Tags: Public Citizen Discusses Too Big to Fail Banks

Liberals Rail Against Too Big to Fail

By    |   Monday, 08 April 2013 02:14 PM

On April 3, Public Citizen assembled a panel at its Washington Dupont Circle headquarters to review the state of the struggle against the cartel of “too big to fail” banks that has achieved domination of public policy in the financial arena. The official reason for the event was to promote a book titled “Reality Check: The Forgotten Lessons of Deregulation and Unsung Successes of Sensible Safeguards” by Taylor Lincoln, Public Citizen’s director of research, but the discussion turned quickly to questions of “What went wrong?” and “What is to be done?”

Since I was moved to come to Washington in large part by opposition to the movement founded by Ralph Nader that is now Public Citizen, there was a palpable sense of irony in stepping into this iconic building, now named after Joan Claybrook, who attended. At the same time, one could see the potential for an effective left-right coalition, lacking mainly a more prominent involvement by the right, although no one detracted from the positive tone of the message by making this point.

The panelists were Brooksley Born, the former chairman of the Commodity Futures Trading Commission who warned of the dangers attendant to the deregulation of derivatives trading and who served on the Financial Crisis Inquiry Commission; Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (TARP) whose efforts to reveal how the money was being spent brought him into conflict with then-Treasury Secretary Tim Geithner; and recently retired former Rep. Brad Miller, D-N.C., who served for 10 years on the House Financial Services Committee and participated in the proceedings leading to the enactment of the Dodd-Frank Act.

The format consisted of an interview of the panelists by Lincoln designed to elicit commentary from them.

In response to a question by Lincoln as to how much has been learned about how to regulate banks and other financial institutions, Born called Dodd-Frank “a good first step, if implemented and fully enforced,” but she added that the industry has mounted “enormous pressure,” consisting of a big public relations campaign, lobbying, campaign contributions, grassroots marketing and lawsuits to enjoin implementation of rules as they are adopted.

Miller lamented that there is no visible public pressure to implement the rules, observing that no one at a fire department dinner would demand to know whether the “pushout” rule was being enforced.

Barofsky spoke of the effort by JPMorgan Chase CEO Jamie Dimon to gut reforms in the immediate wake of hearings on the London whale scandal, and he asked rhetorically why anyone would listen to anything Dimon and his lobbyists have to say. He noted that one of the industry’s refrains is that the people advocating regulation never sat at a trading desk, as if this should absolve the bankers of what took place.

Barofsky lamented, “We had our foot on their throats, but we bailed them out so they could earn their way out of it.”

Miller added that the derivatives the banks trade are synthetic in nature and contribute nothing to the real economy, but the bankers continue to justify themselves by claiming they are maintaining the channels of the distribution of credit.

The panelists all gave their views on the phenomenon of “regulatory capture” by means of the revolving door that allows government officials to rotate back and forth between jobs with financial institutions and their law firms and policy jobs in government.

Barofsky told of “advice’ he received from Herb Allison, a former head of Fannie Mae who had rotated to a top post with the TARP, that he should be mindful of the effect his actions would have on his prospects when he returned to the private sector. He recalled that one of the very first appointees of the Obama Treasury had been the chief lobbyist of Goldman Sachs, and he worried that a key post now would go to one of two finalists from Citigroup.

Miller called the revolving door “entirely corrupted.”

Born said she used to advocate the revolving door on the ground that lawyers who served in government would return to the private sector as “advocate for compliance,” but she found that staff at the CFTC who had served at the U.S. Department of Agriculture were handing out “no action” letters to the industry without the knowledge of commissioners.

The focus of the group going forward is on a movement led by Sens. Sherrod Brown, D-Ohio, and David Vitter, R-La., to force the breakup of the TBTF banks, and Mr. Barofsky referred with approval to support by the Tea Party, as well as groups on the left. Proponents are encouraged by a resolution attached to the recent budget deal that passed the Senate unanimously. Cynics will have the bad grace to emphasize that the resolution is nonbinding.

I suspect that the battle was lost several decades ago when the largest money center banks were already insolvent and had achieved “too big to fail” status. Meanwhile, they have grown even larger and added Wells Fargo, Goldman Sachs and Morgan Stanley to their number. However, the battle is joined, and the lead senators will continue to look for opportunities to exert leverage on the banks.

Perhaps the most optimistic view, expressed by Born, is that the banks will see it as in their interest to break up voluntarily. But opponents of Fannie Mae and Freddie Mac have imagined the death of those institutions, while their share has grown, and the outlook is for the number of housing government-sponsored entities, now backed explicitly by the federal government, to grow to at least three with the addition, again, of Wells Fargo.

The most realistic prospect is for the cost of the 2008 episode, now estimated by several parties as about $15 trillion, to continue to grow and to accelerate if the economy should slip back into a recession in spite of the extraordinary efforts of the Treasury and the Federal Reserve to “simulate” growth.

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Public Citizen assembled a panel at its Washington Dupont Circle headquarters to review the state of the struggle against the cartel of “too big to fail” banks that has achieved domination of public policy in the financial arena.
Public Citizen Discusses Too Big to Fail Banks
Monday, 08 April 2013 02:14 PM
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