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Obama's Half-Baked Bank Reform
For Real Reform, Glass-Steagall Must be Brought Back
Seeing Paul Volcker, former Fed Chair and chairman of the Economic Recovery Advisory Board, lord over President Obama yesterday as he made his proposal to limit the scope and size of financial institutions, it was easy to imagine him saying "I told you so." Volcker, after all, has been a long time advocate of slicing up banks and prohibiting them from the majority of speculative activities.
But as I called around New York and Washington yesterday, it already seems that Wall Street has figured out ways to circumvent the administration's plan, which centers on "proprietary trading"-risky bets the banks make for their own accounts.
The cliff notes from the President's Economic Recovery Advisory Board chief economist Austan Goolsbee on yesterday's press call were: A mandatory ban to prohibit proprietary trading (but not all trading) by firms that own banks. Regulators would prevent commercial banks from owning hedge or private equity funds, and limit non-client related trading. There would remain no limit on investment banks not designated bank or financial holding companies. Regulators could constrain the size of banks, but not break them up. Most important, there would be no return to Glass-Steagall, which divided commercial and investment banks.
The importance of the latter became clear to me as I talked to DC policy advisers yesterday, who had already gotten an earful from Wall Street lobbyists -- touch proprietary trading if you must, and leave everything else alone (i.e., no Glass-Steagall). Prop trading, in other words, would be Wall Street's sacrificial lamb. For a simple reason: They can get around it.
Banks have mucked up their financial disclosures so much that it's already near impossible to tell how much banks are making from risky trading, much less how much trading is uniquely "proprietary," versus how much can be classified as customer-driven or used for hedging purposes, which Obama's rules would allow. Bank of America, for example, has its fixed income, currency and commodities trading figures merged together, making it impossible to see the contribution of Merrill Lynch's sizeable trading activities, as well as the line between proprietary and possibly customer-oriented trading. Other banks are even more Byzantine. You can't limit something that isn't fully disclosed or can be camouflaged on the books.
Plus, in a crisis, it's hard enough to price securities, let alone figure out which trading distinction they possess. At last week's Financial Crisis Inquiry Commission, JPM Chase CEO, Jamie Dimon said, "It's not always possible to evaluate positions...Although we are a proponent of fair value accounting in trading books, we also recognize that market levels resulting from large levels of forced liquidations may not reflect underlying values."
If "it's not always possible to evaluate positions," the notion of evaluating which ones are customer-driven and which are proprietary goes out the window. These firms will just call everything customer driven and alter book distinctions accordingly.
Bringing back Glass-Steagall would force a distinction of commercial banks with access to federal support from those that just call themselves banks, but are in reality Wall Street gambling parlors. Done right, Goldman Sachs and Morgan Stanley would have to give up their commercial bank status to continue doing the trading-oriented business they do. Bank of America might be forced to spin off Merrill and JPM Chase may have to chuck the Bear business and part of its "leading global" investment bank business to adhere to new restrictions.
Without such a move, these merged institutions will continue to divert their capital--given to it by mom-and-pop depositors and cheap government money--to trade, before using it to lend. When the markets go up, trading is more profitable and as we've seen in bank earnings reports this year, banks beef up trading activities where they can, to offset consumer and commercial credit losses. And it works in reverse: If their commercial and investment businesses remain intertwined, banks will extract costs, such as the $90 billion over-10-year tax Obama proposed last week, from the customers' pockets. Banks would still be inclined to use their capital to trade (which is a more capital-intensive endeavor than deposits and lending).
Risk is risk whether it's called propriety trading or comes from the customer-trading business. True systemic risk reduction requires dividing out all trading activities from within a firm that also does deposits and lending. That requires a resurrection of a true Glass-Steagall barrier, not a bunch of stuff that sounds like it gets partly there.
