Five reforms to prevent another financial crash

Posted Wednesday, Sep. 25, 2013  comments  Print Reprints
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Five years ago, the nation’s financial system unraveled due to recklessness on Wall Street and regulatory failure in Washington.

Little, if anything, has changed on Wall Street since then. The biggest banks and their leaders have paid no real legal, economic or political price for their wrongdoing, and the nation remains at risk from unrepentant and unreformed megabanks.

Here are five critical actions that need to be taken to prevent another crisis and to ensure that our banking system serves our nation’s best interests.

• We need tough and resolute leaders in key financial regulatory positions in Washington.

The Financial Crisis Inquiry Commission cited as a key cause of the crisis the failure of the Federal Reserve under Alan Greenspan to stem the flow of toxic mortgages. Regulators must have the backing and backbone to stand up to the big banks and to reform them so they serve the core mission of lending to expand our economy.

• We must put an end to outsized Wall Street executive compensation packages that continue to encourage big risk-taking where the payoff on the upside for executives can be huge and the downside for those executives almost nil. Big institutional investors, who manage the life savings of working Americans, need to demand an end to pay practices that reward the casino culture that brought down the house.

• Big banks must be required to hold more capital. Fed Chairman Ben Bernanke told the FCIC that, in September and October 2008, 12 of the nation’s 13 biggest banks were at risk of failure within a week or two.

Razor-thin capital cushions were a central factor in the meltdown. Yet, capital standards at systemically important banks remain dangerously low.

• We must completely overhaul our broken system of financial law enforcement. There is no real deterrence against corruption that puts our banking system at risk. Banks break the rules, pay modest fines as the cost of doing business (actually, shareholders pay those fines, not the responsible individuals), and then return to business as usual.

We need vigorous enforcement with real consequences. This means pursuit of criminal cases against individuals involved in wrongdoing. It means enforcement agencies seeking remedies with teeth such as meaningful civil penalties, restitution and executives forfeiting their jobs.

It means giving enforcement agencies the resources needed to conduct thorough investigations and go up against the banks’ phalanx of high-priced lawyers.

• It’s time to break up the big banks. Real reform of our financial system cannot occur unless we break the stranglehold that these banks hold on our financial system, our economy and our democracy.

The substantive arguments for restructuring the biggest banks are clear. The financial system’s stability would be greatly at risk if one or more systemically important financial institutions were to fail.

The concentration of banking assets in a few large banks warps the marketplace. The cost of banking for consumers has risen over the last 30 years despite claims that scale would bring savings.

Wall Street has used every resource at its disposal to thwart reform. In the last two years alone, securities and investment firms spent more than $200 million on federal lobbying — on top of hundreds of millions of dollars in campaign contributions — fighting reform in Congress, then at regulatory bodies, and then in the courts.

As of July 2013, less than 40 percent of the rules required under the Dodd-Frank financial reform law enacted in 2010 had been put in place.

Simply stated, the megabanks are too big to fail, too big to manage, too big to regulate and too big for a truly competitive marketplace. In their unrestrained use of their enormous political power to fight change, they have also proven they are too big for a healthy democracy.

Phil Angelides, former state treasurer of California, served as chairman of the Financial Crisis Inquiry Commission. www.philangelides.com

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