The banking lobby, as corporate lobbies are wont to do, can build a wonderful Potemkin village of consumer delights, where a defanged government beholden to business interests smiles as unfettered CEOs and marketers rack up their profits and where only the buyer need beware.
Wall Street Reform Matters
Hear AFL-CIO policy director Damon Silvers explain why financial reform is important and his assessment of his debate with American Bankers Association president Edward Yingling.
This particular village, however, is as flimsy as it is fake, as Damon Silvers, the policy director at the AFL-CIO, demonstrated in a face-off with the banking industry’s chief lobbyist, American Bankers Association president Edward Yingling sponsored by the Aspen Institute.
It started to crumble early. The first question from moderator Walter isaacson was to Yingling about what sort of financial reform he believed the nation needed; he responded by saying "there is a lot of agreement on the core principles" of financial reform. Nice facade. But there were at least two core principles on which there was profound disagreement: the need for an independent consumer financial protection agency and the restoration of the wall that until the 1990s separated consumer banking from insurance, stock trading and high-risk financial ventures.
That wall, created by the Glass-Steagall Act that became law during the Depression, opened the way for the creation of the vertically integrated financial behemoths that became "too big to fail" during last year’s Wall Street meltdown. Yingling insisted that "there is no causal connection between the repeal of Glass-Steagall and this" meltdown.
Silvers countered that Glass-Steagall does matter because without it the banking sector was able to get entwined with the subprime mortgage world, drawn in by the temptation to be involved in high-risk, high-reward financial activities with an implicit government guarantee that if the bets went bad, the government would cover many of the losses.
For decades, Wall Street operated profitably under a set of rules that protected consumers with bank deposits (through federal deposit insurance) but did not protect shareholders and bondholders. That, of course, changed when the Bush administration stepped in to prevent the collapse of Bear Stearns in March 2008, and continued with the bailouts of the major money-center banks and the insurance and derivatives trader AIG.
There has never been a public interest in bailing out the shareholders," Silvers said. "We need to not do that again."
The disagreement over "core principles" was even more stark on the issue of consumer protection, and it is at this point when Yingling went almost hysterically over the top. When he said that already small banks with only a handful of employees have to deal with about 2,000 pages of federal regulations, and proceeded to do the old divide the number of employees by the number of federal-regulation pages, Isaacson interrupted, essentially asking, "What does size have to do with it?"
Yingling’s fundamental point was that if you have a consumer watchdog overseeing the banks, banks would end up being with an untenable stack of burdensome demands and contradictory mandates. An audience member who said he was involved in the creation of the Consumer Product Safety Commission said that agency has proven to be an effective guardian of consumer safety without hindering the private sector’s ability to profit from safe products that succeed in the marketplace. But Yingling argued that "The [Consumer Financial Protection Agency] is the most powerful agency ever proposed. It can do anything it wants." If it were regulating toasters instead of financial products, he said, the agency could design a toaster, force banks to display that toaster in its front window while its own branded toasters were forced to languish in a back stockroom with warning labels saying they were inferior to the government toaster. He later added that a consumer agency could order banks to adopt practices that would expose the institutions to fraud.
Nonsense, Silvers said. For one thing, "if the government can design a product that’s better than the product that you’re designing, I don’t have a problem with that."
More to the point, Silvers said that the financial service industry sells very complicated products in a market dominated by a handful of players. Government does and should regulate more intensively based on the complexity and danger of the product being sold and the power of the institution vis-à-vis the consumer. Complex mortgages and other types of consumer financial products constitute "the classic situation where you want to have very heavy duties imposed on the institution," Silvers said.
There is one core principle on which Silvers and Yingling did have some agreement: There does need to be a way to replace the too-big-to-fail monster with a system in which a financial institution of the scale of a Citigroup of Bank of America—or a Bear Stearns—can be shuttered in a process similar to the process undergone by more than 120 smaller banks so far this year, with shareholders and bondholders suffering the loss.
The question, as Silvers noted, is whether Congress is even ready to move on aspects of financial reform where a Damon Silvers and an Ed Yingling can find common ground, "given the intertwined nature of financial institutions and political power."
"I am an optimist," Silvers insisted. But more than a few people in the audience, knowing the millions of dollars the banking industry has thrown into lobbying and campaign contributions in order to protect as much of the status quo as they can, were shaking their heads.