Robert Reich On Why The Finance Bill Won't Do Anything

Tyler Durden's picture

We have long claimed that any financial reform, determined by the Senator from Countrywide and the Rep from Fannie (thank you Cliff Asness), is worthless, and any debate over it is completely useless as it will achieve absolutely nothing. Sure, it fills blog pages and editorials but at the end of the day, the only thing that can save the financial system is, paradoxically, its destruction. There are just too many vested interests in the status quo, that absent a full blown implosion and subsequent reset of the system, it is all just smoke and mirrors. Luckily D-Day is approaching. We present an opinion by Robert Reich which validates our view that FinReg, and any debate thereof, is a joke.

Why The Financial Bill Won't Save Us, by Robert Reich, via Huffington Post, first appearing on the author's blog,

The most important thing to know about the 1,500-page financial reform bill passed by the Senate last week -- now on he way to being reconciled with the House bill -- is that it's regulatory. If does nothing to change the structure of Wall Street.

The bill omits two critical ideas for changing the structure of Wall Street's biggest banks so they won't cause more trouble in the future, and leaves a third idea in limbo. The White House doesn't support any of them.

First, although the Senate bill seeks to avoid the "too big to fail" problem by pushing failing banks into an "orderly" bankruptcy-type process, this regulatory approach isn't enough. The Senate roundly rejected an amendment that would have broken up the biggest banks by imposing caps on the deposits they could hold and their capital assets.

You do not have to be an algorithm-wielding Wall Street whiz-kid to understand that the best way to prevent a bank from becoming too big to fail is preventing it from becoming too big in the first place. The size of Wall Street's five giants already equals a large percentage of America's gross domestic product.

That makes them too big to fail almost by definition, because if one or two get into trouble -- as they did in 2008 -- their demise would shake the foundations of the financial system, even if there were an "orderly" way to liquidate them. Because traders and investors know they are too big to fail, these banks have a huge competitive advantage over smaller banks.

Another crucial provision left out of the Senate bill would be to change the structure of banking by resurrecting the Depression-era Glass-Steagall Act and force banks to separate commercial banking (the classic function of connecting lenders to borrowers) from investment banking.

Here, too, the bill takes a regulatory approach instead. It includes a provision barring banks from "proprietary trading," or making market bets with their own capital. Even if this regulation were tough enough (and the current Senate bill requires various delays and studies before it's applied), it would not erode the giant banks' monopoly over derivatives trading, adding to their power and inevitable "too big to fail" status.

Which brings us to the third structural idea, advanced by Senator Blanche Lincoln. She would force the banks to do their derivative trades in entities separate from their commercial banking.

This measure is still in the bill, but is on life-support after Paul Volcker, Tim Geithner, and Fed chair Ben Bernanke came out against it. Republicans hate it. The biggest banks detest it. Virtually every major Wall Street and business lobbyist has its guns trained on it. Almost no one in Washington believes it will survive the upcoming conference committee.

But it's critical. For years the big banks have relied on taxpayer-funded deposit insurance to backstop their lucrative derivative businesses. Obviously they want the subsidy to continue. Bernanke argues that "depository institutions use derivatives to help mitigate the risks of their normal banking activities." True, but irrelevant. Lincoln's measure would allow banks to continue to use derivatives. They just could not rely on their government-insured deposits for the capital.

Requiring banks to do derivative trading in separate entities would force them to raise extra capital. But if such trading is so useful, banks should foot the bill, not taxpayers. Bernanke and others say the measure would give foreign banks a competitive advantage. Even if he is right, since when is it up to taxpayers to guarantee profitability at America's largest banks relative to foreign ones?

The trading of derivatives is not so crucial to the US economy that taxpayers should subsidize the practice. If the past two years have taught us anything, the lesson is just the opposite. Derivatives can generate huge risks unless carefully regulated.

Wall Street's lobbyists have fought tooth and nail against these three ideas because all would change the structure of America's biggest banks. The lobbyists won on the first two, and the Street has signaled its willingness to accept the Dodd bill, without Lincoln's measure.

