has been spared for now. - Financial Information for the Rest of Us.

A view on regulation

Regulators are imperfect and corruptible. Just look at the recent record of the SEC, and the fact that they won't enforce the laws that are currently on the books.
That doesn't mean that we shouldn't have regulations. What it means is that the regulations should be simple to understand and enforce. Gray areas are unacceptable.

That's why the New Deal regulations worked so well, and also why the current regulations don't. The current proposals also won't work.
We need to make new/old regulations that are structural and simple: don't go over state lines. Don't mix banking and insurance. Don't charge interest rates over a certain percent.

A most cogent observation, midtowng!

Well said. I would qualify the statement by a previous poster that the dominant theme wasn't "deregulation" so much as it was back to the same transference of wealth and concentrated wealth that existed in the early 1900s.

Beginning with Carter, and continuing through EVERY president (Reagan, Bush(1), Clinton, Bush(2), and now Obama) the socialist plutocracy we presently live in has an inexorable drive to consume and control everything to a pathological degree. The most amazing fact is that if one compares legislation (of course, this requires the populace to actually read the legislation) going back to Nixon, we find that Richard frigging Nixon has been the most liberal president of the present and previous eight presidents! Unbelievable to any but those paying attention. [Note: I voted for McGovern with the mailed in ballot from a combat zone.]

Corporate America has consistently worshipped communism, as witnessed by their chronic need to justify themselves by proclaiming that the only way they can "compete" or remain "competitive" is by offshoring American jobs to Communist China and Communist Vietnam (as well as elsewhere). [Imagine that! The only way a quasi-capitalist company can exist is by depending upon communist orgnizations! Ain't that a hoot!!!!]

And one hears that constant refrain from neocon Republicans and neolib Democrats - thus leading any self-aware creature to ascertain we live in a country with NO true political parties.

As that ancient Washington Post columnist Drew Pearson once observed, our "democracy" works by "controlled greed" - but it has long since devolved to uncontrollable greed!

GAO report on Fannie/Freddie w/ recs. on what to do

Ya all, I can't get to it but if someone wants to take it on, & write up a blog or Instapopulist post with some of the overviews, results, plus comment....there is a new GAO report (see right hand column, scroll down to their news feed) on Fannie/Freddie w/ one rec. to plain terminate them both.

A lot of really good information on not only what the GAO found but also implications of what to do with them.

Really hints that the entire "homeownership for certain subgroups" is a sham from first pass scan.

I will take a look at it. It fits with what I am working on now.

Proposal to restructure our housing finance system. - Financial Information for the Rest of Us.