Dodd-Frank Turns Four and Nothing Fundamental has Changed

This is an abridged version of my remarks on the 1933 Glass-Steagall Act and impotence of the 2010 Dodd-Frank Act at the Schiller Institute's 30^th Anniversary Conference in New York City. June 15 2014. Full text and video are here. July 21, 2014 marks four years since the Dodd-Frank Act was signed.

Thank you. I want to address a few things today, one of which is the Glass-Steagall Act, and what it meant to our country’s history, why it was passed, how it helped, and how the repeal of that Act in 1999 has created a tremendously unstable environment for individuals at the hands of private banking institutions and political-financial alliances with governments and central banks.

I also want to talk about how some of the remedies that have been proposed in the wake of the 2008 subprime crisis, including the Dodd-Frank Act, and its allegedly most important component, the Volcker Rule, are ineffective at combatting this risk; and that what we really need to do is go back to a time, and go back to a policy, and to use the strength and intent of the original Glass-Steagall Act to [attain] a new Glass-Steagall Act, in order for us to be safe going forward. When I say “us,” I mean everybody in this room. I mean the population of the United States. I mean the populations throughout the globe.

Because what we have today, and what we’ve had in the wake of the repeal of the Glass-Steagall Act, is [a condition] where the largest banking institutions have been able to increase the concentration of their capital, of their influence, and of their power. This has been subsidized and substantiated by [bi-partisan] political forces within the White House, the Treasury Department, the Federal Reserve, and governments throughout the world—in particular, throughout Europe and through the ECB—and it’s something that must change to achieve more [financial and] economic stability for the greater citizenry.

How the Glass-Steagall Act Came To Be

Let’s go back in time, to [consider] how the Glass-Steagall Act came about. We had a major crash in 1929. It was the result of a tremendous amount of speculation, and also rigging of markets by the larger financial institutions, as well as things called trusts, which were small components of these institutions, that were set up in order to bet on various industries, and collections of companies within those industries, and so forth, as well as to make special bets on foreign bonds in foreign lands; as well as to make bets on the housing market, which is something we’ve seen and are familiar with quite recently.

A lot of this activity was done, in particular, by the Big Six banks at the time—which included National City Bank and First National Bank, which today we know as Citigroup; the Morgan Bank and the Chase Bank, which today we know as JPMorgan Chase; as well as two other Big Six bank.  [The men running these banks] got together in the wake of the crash in 1929, which they had helped to [perpetrate], and decided that they needed to save the markets, as they were deteriorating very quickly.

The reason they wanted to save the markets was not because they wanted to protect the population; it was because they wanted to protect themselves. The way they chose to do that, was to put in $25 million each, after only a 20-minute meeting that occurred at the Morgan Bank on No. 23 Wall Street, catty-corner from the New York Stock Exchange. After this 20-minute meeting, which was called together by a man named Thomas Lamont, who was a major banker at the time, and the acting chairman of the Morgan Bank, these six bankers broke and went out into the streets. The press heralded them as heroes who [had] saved the day, and in particular, heralded the Morgan Bank as an institution that [had] yet again save the economy from virtual catastrophe.

It [the press] compared the decision that was made after that 20-minute meeting to what had happened after the Panic of 1907, when J.P. Morgan, the patriarch of the Morgan Bank, had been called upon by President Teddy Roosevelt, to save what was then a situation of deteriorating markets, and of deposits being crushed, and of citizens losing their money because of the rigging of markets.

At the meeting, the decision was to buy up stocks. The stocks that were bought were the ones in which the Big Six banks had the most interest. The market rose for a day, which is why the newspapers were so happy. It was why President Herbert Hoover, at the time, decided he might actually get re-elected, as opposed to facing not just “un-election”, but also, a bad historical legacy. And everybody was quite pleased with the results.

