The debate over banks and banking came front and center this week. In his toughest language yet, President Barack Obama vowed to veto financial reform legislation that is not tough enough on Wall Street. “The lobbyists are already trying to kill it,” Obama told Congress in his State of the Union address. “Well, we cannot let them win this fight. And if the bill that ends up on my desk does not meet the test of real reform, I will send it back.”
The President’s rhetoric offers an important measure of progress. Now we can be assured that the political elite are paying attention to the poll numbers showing an unprecedented anger at the big banks and the Wall Street bailouts. Democrats are starting to figure out if they don’t take up this populist message and run with it in November, the Republicans will.
But the rest of the President’s speech and the other dramatic developments in the banking world this week indicate that Democratic actions are falling far short of their rhetoric, a pattern that voters are sure to notice.
First, the speech. Many had anticipated a big announcement on jobs. With jobless rates in the double digits and a projected 5-10 year haul to get employment back to normal levels, workers were hoping for something big and bold. Instead, Obama proposed $30 billion in TARP funds to get credit flowing to small businesses. $30 billion to put 16 million Americans back to work? $30 billion when the Wall Street bonus pool for a few thousand bankers was $140 billion this month? Democrats will live to regret this missed opportunity.
Also on Wednesday, U.S. Treasury Secretary Tim Geithner was called on the carpet once again by irate members of the House for his mishandling of the AIG bailout. To their credit, several Democrats asked the toughest questions. But Geithner bobbed and weaved and no knock-out punches were landed. This is a problem for the Democrats. The whole incident paints an ugly picture of the federal response to the financial meltdown, best described by Representative Edolphus Towns (D-NY): “The taxpayers were propping up the hollow shell of AIG by stuffing it with money and the rest of Wall Street came by and looted the corpse.”
On Thursday, Federal Reserve Chairman Ben Bernanke was reconfirmed by the Senate for another four year term. His nomination had been in trouble and a record number of senators voted no, but Obama stood by his man and pushed him through. The problem with Bernanke is best summarized by economist Simon Johnson: “Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)?” While Bernanke may have saved Wall Street, he has shown little interest in using his power as Fed Chairman to aggressively aid Main Street. He is not the man for the job in these tough economic times and that will soon be apparent to the detriment of the Democrats who secured his confirmation.
Ultimately, however, the most important developments of the week were played out behind closed doors in the Senate. Senate Banking Chairman, Chris Dodd, made the decision some time ago to try to devise a bipartisan financial reform package. His package of reforms was then handed over to four bipartisan working groups. With thousands of bank lobbyists swarming the hill, it is no surprise that these groups are busily making the Dodd bill worse.
The derivatives language is being weakened and bankruptcy is emerging as the preferred method of unwinding financial institutions, which could leave taxpayers to foot the bill for this expensive procedure. To truly end the “too big to fail” problem and crack down on the reckless behavior of the biggest banks, we need strong, specific preventative measures such as leverage limits, capital and margin requirements, limits on counterparty exposures, a ban on proprietary trading and limits on bank size through a low cap on total liabilities. Even Obama’s signature reform, an independent consumer agency is in danger of being whittled down to a corner desk in a failed federal agency.
The President understands that the Wall Street bailout was “about as popular as a root canal.” But if Democrats continue to peddle this type of rhetoric while neglecting meaningful reform as they have done this week, the Republicans will run away with the anti-bailout message and with the election in November.
Crossposted from http://www.banksterusa.org/
More Lies from Obama? by ANWF member, Nate Powell
Last week, Obama announced a surprise head turner: had the sane voices of reason represented by Paul Volcker prevailed over the loot-the-riches Robber Baron Larry Summers and his crackpot team from Chicago? Or, could this possibly be too good to be true given Obama’s proven knack for saying what we want to hear, then going in a completely opposite direction. This has been true in the past, so, for our protection, let us vet his proposal before giving it consideration. Obama needs to be pushed in the right direction since he seems so prone to manipulation by the wrong crowd… so it is imperative that it is we the people that do the pushing.
As the recent Scott Brown electoral victory shows, Americans are sick and tired of Wall Street giveaways as the national priority. Geithner himself gave approval for the 100% payout on collateralized debt obligations (CDOs) and credit default swaps (CDSs) to Goldman Sachs, and the personal OK to hide it from the public reports, as the latest press reports indicate. Independents and liberals voted Republican to send a message to the Democratic “leadership” that we’re tired of betrayal.
The leadership is unfortunately blind to reality and is suicidally pressing forward with more irresponsible schemes. Take for example the recent agreement reached where Obama will create, by executive order, a panel whose duty will be to make cutbacks to our standard of living. I’m not making this up. Recommendations will then be voted on as an entire package, with an up or down vote, and will be impossible to amend. Sniff, sniff, do you smell that? Smells like our constitution is burning away. So, instead of cutting off the bailouts and taking the money back, President Obama is going to propose that we continue feeding the vampires on Wall Street. Talk about going off the deep end.
The answer is not draconian austerity; the answer is to leverage the power of our (still) sovereign currency and create loans for improvements to the physical economy, instead of the near zero interest loans given to large banks specifically to buy the near worthless “toxic assets” called derivatives.
Derivatives are instruments that derive their value from other things, such as mortgages, as in the famous “mortgage backed security,” or commitments from institutions, such as CDOs and CDSs. They are basically valueless in and of themselves, but were used by banks to claim as assets upon which they used as collateral to make other leveraged financial “investments” like when the speculators drove the price of gas up. See, the banks have really bankrupt all along, but they have used derivatives to hide it. When the house of cards came falling down, they ran to the taxpayer to bailout their little scheme, so they could start all over again… Now instead of rebuilding the nation and the world, they continue to trade derivatives. Talk about a waste of time and money. Rome is figuratively burning while the bankers trade worthless “assets” on the public dime.
