The Banking Scandal: Repeating the Same Mistakes and Expecting Different Results

The President and Congress have finally allowed us to allocate $700 billion to a policy, about whose success they are, at least reasonably, doubtful. They have to do it, they say, to save Wall Street. Before they go any further, they should enact new regulations to better protect us all from turning our $700 billion bailout into a trillion dollar bank deposit insurance guarantee.

In the struggle to pass the bill, the government agreed to insure bank deposits up to a limit of $250,000, the previous limit had been $100,000. At the start of 2008, under the old limit, the government estimated that it was insuring about $4.42 trillion dollars at the $100,000 rate and had set aside a $55.2 billion reserve against potential liability. That's calculated at about 1.25% default rate.

No one seems to know how much more money will be insured under the new limit, but the new law provides that banks will not have to pay premiums on the new insurance. They get it for free. The new law insures two-and-a-half times as much as the previous law did. We have put the U.S. Treasury at risk for some additional amount, and for every trillion dollars we must add $10.25 billion to our Reserve fund. If banks collapse at a greater rate, we will incur a far greater loss. And nobody's paying attention.

The last time the federal government went down this track was in 1980, when in order to save "Main Street", i.e. the Savings and Loan industry, Congress, under Jimmy Carter, passed a law raising the deposit insurance limit from $40,000 to $100,000, also a 250% increase over the previous level. Then, under President Reagan, Congress enacted the Garn-St. Germain Depository Institutions Act, which relaxed statutory and regulatory requirements on the S&Ls.

Between 1982 and 1986, the Reagan administration reduced the Bank Board's regulatory and supervisory staff considerably. The average bank examiner had only two years of on job experience. During this period, the bank industry assets increased by more than 50%. Forty Texas S&Ls tripled in size, many of them growing by 100% each year. We insured 50% more assets, with many fewer regulators.

In 1985, the FDIC transferred regulators from Washington to the twelve regional federal home loan banks so that they were no longer overseen by the OMB [Office of Management and Budget] and their salaries were paid directly by the Bank Board system. In other words, regulation of the S&Ls and banks was left largely in the hands of regional representatives far removed from their Washington supervisors. To summarize, fewer regulators were now overseeing more assets with less supervision from the home office. We all know what happened next--the S&L crash, the Keating scandal, and ultimately the George Bush S&L bailout, which cost American taxpayers 124.1 billion dollars.

How can we avoid repeating our mistakes--one first step: add bank examiners as well as asset managers.

We have all read about the Treasury Department's website ad for more asset managers to help in the disposal of Wall Street's "toxic loans." We should also be advertising even more ardently for experienced bank examiners to review banking and S&L performance on a monthly basis. We must double the number of bank inspectors back to pre-Reagan levels. We must return them to Washington, where they will report directly to the people who control the insurance reserves. To prevent a too cozy relationship between regulators and the regulated, bank examiners must switch assignments on a random basis. And bank regulators should be held responsible when banks under their supervision fail. The new administration must demand the accountability of its employees.

Further reading:

It is interesting to note that most of the information above has been available on two federal websites: Office of Thrift Supervision (OTS), http://www.ots.treas.gov/?p=History, and the FDIC, http://www.fdic.gov/bank/historical/s&l/index.html, for many years.

Below readers will find direct quotes from those websites that establish the accuracy of the above narrative, unless, of course, the current administration erases them as soon as this article is posted. The point is, these guys knew, or should've known, about their own record.

Office of Thrift Supervision (OTS): "In the early 1980s, interest rates climbed to unprecedented levels, undermining the viability of the S&L business model. Many institutions were economically insolvent. In an effort to help the industry "grow" out of its problems the government deregulated the powers of savings and loans, and gave them full access to federally insured deposits to fund their new lending powers."

FDIC: "The law is a Carter administrative initiative aimed at eliminating many of the distinctions among the different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts...Deposit insurance limit raised to $100,000 from $40,000."

FDIC, March, 1984--"Failure of Empire Savings of Mesquite, TX "landflips" and other criminal activities are a pattern at Empire. This failure would eventually cost the taxpayers $300 million.

FDIC, July, 1985-- Chairman [Edwin] Grey begins transfer of federal examiners to the to the twelve regional Federal Home Loan Banks so that they are no longer overseen by OMB and their salaries are paid directly by the Bank Board system.

FDIC, August, 1985-- Only 4.6 billion [left] in FLIC insurance fund.

FDIC, 1987--Losses at Texas S&Ls comprise more than one-half of all losses of all S&Ls losses nationwide, and of the twenty largest losses fourteen are in Texas.

FDIC, April, 1987--Edwin Grey ends his term of Chairman of Federal Home Loan Bank Board in June. Before his departure he is summoned to the office of Sen. Dennis DeConcini. DeConcini, with four other Senators (John McCain, Allan Cranston, John Glenn, and Donald Rigle), questioned Grey about the appropriateness of Bank Board Investigations into Charles Keating's Lincoln Savings and Loan. All five Senators who have received campaign contributions from Keating would become known as the "Keating Five". The subsequent Lincoln failure is estimated to have cost the taxpayers over $2 billion."

