Do Not Allow Taxpayers to Remain Hostages of Big Banking
China Times editorial (Taipei, Taiwan, ROC)
January 29, 2010
Unemployment in the US has reached 15 million since the financial tsunami, or nearly 10%. The Obama administration has provided hundreds of billions in government relief for major banks. The banking industry meanwhile, has been doling out huge dividends with complete impunity. The result has been intense public antipathy. Yesterday Barack Obama announced the largest scale financial reform bill since the 1930s. The bill will impose limits on the size of big banks and on their range of services. Obama vowed that he would no longer allow taxpayers to remain hostages to Big Banking. His proposal sent shockwaves through the financial sector and sent financial stocks tumbling on Wall Street for several days in a row.
This is the third time in one week that Obama has targeted Wall Street's big banks. First, on the 14th of this month, he announced the imposition of a "Financial Crisis Responsibility Fee" on the nation's 50 biggest banks. He plans to levy a tax of 90 billion USD on them over the next decade. He intends to get back every dime the taxpayers lost. Next, he ordered the establishment of an independent consumer finance protection agency, responsible for the protection of consumers of financial services. On the 21st of this month he introduced the "Volcker Rule." This financial reform was proposed by former Federal Reserve Chairman Paul Volcker. It will prohibit commercial banks from engaging in dealer transactions. They will not be allowed to own or invest in hedge funds or private equity funds. In addition, any single bank's deposit insurance may not exceed 10% of the US total. This rule will apply to non-insurance deposits as well. These reforms will have a major impact on mergers and acquisitions within the financial sector.
In 1929 the US stock market crashed, sending the economy into the Great Depression. At the time the securities industry was regarded as the culprit. In 1933 the US Congress passed the Glass-Steagall Act, imposing severe restrictions on commercial banks and investment banking sub-sector operations. The bill was not repealed until 1999. Obama has now introduced the "Volcker Rule." It is considered a new version of the Glass-Steagall Act, one that will lead to massive changes in the financial industry's business model. It is widely believed that tanking public support, coupled with the Democratic Party's election defeat in Massachusetts, forced Obama to reposition himself relative to the fat cats on Wall Street, in order to salvage his tarnished image.
The announcement of the "Volcker Rule" was greeted with widespread international approval. The President of the Bank of England, the President of the Swiss National Bank, and the French Finance Minister have all expressed their support. Mario Draghi, Chairman of the International Financial Stability Committee (FSB), said Obama's financial reform will help promote international financial reform. This week the World Economic Forum (WEF) will convene in Switzerland. Early next month the G7 finance ministers will meet. In May the Group20 will meet. All of them will focus on strengthening financial supervision.
But Wall Street firms strongly object to Obama's financial reform bills. Many bankers who deliberately stayed away from the World Economic Forum last year have decided to become personally involved. They intend to use the forum to make their wishes known to national policy-makers and the media.
Wall Street analysts are skeptical. They doubt that Obama's financial reforms will prevent future financial crises, or change the "too big to fail" status of big banks. Suppose a large financial group sells private equity funds and hedge funds. In the event of a financial crisis, will the government really do nothing? Analysts expressed doubts. The root cause of the financial tsunami was toxic securities invented by Wall Street and sold to investors. The process lacked clear supervision. The Volcker Rule does not touch upon this thorny issue. But not all financial industry leaders are opposed to Obama's proposals. For example, former Citigroup chairman John Reed has expressed his support.
Obama's financial reforms face two major challenges. First, the bill must be passed by Congress. The Democratic Party lost a crucial battle in Massachusetts. Its support in the Senate remains in doubt. Secondly, in an era of globalization, Obama's financial reforms need support from other governments. Will the international financial supervisors meeting at the World Economic Forum really reach a consensus? It is difficult to be optimistic.
From an international perspective, unemployment is rising, governments are spending vast sums on relief for Big Banking. Meanwhile these big banks remain utterly indifferent to public perceptions. They continue to hand out huge bonuses, provoking taxpayer wrath. Obama is taking advantage of this sentiment to aggressively promote financial reform. He is clearly speaking to the taxpayer. He has declared his commitment to reform. He hopes to win the hearts of the public. The financial tsunami has not impacted the financial sector on Taiwan as badly. But no matter which party comes to power they firmly support the interests of the big banks and financial groups. They have never been willing to allow banks to fall. Taxpayers have always been held hostage by the big banks. This phenomenon must be reversed. Otherwise bad money will drive out good, becoming the biggest obstacle to progress in the financial sector.
On the first anniversary of his administration, Barack Obama's prestige has taken a beating. But he has demonstrated a resolve to promote a new wave of financial reforms, and a determination to turn the tide. As he approaches the second anniversary of his administration, President Ma's prestige has also taken a beating. Does he have the resolve to protect the interests of taxpayers and promote a new wave of reform?