New Bill Threatens Wall Street

Dear Wade’s Weekly Subscribers: A number of factors have led me to not post here recently. These factors include a series of minor illnesses, an 8-day trip to Mexico to sell my property, another illness, updating Reform-Wall-Street.org, and steady work on the “declaration for action” with which I’m attempting to sum up my thinking in a brief and compelling manner. But now I’m getting back into a consistent routine, which I believe will enable me to return to weekly posts here. Today I re-post “New Bill Threatens Wall Street,” which I originally included in the May Big Bank News.
Wade 

New Bill Threatens Wall Street

Profound concern rippled through Wall Street on April 24 when a bipartisan “odd couple” in the U.S. Senate introduced the Terminating Bailouts for Taxpayer Fairness Act. Occupy Wall Street tweeted, “Encouraging,” and other reform advocates expressed support. But the mood on Wall Street was captured by Philip van Doorn, a bank analyst, who tweeted, “This bill is scary.”
   
The threat is that the bill will greatly reduce income for Wall Street executives and traders. Rather than invest in the real economy, the big banks prefer to make more money buying and selling “paper,” including complex financial instruments that are bets on bets. They know:    

• Risky bets are more profitable.
• If their bets go horribly wrong, the government will bail them out.
• Before those bets go wrong, they can profit by betting the bets will go wrong.
• When other banks get into trouble, they can be bought out at cut-rate prices.

Almost everyone who does not work for the industry agrees that under our current system, the government will once again be forced to rescue a big bank that nears bankruptcy. Otherwise, we’ll suffer a catastrophe even worse than the Great Recession. Knowing this, the big banks suck money out of the real economy by gambling in the paper economy.

The big banks receive special support from the federal government in a variety of explicit and implicit ways. This federal safety net gives them an unfair advantage over smaller banks, including community banks that are the major source of loans for businesses and consumers.
   
Because everyone knows that only the big banks are backed by the federal government, the big banks can borrow money at much lower rates. As a result, community banks are being driven out of business and the big banks are becoming bigger.

The big banks are intertwined like a house of cards. They loan money to each other and eventually must pay back those loans. They sell paper to each other with an obligation to buy back that paper at a later date. And they rely on each other to repay loans and buy back paper.
   
When one bank is unable to meet its obligations, it endangers banks that were counting on that income. If one bank gets worried about another bank’s ability to fulfill its obligations, the first bank stops loaning the second bank money. And when all banks get worried, no one will loan to anyone, we have a nationwide “credit freeze,” and Main Street businesses can’t get essential short-term loans to conduct business and meet payroll.
   
The Brown-Vitter bill aims to prevent this scenario by:

1) Requiring banks with more than $500 billion in assets to set aside at least 15% of their assets (about twice their current levels) to meet sudden, unexpected demands. Mid-size banks would only have to set aside 10%. Community banks would be unaffected.
2) Prohibiting bank holding companies from moving assets and liabilities from their traditional banking units to their trading units that gamble in the paper economy.
3) Preventing the Federal Reserve from lending to the gamblers, as it has.
4) Discontinuing federal deposit insurance for the gamblers, while continuing to insure deposits in traditional banks.

By eliminating the federal safety net for the big banks, these measures will pressure big bank shareholders to insist that their executives downsize their banks into smaller, separate, stand-alone units. By holding less than $500 billion in assets, each unit can avoid the disadvantages imposed on the biggest banks by this legislation.
     
Because the gamblers would be walled off from traditional banking, they could go bankrupt without threatening traditional banks and the entire economy. Moreover, being unable to gamble, traditional banks will be stronger and better able to serve the real economy.
     
Just as a home buyer would rather pay a lower down payment, the big banks prefer to hold less cash in reserve so they will have more cash for the paper economy.
   
So big bank executives and their protectors are predicting that Brown-Vitter will hurt the economy. But even during the Great Depression, our largest banks held reserves that were 15% or more of assets and never needed a bailout.
   
What really hurts the economy is the impact of the paper economy on the real economy. And what hurts even more are the inevitable crises, like the one that started in 2007-8, which has already cost us the equivalent of one year’s gross domestic product. And the next one could easily be much worse.
   
 Ironically, the more the banksters complain about Brown-Vitter’s capital requirements, the more they suggest to their shareholders that if the bill passes, they will need to downsize to avoid those requirements!
   
Support for the Brown-Vitter approach is growing in many quarters. The Independent Community Bankers of America, for example, with nearly 6,000 of the more than 7,000 community banks in the country as members, has endorsed the bill, and ran full page ads for two days in POLITICO, The Hill, Roll Call, The Washington Times and The Financial Times calling for an end to too big to fail.
   
If the Obama Administration does not support the bill, near-term prospects are dim unless another crisis or scandal prompts strong action. On the other hand, the more support the bill receives, the more cover it will give to those regulators who want stronger regulations.
   
Regardless, we need a strong grassroots force that is educated on the issue, spreads awareness, and is ready to act quickly when the opportunity presents itself. Without focused popular pressure, possibilities for real reform will be limited.

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If you want to sign a petition in support of this bill, click here.