Tighten controls on big banks

August 24, 2013 

It’s too early to consider a President Elizabeth Warren, but it would be good if the freshman U.S. senator from Massachusetts and scourge of the financial industry could set the Obama administration’s priorities for a few months.

Maybe then Americans would start to see action on two big gaps in the president’s record. No. 1 is the failure to vigorously prosecute the villains behind the financial crisis that blew up the U.S. housing market and vaporized many Americans’ home equity, savings and jobs. No. 2 is the failure to put in place the regulations and oversight needed to keep it from happening again.

Anniversary of collapse

The nation is less than a month away from the five-year anniversary of the Sept. 15, 2008, collapse of the massive Lehman Brothers investment bank. That event began the serial exposure of how much of the economy rested on shaky bonds and liar loans. Regulators are still digging through the rubble to find the bottom.

Warren is concerned that the U.S. government is settling too easily with institutions that engaged in fraud. Instead, she says, it should raise the price of getting caught both in the size of paybacks and in the frequency of criminal prosecution.

In an Aug. 21 letter to Attorney General Eric Holder, Warren noted a settlement reached with the nation’s five largest mortgage servicers: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial. The servicers had submitted insurance claims to the Federal Housing Administration between October 2008 and September 2010 with a combined value of $12 billion. Many of the claims were based on fraudulent or unsound mortgages, and yet the federal government released companies from liability in return for a payment of $225 million.

‘Timid enforcement’

In her letter, Warren told the attorney general, “I am concerned that this may be yet be another example of the federal government’s timid enforcement strategy against the nation’s largest financial institutions.”

Even with the government playing less than hardball with the main offenders, the size of the settlements raises questions of how fraud could have occurred on such a scale without becoming criminal.

U.S. Sen. Kay Hagan sits on the Senate Banking Committee. The North Carolina Democrat said this week that there’s plenty of actors to blame beyond the banks. She also points to those who were supposed to ensure the value of bonds but failed – the underwriters, the bond rating agencies and the government watchdogs who fell asleep.

“If you take the cops off the beat, crime is going to happen, and that’s what happened,” Hagan said.

But Hagan, like the president and most members of Congress, isn’t clamoring for arrests. She is stressing prevention by moving faster to impose new regulations on financial institutions and investments under the Dodd-Frank Act. President Obama called the heads of the financial regulatory agencies together last week for a pep talk to get them going on drafting and imposing the safeguards.

Restore Glass-Steagall

Meanwhile, banks are again becoming too big and interconnected to fail, and some Republicans are pushing to block the Dodd-Frank Act as overly complex financial medicine on par with Obamacare.

Warren’s response is more medicine. In July she joined a bipartisan group of senators including John McCain, R-Ariz., that introduced an updated version of the Glass-Steagall Act. The Depression-era law, repealed in 1999, had separated deposit-taking financial institutions from the investment business.

“Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” Warren said in a statement announcing the new bill. “The four biggest banks are now 30 percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk.”

That risk needs the tough approach to oversight that Warren is not afraid to advocate.

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