Lest it be assumed that the Dodd-Frank
financial-reform Act, which became law in 2010, two years after the
financial crisis, would render it less probable that taxpayers would again be
faced with having to bail-out financial institutions even without strings
attached in order to keep the financial system intact and the American economy
from collapsing, Gretchen Morgenson of The New York Times wrote
two years after the Act's passage that “failing to confront the
too-big-to-fail question is a serious oversight.”[1] For one thing,
disproportionately increasing the amount of money that the biggest banks must
hold against a rainy day once again neglects the possibility that every bank is
having such a day on the same day and so none of the banks will loan to other
banks (i.e., the commercial paper market). When a financial system itself is
sick to the extent that it cannot stand, all the heavy dominoes may topple, one
after another, even though each has more support. Secondly, widening the
too-big-to-fail category enables more financial institutions to engage in risky
bets because the expanded net could limit any eventual downside. Sure enough,
Morgenson points out that the legislation “actually widened the federal
safety net for big institutions. Under the law, eight more giants were granted
the right to tap the Federal Reserve for funding when the next crisis hits.”[2]
Those institutions, including the Chicago Mercantile Exchange, the Intercontinental
Exchange, and the Options Clearing Corporation were even able to avoid the
penalties for failure specified in the Act. The clearinghouses had
successfully argued that even though only banks had been allowed to borrow from
the Fed’s discount window, the clearinghouses are not financial institutions;
rather, they are financial utilities. So, should they fail,
they should not have to be “wound down” by regulators. This is essentially
having it both ways and getting away with it. To explain this comfortable
arrangement, we would need to look under the hood, so to speak, where I suspect
we would find an exclusive world wherein vast private wealth is itself political
power even apart from any attendant lobbying activity.
In 2011, the CME Group, the parent company of the
Chicago Mercantile Exchange, made almost $3.3 billion in revenue. Craig
Donohue, the CEO, received $3.9 million in compensation and held an additional
$10 million worth of equity outstanding. With this kind of money comes inherent
influence, politically speaking. A very large concentration of wealth has a
certain mass, by analogy, that bends space itself and thus has the force
of gravity on other masses. This subtle force operates on
legislators and regulators too, and thus complements both the influence of
lobbying and campaign contributions. Even beyond the ability or wherewithal of
great wealth to reward and punish, money talks; it is respected in
itself.
So great concentrations of
wealth, like giant planets warping the space nearest to them, intrinsically
warp a democratic system, which facilitates the natural tendency of great
masses of wealth to attract even more. Hence after the financial crisis and the
TARP and Fed infusions of cash, the five largest American banks were even
bigger, and thus carried more systemic risk from the vantage-point of the
financial system as a whole. In other words, it was even more likely that any
of those banks, should it fail, could bring the system down. Additional reserve
requirements seems like a paltry means of countering this natural law of great
concentrations of wealth. Given their inherent and practiced influence, it
should come as no surprise that they leverage the natural law by using even
elected officials to bend the space appreciably more.
It should be no surprise, according to Sheila
Bair, the former head of the Federal Deposit Insurance Corporation, that
just when the managers at the clearinghouses “were drooling at the prospect of
having access to loans from the Fed, top officials at the Treasury and the Fed,
over the objections of the F.D.I.C.,” pushed Congress to allow the non-banks
access to the Fed’s discount window as part of the Dodd-Frank Act even while
saving the clearinghouses from being subject to the law’s “wind-down”
requirements.[3] Approving members of Congress likely either saw the huge
amount of clearinghouse wealth as impressive and thus eminently worthy of being
tapped for political contributions or were already tapping. It is as the
density of the wealth had a warm glow even though a cold winter.
According to Morgenson at the time, the
clearinghouses had "considerable clout in Washington. From the beginning
of 2010 through [November 2012], the CME Group . . . spent $6 million on
lobbying.”[4] Warping space even more by redesigning artificial contours is
apparently not cheap.
As though a rationale were needed, managers at CME
argued that once their institution received Dodd-Frank’s designation of
“systemically important,” the Fed “should provide access to emergency lending”
and without strings.[5] Without strings! It would seem that a certain
presumptuousness comes from prolonged exposure to the warped space near the
immense concentrations of wealth. Not included in the Act’s
penalties for failure, CME hardly deserved an
“offsetting” benefit. The lack of symmetry alone is indicative of the sheer
influence of great wealth. Would such wealth, as almost the entire wealth on
the planet concentrated, be a black hole? No one could escape its pull!
More realistically, when,
according to Morgenson, “large and systemically important financial utilities
that together trade and clear trillions of dollars in transactions appear to
have won the daily double—access to federal money, without the accountability"
in being wound down after failing—the rest of us can legitimately wonder how
much of the Dodd-Frank Act can be relied on to protect the financial system and
economy, and thus us, after the warping effect of the giant planets. Shouldn't
they be pared down, given their sizable risk to the system? If so, democratic
government would be less warped and thus more directly oriented to the public
good. For if a government is thwarted in this role, who is going to look after
our macro systems, whether they be economic, political, or societal in
general?
See Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon.
1. Gretchen Morgenson, “One Safety
Net That Needs to Shrink,” The New York Times,
November 3, 2012.
2. Ibid.
3. Ibid.
4. Ibid.
