BOOK REVIEW 13 Bankers
(Submitted 12/27/10)
Published: 12/30/10 Livingston County News. Midwest Book Review Feb. 2011.

13 Bankers,
The Wall Street Takeover and the Next Financial Meltdown

By Simon Johnson & James Kwak
Pantheon Books, Div. Random House,2010
www.pantheonbooks.com
ISBN 978-0-307-37905-4
Hardcover $10.44, Paper $10.76, Kindle $8.77


America is not a democracy? America is not a democratic republic?
America is an oligarchy? One wonders after reading this book. The authors write “We may have the most advanced political system in the world, but we also have its most advanced oligarchy.” This book is a startling revelation of the power of the large banks in America. An oligarchy is defined as a form of government in which the power is vested in a few, or in a dominant class or clique. It appears that the large American banks have been powerfully influencing Washington for several decades, and culminated in the 1990’s when “Wall Street translated its growing economic power into political power” that gave Wall Street “on issue after issue what they wanted.”

The authors further claim that the result of the Glass–Steagall Banking Act of 1933 that separated commercial banks from investment banks and brokerages was the “safest banking system America had known in its history and booms and busts were prevented.” Repealing Glass-Steagall was at the top of the commercial banks’ wish list, and it was repealed in 1999. Since the 1970’s, the banks have exerted power over various government agencies with the approval of Congress. The savings and loan crisis, the Long Term Capital Management (LTCM) fiasco, Enron, WorldCom, et al, didn’t teach lessons needed, and Johnson and Kwak say, “the conditions that created the financial crisis and global recession of 2007-09 will bring about another crisis, sooner or later.” The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2009 attempts to prevent another 2007-2009 financial crisis, and its regulations are currently being formulated. Its summary is 43 pp. long and the entire bill is 2319 pp. according to Time Magazine(7/12/10). One hopes it’s not closing the barn door after the horse is out, nor that it was written blindly with Wall Street’s lobbying help, nor that our representatives didn’t really read it, nor that it does not conflict with the Financial Crisis Inquiry Commission’s Report (FCIC) of the causes of the financial crisis, which is due January 2011.

One of the Dodd-Frank provisions, detailed in the 12/21/10 Wall Street Journal, “prohibits any bonus plan that encourages inappropriate risks at financial firms with more than $1 billion in assets.” This presumably addresses Main Street’s and the tea partiers’ abhorrence of the enormous bonuses on Wall Street. Another provision now requires that over the counter derivatives receive the scrutiny that the former chair of the CFTC (Commodity Futures Trading Commission), Brooksley Born,
warned about way back in 1998, but was rebuffed by Alan Greenspan, Lawrence Summers, Robert Rubin and others. In fact, a “group of thirty,” an international advocacy group composed of private sector bankers, central bankers, and sympathetic academics, lobbied against such regulation and Congress caved in late 1999 and those derivatives were exempted from federal legislation in the Commodity Futures Modernization Act passed by a lame duck Congress and lame duck President in a appropriations act for fiscal year 2001.

The oligarchy of 13 banks is American Express, Bank of America, Bank of New York Mellon, Citigroup, Freddie Mac, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Northern Trust, PNC, State Street, US Bank, and Wells Fargo. The 6 largest banks now are Goldman Sachs, Citigroup, Bank of America, JPMorgan Chase, Morgan Stanley, and Wells Fargo, and they have been busy lobbying for what they want, so the oligarchy appears to be intact. According to the same Time article, more than 2000 lobbyists were “working on financial reform” and “43 members of the Congressional financial-reform conference had received $112 million from donors associated with the finance, insurance, and real estate industries.” In addition to lobbying, there is a cultural revolving door that has Wall Street operatives and government regulators going to and from the two sectors. If the Dodd-Frank bill addresses this, perhaps the authors will be wrong in saying, “By leaving banks in the hands of existing managers and going out of its way to minimize its own influence, government (is) ensuring that it (has) no way to encourage banks to do anything other than hoard the cash and in no way to affect banks’ behavior in the future.” There are reports about the hoarding of cash being one of the impediments to improving our economy, so is government helping the situation or inadvertently contributing to the continued economic malaise?

In legislation after legislation, Congress seems to have deferred to Wall Street’s so-called “expertise.” Will the authors be accurate in saying “…the conditions that created the financial crisis and global recession of 2007-09 will bring about another crisis, sooner or later?”

Their recommendations include trust-busting to break up these Too Big To Fail entities. This leads one to wonder how the many mergers and acquisitions of smaller banks by larger banks have been approved as not violating the Sherman Anti-Trust Act. Many smaller banks have disappeared. It is one thing for the FDIC to take over struggling or insolvent banks to protect consumers, but that seems different from the large banks taking over the smaller banks, even with shareholder approvals. How does the Sherman Anti-Trust Act protect us and preserve competition? Are we destined for another crisis, as the writers say?

Johnson, now a professor at MIT, was formerly a top economist at the International Monetary Fund, and Kwak, a Harvard graduate with his Ph.D. from UCBerkeley, authored The Baseline Scenario, a commentary on the global financial crisis, mostly focused on the situation in the USA. Readers wondering if the U. S. economy is out of the woods will find the writing concise, yet detailed enough to ask if Robert B. Reich is right in saying on the book jacket, "Unless we separate money from politics, we'll never be safe from another financial meltdown....Read this fine book and get to work." The book contains extensive notes and recommended further readings.
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