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A meditation on banking deregulaiton

A MEDITATION ON BANKING DEREGULATION

In a Mother’s Jones article about the banking industry, the author refers to a wide held belief that the financial sector is over regulated, as a twist on The Stockholm Syndrome. I think this is quite apt. We are held hostage by a mammoth industry which, through its ability to influence policy by making large political contributions to those that make the policy, has accomplished deregulation of the industry to the point where it can do much as it chooses without fear of reprisal. I postulate that part of the financial sector’s lobbying efforts have been directed towards convincing the American public of this lie. A majority of Americans, have been convinced that the banking system is over regulated. Nothing could be further from the truth. It was not an appropriate moment to engage in a political discussion, but I’ve been thinking about what I would have said had Tod and I been in a different setting at a different time. I’m not one to let a good discussion pass me by, and so, darling Tod, these thoughts are for you.

JP Morgan, spent $10 million since the beginning of 2011 on lobbying, mostly against the Volker Rule which would regulate risky proprietary trading at federally-insured banks. This is the same JP Morgan, which is federally-insured (as in tax-payer money), and which just lost $2 to $5 billion on an investment bet.

Given that tax-payer money is standing behind the banks ( as in the last bailout) you’d think it reasonable for tax payers to require regulations prohibiting financial institutions from doing anything terribly risky with the dough. It does not sound unreasonable that they be required to play by some rules, at least. Yet, they and their cohorts in elected office claim they are over regulated. $2 to $5 billion in losses, fellas? Really, you do not think it reasonable for the tax payer to expect a little insurance in the way of regulation?

In 2009, the financial industry spent $402 million on lobbying and campaign contributions. During the 2008 election cycle the finance lobby spent $475 million. Contrasted to the meager $24 million spent by the defense lobby or the $65 million spent by the farm lobby, $402 million begins to look like a lot of money. These are smart business people, I suspect they expect a profit from their investment. Now, what do you suppose they are buying?

A little history; In 1933, in response to events leading to the great depression, the Glass-Steagall Act was put in place to prohibit Commercial Banks from using their government back funds for risky transactions. This seems like a reasonable precaution given tax payer’s money was at risk. The act governed (regulated) commercial banking for several decades until in the 1980s, commercial banks decided their activities were being curtailed in a way unacceptable and began to lobby against the Glass-Steagall Act and government regulation.

Back in Reagan’s day the banking industry became quite disenchanted with their lot and decided it was time to put our (the people’s) money where their (the banker’s) interests were. They were unhappy with some nasty regulations which had been put in place to curb their activities. They decided to get together and “protest”, that would be “lobby,” in crass terminology.

During President Clinton’s term, lobbying finally paid off and the Financial Services Modernization Act, FSMA, (also known as Gramm-Leach-Bliley Act, after the three Republican Congressmen who championed it) dismantled Glass-Steagall. The firewall between commercial banking and investment banking was down. Commercial banks were now able to engage in riskier activities than before. After Glass-Steagull was modernized by FSMA, households, corporations and commercial banks grew by ten-fold. The securities sector grew by one hundred fold. Ya know, I think the lobbying worked! Wall Street changed from providing financial services to creating products like junk bonds, credit default swaps, subprime loans, securitization and collateralized debt obligations. Each and every one of these new “products” was designed to increase Wall Street’s growth and wealth.

In 2000, the Commodities Futures Modernization Act, essentially ensured that new money making activities like derivative swaps, futures and options remained unregulated. At this point all bets were off and Wall Street became Casino Alley. To give some idea of how lucrative the new deregulated environment had become one need only to follow Treasury Secretary (in the Clinton administration) Robert Rubin from his government job, where he supported financial sector deregulation, to his new job at CitiGroup. CitiGroup was one of the banks that lobbied hard for FSMA. Robert Rubin earned a reported $100 million during the decade following his employment at CitiGroup. A little deregulation never hurts those deregulated. It is good for business when regulations are erased and that risky money making activity is legal.

Meanwhile, hedge fund managers were lobbying for tax loopholes. After the “carried interest” loophole was installed into the tax code, hedge fund managers were taxed at 15%. This is a good deal. Basically a hedge fund manager invests other people’s money and earns a percentage on the profits. This is not unlike what a literary agent does when he or she is paid a percentage of the author’s profits. Literary agents must have a very poor lobby though, because, last I looked, their income is taxed at over 15%.

In 2007, while Wall Street was lobbying for the carried interest loophole, Chuck Schumer, Democrat from New York, (who was then a member of both the Senate Committee on Finance and the Senate Committee on Banking, Housing, and Urban Affairs) raised $700,000 from employees of private equity firms. Personally, Schumer has, purportedly, raised $14 million. If I didn’t hold these guys in such high esteem, I’d be tempted to call this bribery.

And then there is the Fox in the Henhouse aspect. In 1913 the Federal Reserve was created as an independent regulation agency. As of right now the 12 regional Federal Reserve Banks are “governed” by a board of directors chosen by those very same banks. Ah ha, the fox. In fact, very little regulating has been going on. A lovely cycle has been established. The financial sector lobbies for deregulation, because of deregulation they make tons of money, because they make tons of money they can lobby for more deregulation, because of more deregulation they make……lots of money….

The only problem is that while bank executives and hedge fund types are making millions, many of us are suffering. The Federal Reserve has been quite, well… reserved, when it comes to regulating. There have been some issues that while good for bankers are quite disquieting to the little guy, the ability of banks to retroactively raise interest rates on customers at any time for any reason, for example. “Yield spread premiums” abuse is another. Yield Spread premiums, reward mortgage brokers with a kick-back for guiding customers to higher interest loans than those for which they are qualified. You might have identified the afore mentioned issue as one of those that led to the housing market collapse and then to the recession, and then to world-wide recession. Well, the bankers made a lot of money. The rest of us? Not so much.

On a positive note, the Obama administration is attempting to put in place regulations which would prohibit some of the risky behavior of Wall Street. The Dodd-Frank Act, according to the senate committee summary, is designed to “create sound economic foundation to grow jobs, protect consumers, rein in Wall Street and big bonuses, end bailouts and Too Big to Fail, prevent another financial crisis.” Those who understand the financial sector report, The Volker Rule section of this bill would prohibit risky activity that resulted in JP Morgan’s loss of $2 to $5 billion. That is if, the darn thing is ever implemented.

Another section of the Dodd-Frank Bill would set up the Consumer Financial Protection Agency to regulate financial products in the same way that the Consumer Product Safety Commission regulates household appliances. This would help the little guy but the going will be tough. In 2009 the financial industry spent $402 million on lobbying and campaign contributions. I’m guessing not one penny of that went towards encouraging our elected officials to provide more protection to consumers through regulation of the Financial Securities Industry.