Betrayed on Bank Reform: 3 Ways Our Leaders Stabbed Us in the Back

Posted by Eric LeRiche | July 14, 2010 .

OUR CONGRESSIONAL LEADERS WERE ON A MISSION.

They have been provided with an opportunity to cut through the misogynistic absurdity and move around one fundamental purpose — to protect the US Taxpayer from ever again being the unwilling recipient of a financial raping of the magnitude that we experienced at the hands of America’s bankers in 2008.

In the 1930′s, in the wake of the 1929 crash as well as in the deep dark shadow of the Great Depression, other political figures were confronted with an equivalent option: Bow under the financial might of the big money crowd, or answer our nation’s call for safeguards against the rapacious predation of the American Banking elite.

What they did was answer that call by having an uncompromising finality that changed the face of banking permanently. They made the unpopular choice of forever (or so they believed) isolating commercial banking from investment banking.

Despite the fact that the bankers of the day howled that their earnings would take a hit and that credit could well be stymied, the politicians rose above the normal back room dealing so established within their world and said no more! Never again will you mercilessly plunder the public bank account!

And you know what? It did the trick!

Sure, there were booms and busts in the process, and banks got in trouble every now and then, but for 70 years we definitely avoided the kind of all encompassing wide spread breakdown that brought the United States to its knees in the 1930′s.

Those government bodies and political figures of the 1930′s weren’t hayseed apprentices. These were the men who took America through the agrarian age fully in to the industrial age. These were realistic, hard nosed business people who had looked deep and long into the abyss of the Great Depression and knew that it was in their own personal long-term best interest to cut the banks off from ever again using publicly insured money to finance their wild risk taking in the wall street game.

Utilizing that historical display of political will as our standard, we can clearly note that our generation’s chosen authorities have gone down far, far short of the mark.

I have read 100s of pages of paperwork concerning the brand new banking reform bill on the verge of being introduced into law, and I will tell you right this moment that it’s filled with more than enough ambiguities to generate loopholes large enough to drive a Mack truck through. Much of the enforcement of this new law, in reality, is discretionary and driven by a small number of people.

We’re left to rely upon the decryption of those policies by what amounts to a tiny cadre of financial bureaucrats. So we’ve gone from weakening the old 1930′s laws with the eradication of the up-tick rule as well as the repeal of the Glass-Steagall Act, to what might turn out to be a little gang of tight knit government bodies with Enormous DISCRETIONARY POWER.

What we will be looking at is the making of numerous so called “star chambers” that can potentially be converted into extremely powerful political weapons. All I see here is a group of hurdles set up to help keep things as they are. The large banking institutions have effectively caused it to be a lot more challenging for other finance institutions to realize the size essential to contend with all of them.

The banking power houses have effectively created a series of “pressure points” where they are able to apply their particular influence over a really small group of people to ensure that their particular challengers are kept at bay while their very own actions are kept off the radar. My friends, not a darn thing has evolved, and don’t let anybody tell you otherwise.

Volcker Rule

The so called Volcker Rule, which may have reinstated the most crucial provision of Glass-Steagall (namely, the separation of investment and commercial banking) was gutted. The thing that was left was a loophole-ridden joke. The headline legislation declares that only 3% of a bank’s capital can go to hedge funds and private equity, but in the small print they open the door to modifications after a study is produced by the Financial Stability Oversight Council.

Mmm, I wonder which way that review will go?

Derivatives

Here once again, the brand new guidelines on derivatives are blurry. The SEC and the CFTC will take over policing this area, and a central clearing house is going to be created to clear derivative trades. However, not all banks will be subject to the newest central clearing guidelines.

To the regulators’ credit, they’re making it mandatory that banks that don’t utilize the derivative clearing house need to enforce higher levels of margin, which is a good concept — but regarding just how much that margin is, who knows? I cannot obtain the number anywhere … if you already know it make sure you post it in the comment section, as I’d like to learn how much the banks will be required to put up.

Mortgage Companies

For a long time, mortgage companies underwrote bad loans, secure within the knowledge that they could get rid of them in to the mortgage backed security market. This, above all else, led to a glut of cheap money that fueled the real estate boom and drove housing prices up to unsustainable levels.

So how can we resolve that?

Well, the politicians are making it mandatory that the mortgage providers are only able to sell 95% of their loans, rather than 100%!! I have to admit, I chuckled when I read this! Do you really believe that 5% ownership can seriously be recognized as having “skin in the game”?

Nevertheless that’s the precise terminology the government is employing.

If you want to make certain that a mortgage company is going to underwrite good paper, wouldn’t you need to make sure they are holding a minimum of 30% of the mortgages that they underwrite with a mechanism in place that could offer them the cabability to loan more money on a sliding scale based on the delinquency rate of their loan portfolio?

The depressing news is the fact that it will likely be a long time before we know without a doubt whether or not these new rules are going to be successful or not.

But think about it: Do you believe that the authorities “watched your back” with these new rules, or did they “stab you in the back” instead?

I know how I feel, and I hope you’ll tell me what you think.

Eric LeRiche

http://www.InvestorRules.com

Share and Enjoy: