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A Decade Late and Billions Short
The wizards of Wall Street are finally admitting they were wrong. But we can't trust that they have learned their lesson
It was a startling admission from one of the architects of the modern financial system. John Reed, who with Sandy Weill created Citigroup, said the merger was a mistake. What's more, Reed went on to say that the repeal of the Glass-Steagall Act, which was needed to make the merger legal, was also a mistake. He said we should "compartmentalise the industry for the same reason you compartmentalise ships" and keep "consumer banking separate from trading bonds and equity". Reed's mea culpa came a decade late and left the world's financial system a few hundred billion dollars short.
Twenty years ago, the fall of the Berlin Wall shook the world. The fall of the wall that separated commercial and investment banking 10 years ago took rather longer to reverberate around the world. The Citigroup merger was so big that it literally required an act of Congress, but that didn't keep it from needing $45bn in taxpayer funds to survive. Today, Citigroup and the other financial monsters created in the wake of that fateful merger are struggling to recover from their self-inflicted wounds and repay billions in bailout dollars from the US government.
After nearly 30 years of financial innovation, it's time to reconsider the laissez-faire attitudes that have wreaked such havoc. The savings and loan crisis of the 1980s should have warned us of the dangers of freeing stodgy lenders to take on risks they didn't understand. Instead, the free-market acolytes argued that we needed even less regulation, not more. The collapse of Long-Term Capital Management in the 1990s should have warned us of the dangers of exotic financial instruments. Instead, the wizards spread their poison throughout the financial system, and banks became more and more like hedge funds.
Time and again, we have given the wizards of Wall Street all they want, and what do we get? Bigger and bigger messes. Time and again, we have been told that an increasingly unfettered financial system will unlock more capital and give us ever-growing prosperity. Instead, we are suffering through the greatest economic crisis since the 1929 crash that prompted the adoption of Glass-Steagall Act in the first place.
A year ago, Alan Greenspan, the high priest of laissez-faire capitalism, admitted that he was "absolutely, precisely" wrong in thinking that self-interest would protect the financial system from self-inflicted collapse. Yet, the belief that unfettered finance would bring blessings to shareholders and customers alike dies hard.
Instead of wondering which institutions might be too big to fail, it's time to consider whether the financial behemoths are too big to succeed. Sandy Weill spent his career trying to build the world's biggest bank, only to see it destroy billions in shareholder wealth and require federal bailout funds to keep it alive. John Reed's admission that the grandiose dreams of the bankers have turned out to be nightmares should bring pause to those who still argue that bigger is better.
Chris Dodd has introduced a bill in the Senate to overhaul financial regulation, saying the current system was "created piece by piece over decades", forgetting the parts that have been dismantled piece by piece. His draft bill has garnered favourable comments from Timothy Geithner, the US Treasury secretary, even though it differs in some respects from Barack Obama's plan. It is reassuring to see lawmakers renounce their faith in unfettered free markets and propose measures to bring order to the chaos they helped create.
The bankers who have left us with yet another mess either don't know what they're doing or, worse, have created an inherently unmanageable financial system. Either way, we have to admit that unfettered finance is too dangerous to be left to the financiers. It's time to impose new controls on those who have shown themselves incapable of self-control.
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8 Comments so far
Show AllRe-engineering the regulatory structures for banks without reinstating the Glass-Steagall Act would be like trying to regulate volcanos with air-quality standards. Greed - by definition - does not limit itself.
Also, it is unbelievable disingenuous for Reed and Weill to claim that the merger of Citigroup and the eliminations of barriers between the different areas of finance were "mistakes." These actions were deliberate; their ultimate cost was well known at the time.
q
"The bankers who have left us with yet another mess either don't know what they're doing or, worse, have created an inherently unmanageable financial system." May I offer a third possibility? Theft. Bankers (the non-productive part of the economy) have been stealing from working people at least since 1913 (establishment of the Fed). Billions are made in every panic, depression, and recession. The idea that these lizards, who devote their lives to nothing apart from accumulating wealth, don't know what they're doing is beyond naive. Working people will be ripped off until banking services become a public trust. We need some entity to provide liquidity for Productive enterprises, but that's all. The rest of it, derivatives, CDS's, MBS's, arbitraging, etc., is just gambling. Confusing the 2 functions was not done by accident.
Very well put, rudyspeaks. We do need lending entities to provide liquidity for productive enterprises, but all the rest of it - the default swaps, the tranched security investment vehicles, the commodities speculators, the hedge funds, etc., are purely parasitic. The unceasing shuffling of paper profits from one pocket to another by these Masters of the Universe is a constant drain upon the productive, goods and services sectors of the real world economy, and a convenient, omnipresent cover for white collar crime.
Which of course brings us straight to AIG.
