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Financiers Expose Fissures Among the 1%
In recent weeks
several big finance insiders have publicly exposed fault lines in the U.S.
financial system. Their inside views are telling us that the corruption we see
is real and, more importantly, those in the system know it.
Financiers that
break from the corruption of gluttonous greed can become the conscience of a
sector that seems to have no conscience. Let's hope their courage is
contagious and others follow their lead. We need a revolt from inside big
finance that will help radically transform finance from greed to generosity,
from gluttony to moderation and from selfishness to community benevolence.
A thorough
examination of the corruption of big finance came in a recent shareholder letter from Robert Wilmers, the Chairman and CEO of
M&T Bank. He laments that " it is difficult, for one who has spent more than a generation in
the field, to recall a time when banking as a profession has been publicly held
in such persistently low esteem" noting that polls show "only a quarter of the
American public expressed confidence in the integrity of bankers ." He
recognizes that this is something big finance has brought on itself: "Since
2002, the six largest banks have been hit by at least 207 separate fines,
sanctions or legal awards totaling $47.8 billion. None of these banks had fewer
than 22 infractions; in fact one had 39 across seven countries, on three
different continents.
And, he highlights the salary disparity
between bankers and other Americans reminding us that this is a recent
development. Just a few generations ago "the average compensation in
the financial services industry was exactly the same as the average income of a
non-farm U.S. worker." But today: "At a time when the American
economy is stuck in the doldrums and so many are unemployed or under-employed,
the average compensation for the chief executives of four of the six largest
banks in 2010 was $17.3 million -- more than 262 times that of the average
American worker . . . it is hardly surprising that the public would judge the
banking industry harshly -- and view Wall Street's executives and their
intentions with skepticism."
How did the finance industry change
into this corrupt mass? Wilmers points to the repeal of
Glass-Steagall, a law "prudently erected in the wake of the Depression, kept
investment banks apart from traditional banks." When banks were
credible members of the community they "saw public service as part of their
obligation" and "played a clear, if limited, role in the economy: to gather
savings and to finance industry and commerce. Trading and speculation were
nowhere included."
But, in the 1970s
and 80s he describes banking moving away from investing in things they knew as
they began investing in areas where they " possessed little
knowledge . " This created high risks, so much so that a
1993 study conducted by the Federal Reserve Bank of Boston found that had
"banks truly recognized all the losses inherent in their books in 1984, one
major bank would have been insolvent and seven others dangerously close."
Rather than reducing
risk, they sought quick profit by creating "investments they did not understand
-- and, indeed it seems nobody really understood. In the process, they contorted
the overall American economy." The repeal of the Glass-Steagall Act
in 1999 married investment banks with traditional banks. Rather than sound investment
Wall Street bet on "increasingly opaque financial instruments, built on
algorithms rather than underwriting." This sowed "the seeds of crisis and
embodied a broader change that, in important and unfortunate ways, continues
today"
Wilmers describes a bigger, systemic problem, "not only bankers but their
regulators, not only investors but those paid to advise them, not only private
finance but its government-sponsored kin." The result -- "the decimation of
public trust in once-respected institutions and their leaders." The
economic collapse "was orchestrated by so many who should have, instead, been
sounding the alarm."
Unfortunately, "the Wall Street banks
continue to fight against regulation that would limit their capacity to trade
for their own accounts -- while enjoying the backing of deposit insurance -- and
thus seek to keep in place a system which puts taxpayers at high risk. In 2011,
the six largest banks spent $31.5 million on lobbying activities. All told, the
six firms employed 234 registered lobbyists."
Wilmers urges us "to distinguish between Wall Street banks who, in my view,
were central to the financial crisis and continue to distort our economy, and
Main Street banks who were often victims of the crisis." Many
activists do see the difference between Wall Street and community banks and
credit unions; and therefore, have engaged in the "move your money"
campaign.
A second example of divisions in the
banking sector comes from the Federal Reserve Board of
Dallas which released a report from its chief
researcher, Harvey Rosenblum , "Why We Must End Too Big To Fail Now,"
cites statistics showing that the five largest U.S. banks hold 52% of all bank
assets . The report points out that "American workers and taxpayers
want a broad-based recovery that restores confidence. . . The road back to
prosperity will require reform of the financial sector. In particular, a new
roadmap must find ways around the potential hazards posed by the financial
institutions that the government not all that long ago deemed "too big to
fail.'" In
an introduction to the report, Dallas Fed President Richard W. Fisher calls for
"downsizing" these megabanks because the continuing cloud of "too big to fail'
hanging over the economy is simply too costly.
Rosenblum, like
Wilmers, sees that Americans have lost faith in capitalism as a result of Wall
Street's greed: "Diverse groups ranging from the Occupy Wall Street movement to
the Tea Party argue that government-assisted bailouts of reckless financial
institutions are sociologically and politically offensive. From an economic
perspective, these bailouts are certainly harmful to the efficient workings of
the market." He blames the big banks for the lackluster "recovery" writing that
the too-big-to-fail banks "remain a hindrance to full economic recovery."
