The Regulatory Charade, By Eliot Spitzer

[girl gone mad]

The Regulatory Charade
Washington had the power to regulate misbehaving banks. It just refused to use it.
By Eliot Spitzer
http://www.slate.com/id/2215055/pagenum/all">Slate

Does it strike you as odd that the American government has invested $115 billion in TARP money alone in Citibank, JPMorgan Chase, and Bank of America, fully 70 percent of their market cap ($164.5 billion, as of March 30), yet we have virtually no say in the management or behavior of these banks? Does it seem even odder that these banks are getting along extremely well with the government regulators who should be picking them apart for having destroyed the economy and financial system?

There is a grand, implicit bargain being struck in our multitrillion-dollar bailout of the financial-services sector. Those in power in D.C. and New York are pretending the bargain is: You give us trillions, and in return, we fix this industry so the economy recovers and this never happens again. In fact, the bargain is much more alarming: Trillions of dollars of taxpayer money will be invested to rescue the banks, without the new owners—taxpayers—being allowed to make any of the necessary changes in structure, senior management, or corporate behavior. In return, the still-private banks will help the D.C. regulators perpetuate the myth that regulators didn't have enough power to prevent the meltdown. In sum, banks get bailed out with virtually no obligations imposed; regulators get more power and a pass on their past failures. The symbiosis of the past decade continues.

We already see regulators, supported by investment and commercial banks, calling for expanded power—specifically the ability to reach hedge funds and other "private equity" with more oversight and to seize institutions that pose systemic risk with greater alacrity.

Each is a worthy regulatory idea. But each is essentially irrelevant to the problems that got us where we are. The new line from Washington and Wall Street is that hamstrung regulators lacked the power to stop malfeasance before the crisis. This is wrong. Washington had enormous power over the misbehaving investment banks, commercial banks, and ratings agencies. It just refused to use that power.

Financial-services companies have been given multiple blank checks, worth hundreds of billions, yet there have been virtually no mandated changes in management, behavior, or lending practices. Nor have bondholders in that sector been required to take a haircut, as they have been elsewhere. GM was required to replace its CEO, Rick Wagoner, and auto company stockholders, bondholders, and unions have all been required to take substantial haircuts.

In return for the free money, the financial-service companies only have to play along with the face-saving myth: The regulators at the Fed, the FDIC, the OCC, Treasury, OTS, etc. would have done better if only they had had more power over "rogue" free-floating funds of capital—hedge funds and private-equity funds. Hence the call for broader authority.

http://www.slate.com/id/2215055/pagenum/all">More...

[aquart]

1. Go Eliot!

[democrank]

2. Thank you, Eliot Spitzer.

So refreshing to read a principled position on these obscene bailouts. It would be inspiriting to learn that Congress was as motivated to solve problems of ordinary people.

[acmavm]

3. I'd K&R this thread all day if I could.

[notesdev]

4. Damn you Eliot

Why the fuck couldn't you have been focused on this when you were Governor rather than risking it all dallying with some dumb prostitute? You see the problem, you know that it's a hell of a lot more important than your dick.

[MADem]

5. Because he was stupid, stupid, STUPID....and he thought, arrogantly, that he was above the law

You don't run around griping about where others put their dicks, and then do the same shit yourself. The guy was on the fast track to high national office, and now, despite his intellect and his many public leadership talents, he'll always be "That do-as-I=say/not-as-I-do disgraced former governor who couldn't keep his willie in his trousers.

I don't think the dumb one was that prostitute, though. She charged plenty, and Mister Anti-Corruption was dumb enough to pay it. AND "Mann Act" to get the goods, too. He was the idiot in this equation...

[BR_Parkway]

8. Well, Newt is making his comeback, maybe Elliot decided he'd look

pretty clean next to that sack of shit

[MADem]

9. Newt's trying....but everytime he goes anywhere with Calista, people snicker behind their hands.

Still.

After all, she was doing to him what Monica did to the Presidential Staff...and much, much, MUCH more.

In the SPEEEEKAH's CHAM-BAHs, too!! Heaven knows how much Lemon Pledge they needed to fix the Speeeee-kah's conference room table!

The only reason all that shit didn't come out (with juicy testimony by members of the Speee-kah's staff, who walked in on them on more than one occasion--and who liked Newt's second wife) is because Calista "stipulated to sexual contact" on the stand, during the divorce trial of Newt from Missus Numbah Two!!

[elleng]

6. Notwithstanding his foolish behavior, he may be just where we need him now.

"These fully empowered regulators fell into bubble-inducing behavior. They were susceptible to the same groupthink that accepted a faulty premise or theory of the moment, or they simply placed too much faith in the magic of the market. Bubbles and market irrationality happen—even with empowered regulators. Of course, aggressive regulators could have ensured that the bubble didn't last as long or get as dangerous as the last one did.

If regulators already had enough power, the simplistic belief that a smart new law will stop the problem next time is clearly false. Giving the regulators all the powers they now seek would not have changed their behavior. We would still be precisely where we are. We shouldn't forget that Sarbanes-Oxley was supposed to cleanse the markets. More laws will not do it.

Instead of creating new regulations and laws that don't really address the root causes of the crisis, we should look to a simpler but more fundamental way to limit systemic financial risk and simultaneously create a healthier financial marketplace: If it is too big to fail, break it up. We should not let any private institution become so big and central to the financial system that taxpayers become its guarantor. The problem is that this model doesn't fit into the secret grand bargain. On the contrary, the entire premise of the grand bargain is that the companies that were already too big to fail have been allowed to get even bigger. Socializing risk while privatizing gain—which is what having more and bigger "too big to fail" institutions guarantees for the future—doesn't work in the long run. Too big to fail, quite simply, is too big."

[OneBlueSky]

7. giving trillions of newly printed bills to the very people who caused the crisis . . .

in some kind of vain hope that they will be the ones to solve it is insanity . . . all that will do is postpone the day of reckoning . . . the money will keep these institutions afloat for now, but it will eventually run out and we will be right back where we started -- except with several trillion dollars more debt and more newly printed money than we can count . . . (wonder where that will lead) . . .

Obama badly needs to meet with some contrary economists to check his assumptions about the economy and the financial system (capitalism is good, free trade is good, regulation is bad, the status quo must be protected, etc.) . . . until that happens, we won't see much real progress anywhere . . .

Obama can work to solve the problems or he can work to preserve the status quo ("the system") . . . he can't do both . . .

[kaygore]

10. We need to replace Geitner with Spitzer

[Elidor]

11. ...

"Most of these are genuinely good people, and everybody who has been in a regulatory position has made errors. The issue is not placing blame."

WRONG.