Unfortunately, as we know, after the market rose, after that day, after they put in the money to buy those stocks, it crashed by 90% over the next few years. The country was thrown into a Great Depression. Twenty-five percent of the individuals in the country were unemployed. There was a global depression that was ignited because of [global speculation and debt gone awry]. Foreclosures skyrocketed, businesses closed, thousands of smaller banks [collapsed], and the country plunged into dire straits, [as did the world].

FDR’s Bankers

Into that, came President FDR, and something that’s very interesting historically, that I did not even know before I [researched] my latest book, All the Presidents’ Bankers. FDR had friends - and they were bankers. Two of [his banker] friends were James Perkins, who ran the National City Bank after the Crash of 1929, and Winthrop Aldrich, who was the son of Nelson Aldrich, who happened to have been [the] Senator that [spawned] the Federal Reserve Act, or its precursor, as created at Jekyll Island in 1910 with four big bankers [See Chap. 1 in All the Presidents’ Bankers for more detail on this.]

These were men of pedigree. These were men of power. These were men of wealth. Even before the Glass-Steagall [or Banking] Act was passed in [June] of 1933, and signed into law, these men worked with FDR, because they believed that if they separated the institutions they were running - their banks, the biggest banks in the country - into keeping deposits of individuals safe and divided from speculative activities and the creation [and distribution] of securities that could sour very quickly - then not only their banks, but the general economy [would be sounder.]

That was the theory behind the Glass-Steagall Act: if you separate risky endeavors and practices, and the concentration of that risk, from individual deposits and loans, then you create a more stable banking system, a more stable financial market, a more stable population, and a more stable economy. FDR believed that, and the bankers believed that.

Even before the Act was passed, Aldrich and Perkins [met] with FDR in the first 10 days of his administration, and promised FDR they would separate their banks. And that’s why [Glass-Steagall] was more than just legislation. It was the [result] of a [positive] political-financial alliance and policy to stabilize the system, so that everybody could benefit.

Those [bankers] also did benefit. Their legacies benefitted. The National City Bank that was run by Perkins, the Chase Bank that was run by Aldrich—those banks exist today. But the Glass-Steagall Act enabled them to grow in a more stable manner. Aldrich and Perkins chose to keep the deposit-taking and lending arms of their banks. They promoted the Act [publicly] alongside FDR. Congress, in a bipartisan fashion and enthusiastically, passed the Glass-Steagall Act. So, it was a [sound] national platform on every level.

That’s something we don’t have today.

The Take-Down

What we’ve had since—and it started to a large extent in the late ’70s, and accelerated throughout the Reagan Administration, the Bush Administration, the Clinton Administration, and then ramifications through the second Bush Administration and the Obama Administration, is a disintegration of the idea of that Act. The idea that risky endeavors and deposits should be kept separate in order for stability to exist throughout.

In the ’80s, banks were allowed to merge across [more product lines]. In the ’90s, banks were allowed to [merge across state lines] and increase their share of financial services by re-introducing insurance companies, brokerages, the ability to create securities that we now know today can be quite toxic, as well as trade in derivatives and other types of more technologically complex, even more risky, securities, all under one roof.

[Because] in 1999, under President Bill Clinton, an act was passed, the Gramm-Leach-Bliley Act that summarily repealed all the intent of the Glass-Steagall Act. What it created in its wake, was a free-for-all, a merging and concentration and consolidation of the largest banks into ever-more powerful and influential entities: influential over our capital; over our economy; and with respect to the White House.

This is not something that the bankers ‘pushed’ upon the White House. We should realize this. It is something that [also stemmed from] Washington, under several administrations, under bipartisan leaderships, under different types of Treasury secretaries that came from the very same banking system that they were supposedly going to watch over from public office—they all collaborated to repeal this Act.

