The End Of Banking As We Know It

The financial earnings of big banks will go the way of the Dodo bird, driven by the will of Congress to right the perceived wrongs of the credit crisis. The disaster was as much the failure of federal regulators and the Fed’s drive a decade ago to get every man, woman, and child into his or her own home. But, that did not matter much to the Administration, the House or Senate. The electorate wanted to draw blood, at least when the debate over the fate of big banks began. Voters have all but forgotten that as they fret about their jobs and the oil leak. At least that is what the latest polls show.

American citizens don’t care about bank reform any more. The credit crisis is ancient history.The new bill eviscerated big banks. Volcker, ancient at 84, got Congress to accept his philosophy that it is dangerous for banks to act as de facto hedge funds which trade for their own accounts. Since most of the earnings for the former investment banks turned commercial banks by TARP, the move is disastrous. Proprietary trading operations will be spun out away from depositor money. It can only be guessed how that will work, but shareholder of banks have sold off stock in anticipation that it is bad. Banks will be allowed to trade interest rate swaps, but that is about it.

The new rules will also force big banks to stuff as much as $19 billion into a rainy day fund, which will partially offset taxpayer bills for the last bailout and offer a cushion against future collapses. If banks have learned anything from the credit crisis that will change their risk management, it is a belt and suspenders approach

As usually happens in the federal government, private institutions fare worse than public ones. The Fed will get a minor audit and then a tracking of its balance sheet actions. It ability to raise or lower rates will be left alone. Ron Paul, who wanted the Fed abolished, will need to retreat into his office to concoct another hair-brained scheme.

Congress says consumers will get something out of the legislation, a sort of protection against the avarice of banks that want to charge high interest rates. In other words the bill has something for everyone.

And, that is the tragedy of the legislation. It doles out little pieces of comfort to several constituents, and nothing comprehensive for any of them

Douglas A. McIntyre

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