A.J. DiCintio
Conservative solutions for the banking problem
By A.J. DiCintio
You won't hear it from the Republican or Democratic Establishments, but the nation's health continues to be threatened by a banking problem that began in 1999 when Bill Clinton and his Wall Street blue blood Treasury Secretary Robert Rubin joined with a bi-partisan congressional coalition to repeal the Glass-Steagall Act, which established the FDIC and prevented commercial banks from participating in the securities business.
Problem is, the new law keeps FDIC guarantees intact while permitting commercial banks to open their own gambling dens (euphemistically named "trading departments"), no matter the size of a bank, the size of the pile of cash with which it wishes to gamble, the size of the risk, or the size of the danger to the country.
The sad truth regarding the Gramm-Leach-Bliley Act, therefore, is that once again establishment politicians have disfigured themselves with the worst kind of hypocrisy, because while they love to warn of the dangers posed by libertarianism (however sophomoric most of their criticisms), they can't resist accepting the ideology at its most extreme and dangerous when the payoff is money and power.
So it is that today America's largest banks are so big that the assets of the top four alone amount to a stunning 47% of the nation's GDP.
And so it is that today the nation's biggest banks make their money not by sound lending practices to businesses and individuals but selling "credit default swaps" to insure debt issued in countries such as Greece and Spain and speculating on currencies, stocks, bonds, and commodities through insanely inscrutable "derivatives," with neither of the financial instruments just mentioned bought and sold in the sunlight of an open exchange.
What can be done, then, about an industry that has raised the ire of and occasioned warnings by sensible Americans at least since the early nineteenth century, when Jefferson expressed a thought that applies in our time to dangerously large banks and the madly profligate governments with which they regularly collude:
"And I sincerely believe. . .that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
According to most independent voices on the subject, replacing Gramm-Leach-Bliley is not currently possible, given the financial industry's large ownership stake in the federal government. (And not just Congress, for even hard left liberal Barack Obama has his Robert Rubin in the persona of Good and Faithful Wall Street Servant Timothy Geithner.)
Happily, however, two financial experts have advanced proposals that may solve the bank problem through other means.
In the sardonic tone he enjoys employing so effectively, Barry Ritholtz (ritholtz.com) offers his solution in a fictitious letter dated June 3, 2015, from the FDIC to "Dear Banker."
In sum, the letter informs big banks that amid continuing losses created by their casino departments, the FDIC will no longer put "taxpayers' money at great risk" and therefore, by May, 2016, will "no longer offer deposit insurance for any firm that engages in derivative trading or securities underwriting or . . . investment banking."
Now, the independent-minded Ritholtz certainly won't describe himself as a liberal or a conservative but his idea is thoroughly conservative in the sense that it says to big banks, "If you want to gamble, fine, but don't expect your dangerous addiction to be supported by government."
In fact, Ritholtz considers his proposal as so appealing to real conservatives he imagined the letter signed by FDIC Chairman Thomas Hoenig.
That's now retired former head of the Kansas City Fed Thomas Hoenig, the outspoken, steadfast conservative who keeps his focus on "the safety of the system and the taxpayer" and therefore has criticized Gramm-Leach-Bliley as well as Dodd Frank for making the U.S. financial system "even more fragile" and subject to another inevitable crisis. (See interview at americanbanker.com)
In the spirit of the thinking exhibited by Ritholtz is that of former big bank executive Sallie Krawcheck, whose market based ideas for saving the nation from the dangers posed by casino banks were reported in the NYT.
Of all her common sense suggestions mentioned by columnist Joe Nocera, this one involving bank shareholders and boards stands out as having the greatest chance of convincing bank bigwigs to go cold turkey regarding their gambling habit:
" . . . top bank executives and senior management should be paid in bonds as well as stocks. . . and in the same percentage as the bank's risk profile. [For instance] a bank that had a dollar of debt for every dollar of equity would pay is chief executive half in debt and half in stock. . . If the bank was accumulating, say, $30 of debt for every $1 of equity, the executive's pay would also be skewed 30 to 1 in favor of debt."
Yes, it's hard to argue with Nocera that such a compensation plan would be a "surefire way to focus a banker's mind on making sure the bank could pay back [its] debt."
Finally, I can't end without offering a piece of advice to Mitt Romney, who, despite what Barack Obama would have us believe, knows a thing or two thousand about the relationship between banking and a vibrant business and job environment.
Mitt, you need to have a very long discussion with Thomas Hoenig and like-minded financial experts, whose ideas about the imperative of returning to "vanilla" banking are supported by the great majority of the American public, including Tea Party members, Main Street Republicans, Independents, Moderate Democrats, and small business owners.
Mr. Hoenig and Friends aren't political strategists, Mitt. Yet if you campaign fiercely on their fundamentally conservative advice about reforming the banking system, November 6 will find you and your team placing a whole mess of swing states on the "asset" side of your Election Balance Sheet, even a few surprising blue ones.
