Bill Black - How the Jumpstart Obama’s Bucket Shops Act is Just Another in a Long Series of Fraud-Promoting Legislation
March 27, 2012 The Washington Post reports tonight that there is some pushback about the decried-by-anyone-who-knows-bupkis-about-securities-markets-and-isn’t-on-take JOBS Ac, which appears to be certain to be signed into law. Bill Black reminds us that tons of absolutely terrible financial regulation (as in deregulation) over the last 25 years have passed with large margins.
The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support. The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed with virtually no opposition. The Texas and California S&L deregulation acts – the two states that “won” the regulatory “race to the bottom” – passed with virtually no opposition. Texas S&L failures caused over 40% of total S&L losses and California failures caused roughly 25% of total losses. In 1984, a majority of the members of the House of Representatives, including Newt Gingrich and most of the leadership of both parties, co-sponsored a resolution calling on us to cease our reregulation of the S&L industry.
The Competitive Equality in Banking Act of 1987 (CEBA) was the product of two cynical political deals. The context was that the Reagan administration refused to allow the Federal Savings and Loan Insurance Corporation (FSLIC) to admit that there was a crisis requiring governmental funds and refused to allow FSLIC to draw any funds on its Treasury credit line. We had spent all but $500 million in the FSLIC fund closing some of the worst S&L control frauds. The S&L industry had over $1 trillion in liabilities and was deeply insolvent, so we were running the insurance fund on fumes and dreading a potential nationwide run. Treasury and FSLIC ginned up a convoluted means of FSLIC receiving the proceeds of a $15 billion (FICO) bond issuance. The repayment of the FICO bonds rested in large part on taking capital and future earnings from the Federal Home Loan Banks (FHLBs). The industry owned the FHLBs, so the S&Ls’ interest in the FHLBs’ capital was treated on their financial statements as an asset. Using the FHLBs’ capital to “defease” the FICO bonds refduced every S&L’s reported capital. The exceptionally powerful S&L trade association (the “League”) opposed the plan. It preferred that the government, rather than the healthier members of the industry, pay to resolve failed S&Ls. Trade associations also do not want to lose members through government closures.
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