It’s not rocket science

Dear readers,

Please indulge me some personal reflection.

Those of us who are trying to understand the last financial crisis, so we can prevent the next one, are often told that the next crisis will be different and unpredictable.

That’s not entirely true. We just need regulators who will relentlessly control short-term financing, self dealing and fraud.  

I offer the following proof:

Thirty years ago this year I co-authored Inside Job, The Looting of America’s Savings and Loans with Steve Pizzo and Paul Muolo. McGraw-Hill published our hard-cover book in 1989, we made the New York Times bestseller list and Harper Collins published our updated paperback in 1991.

That very year, Congress decided it wanted to deregulate banks. We testified against it.

Speaking for the three of us, Steve Pizzo told the Subcommittee on Telecommunications and Finance of the House Energy and Commerce Committee on July 10, 1991:

Americans watched in horror as thrift after thrift burned to the ground, but few have gotten down on their hands and knees and actually crawled through the smoking ruins, as my co-authors and I have. That’s what makes us uniquely qualified to come before you today to say that we are absolutely certain that bank deregulation, as it is now being contemplated, will be a disaster.

Our Summary of our Written Testimony said:

If Congress allows banks to be owned by non-bank companies, to underwrite securities and insurance, and to operate interstate it will unleash on the nation a second financial holocaust which will make the costs of the first one, the S&L crisis, look like chump-change.

As was the case following thrift deregulation, for the first few years banks will appear to prosper beyond everyone’s wildest dreams. But beneath that apparent prosperity will lie the seeds of disaster.

  • The number of Too-Big-To-Fail banks will multiply.
  • Bank conglomerates will prefer to lend or invest with associates and affiliates, regardless of their credit worthiness.
  • When a substantial portion of the assets of the nation’s banks – perhaps 30 percent – are tied up in self-serving loans and investments made by a dozen Too-Big-To-Fail banks and a network of renegade community banks, the regulatory system will be faced with the same no-win choices it faced in 1985 when the thrift industry began to melt down.
  • After the implosion taxpayers and prudent community banks will have to pick up the bill, which will far exceed the $500 billion S&L loss.

It’s totally predictable.

It happened in the 1930s, when 9,000 banks failed, and it happened again in the 1980s, when 1,000 S&Ls failed, and no amount of smoke blown by the nation’s most powerful – and most unsuccessful – bankers can redirect the winds of history and or repeal human nature. There’s nothing complicated about this scenario, though those same bankers would try to make it seem so. It’s up to Congress to see through the con job and Just Say No.

We pretty much nailed it, don’t you think?

We had no idea what the next crisis would look like, and the Panic of 2008 did turn out to be very different than the S&L crisis of the 1980s. But that didn’t matter. Here’s all we needed to know:

  • (1) Given the chance, some bankers will finance themselves with short-term loans because it’s profitable. S&Ls used mainly brokered deposits. Lehman et al. used mainly repos.
  • (2) Given the chance, some bankers will commit self-dealing and fraud because it’s profitable. S&Ls and Lehman et al. excelled in self dealing and knowingly dealt in fraudulent loans.

When the self dealing and loan fraud crumble, the short-term lenders will run.

Banking, even by non-banks, is not rocket science.  Smart regulation and transparency are the answer.

So today I’m wondering:

Thank you,

Mary Fricker


5 responses to “It’s not rocket science

  1. Well said, after reading your comments over the last few years, I think you are correct. I believe so strongly, I am out of the stock market. FDIC insured one year high yield certificates of deposit. Boring, but safe. Look at the ridiculous market action of the last several weeks. The suckers just keep lining up to give their money away. Mary, please forgive me. It’s not only the banks and the non banks. It’s the whole system. Brokers, investment advisors, publishing companies that sell their advice, as if they are experts. I always love the mice type. Your investments may lose value. I could name names, but I don’t want to be sued, by these Charleston’s.

    I have to ask a personal question, do you ever feel like Don Quixote? No, you don’t have to answer. I always enjoy reading your current take on the health of the planet. Yes, I’m smiling, “Give the bankers, what’s what.” That’s a punch line from an old joke.

  2. P.S. I hate Apple’s spell checker. I wrote Charletons and it wrote Charleston’s. Oh well, I don’t expect to see my comments anyway. Have a nice evening and watch out. You have a lot of rain coming your way. Since I grew up in Berkeley, it is unusual for this time of year for Northern California.

  3. You were absolutely right back then Mary. Unfortunately we won’t see any real change until someone outlines the concept, policies and regulations of the new monetary paradigm and shows traditionally opposed constituencies like the individual and all but the most bought commercial agents the tremendous benefits it will bring to them.

  4. Mary Ellen Tuthill

    Your latest post oozes frustration! It is understandable considering what’s at stake–One thing that should be noted is that contrary to your being blindsided by the crisis you foretold it via your testimony. You may not have seen where it originated but you tried to stop it in its tracks. That counts for a lot! Mary Ellen Tuthill

  5. But it seems this time we think know the next crisis and we’re going to prevent it. But is this just going to make the fall harder? Or national the repo market and we will go on forever?

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