Just Another Dog and Pony Reform Show

We have all seen this show before.

You enter the tent and the first thing you see is a trainer with a group of dogs on one side doing amazing dog tricks. On the other side is a trainer with a group of ponies doing awesome pony tricks. And both trainers are vehemently arguing over which is the better act.

Well, regardless of whether you love dogs or love ponies or think combining the two acts would knock the socks off of most audiences, it is all beside the point. Because neither act has anything to do with the sign outside the tent which states “first-aid”. And neither the dog tricks nor the pony tricks will help the deep gash in your leg or the pool of blood forming at your feet.

Yes, we’ve seen this old show too many times.  They played it with bankruptcy reform, credit card reform and health care reform – to name a few.  And so it goes with the financial regulatory reform being offered in the Frank Dodd bill.  Everyone makes it all about the fight between Democrats and Republicans. It is not.  It’s about an efficient and effective government that serves its citizenry.

Not that the MSM ever seems to worry about that.  The latest MSM meme is celebrating hints that the two parties might be coming together and could pass a financial regulatory reform bill soon and to seal the deal President Obama will give a speech in support of the Dodd bill on Thursday.

But before you let out that sigh of relief along with the financial institutions that are one of the biggest source of election campaign dollars for the president and congress, you might want to know that there is a sizable group of economic experts and even democratic supporters who think the financial regulatory reform being offered is at best a half measure that falls far short of what is needed to prevent another financial crisis.

In a April 15th letter to Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) from thirty-six highly respected economic officials and advisers (including former SEC Chief Accountant Lynn Turner, former Lehman Brothers Vice Chair Peter Solomon, former S&L investigator Bill Black, and former Senate Banking Committee Chief Economist Rob Johnson), they place the blame with both parties and state in their opening paragraph (Full letter here) that:

“Nineteen months after the most devastating financial crisis since the Great Depression, our financial system remains at risk. Neither the bill passed earlier this year by the House, nor the one currently under consideration in the Senate would have prevented the crisis. Without serious restructuring, they will not prevent a future crisis.”

From Robert Reich April 16th Salon article (Reich is Professor of Public Policy at the University of California at Berkeley. Former secretary of labor under President Bill Clinton. Author of  SUPERCAPITALISM):

The so-called “resolution” mechanism the Dems are pushing to wind down any big bank that gets into trouble is a step in the right direction. But it won’t work if two or more giant banks are endangered at the same time — which is likely to be the case when the next crisis occurs because every big bank uses whatever profitable financial ploys every other bank uses (as they did in the runup to the crash of 2008).

Furthermore, as I’ve noted before, as long as the big banks are allowed to be huge and become even bigger, their political clout in Washington will remain huge and become even bigger. And as long as they have this kind of clout, they’ll wangle a bailout from Washington the next time their bets get them into trouble regardless of any “resolution” authority.

From Simon Johnson‘s April 20th Baseline Scenario article (Johnson is Professor at the Sloan School of Management at MIT, former Chief Economist of the International Monetary Fund, and co-author, with James Kwak, of 13 BANKERS):

The biggest banks in the United States have become too big – from a social perspective. There are obviously private benefits to running banks with between $1 trillion and $2.5 trillion in total assets (as reflected in today’s earnings report), but there are three major social costs that the case of Goldman Sachs now makes quite clear.

1) The megabanks have little incentive to behave well, in terms of obeying the law. There is fraud at the heart of Wall Street…

2) The people who run big banks brutally crush regular people and their families on a routine basis…. They are not inclined to treat their customers properly… Small investors also lose out…

3) Underpinning all this power is the ultimate threat: Too Big To Fail.

From US Senator Ted Kaufman (D-Del) April 19th letter to President Obama (full letter here):

Until Congress breaks these gigantic institutions into manageably sized banks and draws hard, clear lines for regulators to ensure that effective controls remain in place, we will have done neither that which is necessary to restore the rule of law on Wall Street nor that which will ensure that another financial crisis does not soon happen again.

What have we learned in just the past five weeks? On March 15th, I came to the Senate floor to discuss the Bankruptcy Examiner’s report on Lehman Brothers and said — as many of us have suspected all along — that there was fraud at the heart of the financial crisis. The examiner’s report exposed the use of so-called Repo 105 transactions and what appears to have been outright fraud by Lehman, its management and its accounting firm, who all conspired to hide $50 billion in liabilities at quarter’s end to “window dress” its balance sheet and mislead investors. And this practice does not appear to be unique to Lehman Brothers.

For a hard hitting, must see series of video interviews with Bill Black regarding financial regulatory reform and how our government works  for wall street.  In the last video he has a great suggestion for dealing with the Supreme Courts ruling that expanded big corporations rights – apply the three strikes laws. Of course we would need a working government for that.

(Black is Associate Professor of Economics and Law at University of Missouri teaching White-Collar Crime, Public Finance, Antitrust, Law and Economics. Author of THE BEST WAY TO ROB A BANK IS TO OWN ONE. Former litigation director of the Federal Home Loan Bank Board, and Senior Deputy Chief Counsel, Office of Thrift Supervision and deputy director of the National Commission on Financial Institution Reform)

Part 1: Psychopaths and Sociopaths in Charge
Part 2: An Engorging Leech System
Part 3: No Protection & No Prosecution
Part 4: No Reregulation
Part 5: Political Gold Mine

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[Cross posted at No Quarter]