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"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson
"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered." Thomas Jefferson
"The money powers prey upon the nation in times of peace and conspire against it in times of adversity. It is more despotic than a monarchy, more insolent than autocracy, and more selfish than bureaucracy. It denounces as public enemies, all who question its methods or throw light upon its crimes. I have two great enemies, the Southern Army in front of me and the Bankers in the rear. Of the two, the one at my rear is my greatest foe.. corporations have been enthroned and an era of corruption in high places will follow, and the money powers of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few, and the Republic is destroyed. Abraham Lincoln
" How can I fool and crush the citizenry today?" Obomber
Great quotes, Vern, spot on. Thanks
I think it was Volcker who said about the only thing that came to his mind where banks actually contruibuted innovative value to society was the ATM (not even the banks, but the tech sector). Banks should be either publicly owned like fire or water departments, or heavily regulated public utilities with publically elected, reasonably paid supervisors.
Stop the halfascist Bush Hog, Obama!
Halfascist?
Obombya is doing Hitler, Mussolini, Franco and other 20th century fascists proud.
He is the full meal deal.
The destruction of Glass-Steagall may well be, combined with NAFTA, the most enduring and deadly legacy of Slick Willie's administration.
One cleared the way for banks to make really stupid buys while growing "too big to fail" without wreaking beyond repair the fiscal sector.
The other sold off American jobs to multinationals to export while draining American coffers and destroying the consumer base.
Another STUPID action.
WE don't need vast conspiracies to explain what old-fashioned stupidity will. Though, of course, there WAS collusion on the part of the stupid corporations behind these moves.
And now the corporations are protected by FREE SPEECH goddammit!
Arg.
Gary
"A criminal is a person with predatory instincts without sufficient capital to form a corporation."
-- Howard Scott
And the Telecommunications Act created the conditions for incessant cheerleading, obfuscation, and a simplistic, misleading narrative with all the bells and whistles.
"A criminal is a person with predatory instincts without sufficient capital to form a corporation."
-- Howard Scott
Thank you for the quote, sir. It fits quite nicely with "A terrorist is a person who bombs things, but has no Air Force". Or something like that.
The only real difference between republicans and democrats is their acting ability and entertainment value. Obama's populist rhetoric is great theatre especially as he moves even farther to the right to win a second term following in Clinton's footsteps.
Thanks for this article. This is what I suspected as I listened to Obama lay this out on the news last night.
Bring back Glass-Steagall.
Hello! SS and Medicare are next on Obomber's chopping block through the recommendations of a secret congressional budget committee Obomber will empower through presidential fiat.
We must compete with foreign $5 a day wage earners.
Globalization = total destruction
Obama will declare mission accomplished when he sees us standing on bread lines.
obama has gift of the gab. one year later deliverd nothing
Coming from Obama, I'd expect nothing less.
When it comes to Wall St., they don't need no stinkin' laws.
"But to reenact Glass Steagall would take us back to the thirties" cry the bankers. Exactly. 70 years ago the bankers killed the American economy and FDR had the guts to tame them. It held the devils at bay for 60 years. Today our government, more corrupt than ever doesn't have that much courage and as consequence is the even greater certainty that it is doomed.
Obama's photo op with Volker didn't last.
Little Timme G was on PBS (Jim Lehrer)last night.
Basically said, Nah, he doesn't want any Wall St. reforms.
One year of Obama chronic lying, I'm betting on Tim.
Obama appears to have a Glass-Steagall jaw. He hits like a girl and he can't take a punch.
good one.
Ms Prins quotes Jamie Dimon:
"Although we are a proponent of fair value accounting in trading books, we also recognize that market levels resulting from large levels of forced liquidations may not reflect underlying values."
and apparently reads this as making a distinction between hedges ("customer-driven") and speculative trades ("proprietary"). It seems to me that he's reiterating the banks' regulatory stance regarding mark-to-market accounting. That is to say, if "forced liquidations" are impacting their bottom lines, then it's just too hard to "evaluate positions." Using this self-serving logic, it should be perfectly reasonable and responsible to simply re-appraise all those underwater properties and re-inflate the bubble on the consumer side.
