Banking On Illegal Activity: Who Broke The Law?

The global financial crisis of 2008 brought the issue of banking regulation to the fore, with many commentators arguing that the repeal of the Glass-Steagall Act, which separated commercial and investment banking, was a significant contributing factor. The crisis exposed a financial snake pit rife with greed, conflicts of interest and wrongdoing, with the major banks engaging in reckless profiteering that was of a criminal character.

In the aftermath, the US government stepped in with taxpayer-funded bailouts, and the Dodd-Frank Act was introduced to curb predatory and illegal practices on Wall Street. However, despite its good intentions, the Act has been criticised as a toothless measure, watered down by financial industry lobbyists and loopholes that allow banks to continue engaging in risky behaviour.

The question of whether bankers broke the law is a complex one, as it involves interpreting and enforcing regulations that are often ambiguous and subject to influence from powerful interest groups. While some bankers have been indicted and fined, others have walked away scot-free, protected by their powerful positions and the argument that their institutions are too big to fail.

Did bankers cause the financial crisis?

The financial crisis of 2008 was a global event that devastated local labour markets and the national economy, leading to some of the highest recorded rates of unemployment and home foreclosures since the Great Depression. It was caused by a combination of issues within the finance industry and the broader economy.

The crisis was years in the making, fuelled by cheap credit and lax lending standards that created a housing price bubble. The low-quality loans were packaged and resold to financial institutions as investments. When the bubble burst, the institutions were left holding trillions of dollars of worthless mortgages.

The financial crisis was primarily caused by deregulation in the financial industry, which allowed banks to engage in hedge fund trading with derivatives. Banks demanded more mortgages to support the profitable sale of these derivatives, creating interest-only loans that became affordable to subprime borrowers.

The roots of the crisis can be traced back to the late 20th century, when excessive financial liberalisation and a reduction in regulation created an environment of confidence that markets are efficient. This was accompanied by historically low-interest rates and loose lending standards, which fuelled the housing price bubble.

The immediate trigger was a combination of speculative activity in the financial markets, particularly property transactions, and the availability of cheap credit. There was large-scale borrowing to finance bets on rising property prices, but the boom was ultimately unsustainable as the gap between incomes and debt began to widen due to rising energy prices and global inflation.

The financial crisis was also caused by unscrupulous investment banking and insurance practices that passed all the risks to investors. Banks offered subprime mortgages because they made more money from the derivatives than the loans themselves. They also misrepresented the quality of loans, giving risky loans to individuals who could not afford them.

Another factor was the infighting among financial regulators, which excluded the most robust bank regulator in the country, the FDIC, from examining savings and investment banks within the primary jurisdiction of other regulators. This allowed these firms to wreak the most havoc in the financial crisis.

The failure of regulatory bodies to anticipate and prevent the crisis was due to their assumptions about how the economy works and their reliance on common tools to monitor and regulate market anomalies. They failed to see the connection between the housing price bubble, the subprime mortgage market, and the financial instruments used to package mortgages into securities.

In conclusion, the financial crisis of 2008 was caused by a combination of factors, including deregulation, speculative activity, cheap credit, and unscrupulous banking practices. The crisis had far-reaching consequences, including depressed wages, austerity, and deep political instability, which continue to be felt years later.

What are the consequences of breaking up big banks?

Breaking up big banks can have several consequences, both positive and negative. Here are some key points to consider:

Positive Consequences:

• Reducing Systemic Risk: The failure of a large bank can have a domino effect on other financial institutions, as seen during the 2008 financial crisis. Breaking up big banks can reduce this systemic risk by limiting the impact of a single bank's failure.
• Improving Manageability: Large and complex institutions can be challenging to manage effectively. Breaking them up can enhance management capabilities and reduce the likelihood of operational issues stemming from excessive complexity.
• Addressing "Too Big to Fail": Large banks are often deemed "too big to fail," leading to government bailouts during crises. Breaking them up can reduce this moral hazard and the expectation of government support.
• Enhancing Competition: Smaller banks can increase competition in the banking sector, potentially leading to more innovative products and services, as well as improved customer service.

Negative Consequences:

• Disruption to the Financial System: Breaking up big banks can lead to significant disruptions in the financial system. Renegotiating relationships, terminating lines of credit, and adjusting to new banking structures can be challenging for both individual and corporate clients.
• Loss of Economies of Scale: Larger banks benefit from economies of scale, which can lower the cost of providing banking services. Breaking them up might eliminate these economies of scale, potentially increasing the cost of banking services for consumers.
• Impact on Global Operations: US corporations that rely on large banks for global operations, such as international fund transfers and risk management, may face challenges if US banks are no longer able to operate on a global scale.
• Reduced Ability to Compete with Fintech: As fintech and digital innovation disrupt the banking industry, larger banks have struggled to adopt new technologies and deliver seamless digital experiences. Breaking them up might further hinder their ability to compete with agile fintech startups.

Overall, while breaking up big banks may have some potential benefits, it is a complex issue that requires careful consideration of the costs and benefits. The consequences could be far-reaching, and a thorough analysis is necessary to understand the full impact on the economy, consumers, and the financial system as a whole.

Did bankers break the Glass-Steagall Act?

