Obstacles to Reform in the Banking Industry

On Bill Moyers Journal, he recently talked about the state of the playing field for getting real regulatory reform done for financial institutions with David Corn and Kevin Drum. This was a great discussion and one that every one of us who cares about getting this done should carefully watch. Because what they are laying out here is how regulatory reform for banks is being gutted before our eyes. The video for this program can be found here. As far as I can tell this is not embeddable here, so you’ll have to go over to the PBS site to watch. And I strongly urge you to do so.

[…]Thanks to taxpayers like you who generously bailed banking from the financial shipwreck it created for itself and for us, by the end of 2009 the industry’s compensation pool reached nearly $200 billion. And despite windfall profits, the banks will claim almost $80 billion in tax deductions. And nearly $20 billion of those deductions will go to just three institutions — Morgan Stanley, JP Morgan Chase, and Goldman Sachs.

Ah, yes — Goldman Sachs, that paragon of profit and probity — which bet big on the housing bubble and when it popped — presto! — converted itself from an investment firm into a bank so it could get your bailout money. Now consider this: in 2008, Goldman Sachs paid an effective tax rate of just one percent. I’m not making that up — one percent! — while their CEO Lloyd Blankfein pulled down over $40 million. That’s God’s work, if you can get it. And, believe me, Wall Street bankers know how to get it. […]

KEVIN DRUM: Well, that’s the $64 million question. Or maybe it’s the $64 billion question these days. Yeah, how they do it? They’ve got all the money. And they use all the money. And they use it in Congress to get rules passed and get laws passed that they want. They use it to lobby the Fed, they use it to lobby the S.E.C. They use it to lobby the executive branch. And they get rules passed that allow them to make a lot of money. Just like any of us would. It’s not that American bankers are greedier than anybody else’s bankers. It’s that our rules, our laws, allow them to do things that they can’t do everywhere else. We let them take advantage of the system.

BILL MOYERS: But how do you measure their power? Lobbying doesn’t happen in the public, in the open. We can’t sit in the bleachers and watch the game being played. How do you know they have this power?

DAVID CORN: You can read the lobbying reports. You know that there are scores if not hundreds of lobbyists. And where do they come from? They come from the committees that they’re lobbying. People used to work on the committee, whether they were members, Congressmen or Senators, or staffers. And they spent a lot of time — because, ultimately, Bill, this is about knowledge. This is about information. This stuff is really complicated and convoluted. And, you know, you try reading any of one of these bills and figuring out what’s actually being said. It’s mystifying. And so, these guys who know the rules, they know the language, and they have the access, and they’re giving contributions to the people writing the rules, have all the advantages.

BILL MOYERS: But Barney Frank would disagree with both of you. I don’t know that he’s read your piece yet, but I’m sure he will.

DAVID CORN: Yeah, I’m sure he would.

BILL MOYERS: Barney Frank, Chairman of the House Committee on Financial Services, and a liberal Democrat, said the other day, look, it’s not — I’m not affected by campaign contributions. The members of my committee are not affected by campaign contributions. The problem is democracy. He says everybody sitting on this committee represents somebody back home, a local bank, a car dealer, an insurance company. And they come to the committee and they press, as you do in a democracy, for their interests as you just said.

DAVID CORN: But wait a second. I mean when you look at something like derivatives — derivatives, which were used to enable the subprime lending mess that led to the near collapse of the U.S. and global economy- I’m not sure there are bankers back home who are lobbying, you know, the committee. There aren’t local derivative dealers that you meat in Main Street, when you go back to town hall meetings. It’s a very small group of people who understand this. And we have seen– the “Wall Street Journal” is reporting this week that there’s no real action on regulating derivatives.

BILL MOYERS: I brought that story, because I wanted to read it. Quote, “Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives take blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they’re traded, some efforts have been shelved, and others have been watered down.” What does it say when “Mother Jones” and the “Wall Street Journal” reach the same conclusion? That our government cannot stand up to the lobby even on an issue like derivatives, which were at the root of much of our problem over the last few years?

