When I was in the Senate back in 2009-2010 there were disagreements about virtually every element of Wall Street reform. But everyone, Republican or Democrat, agreed that the American taxpayer should never again have to bail out a bank because it was "too big to fail"-- so large and so intricately a part of our financial system that if it wasn't bailed out it could cause another economic meltdown.
Many of us, led by Senators John McCain and Maria Cantwell, believed that the only foolproof way to do away with TBTF banks was to reinstate the Glass Steagall Act of 1933. For the next 66 years, Glass Steagall separated commercial banks, whose deposits were federally insured, from investment banks, which were free to engage in riskier investment strategies. But Glass Steagall was repealed in 1999. Wall Street banks took greater and greater risks, including credit default swaps and mortgage-backed securities. The result of this seems, in retrospect, to have been inevitable.
Our attempt to reinstate Glass Steagall went nowhere. Instead, what I have always thought of as a fig leaf -- the so-called Volcker Rule -- was attached to the Dodd Frank Wall Street Reform Act, which became law in July 2010. The can was kicked down the road; the Act left it up to regulators to write rules that would prevent banks from making the risky investments that led to the bailouts.
What we are seeing happen right now proves that universal agreement on a goal -- no possibility of a future bank bailout -- doesn't necessarily mean that goal will be achieved. Our major banks are still too big to fail. In fact they are bigger than they were back in 2008 before the wave of forced mergers where the big banks gobbled up Wachovia, Merrill Lynch, Washington Mutual and more.
You would be hard pressed to find an independent economist or business writer who doesn't agree with that TBTF assessment. "Independent" is the key word here. There are any number of economic voices associated with the Wall Street banks' relentless public relations campaign to protect them from "the cost of federal regulation." They want us to forget what the lack of financial regulation cost the U.S. economy back in 2008 -- in terms of jobs, lost homes and a ballooning deficit.
The lobbying campaign over the past few months to influence the regulators in charge of implementing the Volcker rule has been something to behold. A study conducted by Duke Law School Professor Kimberly Krawiec shows that between July 26, 2010 and October 11, 2011, 93.2 percent of those who visited with Securities Exchange Commissioners or staff about the Volcker amendment were financial institutions, law firms, accounting firms, trade associations, lobbyists or policy advisors who represented financial institutions. The remaining 6.8 percent represented public interest or union groups.
October 2011 was the month the regulators released a 300+ page draft proposal about implementing the Volcker rule. It included 1,300 questions, asking for public input. Has there been input since then? You bet. Press reports make it clear that the imbalance in lobbying cited by Professor Krawiec has gotten worse. In the past three months, Goldman Sachs alone has met with the regulators six times. When the February 13 deadline for comments was reached, an avalanche of mail from the Wall Street banks and their supporters poured into the SEC.
Given the one-sided input the regulators have received, it is difficult to imagine implementing a Volcker rule with real teeth. My initial reaction, that it was a fig leaf, is about to be proven true. In just one year's time, a rule that was supposed to confront the very real problem of banks making high-risk bets with government-insured deposits will have evolved into a watered-down version that will do little to solve our continuing TBTF problem.
Here's just one reminder about what that problem would entail. More than three years after it declared, we still have not resolved the relatively simple Lehman Brothers bankruptcy, mainly because of the lack of resolution authority across international lines. Can you imagine how long it would take to resolve a Citibank bankruptcy -- involving over $2 trillion in assets and hundreds of international relationships? The impact on the world's financial markets would be catastrophic.
Albert Einstein defined insanity as doing the same thing over and over again and expecting different results. You don't have to be an Einstein to recognize this TBTF insanity for what it is.
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