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October 8, 2014
THE YELLOW BRICK ROAD OF REGULATORY CAPTURE
Arshad M Khan
The founder of the eponymous bank, J P Morgan believed no corporate head should
earn more than twenty times the lowest paid employees. JP died in 1913, and his
successors a century later would laugh at the naivete of this ruthless banker -- they
earn hundreds, if not thousands of times their lowest wage earners.
In that century, we had the roaring twenties when inequality also reached levels
shameful to a democratic society. We had the crash, then Roosevelt, the new deal,
the war, the GI bill, fairer taxes, and growth of the middle class. Mideast wars led to
the petro-shock, stagflation and the excuse for a new taxation regime of cuts for the
wealthy. We were also dosed with deregulation letting loose rampant speculation, first
at Savings and Loans followed by their demise in the 1980s, and, after the repeal of
Glass-Steagall by the Clinton administration, at the banks and financial institutions in
2008. Inequality is again a disgrace. It is also -- if we examine the course of history --
The above comes to mind because this administration could have been Rooseveltian;
instead, it chose to play to the elites (much to the bankers' surprise initially if
anecdotal evidence is to be believed). A major instrument of this policy has been
Attorney General Eric Holder, who resigned recently. Part of his legacy: Not a single
indictment of any major player in the colossal 2008 banking disaster. The knowingly
erroneous mortgage applications, the slicing, dicing and fraudulent rebranding as
triple-A-mortgage debt, the push and demand by the majors for more and more
mortgages; none of it was worth investigation. Yes, the banks were fined record
amounts in some cases but no person was held to account. It was as if the banks
were sentient beings, not a legal instrument of human concoction and action: Banks
don't act, humans do; banks don't make decisions, the humans within them do; and
banks don't commit fraud, the humans running them do.
These facts did not escape a smart man like Eric Holder (or the President). But few
bite the hand that feeds them, and few want to take on the mighty. Fewer still walk off
the yellow brick road marching them to the golden land of Oz.
But Mr. Holder is far from alone. A recent (September 26th) edition of the radio
program, This American Life had stunning revelations on how the New York Fed
Examiners supervising the big banks operate -- very deferentially it turns out.
Carmen Segarra a New York Fed Examiner began to secretly record her meetings
when she became frustrated with the manner in which the examiners supervised the
big players -- the sample broadcast illustrated a shady deal by Goldman-Sachs
skirting the limits of the law. It involved Goldman holding a Spanish bank's (Banco
Santander) loans so as not to trigger a demand on the bank for more capital by the
Spanish regulators. The service which clearly defeated the purpose of bank
regulation (in Spain) netted Goldman a handsome fee. It was described as holding
someone's briefcase for a while.
Not only was there no question of the deal not going through, but the deference of the
examiners and the arrogance of the bankers was palpable. It is also quite likely that a
small bank would have been warned off by the power of Fed Examiners. Not so
Goldman-Sachs, who ran roughshod over them after just a wimpy one-sentence
comment (reference, advice, certainly not objection) by the lead examiner at the
meeting called to discuss the deal. Banco Santander was clearly more worried about
the nature of the deal and wanted prior Fed approval. For Goldman this meant
merely a terse email on a Friday afternoon informing the examiners the deal had been
concluded. Is this what regulatory capture is about? Meanwhile, the most
sympathetic (to Goldman) of the examiners in the tape left to work for ...
Goldman-Sachs! The yellow brick road calls again.
There is also a segment where Ms. Segarra is evaluated by her supervisor. Judged
highly competent professionally, she is, nevertheless, informed (somewhat awkwardly)
by him that there have been complaints ... that she needs to show "more humility" ...
that she has a tendency to "break eggs" ... that if she wants to be successful, she will
have to be more of a "team player". Who is exerting the pressure? We are not told.
Are the higher-ups at the New York Fed too chummy with the management at the
too-big-to-fail banks. We can only assess the evidence and come to our own
If the President of the country can say, yes we had a financial disaster but no law was
broken, then logically the law must be changed to avert a future crisis. Surely the
public purse cannot keep picking up the tab for bankers' losses each time their legally
permitted recklessness lands them in virtual bankruptcy, while they continue to reap
profits in the good years. The gambling by commercial banks threatens the economy
as a whole, and it has to stop. The obvious way to do it is Glass-Steagall, but it would
certainly hit those multimillion dollar bonuses. Anyhow, who listens to the public these
days? Meanwhile, the to and fro of officials between the private and public sectors