The Glass-Steagall Act was a landmark piece of legislation in the US that separated commercial banking from investment banking. It was signed into law by President Franklin D. Roosevelt in June 1933, as part of a series of measures to restore the country's economy and trust in its banking systems. The Act prohibited bankers from using depositors' money for high-risk investments.

The Act was passed in the wake of the 1929 stock market crash and the Great Depression, which saw millions of Americans lose their jobs and life savings. More than 4,000 US banks shut down between 1929 and 1933, leaving depositors with nearly $400 million in losses.

The Glass-Steagall Act set up a firewall between commercial banks, which accept deposits and issue loans, and investment banks, which negotiate the sale of bonds and stocks. It also created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits.

However, over time, the barriers set up by the Act were gradually eroded. Starting in the 1970s, large banks began to push back on the Act's regulations, arguing that they were rendering them less competitive against foreign securities firms. This argument was embraced by Federal Reserve Chairman Alan Greenspan, who was appointed by President Ronald Reagan in 1987.

By the 1990s, several banks had begun to cross the line established by the Glass-Steagall Act through loopholes in the Act. For example, while the Act stipulated that a Federal Reserve member bank could not deal in securities, it did not restrict the bank from affiliating with a company that did, as long as that company was not "engaged principally" in such activities.

In 1998, banking giant Citicorp merged with Travelers Insurance, which owned the now-defunct investment bank Salomon Smith Barney. This merger was permitted under the Federal Reserve Board's interpretation of the Glass-Steagall Act.

In 1999, President Bill Clinton signed the Financial Services Modernization Act, commonly known as the Gramm-Leach-Bliley Act, which effectively neutralised the Glass-Steagall Act by repealing key components. This Act repealed the provisions of the 1933 Banking Act that restricted affiliations between banks and securities firms.

In conclusion, while the Glass-Steagall Act was a significant piece of legislation that provided protection for depositors and restored trust in the banking system, it was gradually weakened over time by looser restrictions, loopholes, and eventually, its partial repeal in 1999.

Did bankers evade the Dodd-Frank Act?

The Dodd-Frank Act, enacted in 2010, was a direct response to the financial crisis of 2007–2008 and the ensuing government bailouts. The Act targeted financial system sectors that were believed to have caused the crisis, including banks, insurance companies, investment banking firms, mortgage lenders, and credit rating agencies.

The Act established a number of new government agencies tasked with overseeing the various components of the law and, by extension, various aspects of the financial system. It also contained several provisions, spelled out over 848 pages, that were to be implemented over several years.

• Financial Stability: The Act established the Financial Stability Oversight Council and the Orderly Liquidation Authority to monitor the financial stability of major financial firms.
• Consumer Financial Protection Bureau: The Consumer Financial Protection Bureau (CFPB) was tasked with preventing predatory mortgage lending and helping consumers understand the terms of a mortgage before agreeing to it.
• Volcker Rule: The Volcker Rule restricts how banks can invest, limits speculative trading, and eliminates proprietary trading. It also prohibits banks from being involved with hedge funds or private equity firms.
• Securities and Exchange Commission (SEC) Office of Credit Ratings: The SEC Office of Credit Ratings was established because credit rating agencies had been accused of giving out misleading favorable investment ratings in the lead-up to the financial crisis.
• Whistleblower Program: The Act strengthened and expanded the existing whistleblower program, establishing a mandatory bounty program and broadening the scope of covered employees.

While the Dodd-Frank Act was intended to prevent another financial crisis and protect consumers, it has faced criticism. Some argue that the regulatory compliance requirements unduly burden community banks and smaller financial institutions, and that the constraints on capital and liquidity make for a more illiquid market overall.

In 2018, Congress passed a new law that rolled back some of Dodd-Frank’s restrictions, and this was signed into law by then-President Trump. This law eased the regulations for small and regional banks, provided for lower capital requirements and leverage ratios for certain institutions, and exempted lenders with assets of less than $10 billion from the Volcker Rule.

Did bankers avoid prosecution?

While some bankers have been jailed for their actions, it is true that many seem to have avoided prosecution. In the years since the 2008 mortgage crisis, there has been a lack of prosecution of white-collar crime, with federal prosecutors filing no criminal indictments against major banks or senior bankers. Even when authorities uncovered crimes, they often declined to press charges. This has led to the perception that certain financial institutions and large corporations are "too big to jail".

In the UK, for example, after the collapse of Lehman Brothers, the focus of policymakers was on keeping banks like RBS and Lloyds Banking Group afloat rather than apportioning blame. It wasn't until eight years after RBS was bailed out that prosecutors examined the bank and its former employees, and they found insufficient evidence of criminal behaviour to bring charges. Similarly, in the US, politicians have intervened to prevent criminal charges against banks like HSBC out of concern for the potential impact on financial markets.

However, some bankers have been jailed for cases arising from the 2008 crisis. In Ireland, three bankers were sentenced for their roles in the country's banking crisis, and in Iceland, a special prosecutor was appointed to examine the collapsed banks, resulting in charges of market manipulation, fraud, and embezzlement. In the UK, several Barclays bankers were jailed for conspiring to rig global benchmark interest rates.

While public outrage is not enough to send bankers to jail, there have been efforts to strengthen regulations and increase accountability. For instance, the UK's parliamentary commission on banking standards, chaired by Conservative MP Andrew Tyrie, led to the prospect of a seven-year jail term for reckless misconduct.

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