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Bill Moyers: Are the Monster Banks on the Verge of Unleashing Fresh Economic Disaster?

Culture change in the financial world may be coming, but not fast enough says banking expert Shelia Blair.

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SHEILA BAIR: It really needs to, well, the regulators succumbed to industry pressure to do this. And even some of the statutory provisions in Dodd-Frank had too many exceptions. But then we get even more exceptions since these proposed rules come out, things like the Volker Rule. You know, it should be just a simple ban on proprietary trading, but we get these very complicated rules that are very hard to enforce and easy to game.

BILL MOYERS: When Dodd-Frank and the Volker Rule managed to get through a recalcitrant Congress, many of us were hopeful. Would you tell us briefly what Dodd-Frank was supposed to do and what's happened to it and what the Volker Rule was supposed to do and what's happened to it?

SHEILA BAIR: Right. So Dodd-Frank was, is a very large, a very, it is a complicated law. Probably more complicated than I would have preferred. But it is what it is. But at the heart of it is ending "too big to fail." Giving the government new tools to resolve large financial institutions when they fail in a way that will not hurt taxpayers, not subject taxpayers to risk.

Well, it forced the losses on the shareholders and creditors of those large financial institutions, which is where they belong. It also requires the Federal Reserve Board to have much tougher what we call prudential standards. So higher capital more stable liquidity, more stable funding sources, less reliance on short-term debt.

Those are the types of things that were problems during the crisis. And the Fed has been mandated. And they haven't finished those rules yet to have better regulation to prevent these banks from getting in trouble to begin with.

And the Volker Rule, too, a key part was designed to prohibit prop trading by those institutions that are in the government safety net. So if you're a bank holding company that has an insured bank that has FDIC backed deposits or access to the Federal Reserve's discount window, you know, you have a lot of government support, as is provided to traditional banks.

So Volcker’s really about customer service. And your banking model should be you serving customers, making loans or, you know, if you're facilitating trading, you make your money off of a commission, not by by trying to make a profit off the spread.

And that's really what Volker was about. And it turned into a lot more complicated thing than it should have been.

So I do think, you know, I talk a little bit about structural changes, too, that I think could make, give us a more robust regulatory system, because now I think we have cognitive capture, which means basically--

BILL MOYERS: Wait a minute, what does that mean?

SHEILA BAIR: It means the regulators tend to look at the world through the eyes of the banks. So they don't look at themselves as independent of the banks. They view themselves as aligned with the banks, that their charter is not to protect the public, but to protect the banks. And this is the premise of the bailouts, that somehow if you take care of the banks, you're going to take care of the broader economy. And it just didn't turn out that way. They're two very different things.

BILL MOYERS: As coincidence would have it, I took your book with me on a trip last week. And I was actually reading the last chapter again, in anticipation of your coming, before I actually looked at some of the hearings. You say, "When you read about problems like the Libor or Whale scandal or the JPMorgan Chase trading losses, don't accept gobbledygook about regulators needing more information or needing more power." Then the next day I look at the hearings and--

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