7 Ways to Really Take the Ax to Wall Street

We're talking about how to save democracy from the plutocratic rule of elite financiers. It's time to think big.

January 4, 2012 |

As we’ve learned the hard way, the core of our modern capitalist economy is finance, and finance is run entirely by a few large Wall Street firms. But here’s the ultimate irony: while modern capitalism depends on Wall Street, Wall Street no longer depends on capitalist principles. In finance a new system has emerged that makes a mockery of the idea that entrepreneurs should be rewarded for their successes and suffer losses when they fail.

Capitalist Values Vanish from Wall Street

This week we are reminded again that the ideals of capitalism are a joke on Wall Street, as the heads of the largest Wall Street banks earn enormous incomes while the values of their banks plummet. “According to data from Rochdale Securities analyst Dick Bove, the heads of major banking groups including JPMorganChase (JPM), Goldman Sachs (GS) and Bank of America (BAC) are out-earning their employees and shareholders even as shares of bank stocks as a group lost about 26 percent [in 2011].” (Ron Haruni, “Big Bank CEOs Walk Away with Big Bucks in 2011”)

The big boys are raking it in again even while the economy suffers through the highest sustained level of unemployment since the Great Depression. More to the point, these very bank executives were complicit up to their eyeballs in helping to crash the economy in the first place! Chase CEO Jamie Dimon hauled in $41.9 million in 2011 while its bank stock lost roughly 23 percent of its value. Lloyd “I’m doing God’s work” Blankfein, CEO of Goldman Sachs, walked off with $22 million while his bank lost more than 46 percent of its value.

But, at this point, why should we be surprised? Before the crash, the heads of too-big-to-fail banks made billions in packaging, selling and then betting against toxic mortgage-backed securities that directly puffed up the housing bubble. When they couldn’t escape the crash they helped to foster, they went down on their knees begging for government help. At the same time they publicly claimed all was well, while privately taking in more than $7 trillion in secret government loans. And then after sucking up all these enormous bailouts, they used these nearly interest-free government loans to buy up other banks and lobby to prevent rules that might constrain their gambling activities. Meanwhile, they paid not a dime in personal restitution for killing 8 million jobs in a matter of months, most of which have not returned.

Financial Plutocracy is Real

That’s not capitalism. Rather, it’s the very definition of a plutocracy. These banks and those who run them are living off the rest of us and have no intention, ever, of suffering through the ups and downs of capitalist rewards and losses. When you run the casino, it’s always payday for the house.

We’ve got a choice. Either we learn to live under their thumbs or we do something dramatic about it. The porous Frank-Dodd bill has no chance of ending the plutocracy. Instead, we’re going to need some bold thinking and even bolder, more massive mobilizations a la Occupy Wall Street. But first, we need to have a better notion of what the democratizing of Wall Street might look like.

How to Really Overhaul Wall Street

I put this question to Marshall Auerback, global portfolio strategist for Madison Street Partners, a Denver-based fund management group, and a fellow for the Economists for Peace and Security (and an AlterNet contributor). With those titles, he should have an insider's grasp on what needs to be done. In fact, Brother Auerback is more than willing to take an axe to Wall Street as we know it. Here’s his brilliant wish list:

1. Banks should only be allowed to lend directly to borrowers and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government regarding the regulation and supervision of those activities. Goodbye CDOs, synthetic CDOs and the slew of profitable but dangerous financial casino games banks so love.

2. Banks should not be allowed to have subsidiaries of any kind. No public purpose is served by allowing bank to hold any assets "off balance sheet." A bank should be a bank and not a hodgepodge of hidden accounts designed to fool investors, build up leverage and gamble away with impunity.

3. Banks should not be allowed to accept financial assets as collateral for loans. No public purpose is served by financial leverage. This should put an end to highly leveraged, Ponzi-like financing schemes that have become commonplace within the banking community

4. Banks should not be allowed to lend off shore. No public purpose is served by allowing any banks to lend for foreign purposes. The Cayman Islands should be a resort for people, not bank slush funds.

5. Banks should not be allowed to buy (or sell) credit default insurance. Credit default swaps are financial insurance on bonds that might go bust – think Greece. Auerback wants to eliminate banks from this highly profitable game. Banks that rely on government insurance to protect depositors have no business playing in the markets that buy and sell risk.

6. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending. Unfortunately, the big banks are addicted to proprietary trading. That’s because the big money comes from trading for their own accounts – which is the plushest of all their casinos. MF Global, under Jon Corzine’s reckless leadership, was so addicted to proprietary trading that it seems to have used its clients' money as a piggy bank to cover its losses. More regulation will never end these games. But what would work is Auerback’s call for simply banning any and all proprietary trading by banks.

(Hot off the wire: Reuters reports that in the last days before MF Global went under, it sold hundreds of millions in assets to Goldman Sachs, the investment bank that Corzine once headed. But apparently, MF Global did not receive payment from Goldman Sachs, when the transaction was cleared through JPMorgan Chase. We don’t know as yet which bank pocketed that money. But this transaction might help explain what happened to the missing client money.)

7. Abandon “too-big-to-fail” and “systemically important” doctrine in favor of a “too-big-to-save” and “systemically dangerous” approach. They should be broken up, so that they are not "too big to fail." Guarantee the deposits and punish the shareholders. Break the power of finance once and for all. Amen!

Even if you don’t agree with every point, you’ve got to admit that Auerback pushes us to think really big, and rightfully so. After all we’re talking about how to save democracy from the plutocratic rule of elite financiers.

When I wrote The Looting of America in 2009, I was naïve. I thought the crash had so scared the political and economic establishment, that massive financial reforms would be the order of the day, just as in the Great Depression. I didn’t expect Wall Street to so quickly buy up both political parties for a song and get back to the lucrative business of financial gambling as if nothing much had happened at all. (And then they even have the nerve to shift the national conversation to how the rest of us should pay for the debts run up due to the crash they caused!)

But back then, I did cover my bets just a little. I had a feeling that we might live to see yet another crash because we would do far too little to end Wall Street’s rule:

Let’s hope we won’t throw away much of our children’s inheritance because we did not have the courage to do the obvious: Take over the failing major banks, dramatically trim their astronomical salaries, control their hazardous financial engineering and run the damn things for the good of us all…..

If, by the time you read these words we have avoided a full-scale depression, we should consider ourselves more fortunate than wise. Or as Bob Dylan lamented: