What are the lessons that we can take from the financial meltdown? Too big to fail is too big to exist. That is one of the biggest lessons, but the Senate hasn't learned squat.
A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33.
Three Republicans, Richard Shelby of Alabama, Tom Coburn of Oklahoma and John Ensign of Nevada, voted with 30 Democrats, including Senate Majority Leader Harry Reid of Nevada, in support of the provision. The author of the pending overall financial reform bill in the Senate, Banking Committee Chairman Christopher Dodd, voted against it. (See the full roll call.)
The amendment, sponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.), would have required megabanks to be broken down in size and capped so that their individual failure would not bring down the entire system.
Under Brown-Kaufman, no bank could hold more than 10 percent of the total amount of insured deposits, and a limit would have been placed on liabilities of a single bank to two percent of GDP.
Brown-Kaufman was a good start but it got voted down. Why? Wall Street owns Congress. Regulation will never be enough to control these really huge banks. We need to limit their size.
Brooksley Born tried to look at derivatives. She wanted to investigate whether or not we should regulate derivatives. (This was back in the Clinton administration.) Larry Summers, Robert Rubin and Alan Greenspan shut her down cold. Derivatives were not regulated. Billions of dollars that were not accountable to us were part of the cause of the economic meltdown.
Finally, economist Dean Baker has a nice piece on Wall Street:
We had some hopes of reining in the million dollar babies with the financial reform package, but those hopes appear to be dimming. The effort to downsize the "too big to fail" banks got trounced in the senate last week, garnering just 33 votes. Apparently, the prospect of having to head out into the markets unprotected by the implicit guarantee of government bailouts was too frightening for JP Morgan, Goldman Sachs and the other big banks. Their lobbyists twisted the arms and got the overwhelming majority of the senate to continue the big bank subsidy of free government insurance indefinitely.
There is still another good opportunity to rein in the banks ability to gamble with our money. Senators Merkley and Levin have proposed an amendment that would prohibit commercial banks from trading on their own behalf. The point is that commercial banks are backed up by the Federal Deposit Insurance Cooperation and the Federal Reserve Board. If they get into trouble, it is taxpayers' dollars at risk.
Until the repeal of Glass-Steagall in 1999, commercial banks were sharply restricted in what they could do, precisely in order to prevent them from taking advantage of this guarantee. If you wanted to engage in highly speculative activity you could set up a hedge fund or an investment bank, but Glass-Steagall prevented banks from gambling with government insured deposits. But this separation was obliterated by the repeal and now we have investment banks like Goldman Sachs and Morgan Stanley that are openly speculating with taxpayer insured money.