Wall Street is know around the world as the land of the million
dollar babies since is chock full of people who have gotten incredibly
rich as a result of handouts from the government. These handouts come
in all forms, but most in the size extra large. The basic story is
always the same; the banks and financial firms take gambles that
provide big payoffs for their shareholders and "top performers" and
pass along big risks to the taxpayers.
The TARP and the associated bailouts through the Fed were the most
obvious example. The industry and their paid hacks are telling us that
we shouldn't be upset about these deals because we got repaid most of
our money. The reality was that we gave the banks the money they needed
to survive in the midst of a financial panic. They used this money -
and the backing of the federal government - to restore themselves to
health.
While we may have gotten most of our money back, the loans we gave
them were way more valuable at the time they were given. This is like
giving someone water in the middle of the desert.
When we get back to the lush lakeside in the middle of a rainstorm,
they generously offer to repay us. Of course, a big part of the story
is that the banks relent the money to other people who were dying of
thirst and kept the profit. Yes, we should be happy - tell that to the
15 million unemployed and the millions who are losing their homes.
We had some hopes of reining in the million dollar babies with the
financial reform package, but those hopes appear to be dimming. The
effort to downsize the "too big to fail" banks got trounced in the
senate last week, garnering just 33 votes. Apparently, the prospect of
having to head out into the markets unprotected by the implicit
guarantee of government bailouts was too frightening for JP Morgan,
Goldman Sachs and the other big banks. Their lobbyists twisted the arms
and got the overwhelming majority of the senate to continue the big
bank subsidy of free government insurance indefinitely.
There is still another good opportunity to rein in the banks ability
to gamble with our money. Senators Merkley and Levin have proposed an
amendment that would prohibit commercial banks from trading on their
own behalf. The point is that commercial banks are backed up by the
Federal Deposit Insurance Cooperation and the Federal Reserve Board. If
they get into trouble, it is taxpayers' dollars at risk.
Until the repeal of Glass-Steagall in 1999, commercial banks were
sharply restricted in what they could do, precisely in order to prevent
them from taking advantage of this guarantee. If you wanted to engage
in highly speculative activity you could set up a hedge fund or an
investment bank, but Glass-Steagall prevented banks from gambling with
government insured deposits. But this separation was obliterated by the
repeal and now we have investment banks like Goldman Sachs and Morgan
Stanley that are openly speculating with taxpayer insured money.
The Merkley-Levin amendment seeks to restore this separation. It
really should be in the category of no-brainer: why should
schoolteachers and firefighters be subsidizing the high-powered traders
at Goldman Sachs?
But, as Senator Richard Durbin said last spring when the Senate
voted down a bill that would have helped homeowners keep their homes:
"the banks own the place." We'll see what happens.
