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Wall Street: Too Big To Regulate

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On Sunday FDIC Chairman Sheila Bair spoke out against the regulatory protection of the big Wall Street banks, also known as "too big to fail."

"We need to end 'too big to fail' and this needs to be an overarching policy that applies to everyone," Bair said.

Bair has a lot of distinguished company.

For instance, Nobel prize-winning economist, Joseph Stiglitz, Nobel prize-winning economist, Ed Prescott, President of the Federal Reserve Bank of Kansas City, Thomas Hoenig, Deputy Treasury Secretary, Neal S. Wolin, the Congressional panel overseeing the bailout, and countless economics professors across the country have all called for an end to the TBTF doctrine.
The Bank of International Settlements went so far as to say that failure to break up the big Wall Street banks "may well delay recovery" and "it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future."

Yet there is almost no action being taken to do this. Why is that?

There are three reasons for this: regulatory capture, cowardice, and corruption.

A new report was released today that cast a very poor light on the Treasury Department.

The inspector general who oversees the government's bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

That certainly appears like corruption to me. The report points out inconsistencies with the Bank of America/Merill Lynch merger, a merger that is already under investigation for collusion between the regulators and the banks.

Yet despite these embarrassments, the Treasury Department announced today that it was going ahead with a new TARP program, the Public Private Investment Program (PPIP), that would "saddle taxpayers with nearly all downside risk while providing market players with possibly massive upside."

As for the TARP's performance so far, despite reports that the government is making some sort of a profit from TARP investments, the truth is that the taxpayers stand to lose between $100-$200 Billion from the $700 Billion TARP fund.

So how can the Treasury, White House, and Congress be so tone deaf to these calls to stop the massive give-away to the same people who got us into this mess?

Well, for starters, the popular outrage and the pain from the economic crisis isn't being reported by the corporate-owned news media.

Unemployment and the housing crisis accounted for 12 percent. And, the study said, "stories that tried to explicitly examine the broader impact of the economic downturn on the lives of ordinary Americans filled 5 percent of the economic coverage."

The next logical question is whether the government has the power to break up the insolvent banks that it decided to bail out. William K. Black, the man who ran the S&L cleanup, gives an emphatic "yes" to that question.

The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.

Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth.

Black goes on fto say that "the entire strategy is to keep people from getting the facts." Why would the regulators try to cover up the extent of the economic disaster? For starters, the largest campaign contributors in Washington are the very same TBTF banks. Just look at the current condition of the House Financial Services Committee. There are an absurd 71 members on that committee today.

It's a picture of congressmen greedily lining up at the trough to collect those legal bribes from the same people they should be regulating, and even throwing in jail, who are giving back taxpayer money that congress awarded them in the form of bailouts.

The only hope for reform in the face of this opposition is public disclosure of the true depth of the crisis and its roots in widespread "control fraud" and the need for fundamental reform. The administration would have to marshal public outrage, document the fraud and abuses, and provide a supporting theory to have any chance of success.

Instead, the Obama administration and Fed Chairman Ben Bernanke have refused to investigate the nature and causes of the crisis.

Wall Street owns the all-important over-the-counter debt markets. This makes them too powerful to regulate. Economic consultant Edward Harrison and Harvard professor Jeffrey A. Frieden both agree that Wall Street can not be regulated in its current form.

Regulatory agencies are often sympathetic to the industries they regulate. This pattern is so well known among scholars that it has a name: "regulatory capture." This effect can be due to the political influence of the industry on its regulators; or to the fact that the regulators spend so much time with their charges that they come to accept their world view; or to the prospect of lucrative private-sector jobs when regulators retire or resign.

There simply is no other financial reform that will work outside of breaking up the mega-banks and rolling back the deregulation of the past few decades. All other reform proposals are doomed to failure.

Around the Web

Banks 'Too Big to Fail' Have Grown Even Bigger - washingtonpost.com

If It's Too Big to Fail, Is It Too Big to Exist? - NYTimes.com

The Nation - Too Big to Fail? - NYTimes.com

'Too big to fail'? - Eamon Javers - POLITICO.com

AIG's Plight: Too Big To Fail, but Shrinking - WSJ.com

Shouts & Murmurs: Too Big to Fail : The New Yorker