In the classic movie Casablanca, with nearly everyone in town again gathered in Rick's Casino doing what you do in a casino, after the French had drowned out the singing of the German soldiers by singing the French national anthem, the German major demanded that Captain Renault (Claude Raines) close it down. In response, Renault turned to Rick (Humphrey Bogart) and said, "I'm shocked, shocked to find that gambling is going on in here!"
Under this guise, Renault then emptied the casino, but not before accepting from the croupier his share of the house's take that night, for after all that's what Rick's was: a casino.
And for the next 68 years, when someone needs to describe, tongue in cheek, their own feigned surprise at the obvious, you will often hear them parrot Renault and say, "I'm shocked, shocked to find that [INSERT 'ACTIVITY'] is going on here!"
Well, 'feigned surprise' is what pretty much describes the last decade of the finance industry, for with the ill-conceived, laissez faire deregulation bill enacted by Congress in late 1999, the concurrent almost complete breakdown of the nation's governmental regulatory agencies, and the ineptitude and conflicted behavior of the credit rating agencies, how on God's green earth could anyone expect anything else but the financial crisis of 2007-2010? Recently, Senators Dorgan (D-ND) and McCaskill (D-MO) even used the very phrases "unsupervised casino-like gambling" and "flat-out betting" to describe what investment banks like Goldman Sachs have been up to for the past eleven years.
(As an aside, no one should ever forget that it was Senator Dorgan, a Democrat, who courageously and with unwavering conviction led the losing fight back in 1999 to reject financial deregulation, in opposition to President Clinton's and Treasury Secretary Rubin's publicly expressed wishes and arm twisting. Just think what a better place we would be in today had the Senator prevailed.)
Since deregulation in 1999, the big commercial banks failed in their fiduciary responsibilities, the regulatory bodies -- the Fed, the SEC and the credit rating agencies alike -- failed in executing their mandates, and the major investment banks turned into their own modern-day versions of Rick's Casino. And at once the flawed ideology behind the "lightly regulated free market" that Fed Chairman Greenspan and Treasury Secretary Rubin postulated for the finance industry laid a giant egg, but only after nearly destroying credit markets worldwide.
All in all, a complete and total disaster.
Within only a few short months of the deregulation bill's enactment in 1999, what the finance industry did for a living bore little or no resemblance to traditional banking, whether 'commercial' banking or 'investment' banking. To steal a line from Senator Carl Levin (D-MI), the activities of the investment banks turned into nothing more than a "conveyor belt that fed toxic loans into the financial system like a polluter dumping poison into a river." As the industry bounced back and forth between legalistic hair-splitting on the one hand and outright obfuscation on the other, it very soon didn't even recognize itself -- Fabrice Tourre, the young Goldman Sachs executive director at the center of the deal targeted by the SEC in its civil suit against Goldman Sachs, in one of his numerous boastful "fabulous Fab" emails to friends asked, "What if we've created a 'thing', which has no purpose, which is absolutely conceptual and highly theoretical, and which nobody knows how to price?"
If Citigroup is the 'poster child' for all that went wrong in the commercial banking side of the financial industry since 1999, then Goldman Sachs is the 'poster child' for the investment banking side.
Goldman chose 1999 as the year to go public because it believed that the combined efforts of Bob Rubin, its former CEO and then Secretary of Treasury, its 'supporters' in Congress, and its bevy of lobbyists would almost assuredly later that year give it and every other major investment bank the Congressionally-mandated deregulation it was counting on to be the foundation of its activities for the next decade or two. As described ably by the Wall Street Journal, Goldman Sachs, with this 'gift' from Bob Rubin and Congress in hand, quickly thereafter built its core business around proprietary trading and transformed itself from a firm that was primarily an adviser to companies seeking to raise capital or merge into a firm that put its own trading/gambling ahead of nearly every other activity.
Some well-intentioned Members of Congress believe that the best way to avoid a repeat of the 'financial crisis of 2007-2008' is for everything to be "more transparent." With respect, even though 'sunlight is indeed the best disinfectant,' as they say, more transparency alone won't come close to doing what's needed, for the simple reason, as Fabrice Tourre has already admitted under oath, that the "things" Wall Street has been creating have "no purpose, are absolutely conceptual and highly theoretical, and can't be priced." In other words, if the very investment banks that are concocting these 'new-age' securities can't price them, then the remedy is not more transparency, rather it is to not let the securities be issued at all.