In either case, properly designed and rigorously enforced accounting and regulatory standards can easily sort these issues out. Politicians and regulators have been totally rolled by the supposed sophistication of the banks' computerized trading models and whiz-bang algorithms, but financial accounting is little more than basic arithmetic--that is, when it's done honestly.
Did I say "honestly"? Someone please slap some sense into me.
Obama cannot erase the first year of his regime. He may now make a cleverly scripted but completely phony effort to appear populist. Read the fine print of whatever he proposes and never forget his disgusting, revolting betrayal of everyone who voted for him.
0bama rode into Dodge on glib words and largely finance-industry money. He has delivered: he delivered a cooperative electorate to his sponsors.
We have no reason to believe that he intends to mess with that connection or cross any Rubicons moving away from the daemons of finance: his trouble is that he cannot sell American voters to anyone unless they vote for him.
However he interprets the Massachusetts election, it cannot be good news.
The polls are not better; he has had a year of sustained slide.
He apparently bet heavily that he could fool Americans into thinking his Insurance Bill promoted health care. But neither the electorate nor, now, the legislature appears ready to pretend, at least for this round.
He has granted his corporate clients so many favors that he finds himself without a doggy-sized bone to toss his electorate. So the PR elves work overtime looking for something in a cabinet bare of policies to find some thing they can tinsel up and pass off as Hope or Change or at least An Excuse.
The finance industry is a prime focus of American rage and one that few Americans understand. There is only so much and so long even 0bama can convince Americans that he is an antiwar candidate while he tortures and kills civilians, occupies two countries, and attacks various others under transparently bogus pretexts.
He will surely lose a pack of allies in 2010, and he has given his Republican opponents an easy target for 2012. Republicans can score off his record almost any way they care to. His wars are predictably disastrous for Americans, let alone for people of the occupied countries, so Repuggers can claim that is because 0 is not as vicious as they would be or that their drones can shoot more families than his drones. Alternatively, they could claim fiscal conservatism and pull the troops back. As out of character as that would be, they could get it to play.
The field is open. They could profitably play to either side of him on just about any issue.
So, I suspect that 0 looks to the complexities of the finance industry as an opportunity to fool Americans into thinking that he constitutes a compromise between Republican positions and humanity.
Talk was for when Obama was running for office. Action is for when he is President. We needed a pit bull, we got a Wall St lap dog.
Someone is going to sideswipe Obama with Geithner's illegal actions with AIG when he was FED chairman. Probably around the time he starts running for reelection. If he does. He may be so unpopular by then he will just give up. Every time the public gets mad about the banks (who don't even have the decency to be discreet about their excesses), or about unemployment hitting new highs, Obama gives a populist speech and nothing happens. That's going to get old.
The public may be uninformed about what's going down with "reform", but they can certainly tell when things aren't getting better. I can see people were prepared to put up with hard times, but shared hard times. And these aren't. This year's $146 Billion in taxpayer provided bonuses must have people seething. Guess where that buck's going to stop.
When the people fear their government there is tyranny,
when the government fears the people there is liberty.
~ Thomas Jefferson
Prins sez: "Most important, there would be no return to Glass-Steagall ..."
***
Second-most important, there would be no enforcement.
*yawn* - just another tempest in a teabag.
poorly written and editied
first two paragraphs delete
lead should be something like, proposed regualtions are proabaly ineddectie, and they do not include the most important, re enable glass steagall
-"That requires a resurrection of a true Glass-Steagall barrier, not a bunch of stuff that sounds like it gets partly there."
What does this remind me of?...the healthcare debate!
In place of the internationally proven "single payer" you have "glass steagall" which worked for decades before it was removed.
glass steagall is "off the table", "don't make the perfect the enemy of the good", "we don't have the votes!", "we'll pass something and fix it later!"
...Have I forgotten any?
