Safe Banking Act key to real reform
Amid a flood of revelations about fraud and corruption–from mortgage brokers peddling loans they knew couldn’t be paid back, to rating agencies dressing up junk with AAA ratings, to Goldman Sachs creating and selling a security designed to fail–the Senate takes up Wall Street reform this week. The major question is whether the Senate will step up and vote to break up the big banks.
Senate Democrats will seek to act this week. The House has already passed a comprehensive bill. Not one Republican in the House voted to support reform. Senate Republicans are vowing to block consideration, but most observers think they won’t dare stand in the way of basic reform. The big question is whether the Senate bill can be strengthened to make a difference.
Here the key issue is whether the Senate will put a limit on the size of the big banks. The issue is critical. The big banks were rescued without being reformed. They have emerged from the crisis bigger and more concentrated than ever. They’ve already reopened the casino and started to hand out million-dollar bonuses. If nothing is done, they will go back to the same practices that led us off the cliff.
But the situation is even worse than before. The big banks are bigger. The top six–JPMorgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo and Bank of America–have assets equivalent to more than 60 percent of our gross national product. (Twenty years ago, they controlled less than 20 percent.) As Sen. Bernie Sanders has noted, “four of them hold half the mortgages in America, control two-thirds of the credit cards, and amass 40 percent of all deposits.” They also hold a staggering 80 percent of derivatives risk, the very profitable bets that were exposed in the Goldman case.
Now they are officially deemed too big to fail. That means that they are too big for the market to discipline. They have an explicit promise that if they get in trouble once more, the government will step in to keep them from blowing up the financial system.
The effect of this is utterly corrupting. They can borrow at a lower rate than smaller banks, since creditors know that no matter how risky their activities, they won’t be allowed to fail. And they are free to take the wildest bets, confident that while they pocket the winnings taxpayers will cover their losses.
More important than that, banks this big wield enormous political power. They finance elections. They are spending $1million a day to lobby against financial reform. Their wealth makes them powerful advisers whether in office or out. Their power allows them to create the rules that reinforce their power.
Only their excesses contributed directly to blowing up the economy, doubling our national debt, causing millions to lose their homes and jobs, and costing citizens literally trillions in retirement savings and home values. If they are to be brought under control, now is the time.
Neither the Senate nor the House bill limits the size of the big banks. That’s why Senators Sherrod Brown (D-Ohio) and Edward E. Kaufman (D-Del.) have introduced the Safe Banking Act to limit the size of financial institutions–restricting non-deposit liabilities to no more than 3 percent of GDP, and adding tough capital requirements.
This week will feature a fight to amend the Senate bill to include this measure. The banks are mobilizing to stop it–but this is where citizens must speak. Politicians realize that Americans are livid that the banks got bailed out. They also understand that if we are ever to regulate banks, we must do it now.
Mark Zandi, Sen. John McCain’s economic adviser, calls the big banks an “oligopoly.” Are they more powerful than the democracy? Can citizen power overcome the banks’ money power? Will your senators stand with the big banks or with citizens? The stakes are high. Breaking up the big banks isn’t the only reform needed–but it is a necessary reform. Now is the time to make your voice heard. Every senator should be put on notice. This is no time for politics as usual. Hold them accountable for the choice they make.