This doesn't mean we shouldn't demand as much transparency from the banks as practically possible, especially full transparency regarding the mushroom cloud called "derivatives." Nor does it mean that we should let the Fed continue to live in a cocoon, which is why a number of us just sent a letter to Senator Bernie Sanders (I-VT) enthusiastically endorsing his legislation to "audit" the Fed, specifically to include full disclosure of those banks which received and may again receive bailout monies.
All I am saying is that transparency is itself not enough to prevent another Titanic sinking, even when combined with "better ethics," which of course we need as well.
So we can either hope the banks will stop their gambling ways -- in other words, give Bob Rubin's and Alan Greenspan's laissez faire approach another chance to work -- or we can make them STOP.
I, for one, have no interest in giving Wall Street another chance and my skepticism only increased when I heard the other day Lloyd Blankfein, the current CEO of Goldman, tell Senator Levin, after much hemming and hawing, that "sophisticated clients should be allowed to buy whatever they want" and that his firm had no obligation to share with them all information in its possession, even the fact that his firm was trading against the best interests of those clients. If this highly nuanced 2010 version of "CAVEAT EMPTOR" doesn't tell you that these guys won't self-regulate, then you aren't listening.
Financial reform needs to start with and have at its core the "Volcker Rule" which would: (1) prohibit a bank or institution that owns a bank from (i) engaging in proprietary trading that isn't at the behest of its clients and (ii) owning or investing in a hedge fund or private equity fund; and (2) limit the liabilities that the largest banks could hold. At the same time, the minimum capital requirements for banks should be increased to no less than 8 percent.
With these brakes in place, then we can address the myriad ancillary issues that must be part of any genuine reform of the financial industry, including more transparency and better ethics. But this car, first and foremost, needs 'brakes', and that is what the Volcker Rule would install.
In closing, let me make four quick comments:
1. While a fully bipartisan Financial Reform Bill would be a nice outcome, the President can't let the Wall Street allegiances of a small group of Members of Congress leave us with a watered down bill that has even the slightest prospect of another financial crisis of the magnitude we just experienced.
2. Concerning credit rating agencies, they must be subjected to the same legal standards as other market participants, and banks must lose the ability to choose which agency rates their instruments.
3. The reform effort is the perfect place to enhance shareholder rights and put limits on excessive compensation.
4. All standardized derivatives must henceforth be traded over exchanges and central clearinghouses with pricing transparent to market participants.
So, no more feigned surprise that gambling has gone on -- it surely has, for fully a decade and with taxpayers' dollars, and it has to STOP.
Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.
Henry Blodget: Let The Lloyd Blankfein Resignation Talks Begin
Even if the SEC doesn't insist on Blankfein's ouster, Goldman itself may decide that they best way to get a fresh start is to get a fresh face on the top. That way, the firm can blame all the all the stuff that happened on prior management, and say everything's different now.
And there were millions of illegal immigrants holding down jobs too.
Though illegal, folks at Rick's Casino still engaged in gambling.
In other words, making something illegal will not stop it, just drive it underground.
EXACTLY the point your opposition makes, against making derivatives illegal.
So lets get on with the breaking up, the taxing and the regulating.
1) Despite my differences on some policies with President Obama, I still support him. But he has to get out of the way when a fully bipartisan set of reforms is plainly unachievable, simply in the interest of compromise, and stop stonewalling an audit of the Fed. His centrism probably saved health care reform, but could likely destroy financial reform.
2) Individual and institutional investment advisors can contribute to the cause by simply avoiding holdings in issues that do not play the new ratings agency games.
3) Probably true, but shareholder rights and compensation issues will likely take care of themselves when the bigger game is cleaned up.
4) This is one that the anti-reform camp will fight tooth and nail. Why? Because they cannot generate huge bonuses without prioritizing trading over investment. Very simply, they need unregulated neo-Reaganomics allowing traders to keep gambling in the lucrative $600 trillion global derivatives shadow banking casino.