Obama is a Master of the obligatory dodge and weave, public, lip-service declaration: once one cuts to the chase and outlines the devil in the details you quickly discover that Obama is a day late and dollar short. His latest speech in campaign mode in Ohio only demonstrates the value of the Scott Brown victory in MA rather than any authentic commitment to controlling the banking industry even as he shook and shimmied his chest while standing at the podium. Meanwhile, Obama's staff was talking outside the other side of their mouths to defend Treasury Chief Bernake. If you remember, Bernake, Summers and Geithner were all responsible for the rules which led to the financial meltdown in the first place and the current team guiding the so called policies meant to reduce the banking industry control.
And they wonder why the public is cynical about politics.
Bernanke was one of the guys that set fire to my house and now he wants credit for lending me his garden hose.
All of this goes to my maxim: "the ability to create complexity tends to create complexity." (An Evolutionary principle?)
After a year and a half of a rolling international economic meltdown that started with the collapse of the U.S. housing bubble, it is probable that the true financial positions of the big banks and related financial institutions are still unknown, because, as Warren Buffet famously said, all those complex financial instruments are a form of WMD. Thus, for example, the purchasers of diced-and-sliced derivatives still do not really know how to price their "assets." (You wanna call them "liabilities," be my guest)
Meanwhile, many home "owners" who are "underwater" are victims of a system through which they often have a hard time determining whether they are drowning or should attempt to find air. Simultaneously, it appears that the big banks feeding at the Federal Reserve trough aren't using their near-zero-interest-rate fed funds to do traditional banking (providing liquidity for Main Street) but are speculating (again).
All that speculating is done via computers doing global transactions using algorithms I was just beginning to grasp in high-school trig. A lot of people who spend their days sitting in front of computer screens trying to obtain "intelligence" know they are really monkeys typing in the ether. The collapse of the global NWO finance system is ipso facto PROOF that the colluding conspiring bankers and their "friends" in Washington D.C. lost control of something they still do not understand. We can argue about which consequences of this disaster were intended or unintended by the various players, but anyone who thinks things are really "under control" right now is either an idiot or one of those CoC boosters trying to talk up a good game.
"Great town, good schools." Tell that to Detroit or Elkhart. ("Brass instruments? What brass instruments?")
One CD threader posted a URL yesterday about how the Free Marketeers had destroyed their own system by introducing too much complexity into the System, to the point that Contract Law is rendered silly (my term).
"How Supposed Free-Market Theorists Destroyed Free-Market Theory" at baselinescenario.com
As I read that article I was reminded of Frank Herbert's sci-fi classic, "DUNE," (the book not the movie) in which humans abandon computers and use that substance from the worm planet that enhances their ability to travel through space by prediction. (Also, the responses were as erudite as those posted so often here.) Must reading for all those Wall Street jocks out there; the stuff was far better than coke!
I think that those who suffered through The Great Depression would agree that "if you don't understand a contract, don't sign it," (hell, two years later, the lawyer who wrote up the contract won't understand it!)
and, "now teach me to understand it."
That is what UNIVERSAL PUBLIC EDUCATION was all about, which has been under assault for decades. If the people cannot understand the Social Contract upon which The Commonweal is founded, then it cannot stand.
Time to find the Worm World in our own addled Minds and declare that everything that came before was exculpatory.
Looking back on what those bastards have done to the world to come, they were out of their ******* minds. How did Humanity permit this to happen?
Anyone who thinks we're out of the woods is delusional. Just hope they boil the pot really slowly---what they call a "soft landing." (Yeah, I'm mixing my metaphors but so does the Bible!)
But ah thinks y'll gits muh thinkin here, speakin of droppin Populist 'g's! (Gotcha David Brook(e)s...) (Did pickup trucks just get a boost in sales?)
I am reminded of the huge oil painting with ornate gold frame my maternal grandfather brought to Brooklyn from Hamburg in 1936: the brass plaque read: "Icarus Fallen." (Don't you just love dem Greeks?)