The interesting question is why the president, who says he wants to get "tough" on banks, has also turned his back on changing the structure of American banks -- opting for a regulatory approach instead.

It's almost exactly like health care reform. Ideas for changing the structure of the health-care industry -- a single payer, Medicare for all, even a so-called "public option" -- were all jettisoned by the White House in favor of a complex set of regulations that left the old system of private for-profit health insurers in place. The final health care act doesn't even remove the exemption of private insurers from the nation's antitrust laws.

Regulations don't work if the underlying structure of an industry -- be it banking or health care -- got us into trouble in the first place. Wall Street's big banks are just too big, and their ability to draw on commercial deposits for investment banking activities, including derivatives, will make them even bigger. It will also subject the economy to greater and greater risks in the future. No amount of regulation can cure that.

Similarly, the underlying system of private for-profit health insurance is a key driver of America's bloated and ineffective health care delivery. We can try to regulate it like mad, but no amount of regulation will cure this fundamental problem.

A regulatory rather than structural approach to deep-seated problems in complex industries like banking and health care is also vulnerable to the inevitable erosion that occurs when industry lobbyists insert themselves into the regulatory process. Tiny loopholes get larger. Delays get longer. Legislative words are warped and distorted to mean what industry wants them to mean.

Both Senate and House financial reform bills exempt "customized" derivatives from the exchanges, for example, but leave it to regulators to define what contracts will be excused. Yet many of the derivatives that caused the most trouble (read: Goldman Sachs and other banks' deals with AIG) might well be thought of as customized. Another potential problem: in assigning consumer protection to the Fed, the bill puts it under Fed chiefs who in the past displayed a patent disregard of such safeguards (read: Alan Greenspan).

Inevitably, top regulators move into the industry they're putatively trying to regulate, while top guns in the industry move temporarily into regulatory positions. This revolving door of regulation also serves over time to erode all serious attempt at overseeing an industry.

The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.

So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly.

A regulatory approach allows for more bargaining, not only in the legislative process but also, over time, in the rule-making process as legislation is put into effect. It's always possible to placate an industry with a carefully-chosen loophole or vague legislative language that will allow the industry to continue to go on much as before.

And that's precisely the problem.

h/t Ian

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suteibu's picture

Wow...Reich and Summers on the same day.  All we need is for Bobby Rubin and Hank Paulson to share their ultimate wisdom.  File this in the "Yeah, they lied to us all along but they're telling the truth now," folder.

Carl Spackler's picture

I'd like to see Robert Reich wrestle Tom Cruise in a cage match.  No holds barred.

Only thing is I'd have to use the zoom feature on my tv to watch those 2 midgets.

suteibu's picture

No shit.  I'll take the insane midget, you take the narcissistic one.

bigdumbnugly's picture

aren't they kind of interchangeable in that?

Clinteastwood's picture

Reich is just a partisan promoting the left-right divide and conquer strategy.  Reich:  your time has come...........and gone.

Hulk's picture

Reich is a douche, a homunculus actually,  but he is correct on this one..No way Obama takes on the street.

Problem Is's picture

"No way Obama takes on the street."

Obummer THE Wall Street Puppet
Lloyd and Jamie pull the strings and Obummer gives us the soft shoe on command...

PeterSchump's picture

Why would he or any of the Republicrats either.  No way they are going to stop the Gravy train.


oklaboy's picture

why are we wasting our time on RR?

whatsinaname's picture

yup. wasnt he a Clinton crony ?

same guy different hat.

Captain Obviousness's picture

Dr. Evil : Mini Me  ::  John Maynard Keynes : Robert Reich

Agent P's picture

I was going to go with "He represents the Lollipop Guild", but I think I like this better (small hands, smells like cabbage).

Either way, he's a fucking communist horse jockey!

Strider52's picture

Buy Gold, Bitchez...

justbuygold's picture

The reason that Finreg needs to be seriously toughened up is because if they don't it will all end badly.  People will revolt, people will riot and decend upon Washington and NY.  Its starting to happen in other countries and it will soon hit the U.S.

silvertrain's picture

EXACTLY..Thats what Ive been saying..They pass this piece of crap and then get right up on tv and say how this PROTECTS US and the problem has been TAKEN CARE OF..They better damn well hope it is. Its more pressure than I would want..