In 2002, 2003, 2004, when rates were low, and subprime loans started to be offered in bulk, these banks, that now had much more concentration over deposits, over insurance products, over brokerages, and over asset management arms, were able to create [toxic] securities out of a very small amount of loans. Out of a half a trillion dollars worth of subprime loans, extended to individuals, they were able to create a $14 trillion mountain of toxic assets. They were able to leverage that mountain, $14 trillion, to $140 trillion of risk, by virtue of the co-dependencies of the Big Six banks, by virtue of the derivatives involved in the securities [administered through other financial entities], that were laced with these mortgages, and by all sorts of complex different types of financial engineering.

As we know, that practice concluded [badly] in 2008. [But] this time, the result of that implosion was not to chop off the arms of these banks. It was not having men running these banks, like Winthrop Aldrich, say, “You know, this was a bad idea. We screwed up our banks, we screwed up the markets, we screwed up people, we screwed up the economy—let’s separate. Let’s go back to a time that was simpler, that was saner.”

That decision wasn’t made. What occurred instead was a decision at the highest levels of Washington, the Treasury Department, the Federal Reserve, the New York Federal Reserve, to coddle this very banking system, and to subsidize it, to sustain it, and all its flaws, and with all the risks that permeated [from it] around the entire population in the United States, and throughout the world, with trillions of dollars of loans, of debt, [of purchases], of cheap money, of a zero-interest-rate policy approaching its sixth year, which means these banks can continue to be liquid, even though they are very unhealthy, and promoting their interests over the interests of the wider population [or customer-base].

Dodd-Frank: The Banks Are Bigger Than Ever

The Dodd-Frank Act was passed and signed into law by President Obama on July 21, 2010. President Obama, then-Treasury Secretary Timothy Geithner, then-Federal Reserve Chairman Ben Bernanke, as well as many pundits in the media, said it would dial back this immense risk and [act as] sweeping regulation [just] like in the Great Depression.

But it has done absolutely nothing of the kind. In the wake of the 2008 crisis, the big banks are bigger. JPMorgan Chase was able very cheaply [to acquire] Bear Stearns and Washington Mutual, to become the largest bank in the United States again. This ties back to the legacy of J.P. Morgan in the 1907 Panic, throughout the decisions that were made at its request before 1929, in the wake of the 1929 Crash, and so forth.

Citigroup has managed to survive. Goldman Sachs, Morgan Stanley, Wells Fargo, [Bank of America]—all of these banks, the Big Six today, which are largely variations of the Big Six banks, historically, 100 years ago, with a couple of additions and many mergers along the way—have been able to sustain themselves due to a government policy that has enabled them to grow and promote risky practices that are dangerous to all of us.

The Dodd-Frank Act doesn’t separate these banks. It doesn’t make them smaller. It doesn’t diffuse their derivatives concentration [and co-dependencies]. The Big Six banks today in the United States, control 96% of all the derivatives trading in the United States. They control 45% of all the derivatives trading throughout the globe. They control 84% of the FDIC-assured deposits throughout all of the banks in the United States, and 85% of the assets throughout all of the banks in the United States. So their concentration, their power, is immense in the wake of the 2008 crisis, and in the wake of this alleged remedy to the crisis, which is the Dodd-Frank Act.

And the final component of that Act, which is supposed to at least reduce their riskiest trading practices, or proprietary trading: The Volcker Rule is an 892 page [piece of legislation], that [contains] 55 pages of definitions and rule, and the rest is exemptions to that rule. The banks can continue to make markets, to hedge, to provide hedge funds and private equity funds, just under different language, to keep their insurance arms, to keep their brokerages, to create complex securities that are so interlocked that if one fails, the rest of them fail. And if the bank that has the most of them fails or falters, the other banks in this entire system will fail or falter as well. So, nothing in the Volcker Rule of the Dodd-Frank Act materially changes anything.

Resurrect Glass-Steagall!

What we need is a resurrection of the Glass-Steagall Act. And We need to realize it wasn’t just a law; it was a policy of stability. It was a political and financial alliance between the White House and the biggest bankers of the time, and the population.

