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Words from Winterbilt

Something that should not be – but sometimes is

Shannon Bohrer

(7/2013) A while ago I read with some interest about a Senate hearing with banking regulators. The hearing apparently annoyed some regulators, some conservative financial television shows, a GOP bank lobbyist, the consumer Bankers Association - and a few others. The hearing was with Senators and Bank regulators, not the bankers, so it did seem a little strange that the banks and organizations representing them were annoyed.

It was reported that the question that caused the annoyance came from Elizabeth Warren, the first term Senator from the state of Mass. First she questioned why regulators had not prosecuted a bank since the financial crises? Remember, the financial crises started with the housing bubble, which was encouraged by the loan officers, and it was added to with swaps and derivatives, (whatever they are) some of which were created by the banks to bet against the bundles of mortgages the banks were selling, which rating firms rated very safe. Senator Warren also stated that the U.S. Attorney’s Office prosecutes people all over the country, many times to make an example, "as they put it". She went on to say "I’m really concerned that too big to fail has become too big for trial." I think an argument could be made that her statements may have validity.

You may recall from previous articles that I have written that I am not fond of big banks, banks that are too big to fail, banks that we as citizens have to bail out, banks that after we bailed them out they give large bonuses and increased executive pay. After all, if we really believed in free markets, why did we not let them fail? Remember, it was during the great depression, the one in the 1930’s, that almost 5000 banks did fail, which was instrumental part of the depression. At that time our response to these bank failures was the passage of the Glass -Steagall Act. This act separated investment and commercial banking, which was responsible for a large segment of the bank failures and the great depression. This separation under Glass – Steagall worked well for 66 years and keep us from having another depression, at least from bank failures, or at least until it was repealed.

In 1999, the Financial Service Modernization Act (catchy name), also called the Gramm-Leach-Bliley Act, passed and congress repealed the Glass-Steagall Act. This removed the regulations barring mergers with banks, securities and insurance companies, the problems that resulted in the Great Depression. Similar to the Great Depression, in 2008 we experienced a financial collapse that started with a housing bubble that spread to mortgage crises. This was closely followed by problems in the financial markets when investors relied on complex financial instruments. Does this not sound familiar? Since 1933, when Glass- Steagall was passed we did not experience similar problems, until Glass-Steagall was repealed? That’s a clue!

I am sure that congress had a good reason as to why Glass-Steagall was repealed, but I just don’t know what it was. Of course after the repeal of Glass-Steagall and the financial collapse in 2008, our Congress passed the Dodd Frank financial reform law – to protect us. After all, with only four big banks, if any of them fail we could experience real financial problems.

Speaking of financial problems, you may recall that last year when JP Morgan Chase (one of the big four banks – left) was reported to have lost 1.8 billion in their London office. This loss was investigated by our congress with another hearing. Jamie Dimon, the CEO of JPMorgan Chase, appeared and testified at the hearing. I watched some of the hearings but had to stop because of the nausea. He was asked some tough questions, like what he wanted for lunch and if there was anything the congress could do for him. Mr. Dimon gave the impression that the loss was just "a tempest in a teapot."

However, the loss of 1.8 billion then grew to 2 billion and then grew to 6.2 billion. This was just enough to have an investigation and in March of this year a US Senate subcommittee issued a report. Apparently the financial trading that lost the 6.2 billion was not unusual, it was business as usual. If fact Mr. Dimon had approved this "tempest in a teapot" himself, surprise….

At another senate hearing Attorney General Eric Holder inferred that the big banks have been given a pass. He stated that when considering prosecution they are advised that prosecuting the big banks could have a negative impact on our economy. Too big to fail – too big to prosecute, well as least we have the Dodd Frank financial reform law – to protect us. Well, at least some of it. You see only one third of the proposed rules in Dodd Frank have been implemented. If you put 20 million into last year’s elections, as the four big banks did, you too can have influence in congress

The 6.2 billion that JPMorgan Chase lost was in the "London Whale" trades (catchy name) as they were called, which are really industry derivatives, mass betting on bets that have risk to financial institutions. However, JPMorgan had a backup plan. About a week after the US Senate subcommittee’s report that exposed this information, the House Agriculture Committee was to hold a hearing on seven bills. Some bills that were designed to gut derivatives regulations passed in the Dodd Frank financial reform law. One of the seven was HR992, called the "Swaps Regulatory Improvement Act", (catchy name) which would nullify part of Dodd Frank. If passed, the trading that JPMorgan was involved in that lost 6.2 billion, which was illegal, would have been legal.

It has been said that too many regulations can stifle business and hurt the economy. I am sure that many of you are aware of the Halliburton loophole (catchy name). This rule exempts oil and gas companies from the requirements of the safe drinking water act while fracking for natural gas. It also allows the operators from not disclosing the chemicals they are using - after all they are trade secrets.

A government of the people by the people and for big business, but only if it’s good for business. Where’s Teddy when you need him?

Read other articles by Shannon Bohrer