Regulations? We don’t need no stinking regulations!
When the dust settled after the Great Financial Crisis, we learned that the big banks had behaved in overtly criminal ways. Yet none of their executives would be held criminally accountable.
And while legislation was passed in the aftermath to place restrictions on the ‘Too Big To Jail/Fail’ banks, it was heavily watered down and has been under attack by financial system lobbyists ever since.
To talk with us today about the perpetual legislative warfare pitting citizens on one side and lobbyists (and many lawmakers) on the other, is Bartlett Naylor. Naylor is a veteran of the Wall Street wars. He spent a number of years as an aid to Senator William Proxmire at a time when Proxmire was head of the Senate Banking Committee. Naylor himself served as that committee’s Chief of Investigations.
Sadly, Naylor sees the banks winning out here. More and more of the prudent restraints placed on the banking system are being dismantled, as further evidenced by the recent bill President Trump just signed:
The President signed S2155 last week. This bill has 40 or so provisions in it. The most troubling one reduces what’s known as enhanced supervision for a class of banks that are between $50 billion and $250 billion in assets.
Enhanced supervision means tighter capital controls. Capital is assets minus liabilities — the amount of net worth, if you will, of the particular bank. You think of banks of being very solid; but in fact, they’re in hock. They are highly leveraged. 95% of their assets are financed by debt. They really don’t own that much. They mostly owe things.
Stress tests will be reduced. A stress test is to say, “All right bank. Let’s look at your portfolio and decide that of things are going to go bad in the economy—defaults will rise, unemployment will rise — what’s going to happen to your portfolio? And based on that, we will decide how much capital you should have.” In other words, that gap between assets and liabilities, and how much dividends you can pay out, or in fact, executive bonuses, etc. Let’s say you fail. What will happen to all of your assets? Is there a way that this particular part of your bank can be sold to somebody?
So for example, with the failure of Lehman Brothers, they couldn’t sell it. They couldn’t resolve it quickly enough when it was failing. They tried to find buyers for all or parts of the bank. They came close with Mitsubishi, with Barclays, but in the end, there wasn’t a game plan to see how we could break up this bank and avoid a bankruptcy.
Living wills are supposed to help that. A living will exercise is reduced for this class of banks. That’s problematic, because this class of banks would have included Countrywide. Countrywide is now a division of Bank of America. It actually is even a larger class of banks than IndyMac, which was the biggest hit on the Deposit and Insurance Fund. That was only about a $30 billion bank.
Collectively, these are two dozen banks. So you’ve got 25 or the 38 largest banks took about $50 billion in TARP money. They’re not the Boy Scout banks either. We’re talking about all the misconduct at JP Morgan. About half of them have misconduct charges against them just in the last half decade. That’s the most troubling provision.
It also turns back the Volcker Rule. That’s the restriction on gambling within the bank, a general restriction. The regulators are expected to reduce those rules in a proposal due out tomorrow, on May 30th, I think. This new bill says that if you’ve only got $10 billion in assets, you’re free to gamble. We won’t restrict that other than it has to be about 5% of assets.
Again, I worked in the Senate Banking Committee during the savings and loan crisis where what seemed to be small tweaks in savings and loan law, essentially allowing developers to run banks, run savings and loans and loan to themselves, regardless of the promise of the particular project, leading to the inflation of real estate prices and so forth. So in other words, while the smaller banks (less than $10 billion) may not be gambling now, this could usher in a new class of banks. They’ll just say, “Hey, let’s use that deposit insurance money and gamble and start ourselves a $500 million hedge fund.” And since capital is only 5% of a bank’s net worth, a good year can be profitable and a bad year can lead to the failure of the bank.
There are also a dozen or more consumer protection rollbacks. Redlining, which is where banks drew a line around a neighborhood, such as a neighborhood of color and basically said, “Make no loans there”. The Home Mortgage Disclosure Act provided information to see if banks are making loans generally in their market area, including within those red lines.
We learned from the financial crash in 2008 that banks had a different kind of redlining. They were going into some neighborhoods and making predatory loans, high-cost loans even to people who could afford a prime loan. The new HMDA, Home Mortgage Disclosure Data, is supposed to ferret that out. This bill eliminates that new data for pretty much 85% of banks. And there are other anti-consumer provisions in this.
The question is: Will this make America greater again? It’s not clear. We think it’s certainly a step in the wrong direction. I also think that the promise of the bill’s authors, that it’s going to facilitate economic growth, is going to be hard to defend. The banks already have robust loan portfolios and are making record or near record profits. And that’s at all sectors, not just the big banks, but the little banks, too. So this bill was an answer in search of a problem, and again, we think raises the question of whether it will make America greater again.
Click the play button below to listen to Chris’ interview with Bartlett Naylor (55m:53s).