Join Occupy the SEC in Pushing Congress to Reject Dodd-Frank Deregulation
There’s some tricky business going on right now in politics, with a bunch of ridiculous last-minute negotiations to roll back elements of Dodd-Frank and aid Wall Street banks in the current budget deal. Hell, it’s the end of the year, and people are distracted, so the public won’t mind if the banks get formal government backing for their risky trades, right?
Occupy the SEC has a petition you can sign, located here, which is opposed to these changes. You might remember Occupy the SEC for their incredible work in public comments on the Dodd-Frank bill in the first place. I urge you to go take a look at their petition and, if you agree with them, sign it.
After you sign the petition, feel free to treat yourself to some holiday satire and cheer, namely The 2014 Haters Guide To The Williams-Sonoma Catalog.
mathbabe 
Thanks Cathy! Your message to President Barack Obama sent!
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If they can’t trade derivatives, how do we expect the banks will hedge the risks in their portfolio? I would think if anything we’d want to require it, not ban it. Maybe I don’t understand the point of the legislation.
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Once upon a time banks didn’t have so much risk to hedge. They took depositor money and invested it mostly in loans, and they managed the risks on the loans by doing thorough credit analysis — knowing their customers. They were more or less banned, under Glass-Steagall, from using depositor money to fund investments in risky assets. They could loan money to other banks that needed short loans to meet reserve requirements (and typically if those banks failed, the FDIC was going to come in and restructure it to ensure it didn’t actually default), and they could invest in very low risk bonds (like commercial paper), but you didn’t have them building risky CDOs which would then need hedging, or investing in commodities, or whatever else.
It would be nice if we could separate out the “maturity transformation” / commercial and personal banking functions, back into entities that aren’t under the same management as the investment banking and securities market functions. That worked very nicely for several decades. Every segment of the industry that has been deregulated and allowed to take on risk, promptly blew up. (See: Savings and Loans in the ’80s, LTCM in the ’90s, and the mega-crisis in the ’00s following Gramm-Leach-Bliley, which wiped out the last vestiges of Glass-Steagall. There were also examples in Europe, before the global crisis.) I’d wonder why this lesson is so hard to learn, but, well, Upton Sinclair covered that pretty well.
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I think you are missing some pieces:
(1) maturity transformation involves taking risk.
(2) lending money always involves credit risk, even if you “know your customer.”
(3) the sleepy bank/S&L business model was already dead, deregulation allowed the zombies to roll the dice (and probably made things worse)
(4) LTCM’s failure was containable and contained. I always thought this should be a progressive parable: the high fliers got their comeuppance and the world moved on unaffected.
All that said, I come to roughly the same conclusion you reach: financial institutions need to be very simple, either a single business line or very closely related business lines. Otherwise, they are either too complex to manage, too complex to regulate, or both.
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You both make good points about how the banking industry ought to be structured, but we need a rule for how it actually is structured today.
Even so, telling a commercial bank in Houston Texas, for instance, that it is not permitted to buy put options on crude oil futures just seems like you’re asking for trouble.
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I do not know why you think that Dodd-Franks prohibited banks from buying and selling derivatives. I have not read the law, but my impression is that it regulated over the counter derivatives, not such things as oil futures, which are traded on exchanges and which most people who trade understand. It was complex over the counter derivatives that helped to amplify the housing bubble into a catastrophe. Derivatives can be used to hedge risk; they can also be used to amplify it. Casino banking is not good.
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I definitely did not understand the legislation. As to why? I think unfortunately the press I was reading failed to give any detail beyond ‘risky derivatives’ to explain the issue. My first reaction was naturally that derivatives can also be used to reduce risk. Anyway, the following article helped me understand better what was at issue. It looks like the new rules isn’t really needed and not a good idea.
http://www.bloombergview.com/articles/2014-12-11/levine-on-wall-street-swaps-pushed-back-in-harvard-gets-in-trouble
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Re: the banks in Houston comment — it’s a worthy point, but I don’t think the rules in Dodd-Frank banned something that had that obvious a connection to actual risk hedging; they already included exceptions for hedging, and for market-making. The banks keep pushing to expand those into loopholes that swallow the rule. I’d be happier having those much stricter. There’s nothing stopping a bank from including, in the covenant associated with a large corporate loan, a requirement that the recipient of the loan pay for some kind of insurance. Even simple mortgages include insurance. If you’re loaning money to an oil company, you could instruct them to buy and escrow a pool of oil options, on a specified schedule; if the loan tanks, the bank gets the options; if it tanked because of oil prices, they have their hedge.
I trust Mike Konczal‘s take on Section 716 over Levine’s.
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Re: Williams Sonoma parody… I’m sure it must be terribly bourgeois of me, but I totally covet an immersion circulator. (But I’d never buy one from W-S. They’re even more overpriced than Neiman Marcus.)
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