How are the big banks behaving now? Have they mended their errant ways?
The Office of the Comptroller of the Currency (OCC), which is responsible for national banks, reported at the end of 2015 that a trend toward increasingly lax underwriting standards "reflects broad trends similar to those experienced from 2005 through 2007, before the most recent financial crisis..." That seems like the behavior of people who don't think they'll ever have to face the consequences of their own behavior.
Those who do not study history -- or who choose to ignore it -- are doomed to repeat it. So why are we even arguing about this?
Democrats Aren't Always Tough on Banks
Some Democrats aren't as tough on Wall Street as they like to act. Not one senior banking executive was indicted by President Obama's Justice Department, even though banks have paid out some $200 billion to settle fraud charges. Those frauds didn't commit themselves -- but nobody's gone to jail, or even paid back their ill-gotten bonuses.
An example: Recently released documents show that the Financial Crisis Inquiry Commission referred Robert Rubin -- who went from serving as Bill Clinton's Treasury secretary to running Citigroup -- to the Department of Justice because it believed Rubin "may have violated the laws of the United States in relation to the financial crisis." There is no evidence that any investigation ever took place. The lack of action, in this and so many other cases, is ... well, it's not very tough.
And the beat goes on. A recently announced $5 billion settlement between the government and Goldman Sachs amounted to significantly less than meets the eye. It included no civil or criminal penalties for the bankers who conducted the multibillion-dollar fraud or the executives who managed them. Phil Angelides, former chair of the Financial Crisis Inquiry Commission, wrote that the settlement "will not deter future financial lawbreaking and will further undermine the public's faith in the fairness of our legal system."
Hillary Clinton certainly sounded tough in the latest Democratic presidential debate, when she was asked if she would break up the big banks. "I will appoint regulators who are tough enough and ready enough to break up any bank that fails the tests under Dodd-Frank," citing living wills as one such test.
So would Hillary Clinton really break up JPMorgan Chase, Bank of America, Wells Fargo, State Street and Goldman Sachs if they continue to fail the living will test? Nobody seems to think so -- which may explain the vehemence of the side arguments presented by Messrs. Frank and Krugman.
Dodd-Frank Didn't Fix Everything
They want us to believe that Dodd-Frank fixed Wall Street. It was clearly an improvement over the status quo. But it left too much to the discretion of those "tough regulators," many of whom -- like their colleagues in the Justice Department -- had long-standing relationships with the industry they were expected to regulate.
Dodd-Frank didn't restore the protections of Glass-Steagall that would separate standard consumer banking from Wall Street speculation -- protections that are sorely needed -- and it didn't fix "too big to fail."
It's not as if nobody knew its shortcomings at the time. When Dodd-Frank passed, the New York Times said it would "change Wall Street around the edges" but would "not threaten the finance industry's basic business model." Matt Taibbi wrote that "taken together, these reforms fail to address even a tenth of the real problem."
Simon Johnson expressed concern that it didn't provide enough authority to wind down larger institutions with international holdings, and added that "it has never been clear that any government agency would be willing to use such resolution powers pre-emptively -- before losses grow so large that they threaten to rock the macroeconomy."
Now Johnson says the banks are still too big to fail and that "as long as that remains the case, another disaster is only a matter of time."
What's the Answer?
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