Bank Reform Fades Away … With a Thud

There it is. Sitting on my computer desktop, pristine and unopened. The vast 650 odd page Levin report on Wall Street and The Financial Crisis. OK I had to open it to see how many pages it was, but that’s it. At this point we can all throw our hands up in despair and move on with our lives. The big banks, notwithstanding their protestations to the contrary, soundly defeated any chance of thorough reform. They are bigger than ever. They are meaner than ever. And they are just as incompetent as ever. I add this last comment because thus far there has been no evidence that all those rotten risk managers who brought us to our knees have been fired. The same is true for the traders who gorged themselves on toxic paper. The same is true for the executives who paid themselves handsome bonuses whilst overseeing the disaster. Unfortunately the same is true of the economists who dreamt up the horrible fiction that undergirds the structure of modern day finance.

Oh well.

It takes, at least for me, a heroic effort not to gag over the anemic response throughout the world to the enormous and outrageous destruction that the banks managed to get away with.

The have been no significant legal proceedings. The old guard is still safely ensconced applauding itself. The regulators still act as if they in the thrall of the bankers whose lives they should be making as miserable as the bankers made ours. And politicians hope desperately that no one notices how they caved into the lobbying and associated flood of money the banks deployed in order to maintain their ability to hold us all to ransom.

Which they continue to do.

Why is this so hard to understand?

Banks as big as Citi or JP Morgan are simply too big for our economy. They are even bigger, relatively and absolutely, than before. We are thus even more devoted to propping them up. Instead of breaking them up, punishing the mangers and shareholders, and restructuring our banking system to make it less expensive to subsidize, we went in the other direction. We made future bail outs more expensive and provided an even greater amount of subsidy. Were it not for the recent efforts of the Sheila Bair and others to”ring-fence” higher risk activities nothing of lasting value would have come from the crisis.

Yes, the banks now have more capital. So what? They remain huge, complex, largely opaque monstrosities with so convoluted organizational and tax structures that half of their own upper management hasn’t a clue what goes on. They move money around the globe, into and out of each other’s balance sheets to such a degree that untangling one, were it to fail, would bring the entire lot down. It is the ultimate blackmail gambit: I am just too important for you to let me go down because I would take you with me. So get out of my face and let me play. Oh. And don’t call me rude names. That upsets me.

If you add in the Vickers report in the UK, the total amount of pages devoted to making clear the farcical ineptitude of our expensive bankers runs to almost a thousand pages. It is sad that all that investigative effort is for nought. At least so far. I suppose the problem is that the reform effort took place before the full expose was available to embarrass the bankers. After all what is the point to publishing a huge report two full years after the crisis and during a period when our attention is focused on the debt and deficits left in the banker’s wake?

And for all you who think I am just being sour: remember that bank crises are regular features of our economy. There will be another one soon. Banking is inherently unstable and bankers are hopeless at being sensible, careful, thoughtful, or fiscally responsible. They like to gamble. Taking risk is part of banking. Gambling need not be. There is a difference, fine though that difference might be. So as we speak our brave bankers are busy creating the next crisis. Who knows exactly what it will affect?

This knowledge should have led to a more drastic reform, and to a more speedy publication of the facts surrounding the last crisis. It should have led to a decisive movement to stop the banks blackmailing us. It should have led to deeper investigations into the conflict of interest that lies at the very heart of the system. It should have led to serious efforts to bring executives to account, publicly, for their evident failures. It should have jolted shareholders out of the soporific indifference the way in which management squandered vast sums of capital.

Then again maybe not.

Given the way in which modern capitalism works none of this should be surprising.

Shareholders do not own the companies anymore They simply own, and trade stock. That’s a huge and material difference. Modern stockholders have no long term commitment to the businesses underlying the stock. They have abdicated responsibility. This severance of ownership from management allows managers to take enormous risks. Indeed it encourages them to take such risks since the shareholders are not driven by long term, but by short term profits and the resultant stock price movements. So pumping up revenues this year, or even this quarter, at the expense of next year’s or next quarter’s is the game managers have embraced and play so well. In banking this is a recipe for disaster, as it is everywhere, but more so in banking. It places the emphasis on the more volatile aspects of finance, and detracts from those aspects where a long term view, and steady credit evaluation play a key role. The economy suffers as money is syphoned off into gambling and away from long term investment because bankers can make more profit playing in the casino world of trading than in the more humdrum world of lending.

Very few of our top bankers ever set foot inside a bank branch. And most only have contact with small business when their assistants order flowers to decorate their second/third/fourth homes.

This is the lamentable state of our banking system.

Something we failed to fix. Something we will all come to regret soon.

But we sure wrote big reports. Like the Levin report sitting on my computer desktop. Going nowhere.