Elizabeth Warren: Big Banks Waging a "Guerilla War" Against Regulations

Erika Johnsen

5/14/2012 12:51:00 PM - Erika Johnsen

Elizabeth Warren, currently fighting a hot contest for the Massachusetts' junior U.S. Senate seat against incumbent Republican Scott Brown, has done a bunch of financial and bailout-related advising for the Obama administration and styles herself a "consumer advocate." ...Hah. I'm sure everyone in the Obama administration, most especially those on the new-ish Consumer Financial Protection Bureaua borne of the Dodd-Frank Act, fancy themselves 'consumer advocates' -- which offers at least a partial explanation for why all American consumers are still stuck in these economic doldrums.

"There has been a guerrilla war out there in which the largest financial institutions have been doing everything they can to make sure that financial regulations don't get put in place and if they do get put in place, that they are loaded with loopholes and not very effective," Warren said on CNN's "Starting Point." ...

"There is a lobbying army hired by these financial institutions because they really don't want to have any oversight," Warren said. "They want to take on risks, and let the rest of us deal with the consequences with anything goes wrong." ...

"We need to stop the cycle of bankers taking on risky activities, getting bailed out by the taxpayers, then using their army of lobbyists to water down regulations," Warren wrote in the statement. "We need a tough cop on the beat so that no one steals your purse on Main Street or your pension on Wall Street."

In a nutshell, Elizabeth Warren is worried that these big banks will take on more risks when they know the taxpayer is one the hook. ...Uh, you're darn right they will -- and who's fault is that?! For years, the federal government incentivized large financial institutions to take on more risk, and then decided to excuse sketchy behavior with bailouts and allow these banks to grow even bigger. Now, they're continuing to invite rent-seeking behavior with even more federal involvement.

If you're going to provide people chances to manipulate the political environment rather than compete in the free-market, they're going to do so. Obama promised real financial reform, but several years laters, the biggest problems haven't really been addressed. As much as Obama loves to channel the populist "fat cat" rhetoric, it's no coincidence that so many of Obama's closest advisors and biggest donors are Wall-Streeters -- they've been sidling up to him in droves throughout his tenure.

As to the JP Morgan fiasco to which Warren is specifically referring, I defer to the WSJ:

Even though the blunder won't come close to breaking J.P. Morgan, Mr. Dimon deserves thanks for unwittingly reminding regulators of the need for clear playbooks to wind down failing financial behemoths without bringing the system down. …

Mr. Dimon's stumbles underline the two biggest problems left over from the financial crisis: Large banks are both too complex to understand and too big to fail. The latter has become such an integral part of Wall Street's conscience that it has its own acronym: TBTF.

On complexity, regulators should shoulder part of the blame. During the crisis, the Treasury Department and the Federal Reserve encouraged banks to buy each other—J.P. Morgan gobbled up securities firm Bear Stearns Cos. and the banking operations of Washington Mutual Inc., which was felled by bad mortgages. The result is financial institutions that would have made Mary Shelley proud.

Having overly complicated banks makes it all the more imperative to resolve the TBTF dilemma: how to wind down a large institution without forcing taxpayers to bail it out and destroying the financial system. …

After all, as one Wall Street executive recently wrote to his investors, this process "is critically important for forcing managements and creditors…to understand that they are NOT too big to fail—and to understand that they are NOT so important that the taxpayers will bail them out and that they are NOT immune to the consequences of excessive risk taking."

His name? James Dimon.

Adding to the legions of bureaucrats operating with high-minded ideals and imperfect information, who regulate random minutiae like debit card fees on the ostensible behalf of the consumer, does not prevent the type of industry consolidation that the feds claim caused this economic mess, and will only be a hindrance to all financial institutions in the process. You can bet your bottom dollar that these banks are fighting tooth-and-nail against the onslaught of Dodd-Frank regulations -- and the following lone paragraph (from a very helpful breakdown from The Economist) pretty much sums up why:

But the really big issue that Dodd-Frank raises isn’t about the institutions it creates, how they operate, how much they cost or how they are funded. It is the risk that they and other parts of the Dodd-Frank apparatus will smother financial institutions in so much red tape that innovation is stifled and America’s economy suffers. Officials are being given the power to regulate more intrusively and to make arbitrary or capricious rulings. The lack of clarity which follows from the sheer complexity of the scheme will sometimes, perhaps often, provide cover for such capriciousness.