“Excessive regulation in the banking reform bill will destroy a substantial part of our bond-distributing machinery. Can anyone expect that a step of this kind will improve the quality of our long-term investments?”

-President of the American Bankers Association


In case you missed it, Joe Nocera had an outstanding column in Saturday’s NYT. It began with that quote above, circa January 1933. Yes, the banking industry has been railing about regulation for nearly a century. What they really want is to have it both ways — as little regulation as possible, but Taxpayer Bailouts there when they periodically blow themselves up.

But the heart of Nocera’s column discusses how unique the Glass Steagall act was, changing the banking environment form one of speculation (and massive depositor losses) to a boring, modestly profitable, cornerstone of the national economy.

What made it possible was the focused public ire on bankers, mostly due to the Pecora Commisssion.

“There was surprisingly little controversy over what we now think of as [Glass Steagall] law’s primary achievement: splitting commercial and investment banking. The fights were all over issues that seem inconsequential by today’s lights. It’s as if the notion of breaking the banking business into two was always a foregone conclusion.

And, for the most part, it was. Partly, this was because, unlike today, bank failures in the 1930s were often ruinous to customers. So reform was more pressing. But it was also because, for the entire time the legislation was under consideration, the Pecora hearings were going on — in which Ferdinand Pecora, the flamboyant chief counsel of the Senate Banking Committee, dragged one well-known banker after another before the committee and grilled them mercilessly, exposing how they had abused their investment banking roles, sometimes to the point of criminality. The Pecora hearings serve as a steady drumbeat in the American Banker articles.

Those hearings infuriated the country, and made it unthinkable that banks would continue to be allowed to sell securities. In fact, some banks, seeing which way the wind was blowing, applauded: “The spirit of speculation should be eradicated from the management of commercial banks,” declared Winthrop Aldrich, the chairman of Chase National Bank, according to Michael Perino, Pecora’s biographer. Ironically, Glass loathed the Pecora hearings, deriding them as “a circus, and the only thing lacking now are peanuts and colored lemonade.” But the hearings made his bill — which had been filibustered by Huey Long just 18 months earlier — not just possible but inevitable.”

Fascinating stuff.

But it points out an enormous series of errors from newly elected President Obama — from appointing the status quo duo (Geithner and Summers) to letting the guilty parties off the hook. He should have been hammering away at the miscreants who caused the crisis, instead of continuing George W. Bush’s socialist bailouts of the banks.

Just a few results of his team’s inability to confront the causal forces?

1. A generational opportunity to restore accountability and prudence to banking

2. The trashing of zombie bad ideas that refuse to die

3. The misdirected fury of the Tea Party.

The missed opportunity to restore Glass Steagall, repeal the CFMA, and create a more honest framework for Wall Street and Banking will always be for me, the greatest tragedy of the Obama administration.


The Banking Miracle
NYT, June 17, 2011

Category: Bailouts, Corporate Management, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “The Missed Opportunity to Reform Reckless Banking”

  1. JohnT says:

    Nocera’s column had one confused comment on the role of Huey Long in regard to the Glass-Steagall Act. It is true as Nocera says that Long initially filibustered against the bill. But Nocera should have gone on to say why.

    I checked in T. Harry White’s biography of Huey Long.

    Long’s filibuster was to force the Congress to strengthen the then-Act.
    Long forced the Congress to forbid branch banking by national banks (it
    wasn’t in the original bill, apparently).

    Second, Huey Long forced the insurance of deposits to be included in the
    bill. It isn’t clear to me if deposit insurance was also part of the
    filibuster, or if Long campaigned for it some time after.

    Anyhow, according to White, Long was responsible for the two features Nocera admires.

  2. Jim67545 says:

    I “love” these “experts” who opine on TV and elsewhere that “The reason businesses are not hiring is ________ (fill in the topic one is trying to condemn.)” So we hear “The reason businesses are not hiring is because of uncertainty over government regulation in the financial sector.” Really?? Or, “The reason businesses are not hiring is because of fear of increased taxes.” True?? Or, “… global warming” or “Democratic legislation.” Fill in the blanks.

    Surveys of businesses indicate that the number one reason, by a wide margin, is weak/soft sales. The unsubstantiated tossing out of a link between everyone’s concern = unemployment, and anything one wishes, is driving me nuts. AAARRGGH.

  3. Barry,

    Call me naive.

    Surely the bankers understand that deregulation turned out to be a disaster.

    In your opinion, do you think bankers:
    a) Believe they will get things right next time?
    b) Only care about their individual profits and are willing to destroy the world to earn them?
    c) Honestly do not understand the problem?

