Does the Obama Plan for Reforming Wall Street Measure Up?

In a word: No.

The plan doesn’t stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn’t require bankers to take their pay in long-term stock options or warrants, and it doesn’t even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.

Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn’t hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks — before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn’t be allowed to go under. And there’s not the slightest mention of antitrust, to break up the largest banks.

The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans — thereby helping make sure borrowers know what they’re getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there’s no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don’t have a big financial stake in keeping oversight to a minimum.

In short: It’s a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 — which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 — will repeat itself within a decade, if not sooner.

In fact, the banks that have repaid their TARP money are already planning to resume supersize bonuses, even though many of them are still awash in toxic assets and their non-performing loans are up. Bad credit-card and commercial property debts are mounting. Foreclosures are soaring. Yet several of the big banks are showing profits. How are they pulling this off? First, they strong-armed the Financial Accounting Standards Board into allowing them to assign whatever value they wanted to all the junk on their balance sheets. Then they played hardball with the Treasury staffers whose so-called “stress tests” lapsed into little more than negotiations over numbers and probabilities. (The national unemployment rate is already approaching the highest unemployment rate in the stress tests.) Then they convinced investors that financials have hit bottom and were now good bets. Presto!

Watch your wallets. The Street is up to its old tricks. And the White House’s so-called reform is little more than a whitewash.

Originally published at Robert Reich’s blog and reproduced here with the author’s permission.

2 Responses to "Does the Obama Plan for Reforming Wall Street Measure Up?"

  1. Eric Zuesse   June 26, 2009 at 6:07 am

    In every substantive regard, Obama’s “change” has turned out to be a lie and he’s continuing Bush’s policies: letting executives of taxpayer-bailed-out banks assign themselves multimillion-dollar bonuses; keeping the Red Cross and all other outside investigators away from the huge Bagram Afghanistan prison which holds detainees from around the world, retaining don’t-ask-don’t-tell, arguing in court to retain the Defense of Marriage Act, arguing in court to keep secret the coal company executives who’ve visited the White House, continuing Bush’s FISA policies, blocking prosecution of Bush Administration people in regards to torture, blocking prosecution of them for Bush’s politicization of the Justice Department, even trying to throw Don Siegelman back into prison, etc., on and on.Regarding health care, Obama’s four basic points which included a public option became three points which didn’t even mention it. Regarding global warming, Obama isn’t treating it as the most important p0olicy issue in world history and so is letting lobbyists shape the legislation.Obama is the most skillful politician of our time and perhaps of all time, but he’s turning out to be a boon to the Republican Party, a boon which will probably cause them to score gains in the 2010 elections, and which might even hand them the White House in 2012 when voters will have become fed up with a failed President while the nation sinks yet again into a downward-accelerating economy and a really Great Depression, Act II.

  2. bigD   June 28, 2009 at 12:37 am

    Mr Obama so far is the ideal front-man of the ruling class of the last 10-odd years.Where is the “Change”?