365 days after Lehman collapse, still no new bank regulation, and White House proposals face tough climb

Story Transcript

JESSE FREESTON, PRODUCER, TRNN: Welcome to The Real News Network. I’m Jesse Freeston in our Washington, DC, studio, coming to you one year after Lehman Brothers collapsed, igniting or exacerbating a financial crisis in the United States that has now spread throughout the world and into a broader economic crisis. President Barack Obama chose this moment to deliver a talk to Wall Street. The talk came at a time where reports indicate that the five major banks that have come out as winners of the financial crisis are reporting profits of a total of $13 billion over the last quarter. And joining us to talk about this is Kevin G. Hall, McClatchy Newspapers’ national economics correspondent. Welcome, Kevin.

KEVIN G. HALL, ECONOMICS CORRESPONDENT, MCCLATCHY: Thank you.

FREESTON: So, Kevin, tell us a little bit about these profits. Where are they coming from?

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HALL: Well, the biggest driver of the profits is the cheap money. The Federal Reserve has interest rates at almost zero, and has been there for quite some time, and it’ll be there for quite some time. It’s allowing banks to recapitalize. They’re not lending a lot. The consumer’s in the dumps, businesses are in the dumps with the economy contracting. Now it looks like we’re in an expansion, but we’re still going to probably go over 10 percent on unemployment, so that that’s not the environment to be lending. And they’re investing in fairly risk-free things, but largely, basically, getting free money and able to pad the balance sheet.

FREESTON: Now, President Obama mentioned in his speech that some of the same practices that went on before Lehman Brothers collapsed in 2008, that those banks are back to doing some of the similar practices.

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BARACK OBAMA, US PRESIDENT: Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we’re still recovering, they’re choosing to ignore those lessons. I am convinced they do so not just at their own peril but at our nation’s.

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FREESTON: What sort of tactics was he referring to here?

HALL: Well, that was a reference to the executive compensation practices on Wall Street. Soon after the crisis began to ebb, immediately they began poaching each other’s staff and trying to offer incentive-driven packages. It was that compensation, that incentive-driven compensation, that led to the excessive risk-taking, and they’re right back into that environment where the bigger the risk, the bigger the reward, the potential reward. And when you’re playing with other people’s money, that’s kind of what what got us in this mess.

FREESTON: And so the administration has put forward its proposals for regulatory reform, and now we’ve seen movement in the House and the Senate towards their idea of regulatory reform. Is that specific issue taken up in meetings?

HALL: The House has already moved on executive compensation. The Senate is moving in that direction as well. That is one that’s probably going to have an easier go. The administration’s approach has been to let shareholders have a greater say in the compensation package, try to have broad parameters on what’s expected, not try to force it, but try to create an environment where shareholders and transparency will allow this to be clearer, and that pressure, that public pressure, will try to prevent that kind of widespread or outsized compensation. In fact, the head of Goldman Sachs, the CEO, Lloyd Blankfein, Lloyd Blankfein said recently that he agreed that it is necessary and that there had been tremendously outsized compensation.

FREESTON: How is that different from before the crisis, that the shareholders would be the ones determining compensation?

HALL: Well, there’s been a push to have more shareholder say and a broader vote on things like compensation. The rules have worked against individual shareholders and kind of favored the people who have the bigger stake in the company and that sometimes are people who’ve been stacked by, you know, a friendly board of directors, so to speak.

FREESTON: What other changes to the national regulatory system are being proposed by the administration or are we seeing in the Congress?

HALL: The administration’s offered a really wide-ranging reform plan, a revamp plan. It’s looking at giving the Federal Reserve greater powers. It wants to strip away from all the hodgepodge of regulators the protection of the consumer. That’s the biggest failure was protecting the consumer. He wants a new entity, a new agency called the Consumer Financial Protection Agency, which will be charged with a single, sole mission: protect the consumer. Banks are fighting this furiously. They put out a statement opposing this almost immediately after Obama spoke. They want to see consumer protection stay with the variety of bank regulators. The problem with that is we had what was called forum shopping, where they looked for the regulator of least regulation, and it was kind of a race to the bottom. And that’s why the administration feels it’s necessary to pull that out, keep it separate, protect the consumer on credit cards, on home loans, on a range of financial products, credit products that affect the consumer. The House of Representatives is behind this, has pushed this through their legislation. It’s fighting more resistance in the Senate. So it will be interesting to see how that plays out.

FREESTON: What about this issue of too big to fail? This is an idea that was thrown around that was used as the justification for the major bank bailouts, for the moves that the Federal Reserve has made since. Has there been any action to sort of curb that? ‘Cause it appears that the banks that have come out on top are now bigger than they were before the crisis, and perhaps even more pertinent to the system.

HALL: It is. One of the biggest challenges in this revamp is how to address this too-big-to-fail, and how to define it, for that matter. What the administration has gradually come around to—. They first wanted higher capital reserve requirements, higher loan cash requirements—liquidity requirements is the technical term—for transactions. Now they’re finding that that may not be enough, and what they’re now looking at is a sliding scale. So it’s a disproportionate jump: the bigger you get, the more you have to set aside, not commensurate to your size, but disproportionately commensurate to your size. And that creates a disincentive to get too big. But too-big-to-fail also means too interconnected to fail. And the biggest impact of the crisis was these people who had tentacles all over the world and credit default swaps and a bunch of other opaque financial instruments that nobody was quite sure who owed what to whom. So that is another—that’s the challenge that creating a systemic risk regulator who’s going to look across the financial spectrum to try to regulate that or gage how big someone is in terms of their exposure. But that’s going to be a big challenge.

FREESTON: And this was sort of the role that the Federal Reserve was supposed to be playing before the crisis as the overarching systemic-risk evaluator and really failed at that. And a lot of people have pointed to the Federal Reserve’s structure, the fact that it’s made up of banks and bank people. We see a bill on the table to audit the Fed that has a lot of support in the House. Is there anything on the table to maybe look at how the Fed is structured, if it’s going to play such an important role as regulator? That maybe perhaps it shouldn’t be made up by bank people?

HALL: Well, I think that’s on the table. One certainty in this crisis is the Fed as we knew it will not be the Fed as we know it. It’s going to be a different entity. And that’s all in play. The administration wants to empower the Fed even further, and it’s—a big debate in Congress will be coming on this as to whether the Fed needs to be bigger. And if it is bigger and more muscular, what is the transparency, what sort of checks and balances? Right now its balance sheet has grown to over $2 trillion, and there’s very little public input in this. It has reported—it does have transparency on what it does, but the ability to question and the rationale often won’t be known for five years, because what goes on in meetings is often private for five years.

FREESTON: Thank you, Kevin.

HALL: Thanks.

FREESTON: And thank you for watching The Real News Network.

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Please note that TRNN transcripts are typed from a recording of the program; The Real News Network cannot guarantee their complete accuracy.