Hell yes, all those high rollers' high return exotic Wall Street investment instruments were nothing but gambling, pure and simple. What AIG's business model did was set up shop in the casino lobby, offering to let the high stakes gamblers hedge against losing to the house on their way in by paying AIG an "insurance premium" to cover that potential risk. Many sophisticated, too-clever-by-half investor/speculator/gamblers took AIG up on this novel offer, buying "insurance coverage" in case their financial bets went bust the same way they would buy homeowners' coverage protect against theft, vandalism, arson, or accidental fire.
Oops!
When the day of reckoning dawned, exposing securitized debt obligations and credit default swaps as the hocus pocus alchemy that they always were, lo and behold it turned out AIG was trillions short of being able to honor the flood of claims, despite raking in billions of the sucker/speculators' premiums before the bubble burst. So, so sorry about that little oversight but well, shit happens.
It is my understanding some of the loser victims of Bernie Madoff's great Ponzi scheme held policies with AIG, essentially hedging against the likelihood of being conned. With the bailout of AIG, those claims were covered by the public treasury because many of these insured counterparties were deemed too big to fail.
Who says crime doesn't pay?
Bill from Saginaw
The stupidity of our current "system" is known and has been known for many years. Hell, even *I* saw it being nothing but a complete disaster when Reagan shoved it down our throats. Can we get off of the GD Alzheimer's economic system, yet?
To trust those who are stealing from you to do the right thing is the ultimate in willing stupidity. Greenspan is nothing but a complete MORON if he didn't see this coming. I did, and I'm a professional musician, NOT an economist of ANY kind. I knew that you can't trust those whose life is based on greed to do ANYTHING but be greedy and steal everything that isn't nailed down.
Why on earth ANY of these "industry heads" is allowed to walk the streets to this day is beyond me. How the hell is it that we can have an industry that was driven into the ground by the shitty acts of those in charge, and yet not ONE of them has been held accountable for any bit of it? If you or I writes a bad check, WE get into trouble. They bankrupt the entire country, and they get BONUSES?
IMHO, every single one of these scum should be stripped of their assets, sent to jail for the rest of their lives and NEVER bet let out. Keep their stinking, rotting corpses in there as a warning to anyone else shitty enough to try the same thing.
Election finance reform needs to happen and NOW, remove ALL private money from elections. There should be NO allowance for gifts, lunches, dinners, or airplane trips. NOTHING of ANY financial value should go between a candidate or a congress member of either house or jail time will result. It's time to get the GD money OUT of politics. What we have now INSURES that we will have one collapse after another as those who want nothing more than to get rich screw us all over time and time again. As long as they are the ones writing the laws and even the speeches of "our" congress people, we will be nothing more than a bottomless pocket to be picked and picked and picked.
There are a lot of lamposts on Wall Street. I wonder how many finacial manipulators we could hang from them?
"In Greed We Trust"
The crash was not a mistake; it was a raid. Financiers call crashes part of a normal business cycle, a necessary adjunct to considerable profits.
Wall Street rules are a game of chicken. Whoever steals more has more to survive the eventual crash. Honest trading fails as long as others generally steal. Chicken pays well because successful payoffs are high and because Wall Street primarily gambles others' money.
Horatio Alger and Ayn Rand bit through enough anglophone psyche that even progressives are fraught with distortions. Reasonable customs would recognize a gulf between work-for-profit and honest work. We tend to respect people who "earn an honest living" regardless of what contribution their work makes to anything besides some wanker-in-chief's slush fund.
Someone who works for the profit of a business not providing benefit contributes less than nothing by that "work." They just burn common resources to shift money (read "control") to raiders.
Were it a mistake in the usual sense, the players would not be trying to re-institute the same system for the same game. But of course that is exactly what both bailouts and the little sops tossed to consumers to gull them into idiocies like purchasing new cars are designed to do.
If their outcome was to destroy the American middle class by off-shoring ALL manufacturing jobs and breaking ALL the unions AND destroying home ownership while transferring ALL the wealth of America into the hands of the top 1/4 of 1% - THERE WERE NO MISTAKES. They did it just perfect and they have returned this genocidal monster back to its slave plantation roots comprised of Masters, Overseers, and Slaves. Guess which of the 3 describes you and your children, and your first two guesses are wrong.
Next stop, food jeopardy not for 40 million, not for 50 million - for 80%. That leaves 17% as Overseers to transfer the remaining wealth and 3% as Masters of the shit pile. BHO is merely the top Overseer.
Howja like the Kabuki Theater over Health Care? Wasn't that delightful? Predictable, but wonderfully entertaining amid the TRILLION$$ giveaways to richfilth animals who are raping your children to death just for their pleasure...besides, they're ENTITLED to rape our lives - they were born RICH and we weren't.
Oh, yeah, and you can forget all that stuff about higher education for your kids... and health care of course and any kind of pensions. You're not going to have any. Slaves are supposed to have short lives, lives you wouldn't wish on a dog you despised. That's our future in this "country" aka plantation. Only Master and his selected Overseers get to live well in our worker's paradise...everyone else is dog meat.
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