    And what about the politicians? Are they ignorant, just plain stupid, or blindly follow an ideology?


  4. MW

    There’s profits to be made, consequences be damned. At least that is what some seem to believe, and it forces their peer group (with a few exceptions) to follow

  5. Lariat1 says:

    I was driving by a small town post office last week and there was a stand set up with huge “Bring back Glass -Steagall” signs. I had to pull in and see what this was about. Apparently there is legislation creeping about in Congress, H.R. 1489 ” Return to Prudent Banking Act of 2011″. This is trying to repeal certain provisions of the Gramm- Leach- Bliley Act and revive the separation between commercial banking and the securities business. So there is all kinds of paperwork and lists of congressmen and their phone numbers. Guess who was sponsoring this info? The LaRouche political action committee. So that’s all that is out explaining to the public what Glass-Steagall is about?

  6. jnutley says:

    “A generational opportunity to restore accountability and prudence to banking”

    Will it really take a generation for banking to end up in the gutter again?

  7. postman says:

    Even those not generally disposed to regulation should appreciate that if TBTF is operative then banks need to be reined in somehow. Unconditional bailouts are not acceptable.

    Excellent comment on “socialist Bush.” On this issue there’s unfortunately no major difference between the two administrations.

    While I understand your focus on bankng, for me the tragedy of the Obama administration is not giving even moral support to the million+ Iranians in the street in 2009, and the continued naievete about and coddling of Syria and Iran (while getting tough on easier and less relevant targets like Libya).

  8. m.jed says:

    Barry – you need to get off this notion that Glass-Steagall, at least in the sense it’s used, would have mattered for the 2007-present crisis. The comment from the Nocera piece that most clearly laid this out by Martin Lowry:

    “Sorry, friends, the repeal of parts of Glass-Steagall in 1999 did not have a material role in creating the boom that led to the inevitable bust that became the Great Recession. Nor did it have a material role in the difficulties that commercial banks and investment banks experienced.

    Bear Stearns, Lehman Brothers, Morgan Stanley, Merrill Lynch and Goldman Sachs were not fettered by Glass-Steagall. They were investment banks without deposit-taking powers. Washington Mutual and Indy Mac were depository lenders that sold their loans to investment banks and had no underwriting capabilities of their own. Countrywide was basically a mortgage banker with little deposit-taking capability and no underwriting capability that sold its loans to The Street. Fannie and Freddie were neither depository banks nor investment banks. All of the foregoing were major players in the subprime mortgage business. Citi, JP Morgan Chase, B of A (until it acquired Countrywide after the balloon went up), and the other large commercial banks were not significantly damaged by their underwriting operations.

    What damaged the big depository banks most was that some of them bought the triple-A tranches that later imploded. They could have done that under Glass-Steagall as originally written, which permitted banks to buy and own investment grade bonds.

    Even the derivatives trading that may have been an important factor was permitted under Glass-Steagall. Note, for example, the extensive derivatives business of Bankers Trust Company, a depository bank, in the 1980s. Even the observation that repeal of Glass-Steagall authorized greed misses the mark. Greed was in beginning about in 1982, and the investment banks, formerly fairly small partnerships for the most part, began bulking up to take advantage of that climate of greed beginning in about 1985. Regardless of whether one would like to restrain risk-taking by banks, it simply is not true that repeal of Glass-Steagall was a significant factor in creating the Great Recession.

    (I do know something about this subject, having co-chaired the first educational programs on Glass-Steagall for the Practicing Law Institute in the early 1980s. My 2009 book, Debt Spiral, discusses the Glass-Steagall issues in greater detail.)”


    BR: As I wrote in Bailout Nation, the repeal of Glass Steagall did not cause the crisis, but it did make the final damages much worse. The repeal of Glass Steagall allowed banks to get into businesses they would not have otherwise been allowed to. When the music stopped, Citi, BofA, and others who has MBS Securitizing arms got caught with tens of billions in bad paper.

    No Glass Steagall repeal, and that could not have happened.

  9. Petey Wheatstraw says:

    “Partly, this was because, unlike today, bank failures in the 1930s were often ruinous to customers.”

    Today, they’re ruinous to the national balance sheet, the currency, and ultimately, down the road, the taxpayer. In the same way that employer withholding and self-withholding of taxes have a different psychological effect on a taxpayer, the backdoor cost to the average American paying for the bank bail-outs is apparently much more acceptable than having the same money squandered from your personal bank account.

    Mark Wolfinger Says:

    “Surely the bankers understand that deregulation turned out to be a disaster.”