That’s what we must press, and that’s the only thing—a complete separation of risky endeavors from our money, from normal lending practices, [from government subsidies]—that can even start to foster a more stable financial system, banking system, and economic environment for all the rest of us.

That’s the take-away from today. There’s more information about the lead-up to the Glass-Steagall Act, the swipes at it over time, the particular alignment and relationships of Presidents and bankers that actually cared more about the population’s economic stability as well, as the ones that didn’t care at all. This can be found in my book All the Presidents’ Bankers, which I urge you to check out, to gain [further] knowledge about the reasons for why we had that Act, and why it’s more necessary than ever, today.

Declaration of Independence In the 21st Century

While much of America marks July 4th with fireworks, barbeques and family gatherings, people should also take a moment to pause and consider the state of the very freedoms, liberties and rights that the Declaration of Independence was produced to acquire for the population. At a mere 1302 words subject to editorially consent by its creators, the Declaration of Independence from British monarchical rule listed clear intentions of the-then 13 colonies that wanted to become the United States of America.

The preamble is more widely known than the rest of the document, but worth restating for its potency:

“When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.”

The ideology behind the document reflected a sense of spirituality, respect and commonality with God and Nature, but more than that, it underscored essentials that a government should provide the governed, and that the governed were entitled to receive, if said government was to remain appropriately responsible and humane to its citizens. 

The rest of the document delineates grievances against the King of Great Britain that prevented these new Americans from attaining “unalienable Rights” including to “Life, Liberty and the pursuit of Happiness.” It also expressed the idea that “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

The notion here was that if a government was not properly supporting the people it represented or was moreover plaguing them through various forms plundering, ravaging, or otherwise destroying lives, then, it should be abolished. The signers condemned the King for “repeated injuries and usurpations” that promoted “the establishment of an absolute Tyranny over these States.”

Most of the 27 listed pieces of the evidence to these injustices related to demands for fair representation regarding the setting of legislation for the “public good”, as well as for justice, commerce, privacy, war and peace. They also included condemnation of the King for ”transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny.”

They concluded that “A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people” and did “solemnly publish and declare” the “United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved.”

The Declaration of Independence aimed to dissolve monarchical tyranny and associated destructive and aggressive military and financial forces. It aimed to instigate the establishment of a government and legislation that would administer and create policies so as to achieve the reasonable requirements of “Free and Independent States” and the individuals that dwelled in them. But, today's political-financial elite have resurrected a new brand of tyranny.

Tyranny comes in many forms, in particular through actions and decisions that disproportionately elevate the concerns of the most powerful at the expense of the public good or its longer-term stability, liberty or safety.

Today’s most select politicians float seamlessly between elected or appointed public office to the private sector where their personal fortunes and influence are endowed with extravagant speaking or advisory engagements and commensurate fees. 

Former president Bill Clinton having ascended to the presidency through a cadre of wealthy benefactors and the firms they represented, amassed millions of dollars after leaving the White House bestowing his charisma and connections to scores of corporate gatherings at top dollar prices. Hillary Clinton has been doing the same thing since leaving her Secretary of State Post. Barack Obama is poised to reap even greater gains from private sphere elitists that dictate his policies if not his rhetoric.  Vice President Joe Biden recently keynoted Goldman Sachs’ North American Energy Summit conference.

The spirit of the Declaration of Independence, even if some of its signers were richer than others,  reflected one of government for the public good, and not to augment the King’s desires for power or additional riches. Our current system is a long way from that particular ideology. Control of the fate of the population is more than ever in the hands of a select group of families, individuals and the corporate legacies they represent.

Today, the bix six banks hold 85% of the bank assets in the country and 96% of its derivatives activity. The Federal Reserve subsidizes banks with zero interest rate and bond buying policies. Five companies run most of publishing. Six media giants control 90% of  American media, in the process forming editorial content, notions of pop-culture and the dispersion of information to the population. Five health insurance companies dominate half of our nation’s health insurance policies (covering over 100 million people) and thus our access to the most cost-effective care. The approximately half a trillion-dollar federal defense budget favors five prime defense contractors.