 But the man has NOT SIGNED IT INTO LAW yet..This is going to be must see tv over the next month..

Psquared's picture

Don't you think it is too late now? Tough new regulations, breaking apart banks and separating their banking and prop trading activities would take years to implement even if they started tomorrow. Too much damage has been done at this point.

tony bonn's picture

any reform which omits jail time for the perpetrators is also useless.....

chief perps include the bush crime syndicate members starting with daddy bush, soetoro, rubin, summers, clinton, geithner, greenspan, bernanke, soros, buffet, dimon, blankenfein, countrywide, washington mutual, lehman, rockefellers, and so many other well deserving criminals and crooks.

Cheeky Bastard's picture

Is that it; or do you have another set of talking points which were said app. 14 trillion quadrillion times in the past few years. Yeah, we all fucking get it; its not the 16th century and the information will not disappear or get lost if you dont recycle it 7000 times a second.

Duuude's picture

Underneath tha barrage of Bullshit tha public zones out.

As arranged.

dumpster's picture

Jim Sinclair’s Commentary

It is not what is reported here, but the use of EU credit default derivatives that brought about the dive in the euro.

With CDS pounding and the Libor rising the bear play on the euro is successful. This mechanism will turn on all Western world currencies within 12 months, one by one. , this will turn money towards Gold.

Euro’s fall deals new hit to risk appetite

Recovery3000's picture

I agree with you CB, mindless chatter is boring and is mindless (Soros and Bush in the same syndicate?) and breeds complacency and numbs an individual in conspiracy theories and poor judgement, which lets the people in charge to stay in charge.

JR's picture

The financial reform bills may only be “cosmetic” as Roubini says, or ineffective as Robert Reich says, but the real crime, if approved, is that FinReg now institutionalizes the Fed’s emergency powers as sweeping law of the land.  In secret, with no congressional or citizen involvement, the private bankers can now legally steal any American business, even a barbershop, or a major corporation, with just a few made up words of explanation.  Moreover, in secret, these bankers who print the nation’s currency and assign its value, can take vast sums of this currency and reward their friends, punish their enemies, and, again, legally, never offer an explanation.

If this is “cosmetic” as Roubini says, then Stalin’s program for the Ukraine was cosmetic as well.

faustian bargain's picture

It's cosmetic like a wolf in sheep's clothing.

jkruffin's picture

Moment of truth:  go here to submit your comments on the retarded circuit breaker proposals, HFT, Prop trading, etcc...  they are only gaming the system once again.

Greenhead's picture

I always enjoy the "nobody knows better than me" on how to structure/restructure the economy.  Less is more in this case.  Introduce failure again, the band-aids are what cause the problem in the first place.

Psquared's picture

Same thing the people have been saying all along. Except, Simon Johnson is more blunt and direct. The only thing I like about RR is that he made the case that this is just like Healthcare Reform - the "real" reform was gutted and what we had left was form but no substance. RR left out regulation of the oil industry though. Those three industries run the country and no policitician, or Legislator, has the kahoonas to take them on.

TBTF goes way beyond banks. Does anyone think they will let BP fail? They certainly didn't let the auto industry fail.

JR's picture

Who makes regulatory provisions for the insurance industry?  The insurance industry.

Who makes regulatory provisions for the pharmaceutical industry?  The pharmaceutical industry.

And who makes regulatory provisions for the financial industry?  The financial industry.

The finger prints on this latest financial regulatory program belong to top guns such as Chris Dodd whose little hands are held, while pushing the fingers down, by guess who?  The investment bankers, i.e., the financial industry, i.e., the Fed.

To believe this Congress and this President would approve any Wall Street legislation without the approval of Goldman Sachs and JP Morgan is to believe that Elvis is back and has entered the Democrat Primary for governor of California.

