The Missed Opportunity to Reform Reckless Banking

“Excessive regulation in the banking reform bill will destroy a substantial part of our bond-distributing machinery. Can anyone expect that a step of this kind will improve the quality of our long-term investments?”

-President of the American Bankers Association


In case you missed it, Joe Nocera had an outstanding column in Saturday’s NYT. It began with that quote above, circa January 1933. Yes, the banking industry has been railing about regulation for nearly a century. What they really want is to have it both ways — as little regulation as possible, but Taxpayer Bailouts there when they periodically blow themselves up.

But the heart of Nocera’s column discusses how unique the Glass Steagall act was, changing the banking environment form one of speculation (and massive depositor losses) to a boring, modestly profitable, cornerstone of the national economy.

What made it possible was the focused public ire on bankers, mostly due to the Pecora Commisssion.

“There was surprisingly little controversy over what we now think of as [Glass Steagall] law’s primary achievement: splitting commercial and investment banking. The fights were all over issues that seem inconsequential by today’s lights. It’s as if the notion of breaking the banking business into two was always a foregone conclusion.

And, for the most part, it was. Partly, this was because, unlike today, bank failures in the 1930s were often ruinous to customers. So reform was more pressing. But it was also because, for the entire time the legislation was under consideration, the Pecora hearings were going on — in which Ferdinand Pecora, the flamboyant chief counsel of the Senate Banking Committee, dragged one well-known banker after another before the committee and grilled them mercilessly, exposing how they had abused their investment banking roles, sometimes to the point of criminality. The Pecora hearings serve as a steady drumbeat in the American Banker articles.

Those hearings infuriated the country, and made it unthinkable that banks would continue to be allowed to sell securities. In fact, some banks, seeing which way the wind was blowing, applauded: “The spirit of speculation should be eradicated from the management of commercial banks,” declared Winthrop Aldrich, the chairman of Chase National Bank, according to Michael Perino, Pecora’s biographer. Ironically, Glass loathed the Pecora hearings, deriding them as “a circus, and the only thing lacking now are peanuts and colored lemonade.” But the hearings made his bill — which had been filibustered by Huey Long just 18 months earlier — not just possible but inevitable.”

Fascinating stuff.

But it points out an enormous series of errors from newly elected President Obama — from appointing the status quo duo (Geithner and Summers) to letting the guilty parties off the hook. He should have been hammering away at the miscreants who caused the crisis, instead of continuing George W. Bush’s socialist bailouts of the banks.

Just a few results of his team’s inability to confront the causal forces?

1. A generational opportunity to restore accountability and prudence to banking

2. The trashing of zombie bad ideas that refuse to die

3. The misdirected fury of the Tea Party.

The missed opportunity to restore Glass Steagall, repeal the CFMA, and create a more honest framework for Wall Street and Banking will always be for me, the greatest tragedy of the Obama administration.


The Banking Miracle
NYT, June 17, 2011

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