Two weeks ago, I reported on President Obama’s announcing his sudden desire to reform banks after Republican Scott Brown won the Massachusetts Senate seat formerly occupied by Ted Kennedy. I wrote that “after a year of following the traditional Washington way of bending over backwards to hand taxpayer money to financial firms, he was ready to put an end to risky bank activities like proprietary trading.”
I went on:
While the market reacted in a way that predicted crashing bank profits ahead, history suggests that banks will win this scuffle. With the help of Robert Rubin and Larry Summers, they succeeded in getting the 1933 Glass-Steagall Act repealed in 1999, a measure that cleared the way for the housing bubble’s now-infamous toxic derivative assets. If banks could whittle away a protection that had held for almost seven decades, why not block a too-little-too-late regulatory gesture that involves terms most citizens don’t even understand?
Keep an eye on this issue, but do not be surprised when big bank money decides the outcome. . . . Nobody is more vulnerable to big money buy-offs than members of Congress, so all factors suggest banks will not be reined in.
It’s already going that way. On Tuesday, Senate Banking Committee Chairman Christopher Dodd criticized the Obama administration for complicating the effort to overhaul financial-market rules, and said the late addition of a new idea for limiting risky behavior had threatened the process.
He said the announcement of the so-called Volcker Rule “seemed to many to be transparently political,” as in Obama was trying to appeal to voters upset with Wall Street right after his party lost the Massachusetts Senate seat.
Senator Richard Shelby said Obama had “air-dropped” his new idea into the deliberations on fixing the financial system. Other Senators made similarly resistive comments.
Former Federal Reserve Chairman Paul Volcker, after whom Obama’s new proposal is named, told the committee in testimony last week, “I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.”
