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Remember That Whole Thing About Fixing Our Financial System?

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The window for reform is closing. If we don't do it soon, we may not have this opportunity for a long while. And I'm not just talking about health reform. It is just as true of the reforms of the financial system that we were repeatedly promised months ago. As Paul Krugman put it, "by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely."

We have pending reforms, and we have necessary reforms that are not even pending.

The proposed Consumer Financial Protection Agency has become the main target of the financial industry. As Elizabeth Warren wrote, "The CFPA would put someone in Washington -- someone with real power -- who cares about customers. That's good for families, good for market competition, and good for our economy." But it's not good for industry lobbyists, who are working round the clock to kill or water down reforms that would make it harder to bury tricks and traps for consumers within pages and pages of legalistic, hard-to-comprehend fine print.

There are also bills in both the House and the Senate demanding transparency and accountability from the Fed. In the House, Ron Paul's bill to audit the Fed has 274 co-sponsors -- including all Republicans. Since when did Republican lawmakers become more committed to transparency? Larry Summers has said that the administration would support more transparency, but in truth, as Neil Barofsky made clear in his testimony to Congress, "TARP has become a program in which taxpayers are not being told what most of the TARP recipients are doing with the money, have still not been told how much their substantial investments are worth, and will not be told the full details of how their money is being invested."

Talking to George Stephanopoulos last week, Tim Geithner bragged about the success of the bailout: "We've already earned about $6 billion for the taxpayer on those investments." Sounds great -- unless you consider the fact that we've we actually "invested" $4.7 trillion in our bank bailout. Shouldn't we demand to know what happened to the remaining $4.694 trillion?

Reforming the credit-rating agencies, to avoid ratings shopping by financial institutions and the fundamental conflict of having rating agencies be paid by the companies they are rating -- no wonder so much junk got AAA ratings -- got a hearing in the Senate yesterday, but we may not see action on this until next year.

Legislation to reform executive pay passed the House last week. The need for this reform was highlighted last Thursday when New York State Attorney General Andrew Cuomo's office released a study showing that the bonuses of several of the biggest banks exceeded their profits. How can they pull that off? With your help, of course. Because of the wonderful quality of fungibility, your tax dollars are helping to pay obscene bonuses to executives of banks that would otherwise have gone belly up. Here are some lowlights: Goldman Sachs made $2.3 billion in 2008, but gave out $4.8 billion in bonuses; they also received $10 billion in TARP funds and more than $12 billion of taxpayer money as a counterparty to AIG. JPMorgan Chase made $5.6 billion, but gave out $8.69 in bonuses; they received $25 billion in taxpayer bailout money. Citigroup and Merrill Lynch lost $54 billion, but gave out $9 billion in bonuses. It must have helped that taxpayers wrote them a check for $55 billion. As the report dryly puts it, "there is no clear rhyme or reason to how the banks compensate or reward their employees."

"Everybody understands," Geithner said on This Week, "that we cannot have our financial system go back to the practices that brought this economy to the brink of collapse." It's true, we all understand it. The problem is, the system has already gone back. Risky derivatives are traded again, bonuses disconnected from performance are being handed out again, bank lobbyists are spending tens of millions to undermine necessary regulatory reforms again. The only real long-term solution is for the government to ensure that there are no financial institutions too big to fail anymore, so that if they continue to act irresponsibly, then they are just allowed to fail. That's capitalism, remember? The creative-destruction consequences of a free-enterprise system that all these bonus-loving bankers love to extol.

If we're really going to protect taxpayers and create a more stable system, the most important reform is to never again be held hostage by institutions that pose a systemic risk and therefore have the power to tell us: "If you don't give us the money, we're going to blow up the whole system." Actually, what we have now is worse than a hostage system because in a classic hostage setup, after you pay the ransom you get the hostage back. We've paid more than a king's ransom, but have not taken the hostage -- our financial system -- back from the banks.

The administration is considering, for example, splitting Fannie Mae and Freddie Mac and putting their troubled assets in a new government-backed entity, but nothing is being done about the much more powerful, too-big-to-fail banks. Indeed, the only reason banks like Citigroup could announce a profit last quarter is because all the toxic garbage on their balance sheets is still being treated as though magically it will one day turn into gold.

This has about as much chance of happening as Larry Summers' hope that the banks will, as he put it, "join us in working to create the right kind of regulatory system." But why would they voluntarily "join us" to mess up the good thing they have going? After all, if their toxic assets -- whether commercial real estate or credit cards -- continue to go down, guess who is going to pay?

As Geithner said to Stephanopoulos, "We can do this, it just requires the will to act." But the will to act is different than the will to use reformist rhetoric or the will to launch a tirade urging reform, as Geithner did last Friday.

The window for reform is closing. After the August recess, all energy in Washington will be devoted to health care. I hope we get a great plan. But even if we do, with a financial system in which we're still being held hostage by the banks, another collapse is inevitable -- taking everything, including a great health care plan, down with it.