More than half of the people in Congress are millionaires (with Democrats and Republicans about equally wealthy), placing them in the top 1% of the nation’s citizens from a wealth perspective.

Today’s tyranny of power lies also in the myth that we citizens enjoy equal participation or even representation in the political system within which the elected and unelected powerful operate, and through which they impact the rest of  us. But one vote of one individual does not equal the influence of one conversation with one major CEO or one golf-game with a blue-blood patriarch. Millions of votes don’t compensate for decades of tight relationships between the political and financial elite that collaboratively shaped domestic and international economic, military, national security and social policies.

Our country is much bigger in terms of population and land domination today than it was on July 4, 1776, but the concentration of power and wealth is smaller. Back then, we sought freedom from a King, now we must seek freedom from a plutocracy that operates to constantly consolidate its riches and influence to the detriment of broader economic equality and political representation.

In this latest course of human events, we must pursue independence from oligarchical control over our lives, liberties and pursuits of happiness.

We must pursue independence from corporate dominance over our individual economic destinies and collective opportunities to afford basic needs.

We must insist upon the separation of public office and private power crony alliances that increase rather than reduce inequality.

We must demand the reduction in defense budgets that foster international destruction and infringe upon individual liberties.

We must alter the fundamental trajectory of government-banking ties that dictate the flow of money backed by debt to the hands of those that speculate most dangerously with it.

In short, we must elevate the equality of humanity that pervaded the intent of the Declaration of Independence by moving away from the rapaciousness of old and modern tyranny that prevents it.

Before the Election was Over, Wall Street won

Before the campaign contributors lavished billions of dollars on their favorite candidate; and long after they toast their winner or drink to forget their loser, Wall Street was already primed to continue its reign over the economy.

For, after three debates (well, four), when it comes to banking, finance, and the ongoing subsidization of Wall Street, both presidential candidates and their parties’ attitudes toward the banking sector is similar  – i.e. it must be preserved – as is – at all costs, rhetoric to the contrary, aside.

Obama hasn’t brought ‘sweeping reform’ upon the Establishment Banks, nor does Romney need to exude deregulatory babble, because nothing structurally substantive has been done to harness the biggest banks of the financial sector, enabled, as they are, by entities from the SEC to the Fed to the Treasury Department to the White House.

In addition, though much is made of each candidates' tax plans, and the related math that doesn’t add up (for both presidential candidates), the bottom line is, Obama hasn’t explained exactly WHY there’s $5 trillion more in debt during his presidency, nor has Romney explained HOW to get a $5 trillion savings. 

For the record, both missed, or don’t get, that nearly 32% of that Treasury debt is reserved (in excess) at the Fed, floating the banking system that supposedly doesn’t need help. The ‘worst economic period since the Great Depression’ barely produced a short-fall of  an approximate average of $200 billion in personal and corporate tax revenues per year, according to federal data.)

Consider that the amount of tax revenue since 2008, has dropped for individual income contributions from $1.15 trillion in 2008 to $915 billion in 2009, to $899 billion in 2010, then risen to $1.1 trillion in 2011. Corporate tax contributions have dropped (by more of course) from $304 billion in 2008 to $138 billion in 2009 to $191 billion in 2010, to $181 billion in 2011. Thus, at most, we can consider to have lost $420 billion in individual revenue and $402 billion in corporate revenue, or $822 billion from 2009 on. The Fed has, in addition, held on average of $1.6 trillion Treasuries in excess reserves. That, plus $822 billion equals $2.42 trillion, add on the other $900 billion of Fed held mortgage securities, and you get $3.32 trillion, NOT $5 trillion, and most to float banks.

