TRULY PATHETIC

In this NY Times' article, "Trying to Rein In ‘Too Big to Fail’ Institutions," K. Tarullo, an appointee of President Obama’s, is quoted saying that breaking up big the banks is “more a provocative idea than a proposal.” Why would he say this? Because any talk of doing anything that might upset market players "has provoked fears on Wall Street."

Simply put, Wall Street is afraid of how reforms would both regulate them and strip away bankruptcy protections now available to the "too big to fail" institutions.


Imagine that. Wall Street collapses the American economy ... then they tap into a taxpayer funded bailout to the tune of $23.7 trillion ... and policymakers are afraid of upsetting them by taking away their market guarantees?

Does this make sense to anyone? While it does here, apparently it doesn't in Europe.

The Europeans are moving to deal with their market meltdown - which was intricately woven into ours - by mandating and provoking changes like splitting ING, the Dutch insurance and banking firm, into two companies. One firm would focus on banking, the other would focus on insurance. The rationale is simple: Having two big like-minded firms under one roof can create a group-think environment that is both incestuous and uncompetitive.

The incredible thing is that we learned this lesson after 1929, when we saw how large financial firms had taken depositor, investor, and insurance funds and dumped them into markets with little or no concern for their clients. Disregard for client interests was encouraged by the immediate and reckless drive for more fees, commissions, market share, and profits. This is what brought us the Glass-Steagall Act in 1933.


In a few words, Glass-Steagall was the cornerstone of a larger regulatory wall that kept insurance, banking, and investment houses separated and regulated. What followed after WWII was the largest growth and wealth creation spurt in human history. This regulatory regime started to unravel in the 1970s, and was dragged down when Ronald Reagan became president. It was dismantled completely in 1999 by President Clinton (notice, no smiles in the FDR photo).


Mervyn King, governor of the Bank of England, argues that we need to bring these Depression-era common sense policies back to America. In a speech last week he said:

There are those who claim that such proposals [like Glass-Steagall] are impractical. It is hard to see why ... What does seem impractical, however, are the current arrangements. Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.

What we have today is an Alice in Wonderland approach to markets that includes massive market guarantees, record bonuses to the executives of collapsed institutions, strangled credit for small business, government-sanctioned credit card rip-offs, the continued arrogance of Wall Street, and Wall Street fears that they will not have bankruptcy protections.

This is truly pathetic.

- Mark