    I don’t think it was a disaster for them. They’re still profiting from their position(s) in the TBTF scheme, despite their culpability in wrecking the broader economy.

  10. bulfinch says:

    @JohnT — very educational. Thanks for setting the record straight.

    @BR — your response to the 1 star review of Bailout Nation on Amazon was a joy to read for both its thoroughness and restraint. I know that can’t have been easy, since the guy was actually kind of a dick.

  11. Dow says:

    Couple of comments – it’s a shame the Banking Miracle was buried in the Saturday paper – the least read issue of the week. Which is a fascinating tell of what the NYT thinks of Mr. Nocera’s opinion.

    I also find it fascinating that everyone else gets austerity – but not the bankers.

  12. wunsacon says:

    >> instead of continuing George W. Bush’s socialist bailouts of the banks.

    Oh, please don’t call refer to plutocratic bailouts as “socialist”.

    Roughly, the top 1% own 50% of financial assets. That implies that 50 cents of every bailout dollar went to the top 1%.

  13. VennData says:

    How dare you refer to George W. Bush as a socialist. He will one day be recognized as the great President he was, and will be mocking you and you liars from my frozen little corner of Hades.

  14. 873450 says:

    In early 2009 Obama summoned bailed out bank CEO’s to the White House, telling them he was the only thing standing between them and pitchforks. The chastened bankers pledged support for impending reform legislation and promised full cooperation from their now socialist industry helping restore the economy they destroyed.

    By year’s end the rescued bankers realized Obama’s talk was just talk and TBTF actually means TBTF without accountability. Blankfein and Mack attended Obama’s next meeting via teleconference when predicted inclement weather interfered with their plans to jet 225 miles from NYC to Washington DC. Obama complained about their banks lobbying heavily against his conciliatory legislative proposals and implored them to step up lending money taxpayers loaned them.

    At this point it appears Jamie Dimon, while very publicly criticizing almost all proposed financial regulations, is the only bank CEO returning Obama’s phone calls.

    But it sure did sound good hearing Obama call Wall Street bankers “fat cats” and I can’t wait for him to say it again at least once or twice when he is running for re-election. They will probably shower him with campaign contributions only because they are so very afraid of him.

  15. OK Avenger says:

    I’m wondering if we didn’t let things get bad enough before enacting the Bush/Obama response to the crisis. In the Great Depression, people experienced the results of adhering to neo-classical policy with regard to government intervention in the economy. FDR didn’t take office until 3.5 years after the Great Crash. That was a lot of time to try conventional wisdom and see it fail.

    After the 2008 crisis, we moved quickly to intervene and its hard for many to imagine how bad it could have been. For some, they don’t think the intervention made their lives any better because they were shielded from the worst of what could have happened.

  16. ToNYC says:

    Banking Regulation is an oxymoron.

  17. [...] The current administration missed a great opportunity to reform the banking system.  (Big Picture) [...]

  18. CG197 says:

    It’s almost as if the poor responses to the 1929-33 crisis of Hoover’s administration (tightening monetary policy in the face of deflation to maintain the gold standard + premature fiscal tightening) were so disastrous that there was enough widespread damage to force the proper reforms to be made.

    The better responses* to the crisis of 2008 (extreme loosening of monetary policy + expansionary fiscal policy/TARP + safety nets for banks) contained the damage this time around, thus lessening the systemic/political pressure to make the proper reforms.

    (* Yes there is a lot to crap on regarding the administrations responses to the financial crisis today, but the point is that the 10-12% unemployment we’re seeing today is nothing compared to 25-30% levels it was allowed to get to back then. Pain was much more widespread in the wake of the 1929 crisis than the 2008 one.)

  19. Jeff L says:

    I’m not 100% convinced the opportunity has totally passed us…I think it is possible that the Arab Spring, the Greek problem and so on could make its to these shores and bankers literally could die as people suddenly choose to kill them instead of killing their own families and selves. Unless there is a sudden large and noticeable increase in the number of perp walks, I still don’t see how this ends very pretty, regulations or not.

  20. AHodge says:

    reMW and Barry
    yes the answer is b, kind of
    but while bankers might back off of total collapse they do not need to
    bankers expectation is that the combination of extreme risky adrenaline shots of QE and deficits
    and the buy side eventually holding their nose and buying securitizations again
    will ride us a another big huge fake profits bubble
    they are certainly risking another later collapse

  21. Lord says:

    Rarely are problems solved during a first crisis. Instead, knowledge disperses, ideas proliferate, and gestate until a subsequent crisis allows their adoption.