As Obama Dithers, Our Big Banks Grow Politically Stronger

A fair comparison can be made between the oil and railroad trusts of the 19th century and the megabanks of today. Both ride roughshod over legal niceties. And both have Washington protecting their backs.

Our big banks give generously to both parties. And have you noticed the swinging door between DC and Wall Street?

Bankers are increasingly seen as the only people with the insight and expertise to join the government and have a shot at controlling the big banks. But it seems their biggest insight invariably leads to a call to inaction: Banks, you see, are too vulnerable to reign in.

In Obama’s early days in the White House, Treasury Secretary Tim Geithner said that…

The confidence in the system is so fragile still. The trust is gone. One poor earnings report, a disclosure of a fraud, or a loss of faith in the dealings between one large bank and another — a withdrawal of funds or refusal to clear trades — and it could result in a run, just like Lehman.

Either the banks made a miraculous recovery and got better in less than a year or their vulnerability was much exaggerated. I’m sure you can figure out this subterfuge foisted on the public by the Wall Street-DC unholy alliance.

Obama doesn’t get it. He still thinks a stiff breeze will blow these powerful global institutions into smithereens. But New York State’s attorney general knows better than to listen to the likes of Timmy Geithner. He’s beginning an investigation of Wall Street practices. It could, one hopes, finally lead to some long-overdue justice being metered out in our courts.

So far, under a Democratic administration, Wall Street has avoided any serious jail time from attacks on the Left or Right. Even Ron Paul’s answer to Wall Street’s spreading influence is an anemic “let’s not save them in the future” mantra.

But in order to have a ghost of a chance or following through on this simplistic solution, Washington cannot be forced to choose between the collapse of the global financial system or enforcing its own rules. Much of our megabanks’ power comes from their size. From the New York Times

The American ideal of equal and impartial justice under law has repeatedly been undermined by attempts to concentrate power. Our political system has many advantages, but it also provides motive and opportunity for resourceful people to become so strong they can elude the legal constraints that bind others.

The most obvious example is the oil and railroad trusts at the end of the 19th century. A version of the same process is happening again today, but what has become concentrated is not a vital energy source or the nation’s transport arteries but rather something much more abstract – financial sector risk.

In early 2009, Treasury Secretary Timothy F. Geithner reportedly said to President Obama and senior members of the new administration, with regard to the financial system (as described by Ron Suskind on Page 202 of “Confidence Men”:

The confidence in the system is so fragile still. The trust is gone. One poor earnings report, a disclosure of a fraud, or a loss of faith in the dealings between one large bank and another — a withdrawal of funds or refusal to clear trades — and it could result in a run, just like Lehman.

Three years later, the megabanks are even bigger, as is the risk they concentrate (see my recent testimony to the financial institutions subcommittee of the Senate Banking Committee for details). Curiously, their precariousness, as much as their power, is shielding these behemoths from the enforcement of financial fraud laws.

Thankfully, this lawlessness – and it is that – nettles some regulators and prosecutors. The New York State attorney general, Eric Schneiderman, is mobilizing the resources for a long-overdue investigation of Wall Street practices that, I hope, will gather momentum.

But the Obama administration continues to dither, arguing behind the scenes that the financial system is still too weak. This inertia – a government at rest tends to stay at rest – has led to public protest and deeply shaken trust in the financial system.

In an important article in The Huffington Post this week, Jeff Connaughton (former chief of staff to Senator Ted Kaufman, Democrat of Delaware) asserts that the Department of Justice failed to concentrate the resources that might have built successful cases:

As The New York Times and New Yorker have reported, the department’s leadership never organized or supported strike-force teams of bank regulators, F.B.I. agents and federal prosecutors for each of the potential primary defendants and ignored past lessons about how to crack financial fraud.

We may never know exactly why the administration failed to organize effectively along these lines, but Mr. Geithner’s influence is likely to have played a role. For his part, President Obama, the few times he was asked, explained that past unethical Wall Street actions were “not illegal.”

Mr. Geithner may dispute details in “Confidence Men” (which was also quoted by Mr. Connaughton in his piece), but worry about system stability is part of the Treasury secretary’s job. Despite a lack of any supporting evidence, Mr. Geithner sees megabanks as essential to the functioning of the economy – and he gambled on bailing them out as a way to restart the economy.

So it would have been entirely logical for him to fear disclosures that would damage their business models and legal viability.

Whenever someone or a group of people is above the law, equality before the law is ended. This is how the megabanks, and the way they are treated, threaten to undermine democracy.

In the recent past I’ve argued that the banks must be reined in (you’ve seen these articles on these very pages). One way is to cut down the size of our biggest banks. It’s not the entire solution but it would be a nice start.

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