George Orwell may have been a few decades off in his observation that “All animals are equal, but some animals are more equal than others”—the famous commandment of the ruling pigs in "Animal Farm," his popular allegorical novel published in England in 1945.
Although intended to raise public consciousness about the totalitarian tactics on full display in the Soviet Union, Orwell’s parody speaks to another type of pig in our midst. In today’s world, the above maxim would seem to apply in spades to our largest financial institutions that have been deemed too big to fail, while acting above the law.
In Senate testimony last week, Attorney General Eric Holder, who has the express role of enforcing our laws and putting criminals in jail, admitted that our big banks are not only too big to fail, they are too big to jail, as well.
Holder's actual words were discouraging to hear: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that ... if we do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large."
Sen. Elizabeth Warren (D-Mass.), a “pit bull with lipstick” who actually deserves our respect and is the newest member of the Senate Banking, Housing and Urban Affairs Committee, remarked, “It has been almost five years since the financial crisis, but the big banks are still too big to fail. That means they are subsidized by about $83 billion a year by American taxpayers and are still not being held fully accountable for breaking the law. Attorney General Holder’s testimony that the biggest banks are too-big-to-jail shows once again that it is past time to end too-big-to-fail."
OK, you got my attention, but is anything being done to corral our recalcitrant banks? The great hope for correcting all the banking evils this time around was supposed to be the 2010 Dodd-Frank legislation. But this 2,200-page tome has been rendered nearly ineffective by the latest in lobbyist and Big Bank maneuvering.
According to a recent report from the GAO, the delay tactics employed by our bankers have been highly successful. Through December 2012, financial regulators had issued only 48 percent of the final rules mandated by Dodd-Frank, and they have missed deadlines for implementing 89 percent of its provisions.
President Barack Obama signed this act into law on July 21, 2010. Highly paid lobbyists succeeded initially in making Dodd-Frank overly cumbersome and complex, knowing full well that the debate would then focus on subsequent explanatory regulations to follow. The fight there would be to carve out exceptions or make threatening definitions so meek that the status quo could be easily maintained.
One perfect example had to do with putting stiff limits on how banks speculated with their proprietary trading operations. In its report, the GAO noted that this one key control area led to more than 750 questions for public input that sparked more than 19,000 letters of comment. Attempting to legislate good judgment, ethics and morality when the parties in question are bent on anything but is a futile, if not impossible, task.
But the fight goes on. Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have resumed an earlier fight to modify how big our nation’s financial institutions can be. They propose limiting a bank’s non-deposit liabilities to 2 percent of GDP, 3 percent for investment banks. Thankfully, this issue is near and dear to the hearts of a number of conservatives, including members of the Tea Party. Although the idea fell short three years back, there are many new supporters this time around.
Conservatives despised government officials that stepped in with bailouts five years ago. One of their core beliefs is that, if you break the rules and act financially foolish, you should pay the ultimate price—either file for bankruptcy or be carved up into smaller pieces and sold to the highest bidder. They could care less about stockholders and employees. Punish the evildoers, if you want to run a clean shop.
The likes of JPMorgan, Bank of America and Citicorp would be ratcheted back to $1.2 trillion in assets over three years, down from the $2 trillion level that exists today, but returning to 2001 levels. The response from the banking community has been swift and as expected, generally using two related arguments. First, we will not be able to compete with bigger global banks for big deals. The facts are that no one bank ever does a $20 billion loan on its own. They sell solicitations to mitigate their risk, and they will continue to do so. Investment banks securitize the deal and sell the bonds on the market, much as they did with mortgage-backed securities, to their eventual downfall.
Second, critics note that banks in other countries are much larger than ours and yet do not have problems. Once again, the facts get in the way of creditable conjecture. Large banks in Europe and elsewhere are deep in problems, but if you put our banks on equal footing by using the same accounting standards, then the “Three-Amigo-Megabanks” above take over the first, second and third rankings. Imagine that?
How do regulators feel about the idea? Brown emphasizes that “Governor Dan Tarullo, probably the nation’s foremost expert on bank regulation, has said that the idea has some promise, and that it addresses the sources of volatile short-term funding that were at the center of the crisis, but remain unresolved.”
Will other senators lend their crucial support? According to Brown, “Senators are hearing calls to limit the size and risk of Wall Street banks from some surprising places. When regulators like Tarullo, Richard Fisher and Tom Hoenig, and conservative thought leaders like Jon Huntsman, George Will, Peggy Noonan and David Vitter, speak out about this issue, senators sit up and take notice.”
Entreaties to bring back Glass-Steagall have fallen on deaf ears, but this new idea to break up the big banks may have merit, and bipartisan merit at that. Our Orwellian bankers have been pigs at the trough for far too long. If we cannot change the misplaced incentives in the system, then at the very least we need to downsize the risk. Giving bankers cheap dollars at taxpayers' expense to gamble away on complex financial derivatives is not the risk we want them to take. Investing in small businesses and entrepreneurs are the more pressing priorities to address. Lean Forward!
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