A sentence in a recent NY Times editorial captured my immediate attention:
“But the American Public Is short of memory and naively susceptible to the siren song of snake oil.”
In its first system-wide “all clear” since our last financial crisis, “the Federal Reserve announced last week that all of the nations’ big banks are healthy.”
The Times expressed scepticism. Yes, the banks may, in fact, be healthier than when the Fed started implementing annual stress tests that evaluated how banks would withstand financial and economic downturns. However, and it’s a big, however, the present health of today’s banks are in large part due to the banking reforms that were put in place after the crisis to improve lending practices and restrict bank trading practices.
Ironically these same standards, which led to today’s more stable financial system are under heavy fire. Our present administration believes “regulation has impeded bank lending and by extension, economic growth.”
It appears that what is being touted is “a return to the days when excessive risk- taking led to outsize profits.” According to the Times, in part, deregulation led to the financial crash of 2008.
Well, that’s just part of the story. It was also the unprecedented greed and the sub-prime lending and derivatives gambling which fueled it. The system may not be anywhere near as robust as the Fed’s claim. It would be foolish to assure that our banks are prepared to withstand another financial crisis of the magnitude of 2008 or a lengthy recession.
The Fed’s good grades on stress tests mean our banks have the capacity to now engage in financial engineering to increase their stock price through stock repurchases and substantially increased dividends. Loosening standards pave the way for the same gambling we saw before.
History does repeat itself. Not that long ago I wrote about Congress trying to reinstate controls on the TBTF to re-establish the separation between commercial and investment banking and assuring that a firewall stays in place. Do we want banks to once again be allowed to trade in complex derivatives and swaps? Or, engage in hedge fund and private equity activities?
Folks, let’s not forget that banking is “the only industry in the United States that has twice in a period of less than one hundred years brought about a devastating economic crisis,” according to an editorial by Pam and Ross Martens in Wall Street on Parade.
According to the Martens, the Times editorial was not strong enough and did not take their editorial warnings far enough. The authors believe Wall Street should be viewed as a “major threat.”
If the TBTF banks get their way and influence Congress to weaken some standards and regulations, we are headed for another potential disaster. Derivatives and other risky lending practices could once again lead to a breakdown in our economic system.
Dodd-Frank is under fire including its many provisions which were a check on Wall Sreet. Banks were forced to move derivatives out of the bank with insured deposits so that government insured depositors’ money couldn’t be gambled with and requiring derivatIves would all to be centrally cleared, eliminating much of the individual counter-party risk.
Citigroup, who got the Dodd-Frank bill gutted, thereby removing the prohibition of funding derivatives with bank deposits, had $41.3 trillion in notional derivatives in March of 2008. Today they are up to $54.8 trillion which, as the Wall Street on Parade article points out, is equal to 72% of the world’s total GDP! With only a small part of the derivatives being centrally cleared.
And the TBTF concentration is huge, with the largest four of the TBTF having more than 89% of the total banking industry notional amount (face amount) of derivatives, according to the Office of the Comptroller of the Currency (OCC) in their trading and derivatives report which covers the first quarter of 2017. The report also shows that less than 40% of the banking industry derivatives are centrally cleared.
So, what are we thinking? How quickly we forget.
Optimism is fine but not the recklessness which could once again result in millions of people being financially devastated.
The past proves big banks need some oversight. Carte blanche on fewer regulations encourages risky gambling and will have dire consequences.
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Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
Great piece, Dick. The role of investment banks in the financial recession wasn’t the first-time banks played fast and loose with the banking rules with harm coming to customers and society in general. People forget that in the 1980s, savings and loan institutions failed at record levels and some of the tactics used to quench their greedy appetite were astoundingly unethical. Some of us recall Lincoln Savings & Loan, which sold uninsured subordinated debentures issued by its parent company, American Continental, and thousands of California retirees lost their life savings. The total cost to the public to mop up after the failures was $152.9 billion, including $123.8 billion of U.S. taxpayer losses.
The key question is whether ethics can be successfully regulated? I agree that stiff penalties for improper activity by the banks is needed, if for no other reason than to serve as a deterrent and, most importantly, to punish the wrongdoers.
I totally agree, Steve. You noted the 80’s banking S&L crisis, but accountability was pursued in that crisis, with criminal convictions of 1,000 senior bankers… 800 actually going to prison (remember Charles Keating?). And many have attributed the prosecutions with keeping the costs of that crisis down.
The recent financial crisis has had zero prosecutions of senior bankers, despite significant evidence being sent to the DOJ [ https://upk.187.myftpupload.com/senator-warren-calls-out-the-doj-they-ignored-11-congressional-commission-criminal-referrals/ ] with no perceived deterrent for wrongdoing and the ultimate costs to GDP being estimated at $24 trillion.
Since the TBTF banksters now understood that there is no accountability for wrongdoing, the next crisis will possibily take this country down.