Painful Irregularity

How do you feel about banks which have received TARP money joining with other banks to defeat legislation that would benefit individual taxpayer-consumers? That they are using our money to our detriment? How about using that same TARP money to pay lobbyists to push back against the move towards more stringent regulation of financial institutions? Troublesome? How about the fact that their efforts appear to be paying off?! Big time!

Banks let the administration get the headlines, as long as they are getting the dollars. For example, the banking industry successfully lobbied Congress to eliminate a provision in the bankruptcy act that would allow judges to reset the principal amount owed by defaulting homeowners. The June 5^th New York Times: “The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis… It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.”

Lawmakers who voted for the provision gave varying excuses from not wanting to interfere with the current banking process to fearing that mortgage rates might rise. The Times goes on: “In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did the banks defeat the [above] cramdown provision, but they walked away with billions in new bailout money… The housing bill Mr. Obama signed on May 20 saves banks and credit unions at least $13 billion in special fees that they would have had to pay to replenish dwindling deposit insurance funds.”

As we struggle with new regulations to prevent the chaotic patterns of greed, stupidity and excess that generated the current financial meltdown, as well look to regulating instruments like credit default swaps or structures like private equity and hedge funds, and as we take on the challenge of debt-rating agencies, it is indeed painful to watch taxpayer money being used to hold back the tide of financial transparency and responsibility, because the banks and other financial institutions want to continue to play in back rooms in the dark.

On June 9^th, the Department of the Treasury opened the door to letting 10 of the 19 largest U.S. banks begin the process of repaying their TARP money, which will ultimately remove several layers of regulation from those institutions – even as the signals of future economic declines (from consumer credit card defaults to parallel losses in commercial real estate loans) remain on the near-term horizon. Indeed, the stock market, skeptical of the “negotiated” results of the government’s “stress test” in the first place, greeted the Treasury announcement with a drop in the DOW.

Indeed, the initial flurry towards are “ground-up” rewriting of our financial regulatory schema seems to have subsided. Lobbyists from the financial industry pressed across the board, no doubt reminding elected officials as to who funds their campaigns. In the end, the mass of the American individual taxpayers are the big losers, even helping to finance a calculated lobbying effort against ourselves!

The Obama administration’s new plan is focusing very heavily on expanding the power of the Federal Reserve, since over-borrowing was at the heart of the financial meltdown, but this is hardly the ground-up change every thought would occur. The June 17^th Washington Post: “The plan calls for a council of regulators to consult with the Fed, including the Treasury secretary and the heads of the other financial regulatory agencies: The Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Housing Finance Agency and the agencies that regulate banks. A primary task of the council would be to recommend which large, globally interconnected firms are too big to fail and should be subject to more rigorous oversight. But the council will not have the authority to oppose decisions made by the central bank.” And the lobbying from hedge funds, credit default traders, private equity and the big financial institutions are fighting to minimize even these new rules.

Making matters even worse are the interagency regulatory turf wars that seem to contradict each other, like the battle that has emerged between Sheila Blair of the FDIC, and John Dugan, Treasury’s comptroller of the currency, both extremely involved in bank regulation and both holdovers from the Bush administration. According to the June 13^th New York Times, Dugan “blasted a[n FDIC] proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates,” while Blair “could barely hide her contempt. The large banks, she said, had wreaked havoc on the system, only to be bailed out by ‘hundreds of billions, if not trillions, in government assistance.’ She added, ‘Fairness is always an issue.’”

So our regulators are slowing the “fix” with their internecine disputes, and we are still looking at the same basic structures that failed in the past to fix our future. The June 9^th theDeal.com reviews the Wall Street Journal’s take on the situation and adds a spin of their own: “The Wall Street Journal [put] flesh on a story that's been emerging for the [past few weeks], and was pretty obvious before that: The White House is giving up on any real institutional restructuring in its regulatory reform proposals. Instead, sources within the administration say the effort will focus on convincing Congress to tighten up the rules, and eliminate the gaps.

“Well, this is discouraging, though not surprising. Institutional overlap, bureaucratic divergences, a rat's maze of offices and rules has long been symptomatic of the reality that we had a festering regulatory problem. Some basic restructuring of regulatory bureaucracies has long been seen as a precursor to more fundamental and more difficult issues. Now we seem to be skipping that restructuring because it's too difficult politically. From a pure budgetary standpoint, it's also crazy to have four bank regulators when the industry has converged enough to require one.

“And what is the logic of splitting derivatives regulation between the Securities and Exchange Commission and the Commodities Futures Trading Commission? Does anyone really believe outside Congress that complex issues underlying derivatives really have anything to do with pork bellies and corn futures?” So our elected leaders are prepared to throw their constituency under a financial bus to make sure that we minimize bureaucratic turf wars and don’t turn off potential campaign contributors? They’ll “tighten up” the existing regulations, but we shouldn’t expect the massive reform pledged by the administration and virtually every federally elected official? What’s wrong with this picture, and what are you going to do about it?

I’m Peter Dekom, and I am feeling the steam of anger building.