The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

More Form Than Substance

01/21/2010

The Tea Party demonstrators were livid at the big banks, especially when the taxpayers had to bail them out. It is fair to say that profits were privatized, while losses were socialized. This means the banks and their shareholders got to keep the profits, while the taxpayers got to pay for their losses. Their anger is understandable. President Obama, anxious to prove he has heard the Tea Party complaints, went on the attack today.

During the Clinton Administration, the Glass-Steagall Act was repealed. This law kept commercial banks separate from investment banks. Commercial banks accept consumer deposit and commercial loans. They are more conservative, and commercial bankers make decent salaries. Investment banks help companies raise money from the stock and bond markets. Most of the new financial products like derivatives were developed by and traded by the investment banks. They are not as conservative, and investment bankers make huge, maybe obscene, salaries. The President’s comments would start separating the two functions again.

Today, the stock prices of the big banks got crushed, but a curious thing happened. The regional banks, like SunTrust, did great. Clearly, the market sees them as the winner in this effort to re-regulate an industry that needs to be re-regulated. Bringing back Glass-Steagall would help reduce risk but is also unnecessary, if we would start by enforcing the existing regulations. (The Bernie Madoff scandal is a perfect example of that.) Many analysts agree with that position. But, we ALSO need meaningful punishment for excessive risk-taking. There are many bond salesmen who lost their great jobs and are now unemployed, but sitting on some beach AFTER making millions of dollars. Why wouldn’t they take excessive risk?

Today’s comments by the President were required political theatre, and I expect the big banks to recover shortly, once the uncertainty wears off.

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