MetLife is only the first financial company that will try to escape tighter regulation. For taxpayers and working stiffs, the lesson is we need more than Dodd-Frank.
Much of the coverage of MetLife “escaping” the oversight required of too-big-to-fail or Systemically Important Financial Institutions (SIFI) portrayed it as a victory for capitalism against costly and overly powerful new regulations. E.g. this Economist article.
Neither is the case. The Dodd-Frank legislation in the aftermath of the Panic of 2008 sought to clamp tighter capital controls and other regulations on the financial sector. It requires SIFI institutions to keep higher levels of capital, which they hate.
The dirty secret: Much of Dodd-Frank has not been translated into actual rules and most of the ones operating were watered down by banking lobbyists. The so-called Volcker Rule, which would have limited dangerous derivatives trading, remains stuck. The power that regulators have under Dodd-Frank to unwind a SIFI before it reaches Lehman- or Bear Stearns-like critical mass? Few serious observers believe it’s realistic.
What was entirely predictable after MetLife’s victory is that others queued up to have freer range. GE Capital, one of Jack Welch’s bright ideas that nearly wrecked the company, wants to be free of pesky too-big-to-fail oversight. Others will follow.
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Let’s recall that some of the worst actors in the 2008 events that nearly led to a second Great Depression were flying below the radar: AIG, Washington Mutual, the shadow banks. Or they were hiding in plain sight: the money center bank Wachovia that had plunged into the subprime market with its 2006 purchase of the dangerous Golden West S&L.
The problem was never only too-big-to-fail. It was too big, too complex, too fast, too many shadow players, too much gambling instead of assembling capital for job-creating enterprises, too powerful over regulators and politicians. The reforms of Dodd-Frank barely affected the larger edifice and its risk to taxpayers and the economy.
So we need a 21st century Glass-Steagall, one that not only breaks up the big banks but fully separates taxpayer-backed banks from investment outfits of all sizes and modes. The latter are free to gamble, but their tentacles into the larger financial system are severely limited. Transactions are taxed. Political spending prohibited. Executive compensation is unlinked from risk-taking. Oh…Bad actors go to prison, hard time.
No president alone can enact this. It will require majorities in Congress and 60 votes in the Senate, as well as a workaround on Citizens United, even a constitutional amendment. Without it, another iceberg is coming. And the best case is that again profits will be privatized and losses socialized. Bank on it.
Today’s Econ Haiku:
End of the quarter
In like a volatile bear
And out like lamb