FacebookTwitterGoogle+RedditEmail

The Secret World of Banking

by Ralph Nader

All the headlines about corporate disclosures and the need for transparency are sending shivers through the banking industry and its regulators who have always lived in a protected and largely secret world.

Hundreds of millions of dollars are expended on examinations of depository institutions, but most of the key findings are treated as inside information between the bankers and the regulators who see a mutual advantage in keeping the depositors and investors-and even Members of Congress-in the dark about the gritty details of their performance. Only when an institution actually fails and taxpayer-backed deposit insurance funds are lost do the hard facts of mismanagement and regulatory miscues become public knowledge.

The lack of timely disclosures about bank conditions arose a few weeks ago when a recess appointee to the Securities and Exchange Commission, Cynthia Glassman, suggested that the so-called “Camel ratings” of banks be made available to the public. Camel ratings compiled by the regulators are evaluations based on examiners’ and supervisors’ assessment of six factors: capital, asset quality, management, earnings, liquidity, and sensitivity to risk. Performance is based on numerical ratings of 1 to 5-with five designated as the worst.

Ms. Glassman’s suggestion produced an immediate uproar among regulators and the bank lobbyists. Comptroller of the Currency John Hawke, who spent most of his career as a big-time bank lawyer and lobbyist, immediately sent his spokesman out to denounce the idea of public disclosure, contending that the Camel ratings were an “internal tool of the regulators.”

Other opponents suggested that disclosure of the ratings might cause a “run” on a bank by scared depositors. This brings back memories of the savings and loan collapse in the 1980s when the Chairman of the Federal Home Loan Bank-Danny Wall–continued to paint rosy pictures and withhold bad news from the public while behind the scenes the savings institutions rotted and edged toward failure. At one point, Wall barged into the offices of the General Accounting Office in an attempt to block the release of a critical report citing mounting losses and increasing drains on the deposit insurance runs. And the friends of the savings and loans in key positions on Capitol Hill were all too happy to gloss over the worsening conditions until it was too late.

The costs to the taxpayers and the savings and loan industry increased greatly under this blanket of secrecy. The public release of the Camel ratings would make it impossible for regulators and banks to hide conditions and let problems mushroom into disasters ala the savings and loan collapse. And as the SEC’s Ms. Glassman asks “why shouldn’t investors [as well as depositors] have this information.”

Richard Carnell, a professor of law at Fordham University and former Assistant Secretary of the Treasury, wholeheartedly endorses the idea of public disclosure of the Camel ratings, arguing that the disclosure would “facilitate constructive criticism of how bank regulators measure risk.” Carnell was one the key staffers on the Senate Banking Committee who urged action on the savings and loan crisis in the 1980s and crafted many of the reforms after the collapse.

Rather than facing the market discipline which full disclosure would help instill, the banks and other depository institutions prefer to utilize a costly deposit insurance system as a tranquilizer for the public. As thespeculation by the savings and loans revealed in the 1980s, the taxpayer-backed insurance creates a moral hazard that encourages excessive risk taking.

Throughout this Congress, much of the banking industry has been on Capitol Hill in an intensive lobbying campaign to have taxpayer-backed deposit insurance increased from its present limit of $100,000 per depositor to as much as $150,000 plus indexing for future inflation. The present $100,000 limit was pulled out of thin air in 1980 by a handful of House-Senate conferees seeking a means of helping the ailing savings and loans attract deposits in competition with big money center banks. Actually, under loopholes, a family of four could keep as much as two million dollars in insured accounts in a single institution.

The secrecy maintained by federal regulators combined with the tranquilizer of the massive deposit insurance program effectively takes the public out of the debate about banking policy. As a result, it is difficult to build public opinion about legislative and regulatory actions which impact on the safety and soundness-not to mention the efficiency–of banking corporations, and ultimately on the health of the deposit insurance funds.

That was certainly the case in 1999 when the combined lobbying forces of banks, securities firms and insurance companies pushed through a near total rewrite of the nation’s financial laws which authorized the formation of huge nationwide financial conglomerates-with little or no protections for consumers or the taxpayers who stand behind the deposit insurance funds.

