Perhaps the most condescending and unintentionally revealing comments any banker made in the wake of the banker-created 2008 financial crisis came from Jamie Dimon, CEO of too-big-to-fail bank JP Morgan Chase.
"One thing's for certain: if there's another financial crisis, it could make the last one look like child's play."
“Not to be funny about it,” Dimon told a congressional panel in 2010, “but my daughter asked me when she came home from school ‘what’s the financial crisis,’ and I said, ‘Well it’s something that happens every five to seven years.”’
Millions of Americans lost their homes in the wake of Wall Street’s crisis – which, come to think of it, isn’t that funny at all.
Downturns are so simple, Dimon implies, that they can be explained to schoolchildren in a single sentence. Dimon also admitted his own industry’s ineptness and irresponsibility when he told the panel that “in mortgage underwriting, we somehow missed that home prices don’t go up forever.”
Dimon wasn’t the only banker to tell Congress that the titans of Wall Street were clueless. “We never knew what was happening at any minute,” said Goldman Sachs CEO Lloyd Blankfein.
Perhaps schoolchildren should have been doing the underwriting. Their analyses couldn’t have been much worse, and their ethics would almost certainly have been better.
The Wrong People to Trust
Of course, these bankers knew a lot more than they were letting on. Documents released during subsequent investigations and fraud settlements showed that executives at our nation’s largest banks knowingly deceived customers and investors. Banks – or, rather, their shareholders – paid vast sums in fines and fraud settlements. Dimon’s bank paid $20 billion in 2013 alone. Then it gave Dimon a raise.
That raise was money well spent, by the amoral logic of the banking industry. Despite the bank’s multi-year crime spree, neither Dimon nor any other senior executive faced criminal prosecution. And Dimon’s political savvy protected Chase’s criminal bankers from paying for their crimes out of pocket.
Our country’s economic condition is fragile, and the next recession could be catastrophic. Why, under these conditions, would the people entrusted with our economy decide to make things more dangerous? Given Wall Street’s fraudulent behavior and self-proclaimed incompetence, why would regulators or politicians place more trust in it?
And yet, that’s exactly what a bipartisan group of lawmakers (including Democratic senators Heitkamp, Donnelly, and Tester) did recently when they loosened Dodd-Frank rules for most American banks. And it’s what Trump appointees are about to do by weakening the Volcker rule, a move that could pave the way for another financial disaster.
A Compromise, Compromised
The Volcker rule was first proposed by former Federal Reserve chair Paul Volcker. Its goal was to prevent people like Jamie Dimon and Lloyd Blankfein from gambling on risky investments with other people’s money for their own gain and that of their institutions, and to reduce the likelihood of future bank bailouts by ensuring that banks don’t speculate with federally insured funds.
This behavior had been outlawed for decades by the Depression-era Glass Steagall Act. But Glass Steagall was repealed in a bipartisan frenzy of deregulation during the 1990s, involving Bill Clinton’s administration and Republicans in Congress. That didn’t work out too well. When the Dodd-Frank law was passed in 2010, the Volcker rule was intended to help address that problem.
To be sure, the Volcker rule is somewhat complicated. As Volcker himself said at the time, “I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.”
Why is it complicated? As Democratic Rep. Peter Welch said, “The fact that (the text of the rule) is 300 pages shows the banks pushing back and having it both ways.”
Regulators haven’t even finished implementing all the features of Dodd-Frank. Robert Jackson, a Democratic appointee to the SEC, pointed out that “full compliance with the Volcker Rule was not required until July 2015, and now, less than three years later, we are pulling it back—before finishing rules Congress required us to complete years ago.”
Beasts of Burden
Why would regulators undo, or weaken, one of Dodd-Frank’s key provisions? Because it will make bankers richer. That’s not what they say, of course. They say their relaxed rules will make it easier for banks to remain “market makers” who facilitate the buying and selling of financial instruments and commodities. They don’t, however, explain why commercial banks should be “market makers.”
As Bloomberg News concluded: “In some ways, the proposal would shift oversight from a system in which a bank must prove its trades are permissible to one where regulators increasingly take the bank’s word for it.”
Defenders of this move also say it will relieve banks of an “undue burden.” Funny, they don’t seem burdened. Banks were already having a record year, with profits in the first quarter of 2018 soaring 28 percent to $56 billion. The Trump/GOP tax cut certainly helped, giving the nation’s six largest banks $3.6 billion in additional income last quarter. Even if the tax cut hadn’t passed, bank profits would have reached a record $48.4 billion.
Dodd-Frank hasn’t hurt bank profits. In fact, they’ve risen 135 percent since it was passed. Still, if hankers want the rules to be simpler, there’s a way to do that: pass a 21st-century Glass-Steagall Act. Surely, with all that extra money flowing in, banks can cut loose a few more million to follow the rules of the road.
Waiting for the End of the World
“Regulatory capture” – the subservience of regulators to the industry they regulate, typically in hopes of future employment by them – has been a feature of financial oversight for many decades, through administrations of both parties. But Trump’s appointees are taking regulatory capture to new heights, just as Trump’s subservience to the banking sector takes the subservience of previous administrations to new heights.
As financial analyst Nomi Prins points out, Trump appointees are deregulating banks in a number of agencies while the Federal Reserve pumps up the stock market like an over-inflated automobile tire. When it explodes, we will all feel the impact.
Dimon was right about one thing: Periodic recessions, which are sometimes given the more benign-sounding name “business cycles,” are woven into the fabric of modern capitalism. For ordinary recessions, Dimon’s timetable was not far off the mark. Some economists say that there is a one-in-four chance of a recession in any given year.
But, despite Dimon’s facile remark, not every recession is as grave as the 2008 crisis. It nearly brought down the global economy, and the US Treasury Department estimates that American households lost $19.2 trillion in wealth.
The next recession may not be an ordinary one either. While employment has recovered, wage growth has remained weak. A new study shows that almost half of all Americans are unable to pay for their basic necessities. Half of those polled in another study say they would be unable to come up with $400 for a financial emergency.
Nearly two-thirds would be unable to come up with $1,000 in an emergency – under a health insurance system where thousand-dollar emergencies are commonplace. A United Nations report found that nearly 40 million Americans are impoverished, including more than 13 million children. 18.5 million live in “extreme poverty,” and more than 5 million Americans are struggling with “Third World conditions of absolute poverty.”
In short, Americans have very little protection from the next disaster – and regulators are about to make the next disaster even more likely.
The Children’s Hour
The technical details of this move may seem complicated. But the principles involved are so simple even a school child could understand them: Don’t cheat. Don’t gamble with other people’s money. And don’t ruin things for everybody else.
One thing’s for certain: if there’s another financial crisis, it could make the last one look like child’s play.