FDIC, November, 1988--George Bush elected President. S&L problem not part of election debate.

FDIC, 1989--President Bush unveils S&L bailout plan in February."

Comments

[Sagantech]

The only way out is transparency and it must be done now!

[research]

FDR did a good job.

As soon as the GOP dismantled enough of it, we crashed again.

Bring back Glass-Steagall

Ban shorts, margins and derivatives.

Then let's consider eliminated the private profit part of the fed.

[Reese Schonfeld - Huffpost Blogger]

Cynical Tony-

Totally on point. Has anybody launched a Glass-Steagall website?

[CynicalTony]

This was gonna be a short comment but I couldn't help myself and got to rambling and now it's five comments, lol, sorry. But Is anyone going to talk seriously about putting our regulations back on the books? It's really not that complicated to point to specific deregulation at the root of the problem and write the legislation back into law. The first candidate that says the words Glass-Steagall will be the one I vote for. Obviously neither will do that though because it raises too many questions and points too many fingers at both parties for repealing the law. For anyone who doesn't know, Glass-Steagall was was the primary law written in 1933 to regulate the financial services sector so we wouldn't have the same course of events that led to the Great Depression in the future. It created the FDIC to insure checking, savings and CDs in case banks became totally insolvent. More importantly regarding this crisis we're in, it put barriers between commercial banks, investment banks and insurance underwriting to remove the conflict of interest involved with all-in-one financial institutions putting their customers pension and insurance money at risk to finance their high-risk bubble ventures, i.e. subprime mortgage lending. Actually, the fact that it's subprime mortgage lending is somewhat insignificant in a way. If it wasn't mortgages, it would've been a different bubble and if these barriers aren't put back in place there will surely be another one in the future.

[CynicalTony]

I don't think it's coincidence that we haven't had a market crash of this magnitude for seventy-five years since Glass-Steagall was enacted and I certainly don't think it's coincidence that it didn't even take ten years for us to have another Great Depression-like crash after the law was repealed. The law was repealed to promote this ridiculous philosophy of free market society. Just because the word free is in front of it doesn't mean it's a good thing. What it really gives us is capitalism at it's extreme worse and we haven't even reaped all of the consequences yet. Businessmen will make as much money as they can regardless even of the prospect of others suffering, that's the whole point of being a businessman!! I'm far from Communist but Karl Marx said if you give businessmen enough rope they'll surely hang themselves with it. Only problem is, businessmen these days are smart enough to hang everyone else instead because they're using your money instead of their own. As devious and seemingly criminal as it is they have an argument, 'We didn't break any laws. Those laws aren't around any more and now, well, it's just business.' The tragedy of the bailout is that was the ideal time to force back the regulations on wall street and yet there's no regulatory action in that bailout whatsoever. That's like emptying out your savings account, giving it to a cocaine addict and not even suggesting he go to rehab.

[CynicalTony]

As it pertains to the current presidential election, the repeal of Glass-Steagall came about after two decades of intense lobbying by the financial sector led by Citigroup. In '99 they finally had their free market congress, president and their point man Phil Gramm. He was the primary author and sponsor of the Gramm-Leach-Bliley Act which repealed Glass-Steagall. Phil Gramm is famous for two other things. One, being the principle sponsor of the Enron Loophole attached to the Commodities Futures Modernization Act which is a big part of the reason why gas prices are so high because it's allowed speculators to buy energy commodities at ridiculous margins. Although, in former senator Gramm's defense, I doubt he foresaw that happening. He originally intended it to allow Enron to monopolize the electricity business in the western part of our country since his wife sat on the board of directors!!

[CynicalTony]

The other thing he's famous for is being John McCain's presidential campaign co-chair and his top economic advisor only stepping down after having the audacity to say publicly in July that this was just a 'mental recession' and that 'we've become a nation of whiners in a way'. All that at the same time people are losing their jobs, their retirement pensions and their home values through no fault of their own. People like Phil Gramm make me want to believe in God just so I know there's a special circle in hell waiting for them. So if you want to know where John McCain stands on deregulation I doubt you have to look much further. But don't get all excited Democrats, it doesn't get any better for you. Both of those bills were passed into law by a highly bi-partisan vote and signed without objection by your boy Bill Clinton. If ever there was a time for a president to read a bill coherently and use his veto power it was then. I know you all want it to be nice and neat and blame it all on George Bush but the fact is, the course of events which have led to this crisis began with a failure of leadership before Bush ever set foot in the White House. So maybe next time you clamour for Bill and Hill to give a speech on Obama's behalf you should be careful to wave that banner too proudly.

[CynicalTony]

The root cause of all evil then has to be lobby money and the special interests of our congressmen as well as the president. It isn't lobbyists themselves, people have a right to request time with their representatives and present a case for their agendas. What they shouldn't have a right to do is bribe them with campaign contributions or sweet side deals or high paying jobs when they leave office. You can spin it any way you want, but that's called corruption and in our government in this great land of ours it's as natural as the air we breathe. So how do we regulate the people who are supposed to be regulating the people who would act so irresponsibly and do our country so much harm? I have absolutely no idea, I'll leave that one to the smart people.