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The Definition of Insanity
Author: BobR
Date: 05/18/2012 13:31:03
Last night we watched the HBO movie "Too Big To Fail", based on the book of the same name by Andrew Ross Sorkin. I had felt like I had a pretty good handle on what happened, but the movie definitely filled in some gaps in knowledge, and provided some "behind the scenes" looks at just how incestuous the banking industry is. I highly recommend it.
It seems to paint Bush Treasure Secretary Paulson in a favorable light, and pretty much everyone else (including CEOs of the banks, House Republicans and even John McCain specifically) as self-centered dicks that are more concerned for themselves than they are their shareholders or the rest of the country.
While Republicans like to blame people buying "houses they couldn't afford", they forget that Bush was pushing home ownership, that banks were pushing loans they knew were going to blowup to people they knew were risks, and that the reason people were defaulting on their loans was because previous bank failures were affecting the job market. Essentially, the banks created bad economic conditions which made their own "assets" toxic, which had them teetering on the edge of failure.
The banks had sliced and diced the mortgages (ie: debt) as assets and traded them with each other. They were also gambling with their depositors' money (because as we all know - Wall St. is legalized gambling). AIG had insured all of them, to a level much higher than they could ever afford to honor. It was a house of cards getting ready to collapse and take the entire US banking system down (and the economy with it).
People said "let them fail" without realizing the dire consequences of what would happen if that actually occurred. Without credit (and in some cases - without funds, period) business would grind to a halt. Unemployment would skyrocket. It would make the Great Depression look like a simple recession. Congress passed TARP to keep the mess from getting worse.
In the aftermath, Congress passed legislation to prevent that from happening again. The crux of the clumsily-named "Dodd-Frank Wall Street Reform and Consumer Protection Act" was the Volker Rule. This was supposed to ban banks from using depositors' funds to trade - the banks were required to use only their own funds for the legalized gambling.
As in all good ideas, the devil is in how it actually gets implemented:
The idea of "too big to fail" and ghosts of the 2008 crisis (and near meltdown) came back when JP Morgan announced earlier this week that they lost $2B due to dangerous trading. Had the Dodd-Frank act been doing its job, that loss may have been prevented. JP Morgan - a bank that unwillingly took TARP funds in 2008 - could have been spared a $2B loss (that's "B" as in "billion") by a regulation it opposes.
The egos and greed of the men at the top of these companies are the root cause of their "too big to fail" size and their "too much hubris to know what's good for them" attitude. Perhaps it's time to apply the Sherman Anti-Trust Act to them and force them to split off their investment business from their deposit and loan business. The survival of our economy shouldn't be contigent on the price of a bank's shares on Wall Street.
It seems to paint Bush Treasure Secretary Paulson in a favorable light, and pretty much everyone else (including CEOs of the banks, House Republicans and even John McCain specifically) as self-centered dicks that are more concerned for themselves than they are their shareholders or the rest of the country.
While Republicans like to blame people buying "houses they couldn't afford", they forget that Bush was pushing home ownership, that banks were pushing loans they knew were going to blowup to people they knew were risks, and that the reason people were defaulting on their loans was because previous bank failures were affecting the job market. Essentially, the banks created bad economic conditions which made their own "assets" toxic, which had them teetering on the edge of failure.
The banks had sliced and diced the mortgages (ie: debt) as assets and traded them with each other. They were also gambling with their depositors' money (because as we all know - Wall St. is legalized gambling). AIG had insured all of them, to a level much higher than they could ever afford to honor. It was a house of cards getting ready to collapse and take the entire US banking system down (and the economy with it).
People said "let them fail" without realizing the dire consequences of what would happen if that actually occurred. Without credit (and in some cases - without funds, period) business would grind to a halt. Unemployment would skyrocket. It would make the Great Depression look like a simple recession. Congress passed TARP to keep the mess from getting worse.
In the aftermath, Congress passed legislation to prevent that from happening again. The crux of the clumsily-named "Dodd-Frank Wall Street Reform and Consumer Protection Act" was the Volker Rule. This was supposed to ban banks from using depositors' funds to trade - the banks were required to use only their own funds for the legalized gambling.
As in all good ideas, the devil is in how it actually gets implemented:
Public comments to the Financial Services Oversight Council on how exactly the rule should be implemented were submitted through November 5, 2010. Financial firms such as Goldman Sachs, Bank of America, and JPMorgan Chase & Co. posted comments expressing concerns about the rule. Republican representatives to Congress have also expressed concern about the Volcker Rule, saying the rule's prohibitions may hamper the competitiveness of American banks in the global marketplace, and may seek to cut funding to the federal agencies responsible for its enforcement. Incoming Chairman of the House Financial Services Committee, Representative Spencer Bachus (R-Alabama), has stated that he is seeking to limit the impact of the Volcker Rule, although Volcker himself has stated that he expects backers of the rule to prevail over such critics.
Regulators presented a proposed form of the Volcker Rule for public comment on October 11, 2011, which was approved by the SEC, The Federal Reserve, The Office of the Comptroller of the Currency and the FDIC. The proposed regulations were immediately criticized by banking groups as being too costly to implement, and by reform advocates for being weak and filled with loopholes. On January 12, 2012 CFTC (the U.S. Commodity Futures Trading Commission) became the final major regulator to vote in favor of the bill.
[..]
Regulators gave the public until February 13, 2012 to comment on the proposed draft of the law (over 17,000 comments were made). Under the Dodd-Frank financial reform bill, the regulations go into effect on July 21, 2012. However, during his report to Congress on February 29, 2012, Federal Reserve Chairman Ben S. Bernanke said the central bank and other regulators won’t meet that deadline.
The idea of "too big to fail" and ghosts of the 2008 crisis (and near meltdown) came back when JP Morgan announced earlier this week that they lost $2B due to dangerous trading. Had the Dodd-Frank act been doing its job, that loss may have been prevented. JP Morgan - a bank that unwillingly took TARP funds in 2008 - could have been spared a $2B loss (that's "B" as in "billion") by a regulation it opposes.
The egos and greed of the men at the top of these companies are the root cause of their "too big to fail" size and their "too much hubris to know what's good for them" attitude. Perhaps it's time to apply the Sherman Anti-Trust Act to them and force them to split off their investment business from their deposit and loan business. The survival of our economy shouldn't be contigent on the price of a bank's shares on Wall Street.