In the report, Rosenblaum states that the financial crisis arose because of
"failures of the banking, regulatory and political systems." But, he warns
"focusing on faceless institutions glosses over the fundamental fact that human
beings, with all their flaws, frailties and foibles, were behind the tumultuous
events that few saw coming and that quickly spiraled out of
control." As the regulatory and political systems failed, the rule
of law was not enforced, when this occurs
"incentives often turn perverse, and self-interest can turn malevolent. . .
Greed led innovative legal minds to push the boundaries of financial integrity.
. ."
Rosenblaum sees the too big to fail
financial banks, not community banks, as the "primary reason" for the weak
recovery: "Many of the biggest banks have sputtered . . . in contrast, the
nation's smaller banks are in somewhat better shape . . . most didn't make big
bets on mortgage-backed securities, derivatives and other highly risky assets
whose value imploded." He
concludes: "an economy relatively free from financial crises--won't be reached
until we have the fortitude to break up the giant banks."
The most highly
publicized division among financiers was in mid-March when Goldman Sachs
executive Greg Smith publicly resigned, with a pointed letter in the New York Times. The
letter described a "toxic and destructive environment" in Goldman where
the entire staff from senior partners to associates, pursued nothing but
ever-more sophisticated means of "ripping their clients off." At the center of Smith's critique is the massive derivatives
market, where he was a central player.
What may have been most interesting
about the public resignation letter was so many commentators saying -- ho hum,
Goldman rips off its clients, big surprise. Former Secretary of
Labor Robert Reich broadened the discussion describing the
history of Goldman rip-offs going back to the 1920s and broadening the rip-off
mentality to all of Wall Street's big banks, not just Goldman. Reich describes
this as a problem of "endemic abuse of power and trust." This culture of corruption led to "the
junk-bond and insider trading scandals of the 1980s, the dot-com scams of the
late 1990s and early 2000s, the Wall-Street enablers of Enron and other
corporate looters, and the wild excesses that led to the crash of 2008."
What do these
emerging cracks mean to people in the United States who want to see radical
transformation of finance, democratization of the economy and a participatory
democracy where people have real power? It means, we are seeing the
weakening of the pillars that hold the power structure in place -- a critical
step to people having the power to demand change.
Steve Chrismer, an engineer working
with Occupy, describes this in engineering terms; how with the right frequency
we can insert our fist, even our arm between rocks: "Did you know that it is
possible to insert yourself between rocks that are vibrating at just the right
frequency? When looking for the optimum vibration frequency I increased
the frequency by single digits from 0 Hz. When resonance occurred the
situation changed dramatically and as the rocks became "fluid' I was able to
insert my hand and then my whole arm into the rocks. If you went slow
enough the rocks flowed around you, not noticing your presence, and did not
resist: go too recklessly fast and the rocks would resist.
"This is where Occupy is as a movement: only 6 months old and we are already
noticing the weakness of solid walls. To weaken the pillars of power requires
that we study these cracks so that we can provide the needed energy to open
them non-violently and allow us all to pass through."
Occupy needs to
drive wedges through these cracks.
Protests of executive salaries, stopping foreclosures and evictions
through Occupy Our Homes, highlighting
the failure to loan to small businesses and the hiding of profits off shore to
avoid paying taxes, pressuring banks for their investments
in private prisons, dirty fuel, for-profit health
care and other negative corporate interests need to escalate as we build
pressure to break up
the Too Big to Fail Banks. At the
same time, we need to build a new finance system which includes developing public banks at the state and
city level and building community banks and credit unions by moving our money from the big banks.
Time
banks that record volunteer time which is traded for unpaid labor at the
community level will avoid the banking system altogether. Expanding the
fissures by the combination of protest and building the new economy will result
in a finance system that serves the public interest, not private gain.
No doubt many others
inside big finance feel the same as those who have spoken out. The courage of
the few may embolden more to expose the corrupt practices and unsafe risks that
are being taken; and to speak about real solutions to the financial crisis. Up
until now, those who see the corruption may have felt alone but now they know
they are not and they can join with others seeking to stop the exploitation of
people and the planet.
The more we speak
about the fraud and corruption of Wall Street, the more we will empower those
in big finance who are questioning the current paradigm. The more we protest at
banks and financial institutions, exposing the truth about unethical
foreclosures, concentrated wealth and ties to industries that harm people and
the planet; the more reasons those inside will have to change their behavior.
Using creative conflict and nonviolent tactics, we can draw more people to the
movement for social and economic justice and provide a safe place for them to
speak the truth of much-needed transformation.
Kevin
Zeese is co-director of Its Our Economy and an organizer of the National
Occupation of Washington, DC.