Unleash the Dogs of Banking

Former British Prime Minister, Harold Wilson, famously said, “A week is a long time in politics.” So, what price a decade? Would it amount to an aeon? What is also said by many political observers is that voters have short memories. I don’t know how true this is but I would suggest that most voters are uninformed. I do not suggest they are lazy or uneducated but that legislation passed by governments is often complex and the language used is too often opaque.

All of us remember that ten years ago, there was a banking crisis in the West, the like of which had not been seen before, not even in the Great Depression. Big banks, those too big to fail, were running out of money and the Federal Reserve and the Bank of England were prevailed upon to save the day.

In the early 1930s, bank failures in America were rife, so much so that in Roosevelt’s Inauguration speech, he declared a five-day bank holiday. During those five days, all American banks were inspected by federal government officials. Those banks found solvent were provided with sufficient cash to deal with demands of depositors. Those banks found insolvent were closed and depositors lost their money. At the end of the bank holiday period, solvent banks soon satisfied depositors and the banking crisis was averted.

Then, in FDR’s first 100 days, Congress passed the US Banking Act, commonly known as Glass Steagall. The most fundamental provision of the Act separated commercial and investment banking in an effort to stop security firms and investment banks from taking customers’ deposits without consent. It also prevented commercial Federal Reserve member banks from a number of actions, including dealing in non-governmental securities for customers.

By the 1960s, the banking community sought the repeal of Glass-Steagall, pressuring Congress in a manner that has become only too common. Lobbyists doing their masters’ bidding sought to persuade members of the House of Representatives and Senators alike of the value and benefit of their cause, which of course were for the few at the potential cost of the many. Congress initially was unhelpful and bank successes took time. However, the cause was not helped by the Reagan administration, assisted by the Thatcher government, who both approved Big Bang, the phrase used to describe the deregulation of the financial markets. Market activity increased exponentially and there were significant structural changes of the financial markets. For example, old brokerage firms were taken over by big banks. The American banking community wanted its day in the sun.

In the laissez-faire climate of the 1980s and 90s, Glass-Steagall’s effect diminished. In the late 1990s, the securities firm, Salomon Smith Barney was taken over by Citibank. President Clinton recognised the reality that Glass Steagall was, to use his words, “no longer appropriate.” The truth was it was moribund. When the financial crisis of 2007/8 reared its ugly head, one can trace the causes to the egregious acts of banks like Lehman Brothers and Merrill Lynch, who had leveraged the value of securities to unrealistic levels in the expectation that the market would never fall. Put simply, the bankers’ behaviour was grossly negligent, probably criminal and uncaring of the suffering it would impose on ordinary depositors. Their conduct was exactly what Glass Steagall was designed to prevent.

The list of names ending in bankruptcy or government bail-out is endless. In addition to the banks named above, one can include, Bear Stearns, HBOS and the Royal Bank of Scotland. Billions of taxpayers’ money went into saving the banking system. How much was the contribution of those who caused the crash and where were the punishments? Little or nothing. Little wonder that better regulation was needed.

In 2010, Dodd-Frank was signed into law. The Dodd-Frank Wall Street Reform and Consumer Protection Act changed America’s financial regulatory environment, affecting all federal financial regulatory agencies and the country’s financial services industry. The Act improved America’s financial stability and consumer protection, according to articles in several newspapers including The Financial Times. However, the banking lobby is very strong. The investment banking community disliked Dodd-Frank because it placed strict limitations, not only on banking business but also and more significantly, the conduct by bankers of their business.

Congress has now decided to help the bankers. The Senate has passed the Economic Growth, Regulatory Relief and Consumer Protection Act. It’s one of those misleading titles which can be compared to a sensational newspaper headline which bears no resemblance to its story. The new measures gut Dodd-Frank, undoing regulations which protect ordinary consumers.  The bankers say that small and mid-sized banks serving rural America need the help of reforms but the Act, if passed into law, will deregulate foreign megabanks like Santander and let off the hook domestic firms like American Express from regulations that ensure failure does not bring down the banking system. In addition, Federal Reserve oversight will be undone or diminished. How does this help rural America? Face it, the Act is in lock-step with the wish list of the banking lobby and its paymasters.

Why does the Senate have such a poor memory that it cannot recall what happened ten years ago? Let me help jog memories. During the financial crisis, Countrywide Financial, a $200 billion mortgage lender, failed, a stark reminder that mid-sized, regional financial institutions can put the entire financial system at risk.

The failure to learn from history is not limited to politicians. Administrators and bankers can be accused of the same failing. What would be the most appropriate way for Congress to mark the tenth anniversary of the financial crisis later this year?  Remembering the attitude and greed of many of those who work in Wall Street, surely the rules should be strengthened on banks and bankers. Wall Street should never again get away with cheating ordinary Americans and crashing the economy. I suspect this suggestion will fall on stony ground. I believe President Obama would have vetoed the current bill. President Trump will sign it without a care.

One of my readers recently observed: “Nothing is more precious and perishable than trust and confidence which take years to build but can be destroyed in minutes.” Another banking crisis so soon after the last will destroy confidence. Perhaps the President and members of Congress, as well as the Wall Street bankers should learn this lesson and realise a bank crisis in America is not limited to America. It is global. The responsibilities of those concerned, especially members of Congress, should be told these truths in no uncertain terms. Furthermore, excuse the pun, someone should remind Mr Trump that bad Presidents make bad laws.