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Thursday, November 8, 2012

Matt Taibbi asks will Obama Administration 'keep sitting on their ass' when it comes to cleaning up Wall Street?

In a Huffington Post phone interview, Matt Taibbi asks will the Obama Administration "keep sitting on their ass" and not clean up Wall Street.

The Obama administration in its first four years didn't take a hard line on Wall Street reform, and that probably won't change, according to Rolling Stone writer and infamous Wall Street hater Matt Taibbi. 
The administration might "keep sitting on their ass," Taibbi told The Huffington Post in a phone interview late Wednesday. 
Taibbi said he believes that the president could have won in a landslide if only he'd called the financial industry to account for the mistakes that brought on the mortgage meltdown, financial crisis and recession
"They kept the status quo," Taibbi said. "The bailouts and policies were totally continuous with Bush's." ...
Your humble blogger refers to these bailouts and policies as the Japanese Model for handling a bank solvency led financial crisis.  Under the Japanese Model, bank book capital levels and banker bonuses are protected at all cost.
Obama signed the Dodd-Frank financial reform bill into law in 2010, after leaving it mostly to Congress to hash out the details. Dodd-Frank includes many regulations that bother Wall Street -- such as requiring big banks to carry more capital and (mostly) banning proprietary trading. But critics say the 848-page law is full of potential loopholes and does not address the true causes of the financial crisis. 
Specifically, it does not address opacity across wide swathes of the financial system including the banks and structured finance securities.

But this was to be expected from a bill that was written by Wall Street for Wall Street with the exception of the Consumer Financial Protection Bureau and the Volcker Rule.
The Obama administration has not criminally prosecuted any Wall Street executives for contributing to the financial crisis. 
Which is remarkable considering that over 3,000 individuals went to jail for their actions which contributed to the US Savings and Loan crisis.
The administration also decided not to break up big banks.
Simply requiring these banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details will do this.

Pressure to break up will come through several channels.  The primary one being higher funding costs for having higher risk. Close behind will be a crackdown on the 14,000 subsidiaries engaged in arbitraging rules and regulations.
Fannie Mae and Freddie Mac still are under government control; they have cost taxpayers $150 billion as of May 2012. ...
These could be easily dealt with by requiring observable event based reporting for all activities like payments or defaults involving the underlying collateral before the beginning of the next business day.  With this information, investors in structured finance securities would know what they own.

Equally importantly, the private mortgage-backed securities market would restart because potential buyers could independently assess the risk of what they are buying.
Taibbi said that the Obama administration needs to stop worrying that it might appear anti-business if it cracks down on Wall Street. 
"If they had made that argument clearly -- that we have to clean up Wall Street, we have to do the right thing -- then people would have gotten it, and he would have gotten more support than he got last night," Taibbi said.
Cracking down on Wall Street is actually incredibly pro-business.  One of the impacts of cracking down on Wall Street will be the banks will recognize all the losses currently hiding on and off their balance sheets.

With the excess debt removed from the financial system, the burden of supporting this debt will be lifted from the real economy.  Rather than capital going to the black hole of debt service, the capital can be used for reinvestment or growth.  Both of which would contribute to improving economic performance.

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