Former Top Regulators Tell Congress to Rein in Big Banks
Three former financial regulators testify to the House Financial Services Committee in
support of reinstating Glass-Steagall legislation and addressing Too Big to Fail Banks. - October 3, 14
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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.
Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.
Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.
JAISAL NOOR, TRNN PRODUCER: Welcome to The Real News Network. I'm Jaisal Noor in Baltimore. And welcome to this latest edition of The Black Financial and Fraud Report. Now joining us: Bill Black. He's an associate professor of economics and law at the University of Missouri-Kansas City. He's a white-collar criminologist, former financial regulator, author of The Best Way to Rob a Bank Is to Own One, and a regular contributor to The Real News.Thank you for joining us, Bill.BILL BLACK, ASSOC. PROF. ECONOMICS AND LAW, UMKC: Thank you.NOOR: So, Bill, what do you have for us this week?BLACK: Well, some possible good news. There was just a big hearing in front of this massive House Financial Services Committee, which is up to almost 80 members. And the reason it is is because both parties now stick members of their party that are going to be in tough races on the committee because you're guaranteed to get so many political contributions from the big banks. Well, that's the bad news. The good news is that they had witnesses who had an unusual degree of agreement on the fact that things are screwed up and need to be fixed and how to fix them. And so the big three were Sheila Bair, former chairman of the Federal Deposit Insurance Corporation and the strongest of the regulators under the Bush administration, and continued under the Obama administration for a time; Tom Hoenig, the former head of the Federal Reserve Bank of Kansas City, a real gruff guy who is now the vice-chairman of the Federal Deposit Insurance Corporation. To give you an idea, when he was with a small group of us in Kansas City, he announced that every four years we hold an auction in which we auction off the secretary of Treasury to Wall Street, and that of late Goldman Sachs has always been winning the auctions. So that gives you some idea of his view of the largest banks. And the other one was president Fisher of the Federal Reserve Bank of Dallas, which is also interesting, because in recent times he's been exceptionally conservative on most issues, but on two issues he's now said, one, that too-big-to-fail has to end, we've got to get rid of the concept that there are these banks that are just too massive to deal with, and in this hearing he has just testified in favor of the return of Glass-Steagall.NOOR: So, Bill, can you talk about the significance of this call to pass some type of measure that would bring back Glass-Steagall and talk about what Glass-Steagall is, the fact that it was repealed and what that led to? Give us a little background on that.BLACK: So Glass-Steagall was a law adopted after the scandals of the Great Depression that said there's an inherent conflict of interest if you have both an investment bank and a commercial bank owned by the same folks. If the bank customer gets in trouble, well, you'll tend to use the investment bank to issue securities to try to bail it out and vice versa. And so Glass-Steagall said you have to have this separation; you can't do both of them. And this worked spectacularly well for the U.S. financial system. After the Great Depression and World WarÂ II, it became the top financial system in the world. And so, naturally, we decided to screw it up. And we decided to screw it up first as a combination of the regulators and the big banks, who got together to pass rule after rule that was designed to have the death of 1,000 cuts of Glass-Steagall. And then, finally, under President Clinton again, they got rid of Glass-Steagall entirely. And, you know, there's a debate about how much it contributed to the current crisis, but it certainly was not helpful in the current crisis and may--you know, some people believe that it was actually disastrous. So that's what Glass-Steagall was. It was repealed, as I say, over a decade ago, well over a decade ago.But now you have three very prominent conservative--I think all three of them are Republicans--experts saying we need to bring back Glass-Steagall. And they're also saying, all three of them, that we need to get rid of too-big-to-fail. And we have a bill in the House that has over 60 cosponsors. Well, the House has, you know, hundreds of members, so that is hardly enough, but that's a significant thing in terms of cosponsors. It's the first time we've had any real momentum to do something serious about the problems of too-big-to-fail and the problems of the conflict of interest. So, as I said, we actually have some potential good news.NOOR: Well, Bill, I mean, we have Dodd-Frank. Why isn't that enough? And I know the folks you mentioned early in the interview, they had some responses to Dodd-Frank as well.BLACK: Yeah. I mean, there's broad agreement, I think, under anyone serious that Dodd-Frank is a joke when it comes to too-big-to-fail. It of course could have ended the too-big-to-fail institutions. It could have said, you can't be bigger than this size, and you have five years to shrink down to that size, and we will intensively regulate you during those five years to make sure you don't do anything really stupid. But they didn't do that. Instead, they ended up with silly things like you're supposed to create, like, a living will, as if you could predict what the disaster scenario would be. And this living will is supposed to guide your regulator on how to resolve you if there's a failure. Well, the only thing we know is that those will be complete junk because nobody can predict the scenario in which it's going to go down, and it probably won't be a single too-big-to-fail institution. Like this time around, it'll probably be multiple too-big-to-fail institutions. So all of that is nonsense. There's no serious aspect of Dodd-Frank that takes on too-big-to-fail, and therefore it's good to have people saying that and saying forget Dodd-Frank in terms of too-big-to-fail. You need to start from scratch, you need a separate bill addressing it directly, and you need to simply get rid of these things.NOOR: And what kind of impact do you think this might have? You talked about a bill that's currently proposed. What's the likelihood that this could be passed?BLACK: Well, I mean, the odds are always in favor of the bankers on these things, and I don't think there's going to be enough this term. But it's interesting, as I said, that these three experts, I believe, are all Republicans, and indeed, you know, fairly conservative Republicans. There is a lot of support among progressive--indeed, I think there's almost universal support among progressives, except perhaps those representing Connecticut and New York, that we need to deal seriously with too-big-to-fail. So this is the type of thing where you could build serious momentum. It's certainly worth people's efforts at this point to learn about the bill. One of the cosponsors is in Massachusetts and such. As I said, they have well over 60 cosponsors at this point, and that's significant. And at a minimum we can start making their life miserable and putting them partly on the defensive.NOOR: Bill Black, thank you so much for joining us.BLACK: Thank you.NOOR: And thank you for joining us on The Real News Network.
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