The most consistent political platform is that big finance trumps main street economics, and the needs of the banking sector trump those of the population.  We have a national policy condoning zero-interest-rate policy (ZIRP) as somehow job-creative. (Fed Funds rates dropped to 0% by the end of 2008, where they have remained since.)

We are left with a regulatory policy of pretend. Rather than re-instating Glass-Steagall to divide commercial from investment banking and insurance activity, thereby removing the platform of government (or public) supported speculation and expansion, props leaders that pretend linguistic tweaks are a match for financial might. We have no leader that will take on Jamie Dimon, Chairman of the country’s largest bank, JPM Chase, who can devote 15% of the capital of JPM Chase, which remains backstopped by customer deposit insurance, to bet on the direction of potential corporate defaults, and slide by two Congressional investigations like walks in the park.

Pillars of Collusion

A few months ago, Paul Craig Roberts and I co-wrote an article about the LIBOR scandal; the crux of which, was lost on most of the media. That is; the banks, the Fed, and the Treasury Department knew banks were manipulating rates lower to artificially support the prices of hemorrhaging assets and debt securities. But no one in  Washington complained, because they were in on it; because it made the over-arching problem of debt-manufacturing and bloating the Fed’s balance sheet to subsidize a banking industry at the expense of national economic health, evaporate in the ether of delusion.

In the same vein, the Fed announced QE3, the unlimited version – the Fed would buy $40 billion a month of mortgage-backed securities from banks. Why – if the recession is supposedly over and the housing market has supposedly bottomed out – would this be necessary? 

Simple. If the Fed is buying securities, it’s because the banks can’t sell them anywhere else. And because  banks still need to get rid of these mortgage assets, they won't lend again or refinance loans at faster rates, thereby sharing their advantage for cheaper money, as anyone trying to even refinance a mortgage has discovered. Thus, Banks simply aren’t ‘healthy’, not withstanding their $1.53 trillion of excess reserves (earning interest), and nearly $900 billion in mortgage backed securities parked at the Fed. The open-ended QE program is merely perpetuating the illusion that as long as bank assets get marked higher (through artificial buyers, zero percent interest rates, or not having to mark them to market), everything is fine.

Meanwhile, Washington coddles and subsidizes the biggest banks - not to encourage lending, not to encourage saving, and  not to better the country, but to contain harsh truths about how badly banks played, and are still playing, the nation.

The SEC’s Role

According to the SEC’s own report card on “Enforcement Actions: Addressing Misconduct that led to or arose from the Financial Crisis”: the SEC has levied charges against 112 entities and individuals, of which 55 were CEOs, CFOs, and other Senior Corporate Officers.

In terms of fines; the SEC ‘ordered or agreed to’ $1.4 billion of penalties, $460 million of disgorgement and prejudgment interest, and $355 million of “Additional Monetary Relief Obtained for Harmed Investors. That’s a  grand total of $2.2 billion of fines. (The Department of Justice dismissed additional charges or punitive moves.)

Goldman, Sachs received the largest  fine, of $550 million, taking no responsibility (in SEC-speak, “neither confirming nor denying’ any wrongdoing) for packaging CDOs on behalf of one client, which supported their prevailing trading position, and pushing them on investors without disclosing that information, which would have materially changed pricing and attractiveness. (The DOJ found nothing else to charge Goldman with, apparently not considering misleading investors, fraud.)

Obama-appointed SEC head, Mary Shapiro, originally settled with Bank of America for a friendly $34 million, until Judge Rakoff quintupled the fine to $150 million, for misleading shareholders during its Fed-approved, Treasury department pushed, acquisition of Merrill Lynch, regarding bonus compensation. (Merrill’s $3.6 billion of  bonuses were paid before the year-end of 2008, while TARP and other subsidies were utilized). Still embroiled in ongoing lawsuits related to its Countrywide acquisition, Bank of America agreed to an additional $601.5 million in one non-SEC settlement, and $2.43 billion in another relating to those Merrill bonuses. Likewise, Wells Fargo agreed to pay $590 million for its fall-2008 acquisition of Wachovia’s foul loans and securities. These are small prices to pay to grow your asset and customer base.

