Uncle Sam Needs YOU for a Bailout: 6 Reasons Another Big Banking Crisis Is Coming Our Way
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There’s no one single, buck-stops-here banking regulator. Instead, the newly created Financial Stability Oversight Council, comprised of representatives drawn from each agency named above, is supposed to coordinate and oversee all policies.
Believe it or not, each state is also part of the regulatory mix. Insurance regulation remains primarily a state affair, and states are also heavily involved in banking regulation.
Does this seem sensible? Just as a teenager may play one parent off of another until one of them says “All right! You can go to the prom,” the lack of a streamlined regulatory system means banks play regulatory arbitrage. Recently we saw this dynamic unfold—unsuccessfully in this case— as Standard Chartered Bank used its press cronies to pressure Benjamin Lawsky, New York’s Superintendent of Financial Services, to go easy on the bank for laundering money for Iranian clients and cooperate with other regulators — the Fed, Justice and Treasury— that favored a softer stance. Lawsky threatened to cancel the bank’s license to operate in New York—a death sentence for any international bank. When he didn’t back down, the bank agreed to a $340 million settlement. Lawsky’s firm stance improves the prospects for the pending federal probes.
There’s another major problem with our current regulation. Agency missions often confuse priorities. Some agencies are supposed to worry about a bank’s survival at the expense of other concerns, such as looking out for the bank’s customers or worrying about broader public goals such as stopping money laundering.
The consequence? The regulator often sides with the bank and colludes in concealing facts and circumstances that should be more widely known.
The latest financial crisis should have been a giant wakeup call. The Obama administration had the chance to reform bank regulation to confront 21st-century challenges. Instead, it caved to bank lobbying, and in Dodd-Frank cemented a confused mix of regulatory imperatives. Even the meager promises are not kept, since further rule-making procedures must occur before key provisions can be implemented. Many of these have slipped their deadlines, and as a result of continued bank pressure, reforms remain pending or have been watered-down.
6. Perps get off scot-free
And so we come back to where we started—the decision not to go after Goldman Sachs. Normally, the Justice Department doesn’t comment on its pending investigations. But for Goldman, the rules are different. Justice issued an unusual statement saying the firm wouldn’t be criminally charged, as prosecutors didn’t believe they could meet the burden of proof necessary to win a trial. Earlier last week, Goldman disclosed that the SEC wouldn’t be pursuing criminal charges against the firm, despite having issued Goldman a “Wells notice” of its investigation. Dropping an investigation after issuing such a notice is not altogether unprecedented-- but is also rare.
Things weren’t always this way. During the savings and loan crisis of the late 1980s, banks were allowed to fail, prosecutions were undertaken, and executives and employees were jailed. Even after the popping of the dot-com stock bubble in 2000, prosecutors chased after cheating companies and their executives. Officers of Adelphia, Enron, WorldCom, to name a few, ended up doing significant jail time.
The current failure to prosecute means that banks will continue to pursue risky policies. Bankers continue to get paid based on results, and there’s so much to gain from a successful risky bet, and so little to lose from a bet gone bad, particularly if the taxpayer is there to pick up the tab.
In America, if you misuse food stamps, and you get caught, there’s a good chance you’ll lose your benefits, and you might even go to jail. If you rip off the Medicare system, commit tax fraud or perpetrate identity theft, federal prosecutors will throw the book at you. But if you’re part of a multi-billion dollar enterprise that misleads investors and lies to Congress, you’re like the trophy fish that’s caught and released. You’re off the hook.