It's Time To Break Up the Big Banks

    Pushing to reinstate the Glass-Steagall Act
    would be a smart move for Obama both
    politically and economically

By Robert Reich
blog
October 25,2011

http://robertreich.org/post/11930107240

Next week President Obama travels to Wall Street where
he'll demand - in light of the Street's continuing
antics since the bailout, as well as its role in
watering-down the Volcker rule - that the Glass-
Steagall Act be resurrected and big banks be broken up.

I'm kidding. But it would be a smart move - politically
and economically.

Politically smart because Mitt Romney is almost sure to
be the Republican nominee, and Romney is the poster
child for the pump-and-dump mentality that's infected
the financial industry and continues to jeopardize the
American economy.

Romney was CEO of Bain & Company - a private-equity
fund that bought up companies, fired employees to save
money and boost performance, and then resold the firms
at a nice markups.

Romney also epitomizes the pump-and-dump culture of
America's super rich. To take one example, he recently
purchased a $3 million mansion in La Jolla, California
(in addition to his other homes) that he's razing in
order build a brand new one.

What better way for Obama to distinguish himself from
Romney than to condemn Wall Street's antics since the
bailout, and call for real reform?

Economically it would be smart for Obama to go after
the Street right now because the Street's lobbying
muscle has reduced the Dodd-Frank financial reform law
to a pale reflection of its former self. Dodd-Frank is
rife with so many loopholes and exemptions that the
largest Wall Street banks - larger by far then they
were before the bailout - are back to many of their old
tricks.

It's impossible to know, for example, the exposure of
the Street to European banks in danger of going under.
To stay afloat, Europe's banks will be forced to sell
mountains of assets - among them, derivatives
originating on the Street - and may have to reneg on or
delay some repayments on loans from Wall Street banks.

The Street says it's not worried because these assets
are insured. But remember AIG? The fact Morgan Stanley
and other big U.S. banks are taking a beating in the
market suggests investors don't believe the Street.
This itself proves financial reform hasn't gone far
enough.

If you want more evidence, consider the fancy footwork
by Bank of America in recent days. Hit by a credit
downgrade last month, BofA just moved its riskiest
derivatives from its Merrill Lynch unit to a retail
subsidiary flush with insured deposits. That unit has a
higher credit rating because the Federal Deposit
Insurance Corporation (that is, you and me and other
taxpayers) are backing the deposits. Result: BofA
improves its bottom line at the expense of American
taxpayers.

Wasn't this supposed to be illegal? Keeping risky
assets away from insured deposits had been a key
principle of U.S. regulation for decades before the
repeal of Glass-Steagall.

The so-called "Volcker rule" was supposed to remedy
that. But under pressure of Wall Street's lobbyists,
the rule - as officially proposed last week - has
morphed into almost 300 pages of regulatory mumbo-
jumbo, riddled with exemptions and loopholes.

It would have been far simpler simply to ban
proprietary trading from the jump. Why should banks
ever be permitted to use peoples' bank deposits -
insured by the federal government - to place risky bets
on the banks' own behalf? Bring back Glass-Steagall.

True, Glass-Steagall wouldn't have prevented the fall
of Lehman Brothers or the squeeze on other investment
banks in 2007 and 2008. That's why it's also necessary
to break up the big banks.

In the wake of the bailout, the biggest banks are
bigger than ever. Twenty years ago the ten largest
banks on the Street held 10 percent of America's total
bank assets. Now they hold over 70 percent. And the
biggest four have a larger market share than ever - so
large, in fact, they've almost surely been colluding.
How else to explain their apparent coordination on
charging debit card fees?

The banks aren't even fulfilling their fiduciary duties
to investors. Last summer, after Groupon selected
Goldman Sachs, Morgan Stanley, and Credit Suisse to
underwrite its initial public offering, the trio valued
it at a generous $30 billion. Subsequent accounting and
disclosure problems showed this estimate to be absurdly
high. Did the banks care? Not a wit. The higher the
valuation, the fatter their fees.

Just last week Citigroup settled charges (without
admitting or denying guilt) that it defrauded investors
by selling them a package of mortgage-backed securities
rife with mortgages it knew were likely to default, but
didn't disclose the hazard. It then bet against the
package for its own benefit - earning fees of $34
million and net profits of at least $126 million. So
what's Citi paying to settle this outrage? A mere $285
million. Its CEO at time (Charles Prince) doesn't pay a
dime.

I doubt the President will be condemning the Street's
antics, or calling for a resurrection of Glass-Steagall
and a breakup of the biggest banks. Democrats are still
too dependent on the Street's campaign money.

That's too bad. You don't have to be an occupier of
Wall Street to conclude the Street is still out of
control. And that's dangerous for all of us.

___________________________________________

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