© A.J. DiCintio
June 10, 2012
You won't hear it from the Republican or Democratic Establishments, but the nation's health continues to be threatened by a banking problem that began in 1999 when Bill Clinton and his Wall Street blue blood Treasury Secretary Robert Rubin joined with a bi-partisan congressional coalition to repeal the Glass-Steagall Act, which established the FDIC and prevented commercial banks from participating in the securities business.
Problem is, the new law keeps FDIC guarantees intact while permitting commercial banks to open their own gambling dens (euphemistically named "trading departments"), no matter the size of a bank, the size of the pile of cash with which it wishes to gamble, the size of the risk, or the size of the danger to the country.
The sad truth regarding the Gramm-Leach-Bliley Act, therefore, is that once again establishment politicians have disfigured themselves with the worst kind of hypocrisy, because while they love to warn of the dangers posed by libertarianism (however sophomoric most of their criticisms), they can't resist accepting the ideology at its most extreme and dangerous when the payoff is money and power.
So it is that today America's largest banks are so big that the assets of the top four alone amount to a stunning 47% of the nation's GDP.
And so it is that today the nation's biggest banks make their money not by sound lending practices to businesses and individuals but selling "credit default swaps" to insure debt issued in countries such as Greece and Spain and speculating on currencies, stocks, bonds, and commodities through insanely inscrutable "derivatives," with neither of the financial instruments just mentioned bought and sold in the sunlight of an open exchange.
What can be done, then, about an industry that has raised the ire of and occasioned warnings by sensible Americans at least since the early nineteenth century, when Jefferson expressed a thought that applies in our time to dangerously large banks and the madly profligate governments with which they regularly collude:
"And I sincerely believe. . .that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."
According to most independent voices on the subject, replacing Gramm-Leach-Bliley is not currently possible, given the financial industry's large ownership stake in the federal government. (And not just Congress, for even hard left liberal Barack Obama has his Robert Rubin in the persona of Good and Faithful Wall Street Servant Timothy Geithner.)
Happily, however, two financial experts have advanced proposals that may solve the bank problem through other means.
In the sardonic tone he enjoys employing so effectively, Barry Ritholtz (ritholtz.com) offers his solution in a fictitious letter dated June 3, 2015, from the FDIC to "Dear Banker."
In sum, the letter informs big banks that amid continuing losses created by their casino departments, the FDIC will no longer put "taxpayers' money at great risk" and therefore, by May, 2016, will "no longer offer deposit insurance for any firm that engages in derivative trading or securities underwriting or . . . investment banking."
Now, the independent-minded Ritholtz certainly won't describe himself as a liberal or a conservative but his idea is thoroughly conservative in the sense that it says to big banks, "If you want to gamble, fine, but don't expect your dangerous addiction to be supported by government."
In fact, Ritholtz considers his proposal as so appealing to real conservatives he imagined the letter signed by FDIC Chairman Thomas Hoenig.
That's now retired former head of the Kansas City Fed Thomas Hoenig, the outspoken, steadfast conservative who keeps his focus on "the safety of the system and the taxpayer" and therefore has criticized Gramm-Leach-Bliley as well as Dodd Frank for making the U.S. financial system "even more fragile" and subject to another inevitable crisis. (See interview at americanbanker.com)
In the spirit of the thinking exhibited by Ritholtz is that of former big bank executive Sallie Krawcheck, whose market based ideas for saving the nation from the dangers posed by casino banks were reported in the NYT.
Of all her common sense suggestions mentioned by columnist Joe Nocera, this one involving bank shareholders and boards stands out as having the greatest chance of convincing bank bigwigs to go cold turkey regarding their gambling habit:
" . . . top bank executives and senior management should be paid in bonds as well as stocks. . . and in the same percentage as the bank's risk profile. [For instance] a bank that had a dollar of debt for every dollar of equity would pay is chief executive half in debt and half in stock. . . If the bank was accumulating, say, $30 of debt for every $1 of equity, the executive's pay would also be skewed 30 to 1 in favor of debt."
Yes, it's hard to argue with Nocera that such a compensation plan would be a "surefire way to focus a banker's mind on making sure the bank could pay back [its] debt."
Finally, I can't end without offering a piece of advice to Mitt Romney, who, despite what Barack Obama would have us believe, knows a thing or two thousand about the relationship between banking and a vibrant business and job environment.
Mitt, you need to have a very long discussion with Thomas Hoenig and like-minded financial experts, whose ideas about the imperative of returning to "vanilla" banking are supported by the great majority of the American public, including Tea Party members, Main Street Republicans, Independents, Moderate Democrats, and small business owners.
Mr. Hoenig and Friends aren't political strategists, Mitt. Yet if you campaign fiercely on their fundamentally conservative advice about reforming the banking system, November 6 will find you and your team placing a whole mess of swing states on the "asset" side of your Election Balance Sheet, even a few surprising blue ones.
© A.J. DiCintio
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