Citigroup agreed to pay $285 million to the SEC to settle charges of misleading investors and betting against them, in the sale of one (one!) $1 billion CDO. Judge Rakoff rejected the settlement, but Citigroup is appealing. So is its friend, the SEC.  Outside of that, Citigroup agreed to an additional $590 million to settle a shareholder CDO lawsuit, denying wrongdoing.

JPM Chase agreed to a $153.5 million SEC fine relating to one (one!) CDO. Outside of Washington, it agreed to a $100 million settlement for hiking credit card fees, and a $150 million settlement for a lawsuit filed by the American Federation of Television and Radio Artists retirement fund and other investors, over losses from its purchase of  JPM’s Sigma Finance Hedge Fund, when it used to be rated ‘AAA.’

There you have it. No one did anything wrong. The total of $2.2 billion in SEC fines, and about $4.4 billion in outside lawsuits is paltry. Consider that for the same period (since 2007), total Wall Street bonuses topped $679 billion, or nearly 309 times as much as the SEC fines, and 154 times as much as all the settlements.

The SEC & Dodd Frank Dance

The SEC embarked upon 90 actions, divided into 15 categories, related to the Dodd-Frank Act that amount to proposing or adopting rules with loopholes galore, and creating reports that summarize things we know. Some of the obvious categories, like asset backed related products or derivatives, don’t even include CDOs, which got the lion’s share of SEC fines and DOJ indifference.

Rather than tightening regulations on the most egregious financial product culprits; insurance swaps, such as the credit default swaps imbedded in CDOs, the SEC loosened them. It did so by approving an order making many of the Exchange Act requirements not applicable to security-based swaps. In one new post-Dodd-Frank order, it stated, a “product will not be considered a swap or security-based swap if ,,, it falls within the category of…insurance, including against default on individual residential mortgages.” Thus, credit default swaps, considered insurance since their inception, warrant no special attention in the grand land of sweeping reform.

The credit ratings category includes 20 items proposed, requested, or adopted. Under things accomplished, the SEC gave a report to Congress that basically says that the majority of rating agency business is paid for by issuers (which we knew), and proclaims (I kid you not) that a security is rated “investment grade” if it is rated “investment grade” by at least one rating agency. Further inspection of SEC self-labeled accomplishments provides no more confidence, that anything has, or will, change for the safer.

The White House & Congress

Yet, the Obama White House wants us to believe that Dodd-Frank was ‘sweeping reform.’ Romney and the Republicans are up and arms over it, simply because it exists and sounds like regulation, and Democrats defensively portray its effectiveness.

Ignore them both and ask yourself the relevant questions. Are the big banks bigger? Yes. Can they still make markets and keep crappy securities on their books, as long as they want, while formulating them into more complicated securities, buoyed by QE measures and ZIRP? Yes. Do they have to evaluate their positions in real world terms so we know what’s really going on? No.

Then, there’s the Volcker Rule  which equates spinning off private equity desks or moving them into asset management arms, with regulatory progress. If it could be fashioned to prohibit all speculative trading or connected securities creation on the backbone of FDIC-insured deposits, it might work, but then you’d have Glass-Steagall, which is the only form of regulatoin that will truly protect us from banking-spawned crisis.

Meanwhile, banks can still make markets and trade in everything they were doing before as long as they say it’s on behalf of a client. This was the entire problem during the pre-crisis period. The implosion of piles of toxic assets based on shaky loans or other assets didn’t result from  private equity trading or even from isolating trading of any bank’s own books (except in cases like that of Bear Stearns’ hedge funds), but from federally subsidized, highly risky, ridiculously leveraged, assets engineered under the guise of 'bespoke' customer requests or market making related ‘demand.’ 

