Does Too Big to Fail Mean Too Big to Change?

Now that we, the taxpaying electorate, have bailed out Wall Street, Wall Street is mightily resisting all efforts toward effective financial regulatory change. The proposed independent consumer protection agency seems likely to end up a division of the Fed. That would be the same Fed that famously insisted there was no housing bubble--right at the peak of the housing bubble. If they can't see the problem, they won't fix it. Consumers, emptor.

Investors, emptor, as well. It now seems that the concept of a fiduciary duty probably will not be imposed on stockbrokers. Too bad, since it would have required stockbrokers to put the customer first--admittedly a quaint notion but one that might restore some confidence in the financial markets. But given how the Treasury Department and the Fed have persistently put Wall Street first, with taxpayers and everyone else second, it's hardly surprising that Congress and the administration don't see why investors, who crucially furnish the capital that fuel the financial markets, should get a break.

The derivatives market--the shadow banking sector whose unregulated rambunctiousness made the mortgage and credit crises of 2007-08 possible--continues to dodge and weave away from serious efforts at reform. While the CFTC and SEC are pushing for change, one gets the sense that power brokers are quietly maneuvering at Congressional fundraisers to put concrete shoes on derivatives reform and take it for a nocturnal boat ride.

The "Volcker Rule," a proposal to separate taxpayer supported federally insured deposits from high risk bank proprietary activities, seems to have run afoul of a basic Wall Street principle: money talks and fairness walks. The financial sector, once the epitome of free markets, now seems never to see a federal subsidy it doesn't like. Moral hazard is good for profits, and profits are good for bonuses. Wall Street will pig out on as much federal largess as it can scoop out of the hands of taxpayers.

All this isn't surprising when one considers that the basic structure of Wall Street was saved in the bailouts of the last 18 months. The big banks now follow the imperative of all organizations and endeavor to preserve their status quo. Given their enormous financial power, restored by dumping a lot of risk and loss onto the backs of taxpayers, it's hardly surprising they can wheel in panzer divisions of lobbyists and roll back their opposition.

Too big to fail, therefore, may turn out to mean too big to change. The financial behemoths that played crucial roles in the recent financial crisis may escape largely unscathed and unchanged. What, then, would prevent a recurrence of the crisis? The tale of Fannie Mae and Freddie Mac may be instructive. For decades, Fannie and Freddie used their enormous financial resources to fund the most powerful lobby in Washington, bar none, while their officers and other personnel relentlessly made self-interested campaign contributions. Key members of Congress of both parties became running dogs for Fan and Fred, snapping up all the doggie treats tossed in their direction. All efforts to reform Fan and Fred, and reduce the systemic risk they presented, failed miserably. It was not until they, along with others, created a bad mortgage loan tsunami that overwhelmed every sea wall in the financial sector that the government, facing economic Armageddon, seized control of Fan and Fred, and put an end to their lobbying juggernaut. But the cost of nationalizing them has been hundreds of billions--a premium price for regulatory reform.

Not changing the landscape of financial regulation won't improve things, not in the short or long run. It would only set the stage for another crisis, one that very possibly will be worse than the recent one. The doctrine of too big to fail seems to have saved and consolidated powerful banks that now are using their restored financial and political muscle to hinder and delay desperately needed regulatory reform. Although the key players--Ben Bernanke, Henry Paulson and Timothy Geithner--surely wouldn't have intended such a result, their very strongly held belief that one must save the financial sector above all appears to have led to this dilemma. There is no shame or gratitude on Wall Street, where money--and only money--talks. If taxpayers bail them out, they'll proceed with business as usual, even when, and especially if, increased regulation to protect taxpayers would crimp their profits. Chumps are not meant to be repaid.