Here’s a sobering thought: Fifteen years ago, the six largest banks in the United States produced 17 percent of country’s Gross Domestic Product (GDP); today, the six biggest banks produce 63 percent of GDP. That means that these six banks (Bank of America , JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley) produce nearly two-thirds of the finished goods and services in the U.S. More than our waning manufacturing industry plus all of our software or music or film or any industry that you think of as substantial, combined.
What caused this exponential explosion of bank profits? During the Clinton Administration, bank regulations, which had been in place since 1933 (to curtail abuses that led to the Great Depression), were rescinded. This opened the barn door and allowed mega bankers to freely roam, eating up smaller banks, developing synthetic (meaning they really are nothing but a bet) investment products, drastically reducing the amount of capital required to ensure bank ‘stability’, and evolving into institutions with questionable financial practices. As we learned during the Goldman Sachs’ hearings before the Senate Subcommittee on Investigations, substantial profits resulted from risky bets made using esoteric financial products.
Major banks with investment divisions sold overvalued investment products to customers, knowing they would plunge in value. Simultaneously, they bought the same products ‘short’, which means they were betting on their failure, while selling these products as if they were reputable and reliable investments.
These financial institutions went blithely forth, leaving mayhem from their customers in their wake. They seemed to hold no regard for the pension funds, college accounts, and other critical investments they wiped out. It appears that a greed culture developed in this largely unregulated banking environment. The behemoth banks, and peripheral enterprises, engaged in practices that financially gouged businesses and consumers. Their actions demonstrated they need to be reined in and governed by sound financial principles.
When the federal government bailed out the big banks in 2008, they accepted billions of dollars. Instead of using that money to invest in small businesses and make loans to consumers in communities around the country, as the Bush Administration promised they would, the banks primarily hoarded the cash or used it to further increase the size of their institutions through acquisitions of smaller banks. Simultaneously, numerous viable businesses with superior credit folded or shrunk in size because their banks cut off their lines of credit, which they depended on to buy inventory and for other essential operating expenses. As a qualified borrower, you probably don’t want the nation’s major financial institutions to hold the power to dictate your financial solvency by cutting off your access to funds, when your performance has been exemplary. That is what banks did, and can do, today.
The Restoring American Financial Stability Act of 2010, has received much biased publicity. Of course, the legislation is not perfect. There are no perfect bills because the process of making laws involves compromise among legislators with disparate views. Now that the Republicans have allowed the bill to move to the Senate Floor for debate and to add amendments, it will change significantly. No one knows what regulations will be included in the final bill. If you’re interested, the Library of Congress keeps the most up-to-date versions. However, they constantly change the URLs for their pages so you’ll need to enter the name of the bill in the search box. When the page opens, click on the box labeled Text of Legislation to read the document. Like most major bills, it’s a tome. After it passes the Senate, it will go to a Conference Committee, which will include Members from the House and the Senate. They will hammer out differences between House and Senate versions, and more compromises will occur as a final version of the legislation is honed.
The bill that reports out of the Conference Committee will not be stringent enough for some of us, who had a close-up view of egregious practices in the mortgage industry. We know banks should never be permitted to offer mortgage brokers a commission rate that is three times the normal loan commission for products that carry the greatest risk for borrowers. The country faces the prospect of millions more foreclosures during the next two years. Many of these are the direct result of unscrupulous banking practices.
Some will think any restrictions are too much. They preach: Let the market ‘fix’ itself. How na?ve to believe the banks that led us to the brink of a severe depression will magnanimously forgo billions to ‘fix’ the problems. A recent ABC News poll indicates that two-thirds of the country backs financial industry reform. When we look at the widespread devastation wrought as a result of banking practices, strong support makes sense.
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