Whether Wall Street or Washington, we have to turn off the stove and kill the parasite of intentional complexity. It is called "deregulation." "Contracts" no one understands (wink wink until the shit hits the fan). Without order there is only Entropy. Sorry you didn't get that million-dollar bonus, bud, but maybe you didn't earn it. Earn it?
Philosophical Anarchists are welcome here. That includes some Libertarians. Argue with me here. Trickle-down, my ass. Can voodoo economics earthquakes be attributed to global warming? Is the financialization of everything the ultimate bubble? What then? The Big Bang? Then we can start all over again, headed into an asteroid belt.
Recent events suggest a time for some reflection. In common law there is something called a "decent interval."
International Day Off? (And, no, I'm NOT Mike Whitney!) (And thanks to teddy for trying to push the edges of respectability even as I try to define it.)
Just an International Day Off, whether anyone participating in it agrees with anyone else participating in it would send a message. Isn't that what those CO2 people were trying to get across at Copenhagen.
Nearly all Western Classical Economics have failed.
Hey! It's not my fault! I'm just watchin.
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Enlightening observations, thank you.
Yep, the Big Bang is just beginning, Man.
Just in case you missed it:
http://www.commondreams.org/view/2010/01/22-7
Folks: I do not know if you heard Obomba's speech today in Ohio, but this S.O.B. is good, I mean really good! He had the town hall audience eating out of his hand! I will give the devil his due. Obomba is a master at making his audiences feel that he is on their side ( almost like mass hypnosis ) and then does just the opposite.... and they still love him! That is why I have called him the consummate con man for a long time. He is on the side of Wall Street, but his silver tongued rhetoric makes people feel he is on the side of main street!
There must be a whole lot of people who are hearing something else than all of the hemming, hawing, bullshitting, and umming that I hear when Obama speaks.
Exactly. "Now, let me be clear ..." bla, bla, bla. Every time I hear those words I burst out laughing, and I don't think I could hold back even if I was standing in the front row of the audience. Then again, I'm from New York and we've had a lot of practice with the BS meter.
When is the Emergency?
We found out that the banks and the interest from money they create out of debt (negative nothing) and charge the public to use controls government.
OK so basically the banks control Government with our money.
Obama could declare a "Banks and too big to fail Corps controls government" emergency in a one page decree and change that and he could bring back FDR's regulations and a consumer protection executive order... he could under emergency powers handle the emergency.
Since the corporations and banks with our money have full power to take it all now, presidential emergency power is the only power of government for the people left.
Will Obama get tough and change? ... we'll see.
Can he go from "We want our money back" to..."There Boys, it is our money now".
Can Obama change from war to a peace economy president and be great?
I dare him to do his job,
asking would be too much.
Jim Glover, my answer to you is "No he can't". And he wouldn't if he could. He has other priorities, clearly, from the people he chose for his Cabinet. Add to that his shrinking violet personality when faced with alpha types - and Lord knows Wall Street and his Cabinet are full of them, and we have the perfect shill in the White House. That is, they do. We're just stuck with the perfect shill.
OleManRiver, that was a great post above. A most satisfying read. Thank you.
Kathy
When the people fear their government there is tyranny,
when the government fears the people there is liberty.
~ Thomas Jefferson
Jim Glover---
Be careful what you ask for when it comes to Presidential Decrees!!!
-30-
This article is getting at the institutional analysis needed to provide a solution to the problem, and nationalization of the banks wouldn't be a bad idea.
AD
While there are major issues to resolve with the centralized banking system, there is a new decentralized model currently forming, here in the US, which YOU can help to start by moving your money locally:
Common Good Bank
democratic economics for a sustainable world
http://www.commongoodbank.com
Common good banks are designed to be the cornerposts of a new economic system -- a democratic, community-based system that can spread very quickly, empowering people everywhere to take control of their own economic destiny. This is not just another bank with a social mission. This is
...a social mission with a bank!
Ed Democracy
http://www.Democracy207.com
To radicalsense---
Brilliant!
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