US BANKS ARE BEING "SKEWERED" WHILE WALL STREET GOES "SCOTT FREE"

...Wall Street Today

Why Wall Street and the US banks should both be regulated the same.

During a recent press conference, President Obama was asked; "What should be done about the bailed out financial organizations that were still not lending and were instead buying other financial operations while still giving out big company bonuses?" The president´s answer was that financial regulations and oversight needed to be re-installed to prevent this kind of activity.

Well Mr. President, I hope that those deregulation activities are on the "short list" of what will soon be happening as it could be a major item in the total requirement for getting the economy back on line. It could also help to re-instill the American public´s confidence in the US financial community.

Most average Americans think of "banks as banks" and Wall Street as a totally different animal. In fact, in the past, home buyers usually obtained their home mortgages and other loans from their local, or "Main Street", banks, which typically held those loans until they were fully repaid. Therefore, the banks had an interest in making loans that borrowers could actually afford.

Then, with all of the financial deregulation over the past 20-30 years, Wall Street began creating and selling what became known as "derivative securities". And it was such instruments as these, not traditional mortgage loans or standard bank lending, that spawned a mass of "faux credit". These events have created the building of too many houses while it also weakened America´s capital structure for the traditional banks which has undermined public confidence in America´s banks.

As a better explanation of the problem, "derivative securities" are when Wall Street bundles a bunch of home mortgages to serve as the foundations for bonds that are then sold in the securities markets. Traditional bank deposits are then no longer the primary funding source for credit. Instead, loans are financed by the capital market and these securities are packaged and sold by Wall Street.

These "derivative" home mortgages were originated by one firm, packaged by another firm, sold by a third firm and serviced by yet another firm. However, none of these Wall Street firms worried if the mortgages would ever be repaid. That is because the individual mortgage loans themselves were not listed on the Wall Street firm´s books, only the total "derivative security" package was listed.

From 1980 to 2000, the nation´s "securitized derivative debt" grew by 50-fold. This is compared with a 3.7-fold increase for standard bank loans. In 1998, for the very first time, traditional bank lending was surpassed by "securitized" loans. In 2007, Wall Street held two-thirds of all private U.S. debt, which was mostly in home mortgage derivatives.

This growing market for these "faux" mortgage-backed securities overwhelmed the country with credit and with historically low mortgage interest rates. These new mortgage products then fueled the housing bubble and turned the financial markets into a virtual "Las Vegas Casino". In the collapse that followed, billions of dollars of mortgage-backed securities were just written off at total loss.

Unfortunately, the American public continues to think of traditional banks as the primary source of US credit. And they also blame those same banks for the current credit crunch, of which they are only slightly at fault.

And public officials contribute to the confusion by criticizing the banks, while still allowing Wall Street to operate what the Washington Post refers to as the "shadow banking industry", with little or no regulation. This "shadow" operation exists without the normal banking standards for safety and soundness that apply to the US banks, but not to Wall Street. In other words, as compared to the banks, Wall Street has no obligation to make clear the extent of their firms' "debt, leverage, capital or reserves".

The conversion of these "Wall Street investment banks" into giant "hedge funds" has gone unchecked by legislators and regulators, despite constituting a radical change to America´s long-time financial system. And these "funds" have also received billions in taxpayer bailouts for helping to keep them alive. And why is that happening?

Well, it just so happens that these huge hedge funds have also spent $40.6 million on political lobbying and campaign contributions from 1998 to 2008. And these lobbying efforts have paid off tremendously for these Wall Street firms.

As an example, in a recent transaction, when a medium-sized, traditional US bank applied for regulatory approval to acquire another small bank in N.Y., it took 10 weeks and a promise to divest itself of three of their branches before permission was granted. When a major Wall Street investment house decided to seek a large, commercial bank charter package in the midst of the current financial storm, permission was granted in less than a week.

By obtaining this charter, this Wall Street investment bank also received access to the Federal Deposit Insurance Corp (FDIC). The FDIC has long been funded by dues, not from Wall Street, but from thousands of smaller, community-based banks across the US. And without any Wall Street funding support, the FDIC now guarantees $28 billion of the Wall Street investment bank's debt securities. That's equal to 10% of all funds guaranteed under the government's Temporary Liquidity Guarantee Program.

The balance of regulatory oversight between commercial banks, investment banks and other parts of the financial services industry must be restored. This is not only to be fair to the banks but because the nation's ailments won't be cured unless solutions are directed at the entire financial system, not just the one-third of it that had little to do with the current financial crisis.

Copyright G.Ater 2009

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