by Jim Brown,
Show host, Jim Brown’s Common Sense
In the movie Wall Street, Michael Douglas’s character Gordon Gecko summed up the attitude of major U.S. banks quite well: “Greed is good.”.
And this certainly appears to be true, at least for the banks, because after all, the federal government has made it clear that even after the 2008 financial debacle, where hundreds of billions’ of dollars were poured into the likes of these big guys, no effective new rules have been put into place and no major banker has been held accountable.
The old axiom is true. The more the big banks take irresponsible risks and commit out- right fraud, the more things stay the same, as the regulatory system looks the other way. That is until the banks face major losses and cry for help. Then the federal dollars begin to flow and bailout checks pour out of the federal treasury with the force of a flooding river.
Remember just five years ago? The big banks made off like bandits. J.P. Morgan Chase received $25 billion. Bank of America cashed in for $15 billion. Citigroup was the recipient of $25 billion, while both Goldman Sachs and Morgan Stanley received $10 billion, each. With all this money being handed over by taxpayers, surely the rules of financial solvency and bank accountability would be overhauled. Too many risky investments and not enough money kept in reserve was the cry.
And there were some efforts by congress and legislators to build in more “perceived” safeguards. Dodd-Frank legislation was enacted into law in 2010, but many members of Congress who strongly supported the reforms in this legislation feel it did not do enough. “The bottom line is that Dodd – Frank didn’t end too big to fail,” says Representative Jeb Hensarling, chairman of the House Committee on Financial Services. According to Hensarling, the “Dodd-Frank institutionalized and codified too big to fail.”
Then there were internationally agreed upon rules called Basel III, but such rules assume that there are regulators across the globe that can handle the job of monitoring big banks. There have been many instances were regulators have dropped the ball, or have been intimidated by the very banks they are supposed to regulate. And the rules themselves have proven to be complicated and open to varying interpretations.
Into to fray comes two Senators who seem to be making a good faith effort to both simplify the rules and bypass the incompetency of the regulators. And they seem to be on the right track. Ohio Senator Sherrod Brown, a moderate democrat, and Louisiana Senator David Vitter, a conservative republican, have proposed some systematic reforms with the goal of allowing us to stop worrying about big banks. Their legislation is purported to raise the cushion against bad risk by requiring more reserves, and simplifying the requirements to be followed.
Sherrod Brown (no relation) is a details guy. I had the chance to work with him on a number of election reform proposals when we were both Secretaries of State for our respective states back in the 1980s. David Vitter worked with me on a number of insurance reform proposals when he was in the Louisiana legislature in the 1990s, and I was the state’s insurance commissioner. They come from different philosophical slants, but both agree that big banks have taken advantage of the regulatory system and the taxpayers.
Brown summed up their joint approach in a recent statement where he pointed out “that the more we learn about these bailouts, gifts and advantages that Wall Street gets, the clearer it becomes that one set of rules applies to the largest megabanks and another set of rules to the smaller financial institutions and the rest of the country.” Louisiana banker Presto Kennedy agrees. “The solution demands a political will to break up these greedy and corrupt giants that threaten to engulf our financial system.”
The Brown-Vitter proposal does not go as far as requiring break-ups of giant banks. But the legislation does make an attempt to level the playing field. One way is to limit the discretion of regulators who often have been intimidated by the political influence of the Wall Street giants. The New York Times commented that “in a major way, the Brown – Vitter bill effectively sidesteps the need for reliable regulators. It simply says that all banks would have to set up a buffer for potential losses – called capital in the industry – that is equivalent to 15% of their total assets.”
The Brown-Vitter proposal is not a “solve all” solution. But it will go a long way to inhibiting future major financial crises. It recognizes that the five biggest banks in the U.S. control assets that add up to some 60% of America’s gross national product. This doesn’t reflect the free market or real competition. In fact, there is no present free market in the financial system. When you allow an inefficient government-subsidy scheme like the one we have in place now to protect megabanks that are carrying on large, complex activities, even with Dodd-Frank, the regulatory system will continue to allow unmanageable financial giants that will be deemed “too big to fail.”
We’ve had enough of Wall Street welfare. Right now, risky financial behavior is the norm on Wall Street. Heads they win, tails, the taxpayer looses. The Brown-Vitter proposal may have some slight unintended consequences. But it’s a good start, and it will create a much better balanced marketplace with a much greater likely hood of averting any financial crisis in the future.
Jim Brown’s syndicated column appears each week in numerous newspapers throughout the nation and on websites worldwide. You can read all his past columns and see continuing updates at http://www.jimbrownusa.com. You can also hear Jim’s nationally syndicated radio show each Sunday morning from 9 am till 11:00 am, central time.