Barofsky, Born and Miller’s bombshells (video and notable quotes on “too big to fail”)

“Too big to fail” banks not only leave the country at risk of another crippling financial crisis, but also are holding the country’s political processes hostage because of the outsized power they wield.

That was the consensus among speakers at the release of Reality Check, a book by Public Citizen’s Taylor Lincoln that seeks to remind the public that deregulation caused the economic downturn and to counter the myths that have been propagated about regulations in recent years.

Watch the video (also embedded above) featuring highlights of the discussion.

Speakers included Neil Barofsky, the former inspector general of the Troubled Asset Relief Program, former Commodity Futures Trading Commission (CFTC) Chairperson Brooksley Born, and former Rep. Brad Miller (D-N.C.).

These three former public officials are among the best equipped to evaluate risks to the economy from insufficient regulation. Barofsky went toe-to-toe with the other financial regulators in pursuit of standards to prevent fraud and steps to ensure that loan restructuring programs perform their stated purpose of helping people avoid foreclosure rather than softening the blow to the banks’ balance sheets. Born warned about the risks of financial derivatives in the 1990s, a decade before they nearly brought down the financial system. Miller sought to police subprime lending abuses long before they were widely recognized and was an outspoken champion of the creation of the Consumer Financial Protection Bureau in the 2010 Dodd-Frank Wall Street reform bill.

The panelists’ discussion about the influence of too-big-to-fail banks and the force that industry wields through its ability to offer future employment to agency and congressional staffers was packed with eye-opening – and often appalling – observations.

For example, Born’s revelation that the congressionally appointed Financial Crisis Inquiry Commission made criminal referrals to the Department of Justice  — and that those referrals have not been acted upon – was one among many bombshells that should further outrage those demanding that the government work on behalf of ordinary people, not the special interests.

Below are some highlights from the 25-minute video (emphases added):

Barofsky:

“There is this theme of [the financial services] industry … these same tired invalid, disproven arguments that any type of financial regulation will destroy the world …”

“You have to go to the source of the corrupting influence, and that is, you have to break the power of these institutions, and the best way of doing that is to break up the largest banks…”

“If a large bank was lying about its health, was committing that type of accounting fraud, and it turns out that they had a hole that was $25 or $30 or $35 billion bigger than what they were representing to the government, the government’s response, Treasury’s response, wouldn’t be ‘Oh, you’re not getting any TARP money, you’re going to jail.’ Treasury’s response would be, ‘Well, here’s another 25 or 30 billion dollars to fill that hole … The desire at that point in late 2008 wasn’t to seek criminal accountability for these institutions. That was not only not a priority, it was something to be avoided, it something that was feared.”

Born:

“Too big to fail is the primary problem here. These institutions will always have too much political power and too much money to be sufficiently capable of being managed, of being supervised and regulated, and of being permitted to fail because of their interconnections throughout the financial system that would bring down the financial system if they were allowed to fail…”

Born, who served on the Financial Crisis Inquiry Commission, noted that the commission was required to refer evidence of violations of the law to the Justice Department. “We made a number of such referrals,” Born said. “We made them all by the end of 2010 or maybe January 2011. I have not seen anything happen on those referrals and I became convinced that there was a philosophy within the administration, unfortunately along the lines of letting the banks earn their way out of the insolvency they were in, that the banks had to be protected from the rule of law.”

Back when she lead the CFTC, Born recalled, “It was very disturbing to me to see staff people actually secretly giving out no action letters that, if the commissioners had seen them, would never have been approved because they were trying to curry favor with potential employers … I think there should be a rule that for the first 10 years after you leave an agency you do not go to the regulated industry.”

Miller:

Subprime lending was portrayed as “entirely a wholesome thing. And they completely dominated the debate … Subprime lending was entirely predatory. It was designed to strip people of the equity in their home … as home prices continued to appreciate, subprime lending was designed to make sure that value ended up in the financial markets to be divvied up, not in the net worth of middle class families.”

“It was stunning to me how quickly the industry regained their footing. They were kind of chastened and kind of embarrassed about it all for about 15 minutes, and they were right back making exactly the same arguments … the phrase that drove me crazy, and all the others reformers crazy, was ‘while these reforms are well intended — bless their hearts, they mean well — it will hurt the very people they are trying to help.”

“I think that Democrats need to be willing to be Democrats … Traditionally, the Democratic Party has been the party of everybody else. And I think the Democratic Party has failed in that over the past generation. We wanted to sound reasonable, we wanted to sound sophisticated. We wanted the approval of all the ‘masters of the universe’ … Before we reclaim American politics, I think we need to have a party that does speak for the concerns of most Americans.”

“I think we need to have a president who has the self-confidence not to need the approval of the ‘sophisticated’ people.”

Rick Claypool is online director for Public Citizen’s Congress Watch division. Follow him on Twitter at @RickClaypool.

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