KEVIN DRUM: Well, it doesn’t say anything good. And derivatives are a good example of how this stuff works. I mean, take a look at what happened. Derivatives were at the center of the financial meltdown in 2008. And at first everybody was all ready to regulate derivatives. And the big idea was to put them on an exchange, like a stock exchange, where they’re all traded publicly and transparently. What happened was there were corporations — you know, if you’re an airline, and you’re worried about the price of jet fuel, you might want to buy a hedge. Hedge the price of jet fuel. And so, the airlines and some other companies went to Congress and said, look, those are derivatives, but they shouldn’t be traded on the exchange, because that’s not the financial stuff that blew up the world. No problem. Everybody pretty much agreed they ought to be exempted from that. But then it’s all in how you write the rules. So, the rules got written. And as they slowly got changed, it turns out you’ve got to define who is an end user. Who is a corporation, as opposed to a bank? And the rules got written and they got written a little more broadly and a little more broadly until eventually if you read the rules right, it looked as though pretty much anybody was an end user. Goldman Sachs would end up being an end user. And 80 percent of the derivatives would have been exempt.

BILL MOYERS: And what does that say to us?

KEVIN DRUM: It says that the banks are in charge. And they’re in charge, they get people, you know, right now, banks are in, you know, nobody wants to be around Goldman Sachs, right? So, what they do is what you were talking about. They get the car dealers and they get the local banks and the credit unions and so forth to basically front for them. And these corporations go in and they say, “We want an end user exception.” And they get it. And then all it takes is a few congressional aides here and there to change the wording a little bit–

DAVID CORN: Now, the interesting thing is at this point having a conversation like this, we’ve already lost. Because now we’re arguing about how the technical side of things are handled. And we- what the Wall Street collapse didn’t really lead in Washington or anyplace else was sort of a reevaluation of what finance is supposed to be about. And what government’s role might be in advancing a financial system that benefits citizens at large. Wall Street has become a place- and the banking industry, where you don’t lend money to improve local businesses and industry. You basically, you know, create new- they call them instruments, devices- to make money yourself. It’s really turned into nothing except a casino, in which they lend money and then they make bets and side bets and bets on the side bets about what’s going to go up and down. So, a lot of the action is really, at the end of the day, not about providing credit and keeping capital flowing. It’s about what- how they think they can make more money through more trades.

BILL MOYERS: Yeah, I was struck by the — by that paragraph in your story, where it said the financial industry has persuaded us, convinced us over the last 30 years that the purpose of the financial industry is not to serve companies needing capital or consumers needing credit, but to make money for themselves. And you go on to say that in a very fundamental way, this financial lobby has changed America. What do you mean by that? That goes deeper than campaign contributions and money and even influence in Washington. You say they’ve changed our framework.[…]

There’s alot more at the transcript for this program, which I won’t post since I’ve gone well beyond fair use here. But you should click over and read this transcript or watch the video to get the complete story as told by Drum and Corn. And the series of articles that Mother Jones commissioned on the banking crisis can be found here.

Dick Durbin remarked after the mortgage cramdown provision was defeated that the “banks own the place”. What is remarkable to me is that Democrats can be so complicit in letting these banks own the place. These banks and AIG brought the world to its knees and we are all still feeling the affects of that. The business at hand ought to be Never Again — meaning making Too Big to Fail into Too Big To Exist, getting real consumer protections in place and making banks act like banks. In short — taking the risk of high risk money-making schemes off of the backs of taxpayers and off of the backs of deposit customers. And people like Barney Frank are pretty clear about the regulatory mess that currently exists — the one that lets banks pick and choose their regulators — but not suiting up (especially now) to burn down that mess just makes no sense. This idea of a systemic regulator who would be able to rein in bad practices before they crash the economy is a pipe dream — people in the midst of a bubble are making money and hiring people. And someone from the government will put the brakes on that?

There is no doubt that either the House or Senate efforts will be better than what we have now, but really, there is simply no reason to just let the people who burned down the house continue to have basically unfettered access to the gas, the matches and the house. And somehow I suspect that owning the place is still what the banks will do.