Next week President Obama travels to Wall Street
where he'll demand -- in light of the Street's continuing antics since
the bailout, as well as its role in watering-down the Volcker rule --
that the Glass-Steagall Act be resurrected and big banks be broken up.
I'm kidding. But it would be a smart move -- politically and economically.
Politically smart because Mitt Romney is almost sure to be the
Republican nominee, and Romney is the poster child for the pump-and-dump
mentality that's infected the financial industry and continues to
jeopardize the American economy.
Romney was CEO of Bain & Company -- a private-equity fund that
bought up companies, fired employees to save money and boost
performance, and then resold the firms at a nice markups.
Romney also epitomizes the pump-and-dump culture of America's super
rich. To take one example, he recently purchased a $3 million mansion in
La Jolla, California (in addition to his other homes) that he's razing
in order build a brand new one.
What better way for Obama to distinguish himself from Romney than to
condemn Wall Street's antics since the bailout, and call for real
Economically it would be smart for Obama to go after the Street right
now because the Street's lobbying muscle has reduced the Dodd-Frank
financial reform law to a pale reflection of its former self. Dodd-Frank
is rife with so many loopholes and exemptions that the largest Wall
Street banks -- larger by far then they were before the bailout -- are
back to many of their old tricks.
It's impossible to know, for example, the exposure of the Street to
European banks in danger of going under. To stay afloat, Europe's banks
will be forced to sell mountains of assets -- among them, derivatives
originating on the Street -- and may have to renege on or delay some
repayments on loans from Wall Street banks.
The Street says it's not worried because these assets are insured.
But remember AIG? The fact Morgan Stanley and other big U.S. banks are
taking a beating in the market suggests investors don't believe the
Street. This itself proves financial reform hasn't gone far enough.
If you want more evidence, consider the fancy footwork by Bank of
America in recent days. Hit by a credit downgrade last month, BofA just
moved its riskiest derivatives from its Merrill Lynch unit to a retail
subsidiary flush with insured deposits. That unit has a higher credit
rating because the Federal Deposit Insurance Corporation (that is, you
and me and other taxpayers) are backing the deposits. Result: BofA
improves its bottom line at the expense of American taxpayers.
Wasn't this supposed to be illegal? Keeping risky assets away from
insured deposits had been a key principle of U.S. regulation for decades
before the repeal of Glass-Steagall.
The so-called "Volcker rule" was supposed to remedy that. But under
pressure of Wall Street's lobbyists, the rule -- as officially proposed
last week -- has morphed into almost 300 pages of regulatory mumbo-jumbo,
riddled with exemptions and loopholes.
It would have been far simpler simply to ban proprietary trading from
the jump. Why should banks ever be permitted to use peoples' bank
deposits -- insured by the federal government -- to place risky bets on
the banks' own behalf? Bring back Glass-Steagall.
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True, Glass-Steagall wouldn't have prevented the fall of Lehman
Brothers or the squeeze on other investment banks in 2007 and 2008.
That's why it's also necessary to break up the big banks.
In the wake of the bailout, the biggest banks are bigger than ever.
Twenty years ago the 10 largest banks on the Street held 10 percent of
America's total bank assets. Now they hold over 70 percent. And the
biggest four have a larger market share than ever -- so large, in fact,
they've almost surely been colluding. How else to explain their apparent
coordination on charging debit card fees?
The banks aren't even fulfilling their fiduciary duties to investors.
Last summer, after Groupon selected Goldman Sachs, Morgan Stanley, and
Credit Suisse to underwrite its initial public offering, the trio valued
it at a generous $30 billion. Subsequent accounting and disclosure
problems showed this estimate to be absurdly high. Did the banks care?
Not a wit. The higher the valuation, the fatter their fees.