More big picture unseen

February 9th, 2010 by Rick Drain

In my prior post I described how financial executives are apparently blind to the fact that the financial crisis has hurt many other people, non-bankers all over the country and the world.  The execs seem to think that since they’re OK now thanks to taxpayer bailout, then everything is OK.  They don’t see that they have some responsibility to help out the still-suffering taxpayers who helped them.

It’s not as if the big banks were simply present at a major accident, and were innocently harmed along with all the other bystanders.  Quite the contrary, the banks’ actions, political and financial, set up the necessary conditions for the collapse.  They may argue that they didn’t “cause” the crisis, in the sense that they didn’t push a button labeled “cause crisis,” but they did create an environment where a crisis was inevitable.  So it happened.

Details of the banks’ shenanigans are detailed in this excerpt from They Brought It Upon Themselves:

Executives at our nation’s largest financial firms reacted with shock and dismay this afternoon, but they brought these policy proposals on themselves. They’ve successfully gamed the legislative and regulatory systems so well and for so long that they literally cannot understand why so many people are angry enough to side with the President on this issue. Maybe their memories are a little foggy, so let me try to list just some of the change Wall Street firms themselves were able to effect during the past 15 years. It’s a Top 10 checklist of memorable achievements only a bank executive could love:

(1) Preventing OTC derivatives from being listed on exchanges and keeping them in a “regulation-free zone” during the mid 1990’s so they could become today’s multi-hundred trillion dollar business of intertwining counterparty risks — check.
(2) Tearing down the Glass-Steagall act during the late ’90’s so financial firms could take more risk and enter almost whatever business they pleased — check.
(3) Prevailing upon SEC Chairman Chris Cox during the early 2000’s to let firms lever up by exempting large financial institutions from regulations that had effectively capped their balance sheet leverage at levels just above 10 to 1– check.
(4) Finding (or creating) loopholes that would enable large financial firms to take on even more leverage through off balance sheet vehicles like SIVs — check.
(5) Boosting ROEs during the last decade by acquiring illiquid, higher yielding investments with this newfound leverage — check.
(6) Letting lending standards slip so badly during the middle of the last decade that almost anyone who could fog a mirror could now receive whatever financing they needed to buy a home — check.
(7) Allocating huge amounts of the resulting ersatz profits to themselves as compensation — check.
(8) Negotiating and then accepting relatively cheap, taxpayer-backed funding from the TARP — with few strings attached — when their levered business models threatened to bring down the entire financial system in late 2008 — check.
(9) Negotiating their way back out from under the TARP with relatively little pain during 2009 — check.
(10) Lobbying Congress to thwart the type of financial reforms that might prevent taxpayers from having to bail them out again some day — check.

By helping to bring about the changes listed above, executives in the upper echelons of our largest financial firms have, in the eyes of most of the public, pulled off the perfect caper: Private profits and socialized risks. Until now. Now these firms will reap the political whirlwind of antipathy blowing in the wake of the changes these firms foisted upon our financial system since the mid 1990’s. Yes, there many others — like the Maestro, who gave his official nod to numbers 1-7 above — who deserve blame. But if Wall Street and its army of lobbyists hadn’t been so successful in preventing even sensible reform in recent months, then they might have escaped the type of populist proposals put forth by the President this morning. In so many ways, they brought this mess upon themselves.

– Jack McHugh

Until the banks realize the extent of their mistake, and take part in a genuine sensible conversation about re-regulation, then the animosity toward the banks will continue to rise.  If the banks manage to dodge the regulatory bullet this time, through public spin and private lobbying, then the public’s re-regulatory thunderbolt when it comes will be all the stronger.