Opinion

The Great Debate

‘Democratic wing’ of Democratic Party takes on Wall Street

The chattering classes are fascinated by the Republicans’ internecine battle to redefine the party in the wake of the George W. Bush calamity and the Mitt Romney defeat — from Senator Rand Paul’s revolt against the neoconservative foreign policy, to intellectuals flirting with “libertarian populism.” Less attention has been paid, however, to the stirrings of what Senator Paul Wellstone dubbed “the Democratic wing of the Democratic Party” — now beginning to challenge the Wall Street wing of the party.

Perhaps the strongest demonstration of this was the barrage of “friendly fire” that greeted the White House’s trial balloon on nominating Lawrence Summers to head the Federal Reserve Bank. More than one-third of Democrats in the Senate signed a letter supporting Janet Yellen, now vice chairwoman of the Fed. More than half of the elected Democratic women in the House of Representatives signed a similar letter. Many were appalled at the notion of passing over the superbly qualified Yellen for Summers, with his notorious record of denigrating and dismissing women.

But, as Katrina vanden Heuvel, editor of the Nation wrote in the Washington Post, Summers also drew opposition because he was the “poster boy for the Wall Street wing of the party — literally.” (Summers joined then-Treasury Secretary Robert Rubin and then-Federal Reserve Chairman Alan Greenspan on the now risible 1999 Time magazine cover celebrating the “Committee to Save the World” — before the global financial collapse exposed the folly of their policies).

Under President Bill Clinton, Summers was Rubin’s powerful protégé and championed the deregulation of Wall Street. Summers scorned the chairwoman of the Commodity Futures Trading Commission, Brooksley Born, when she sought to tame the market in derivatives. (Instruments that Warren Buffett later called “weapons of financial mass destruction.”) He defended the Clinton administration’s trade policies — the North America Free Trade Agreement, the World Trade Organization, opening to China — that led directly to unprecedented and unsustainable trade deficits, as multinationals rushed to ship good jobs abroad.

After a troubled stint as president of Harvard, Summers made millions consulting for hedge funds on Wall Street. He then went back through the revolving door — into the Obama administration, where he supported the bailout of the banks without restructuring them, suffered (though opposing internally) the premature turn to austerity and pressed on with the old trade policies.

Fixing ‘too-big-to-fail’

The United States is plagued by large corporations with outsized political power. They are “too big to fail.” So if they are about to fail, they get rescued. Many are so big that they can block the laws needed to stop them from destroying the economy or the environment.

We need to replace them with smaller companies, but U.S. antitrust law is inadequate. It exists, but has been weakened over the past decades. Consider the proposed “Volcker Rule,” which would make many banks split into two companies, one for risky investments and one for loans based on savings, as the old Glass-Steagall law required.  This would address some problems, but would not make banks small enough.  Eliminating “too big to fail” banks means making sure that each is small enough that regulators, prosecutors and elected officials won’t hesitate to let it suffer the consequences of its own decisions.

Using anti-trust law now to split up a company requires a lawsuit, and many large companies can make that costly – as Microsoft did each time it was convicted. Corporations can also use their political influence to avoid being split, as Microsoft did when last convicted.

from Rolfe Winkler:

Politics and bank regulation don’t mix

The Federal Deposit Insurance Corp tried to seize and sell Cleveland thrift AmTrust last January but local politicians intervened. In the end, the bank still went bust 11 months later - a delay that may have increased losses to the U.S. regulator’s funds. As Congress debates banking reform, AmTrust provides a useful warning that the regulatory apparatus needs to be kept free from politics.

Regulators had known for some time that AmTrust was troubled. AmTrust's chief regulator turned down the bank’s request for TARP money last fall. It also hit AmTrust with a cease-and-desist order, instructing management to change lending practices and boost capital by December 31. When AmTrust missed the deadline the FDIC decided to step in.

But Ohio Congressman Steven LaTourette and Cleveland mayor Frank Jackson convinced Treasury and the White House to keep the regulators at bay. Bythe time FDIC finally seized AmTrust on Dec. 4, its tangible common equity – the capital it has to withstand loan losses – had fallen to $276 million from $943 million the year before. The cost of the bank’s failure to FDIC: $2 billion.

from The Great Debate UK:

When firms “Too Big to Fail” fall

Amid the turmoil of the 2008 financial crisis a myriad of events unfolded that the general public knew nothing about, writes New York Times reporter Andrew Ross Sorkin in a new book titled "Too Big to Fail."

Wall Street fell from the dizzying heights of good fortune to calamity in a matter of months. To a large degree it's still to early to tell whether financiers and politicians involved made the right choices.

"At its core 'Too Big to Fail' is a chronicle of failure -- a failure that brought the world to its knees and raised questions about the very nature of capitalism," writes Sorkin in his behind-the-scenes account.

UK takes right step on too-big banks

jamessaft1.jpg(James Saft is a Reuters columnist. The opinions expressed are his own)

So it can be done after all.

Britain is poised to take tough steps to break up the large banks it rescued, setting it in stark contrast to the United States, which seems set on a policy of shoring up the unfair advantages it grants its too-big-to-fail banks while regulating around the edges.

It is quite a change for Britain, which has a sorry history of self-serving self-regulation in financial services combined with limp and outgunned official control.

Chancellor of the Exchequer Alistair Darling on Sunday told the BBC that Lloyds, RBS and Northern Rock would be partly broken up and assets sold to new entrants into the banking market. Large existing competitors such as HSBC are expected to be blocked from making bids for the assets.

from Rolfe Winkler:

Break up the big banks

President Barack Obama pledged on Monday "to put an end to the idea that some firms are 'too big to fail.'"  Though he outlined some worthy prescriptions, he failed to face up to the very size and power of the financial institutions that makes "too big to fail" possible.

For the big have gotten even bigger since the start of the financial crisis. At the end of 2007, the Big Four banks -- Citigroup, JPMorgan Chase, Bank of America and Wells Fargo -- held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent.

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In total, they had $3.8 trillion worth of deposits as of June 30th. Compare that figure to the FDIC's Deposit Insurance Fund, which showed a balance of just $10.4 billion on the same date.

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