When the Banking Act was passed in 1933, even Republican millionaire bankers, like the head of Chase, Winthrop Aldrich, understood that reducing systemic risk might even help them in the long run, and publicly supported it. Today, Jamie Dimon shuns all forms of separation or regulation, and neither political party dares interfere.

But things worked out for Dimon. JPM Chase’s board (of which he is Chairman) approved his $23 million 2011 compensation package (the top bank CEO package), despite disclosure of a $2 billion (now about $6 billion) loss in the infamous Whale Trade. He banked $20.8 million in 2010, the highest paid bank CEO that year, too. In 2009, Dimon made $1.32 million, publicly, but really bagged $16 million worth of stock and options. He made $19.7 million in total compensation for 2008, and $34 million for 2007. Still a New York Fed, Class A director, he’s proven himself to be untouchable.

Yet, the kinds of deals that were so problematic are creeping back. According to Asset Backed Alert, JPM Chase was the top asset-baked security (ABS) issuer for the first half of 2012, lead managing $66 billion of US ABS deals.

In addition, according to Asset Back Alert, US public ABS deal volume rose 92.8% for the second half of 2012 vs. 2011, while issuance of US prime MBS (high quality deals) fell 50.6%. Overall CDO issuance rose 50.2%. (Citigroup is the lead issuer (up 552%.))

ZIRP’s  hidden losses

According to a comprehensive analysis of data compiled from regulatory documents by  Bill Moreland and his team at my new favorite website, www.bankregdata.com, some really scary numbers pop out. Here’s the kicker: ZIRP costs citizens and disproportionately helps the biggest banks, by about $120 billion a year.

Between 2005 and 2007, US commercial banks held approximately $6.97 trillion of interest bearing customer deposits. During the past two quarters, they held an average of $7.31 trillion. During that first period, when fed funds rates averaged 4.5%, banks paid their customers an average of $39.6 billion of interest per quarter. More recently, with ZIRP, they paid an average of $8.9 billion in interest per quarter, or nearly 77% LESS. In dollar terms - that’s about $30.7 billion less per quarter, or $123 billion less per year.

Since ZIRP kicked into gear in 2008, banks have saved nearly $486 billion in interest payments. Average salary and compensation increased by approximately 23%. Dividend payments declined by 14.05%.

The biggest banks are the biggest takers. Consider JPM Chase’s cut. Although its deposits disproportionately increased by 46% from 2007 (pre ZIRP and helped by the acquisition of Washington Mutual) to 2012, its interest expenses declined by nearly 89%. From 2004 to 2007, Chase paid out $34.4 billion in interest to its deposit customers. From 2008 to mid-2012, it paid out $3.4 billion. JPM Chase’s ratio of interest paid to deposits of .27% is the lowest of the big four banks, that on average pay less than smaller banks anyway.

The percentage of JPM Chase’s assets comprised of loans and leases is lower at 36.04% compared to its peers’ percentage of 52.4%. Its trading portion of assets is higher, as 14.78% vs. 6.88% for its peers, and 4.23% for all banks.

Looking Ahead

To recap: savers, borrowers, and the economy are still losing money due to the preservation of the illusion of bank health. More critically, the big banks grew through acquisitions and the ongoing closures of smaller local banks that provided better banking terms to citizens.  The big banks have more assets and deposits, on which they are over-valuing prices, and paying less interest than before, due to a combination of Fed and Treasury blessed mergers in late 2008, QE and ZIRP. Yet, we’re supposed to believe this situation will somehow manifest a more solid and productive economy.  

Meanwhile, past faulty securities and  loans will fester until their transfer to the Fed is complete or they mature, while new ones take their place. This will inevitably lead to more of a clampdown on loans for productive purposes and further economic degradation and instability. Financial policy trumps economic policy. Banks trump citizens, and absent severe reconstruction of the banking system, the cycle will absolutely, unequivocally continue.