Meanwhile, the still somehow prevailing delusion is that the speculators must be protected! Why do we even need to protect them at all? The Federal Reserve Board, Inc. created trillions of dollars in loans to trade for these financial instruments at nearly 0% interest. Their measures have allowed the big banks to “earn” so much profit at taxpayer expense under the various bailout programs. Let’s instead use the awesome power of money creation to create trillions of dollars in loans for fantastic new technology and infrastructure for the nation and the world. We can eventually wipe poverty, hunger, and disease out of existence if we can make this decision. We’ll build a real recovery so we don’t need to make austerity cuts like those that were forced upon Haiti, for example, by the IMF.
The Four Disingenuous parts of the Obama/Volcker Proposal
Smokescreen #1, More gambling with your money in tow: An article in the Financial Times explains why Obama’s putative “war on Wall Street” is no threat to the Casino Economy. As concerns “proprietary trading,” banks will be able to continue proprietary trading related to their customers’ business (i.e., on behalf of their customers). “Glass-Steagall [Act] largely banned proprietary trading with certain exemptions for safety and soundness concerns. The trading, in which a bank buys and sells stocks and other securities from its own account, led to big profits at institutions after Gramm-Leach-Blilely allowed the transactions…. But implementation of Obama’s plan for proprietary trading could be messy since banks often conduct trading on behalf of clients from their own account.”
The Economist says, “Commercial banks may be unfazed by curbs on trading. Most have already pared their prop-trading desks. JPMorgan Chase derives a mere 1% of its revenues (and 3-5% of its investment bank’s) from such business. But having to divest Highbridge, a big hedge-fund firm, would be “horrible”, says a JPMorgan insider. The bank thinks that may not be necessary since its capital is not invested directly in Highbridge’s funds. But no one is sure.”
Smokescreen #2, Risky bets will continue: While banks would be forced to spin off or close proprietary trading desks, they could continue to take risky bets on their own account as part of market-making activities, as counterparties to derivative and structured credit products demanded by clients, and in securitization activities. As the Economist goes on, “Enforcement could be tricky, too. Regulators will struggle to differentiate between proprietary trades and those for clients (someone is on the other side of every trade) or hedging. Getting it wrong would be counter-productive: preventing banks from hedging their risks would make them less stable.”
Smokescreen #3, Cover-up for investing in hedge funds: Prohibiting banks from investing in hedge funds means nothing: banks would still be able to lend to hedge funds and private equity funds — and could structure these loans in ways that mimicked equity participation, in much the same way as shariah-compliant securities provide debt-like exposure without violating Islamic prohibitions on interest. The Economist says, “Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.”
Smokescreen #4 No real break up plans: According to Simon Johnson,
“The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all. The Bush and Obama administration’s solutions to banking failure was to federally subsidize the already behemoth banks, and encourage them to eat their competition.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
The same Economist article says, “Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.”
John Carney notes “The banks are hesitant to speak out in any official capacity, although Goldman Sachs did say they thought less than 10% of their business would be affected. How is this going to really going to break up the banks?
This caused one executive at a competitor to scoff: “Goldman thinks it can still be Goldman, huh? Well, if they’re right, nothing changes. But I’m not sure Obama really can get away with leaving Goldman untouched,” the person scoffed.”
What actually needs to be done
Banks that we deposit our money into should be commercial banks, and do things that commercial banks do, you know, like lend commercially to the community. I don’t see any need for banks larger than community and regionally sized banks. The big national/international banks don’t know how to address the needs of the community. Roosevelt’s Glass-Steagall Act was banking modernization. The 1999 “Banking Modernization Act” was demodernization.
In order to achieve this, first, the scoundrels surrounding the President must be removed. This includes Summers, whose removal along with Geithner, Bernanke, Orszag, and the Emanuel brothers will probably be the first step away from careening over the edge of a pit of no return. This is essential because they will vehemently oppose what reforms that must be done. The President is apparently not capable of thinking for himself. We must therefore remove all corrupting influences whispering into his ears. We must completely split commercial banks from investment banks so banks will return to traditional banking activities, such as making investments in the community, in the physical economy. They may presently make more profit risking our deposits as leverage to speculate rather than produce. This is why we must separate them– in order to remove the temptation and turn them yet again into good servants of our communities.
Wealth is in production, not paper. Speculation produces no true wealth. Yet, strangely, investment banking functions are valued over commercial lending. This activity actually threatens us all because it dries up credit for the real economy– the place where we all live and work. This is why we need a true return to Glass-Steagall, because it will largely eliminate the derivative trade which is toxic to growth of the real economy.
Most of the credit in the world is now controlled by the big banks, thanks to the Bush-Obama bailout. This credit is being tied up by these toxic investment banking activities, like derivative trading that is actually counterintuitive to the health of the real economy, and there is little leftover for any traditional banking functions. Either we force Obama to implement the true Glass-Steagall and really break up the banks, or it’s the austerity panels for all of us.
State of the Union Draft Leaked To Mediachannel.org. Could You Imagine? The State of The State Of The Union: Our “Leaked” Speech?
Washington Post Today:“The state of the union is obstreperous. Dyspepsia is the new equilibrium. All the passion in American politics is oppositional. The American people know what they don’t like, which is: everything.”