Recovery3000's picture

How can you reform a system with the same players?  I know when my company is dysfunctional, I go to the worst employees for advice on how to fix it.  Unfortunately, unlike Zero Hedge mostly, other fin-blogs are stuck in the same well worn grooves of argument, which gives me every indication that this whole thing will reset as it does every 80 years or so.

TooBearish's picture

1500 pages of loopholes and interpretations leaves room for years of political donations, fund raising, backdoor bribes and financial security for all involved in its passing...congrats Chris Dodd I am sure the job you landed after your "retirement" from politics had no bearing on this masterpiece of shite you sponsored.

Treeplanter's picture

For once I can agree with Robert Reich.  Another day, another scam by Congress, Inc.

Recovery3000's picture

RR is still a statist, but at least an anti-corporatist one.  I don't mind an honest liberal, just not the fist-f'ing ones that pledge to protect you, while backdooring your mother.

mchawe's picture

"the only thing that can save the financial system is, paradoxically, its destruction"....

Bring it on, but make sure you have gold in your physical possession !


rawsienna's picture

It is too late. We made our deal with the devil in the belief that globilization was in our best interest.  It sounded great and worked for a while as we exported blue collar jobs but replaced em with acceptable service industry jobs (finance, insurance, real-estate, etc) along with declining inflation.  Reforming wall street means giving up on tons of financial industry related jobs and Obama will not do it  - who will pay taxes for his social programs. Sorry, green jobs will not do it and we exported most manufacturing jobs to Asia. That is why more borrowing has a negative mult effect.  We are screwed and it started with Clinton/Greenspan. Reich is correct in that if one of the big banks fail they all fail -  That needs to change and should be the sole purpose of any legislation.

jmc8888's picture

Yep, this is going to blow up their faces.  It's amazing that while the markets are jittering around so much, they are still stroking the golden c**k of the street.  They have to be insane to be signing such a bill right now.  It could blow up any day.  Yet they're going to give the 'two thumbs up' to it. 

Yes, things do need to be repeated over and over and over again.  Especially since alot of people don't get it the first time around, are too busy to care the next, believe the bs the third time, etc, etc.  What do they also say it can take something like 7 times to learn something.  You hear things from other angles, giving you a better perspective from which to judge what's going on.

We are getting jobbed hard on this one, as we all know - but definitely not everybody (and most with no depth in the subject), and the spin meters are going as fast as our printing presses to paint this as REFORM.  Hit it Chewie.

I just love our new 'reforms', each one making the situation worse and more backwards than the 1812 backwards situation it was already. 

If Obama says he wants to 'reform' something, everybody relax, he's about to give a kickback to that industry.  That's a nice change.

Same people up to the same tricks, all benefiting the same side.  History is important to consider for context, and most are not too aware of it.  If more people were aware of how blantant the screwing is, things would immediately come to a head.

Reich has definitely been on the administrations side and now that's changed somewhat.  You could see breaks before, but he held back, and those time should be more infrequent here on out.  We'll see.

I'm glad he lumped in healthcare, because they both are craptastically similar in their crony outcomes.

Implicit simplicit's picture

I just wish some of these politicians would show some balls, and stand up to the big banks and their lobbyists. Politicians that show some gumption will be rewarded. Consciousness is changing; people want change.

Zero has done such a good job. I hope we can continue to have lists of politicians, and how they vote on upcoming bills; then we will know who to get rid of. Clean the House, Clean out the Senate while your at it. (Sticker on my car) 

Duck Butter's picture

Does oklahoma now celebrate tim mcveigh?  wierd state.

Gimp's picture

Wasn't Robert Reich calling for economic growth through 2009 and beyond in 2008?

Another Ivy League boob who hasn't a clue. If these fucks actually lived in the real world and stopped thinking they are superior to the rest of us life forms they might get it right.....


robobbob's picture

are you quoting this RR?

a Keynsian and social justice engineer. all on borrowed money. nice


snowball777's picture

Look folks, it's simple: they can't accept anything that involves separation or spinning any parts of the beasts...because doing so would require them to actually place a value on their books. And they want to look under those covers as much as a sane man wants to watch his octagenarian parents get it on.