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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

April 26, 2010 at 10:14 AM

A cheat sheet for the bank reform rumble; Kerry played with Goldman’s squid

Cue West Side Story music, please. The Dems and the Reps are set to rumble on financial reform. The Dems haven’t covered themselves in glory in the past, with Bill Clinton allowing casino capitalism to slip the leash and many legislators taking cash from Wall Street to do its bidding. The Reps are the gang of big business, and whatever their talking points, want to kill financial reform.

What to watch for to see if reform is real. Consider:

1. Derivatives. We must see real regulation of these “exotic products” which are not only often swindles, but carry heavy systemic risk. Real reform means they are transparent, regulated and traded on an exchange. It means they have to be close to something of real value, and not endlessly sliced into ever more meaningless slices of fraud. Custom-made derivatives, the most dangerous, should be outlawed or heavily curtailed.

2. Systemic risk. How does reform handle too-big-to-fail and the interconnections among the big players that nearly blew up with world economy. I’d like to see TBTF broken up and a new Glass-Steagall that separates risky investment banking from taxpayer-insured commercial banking. This, along with tax reform to discourage gambling and excessive compensation would be the best way to de-financialize the economy. That won’t happen; the banksters own too much of D.C. The Dems’ plan to require the TBTF institutions to fund their own protection is a step forward, but only if…

3. Regulators regulate. Real reform will change the culture, incentives and even structure of the federal watchdogs so they go back to insisting upon safety, soundness and accountability.

4. Consumer protection. This agency, which might emerge from the bill, is well and good. Customers have often been gouged or worse by predatory lenders. It can’t excuse greedy and stupid customers. Still, no consumer agency with teeth = no reform.

The Back Story: The evidence continues to support Matt Taibbi’s assertion that Goldman Sachs is “a great vampire squid wrapped around the face of humanity.” In today’s Wall Street Journal is an examination of Goldman’s highly profitable partnership with Washington Mutual on the latter’s way to perdition.

“Recently released emails and other documents, including securities filings, show how Goldman, considered one of Wall Street’s most elite banks, built its mortgage business by closely working with lenders such as Washington Mutual and Long Beach, two firms that ‘polluted the financial system’ with souring loans, according to a Senate review of Washington Mutual on April 13.”

In one email, a WaMu executive warns, “We always need to worry a little about Goldman because we need them more than they need us and the firm is run by traders.” You mean, as opposed to running a bank or thrift that made sound loans to build a productive real economy? Nah, what could possible go wrong?

Today’s Econ Haiku:

Where’s the right locale

To explain derivatives?

At the casino

Comments | More in Bailout, Banking


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