So, the idea advanced by a lone member of the Securities and Exchange Commission for disclosure of the regulators’ ratings of banks is a welcome development in this desolate desert of secrecy which surrounds the banking industry. But, don’t expect the banks or their regulators to agree voluntarily to come out in the sunshine. It is too convenient to leave bank regulation asan inside-game. The same is true for the Congress-particularly the House and Senate Banking Committees-which prefer to legislate favors for the industry without being bothered with messy facts in the hands of their voters back home.

But the Enrons, the Worldcoms and the Global Crossings-among others-are placing a new premium on open disclosure. Perhaps, the sunshine may ultimately reach the musty dark corners of the secret world of banks and bank regulation.

 

Weekend Edition
February 12-14, 2016
Andrew Levine
What Next in the War on Clintonism?
Jeffrey St. Clair
A Comedy of Terrors: When in Doubt, Bomb Syria
Ismael Hossein-Zadeh – Anthony A. Gabb
Financial Oligarchy vs. Feudal Aristocracy
Paul Street
When Plan A Meets Plan B: Talking Politics and Revolution with the Green Party’s Jill Stein
Rob Urie
The (Political) Season of Our Discontent
Pepe Escobar
It Takes a Greek to Save Europa
Gerald Sussman
Why Hillary Clinton Spells Democratic Party Defeat
Carol Norris
What Do Hillary’s Women Want? A Psychologist on the Clinton Campaign’s Women’s Club Strategy
Robert Fantina
The U.S. Election: Any Good News for Palestine?
Linda Pentz Gunter
Radioactive Handouts: the Nuclear Subsidies Buried Inside Obama’s “Clean” Energy Budget
Michael Welton
Lenin, Putin and Me
Manuel García, Jr.
Fire in the Hole: Bernie and the Cracks in the Neo-Liberal Lid
Thomas Stephens
The Flint River Lead Poisoning Catastrophe in Historical Perspective
David Rosen
When Trump Confronted a Transgender Beauty
Will Parrish
Cap and Clear-Cut
Victor Grossman
Coming Cutthroats and Parting Pirates
Ben Terrall
Raw Deals: Challenging the Sharing Economy
David Yearsley
Beyoncé’s Super Bowl Formation: Form-Fitting Uniforms of Revolution and Commerce
David Mattson
Divvying Up the Dead: Grizzly Bears in a Post-ESA World
Matthew Stevenson
Confessions of a Primary Insider
Jeff Mackler
Friedrichs v. U.S. Public Employee Unions
Franklin Lamb
Notes From Tehran: Trump, the Iranian Elections and the End of Sanctions
Pete Dolack
More Unemployment and Less Security
Christopher Brauchli
The Cruzifiction of Michael Wayne Haley
Bill Quigley
Law on the Margins: a Profile of Social Justice Lawyer Chaumtoli Huq
Uri Avnery
A Lady With a Smile
Katja Kipping
The Opposite of Transparency: What I Didn’t Read in the TIPP Reading Room
B. R. Gowani
Hellish Woman: ISIS’s Granny Endorses Hillary
Kent Paterson
The Futures of Whales and Humans in Mexico
James Heddle
Why the Current Nuclear Showdown in California Should Matter to You
Michael Howard
Hollywood’s Grotesque Animal Abuse
Steven Gorelick
Branding Tradition: a Bittersweet Tale of Capitalism at Work
Nozomi Hayase
Assange’s UN Victory and Redemption of the West
Patrick Bond
World Bank Punches South Africa’s Poor, by Ignoring the Rich
Mel Gurtov
Is US-Russia Engagement Still Possible?
Dan Bacher
Governor Jerry Brown Receives Cold, Dead Fish Award Four Years In A Row
Wolfgang Lieberknecht
Fighting and Protecting Refugees
Jennifer Matsui
Doglegs, An Unforgettable Film
Soud Sharabani
Israeli Myths: An Interview with Ramzy Baroud
Terry Simons
Bernie? Why Not?
Missy Comley Beattie
When Thoughtful People Think Illogically
Christy Rodgers
Everywhere is War: Luke Mogelson’s These Heroic, Happy Dead: Stories
Ron Jacobs
Springsteen: Rockin’ the House in Albany, NY
Barbara Nimri Aziz
“The Martian”: This Heroism is for Chinese Viewers Too
Charles R. Larson
No Brainers: When Hitler Took Cocaine and Lenin Lost His Brain
FacebookTwitterGoogle+RedditEmail