I would like to follow-up on yesterday's post Wrongdoing Is Necessary (And Risk-Free Too!) In the video below former FDIC chair Sheila Bair asserts that "the market is starting to understand that there aren't going to be more [bank] bailouts." I do not share her optimism.
Has Congress passed a law declaring bank bailouts to be illegal? That a failing financial institution must be allowed to fail? Well, No. If Dodd-Frank contains such language, I must have missed it. Allow me to quote Joe Nocera of the New York Times—
Will the law prevent another bank bailout if we have a repeat of September 2008? Will it bring transparency to the trading of derivatives? Will the Volcker Rule truly eliminate the ability of banks to make risky trades for their own account? Are all the new regulations burying small and medium-size banks in excessive costs? Or are they ensuring their safety and soundness? No one can say for sure.
No one can say for sure because the explicit language I mentioned is absent in Dodd-Frank. This conspicuous omission was intentional. The bankers own (or rent) enough key Congressmen to insure future bailouts will occur as necessary. Nocera is complaining about the complexity of Dodd-Frank, and how so many of the key decisions have been pushed off onto regulators.
There are two grand strategies at work here: 1) baffle the people with bullshit; and 2) stall & delay until an even more banker-friendly Congress and administration assume power. In the meantime, the bankers pressure (or buy off) regulators to water down any provisions which might be established, preferably sometime in an indefinite future which will never arrive.
Moving on, did Fed chairman Ben Bernanke sign a document in which he swore to end surreptitious bailouts of banks and other corporations should they get into trouble again? Not to my knowledge.
Who can truly believe there will be no more bailouts? If Citigroup or Bank of America or Morgan Stanley or Goldman Sachs or JP Morgan Chase or Wells Fargo self-destruct once again, what realist is willing to tell us with a straight face that no bailout will occur? Tell us that these institutions will simply be allowed to fail, probably catastrophically? Sheila Bair just did tell me that, as incredible as this sounds, and I simply do not believe her. There is no evidence to back up her assertion, and these institutions are still considered too big to fail (TBTF) because their undue influence makes breaking them up impossible. The six biggest banks (by assets as a percent of GDP) are larger now than they were in 2006
On the contrary, our big banks problem goes far beyond bailouts in times of financial panic. Covert bank bail-outs are going on all the time. Why do think there was never any extensive, major loan restructuring for the 25-30 million homeowners who are still underwater on their mortgages? Anybody familiar with this issue knows that the current adminstration (and the one before that and the one before that ...) is unwilling to make the big banks (and assorted other financial institutions) pay for their mistakes and crimes. There have been literally hundreds of articles from all sorts of sources detailing how the administration, through the good graces of Mr. Timothy Geithner and other financial appointees, have never pressured bankers to help ordinary Americans who are behind the eight-ball.
And speaking of financial mistakes and crimes, the list of those keeps getting longer and longer. One such list appears in the Daily Ticker article in which Ms. Bair makes her unwarranted assertion.
The latest stain on the world of trading and finance is still darkening, but once again it appears that millions of dollars in customer funds have been misappropriated.
This time it's Iowa-based futures broker Peregrine Financial Group/PFGBest, which dealt another blow to investor confidence after over $200 million of customer money couldn't be accounted for. If this sounds familiar, it's not your imagination.
Last fall, commodities firm MF Global, run at the time by ex-Goldman Sachs chief, ex-New Jersey Governor and Senator Jon Corzine, went out of business after alarming questions arose about its handling of its customers' accounts. Reuters noted that the size of the Peregrine controversy was "modest relative to the estimated $1.6 billion missing from MF Global's accounts." But the amount is secondary to the notion that it's yet another case of alleged malfeasance in finance and broken customer trust.
Here's a quick look at a few of the other recent scandals that have drawn the public's ire:
- A multibillion-dollar trading loss at JPMorgan Chase
- The Barclays LIBOR manipulation case
- HSBC and a probe into money laundering
- A Georgia money manager goes missing amid an embezzlement investigation
- A rogue trader and a $2 billion loss at UBS
- Raj Rajaratnam gets nailed for insider trading
You get the idea...
[My note: yes, we do.]
Dodd-Frank is now two years old. The following [regulatory] bodies already exist, as do thousands of specifications associated with their functions: The Securities and Exchange Commission [SEC], the Financial Industry Regulatory Authority, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Securities Investor Protection Corporation and a slew of various state-level agencies. Plus, the Justice Department gets involved in some probes, there are congressional committees, both standing and specially formed, etc. This list could go on and on...
Nothing has been done about the MF Global/Jon Corzine fiasco. Their customers lost about 1.6 billion dollars. JP Morgan Chase, where a lot of the money ended up, has returned only 89 million dollars to MF Global customers. Not to mention that not a single Wall Street banker has been put in jail, including former Lehman CEO Dick Fuld. The SEC has ended its probe of Lehman. And Wells Fargo just settled with the Justice Department for a paltry $175 million to counter the harm they did when they steered minority borrowers into risky subprime mortgages.
So in my considered (and cynical) judgement, the "capture" of the U.S. government by the financial system is alive and well. Nothing has changed, nor should we expect anything to change in the future. If something had changed, I think we all would have noticed it.
I have a lot of respect for Ms. Bair, who was a sane voice Inside the Beltway Wilderness when she ran the FDIC. But I can not buy her assertion that there aren't going to be any more bank bailouts. Wishing something were so does not make it so.
On the contrary, "the best" may be yet to come if the economy falls apart again. We shall see.