Fat Cats I

    Recently President Obama railed against so-called “Fat Cats.” We think all Americans should support his disdain for Fat Cats. However, a more comprehensive definition of the term “Fat Cat,” would also be helpful. Let’s examine how we got to the point where Fat Cats regularly manipulate and exploit our financial system on such a grand scale. How can Fats Cats successfully prompt government to step where it does not belong and micro-manage various segments of our economy. Perhaps a little background is in order.

    Ending Glass-Steagall - With bi-partisan support on November 12, 1999, President Clinton signed into law a bill that essentially tore down banking system safeguards contained in the Glass-Steagall Act. Naturally, like most government folly, this ill-advised reversal of a policy that dated back to the Great Depression, was completed only after an army of clever lawyers successfully sold shell game-like arguments to elected officials. Our domestic depository banking institutions, these advocates argued… deserved more “fair” treatment so they could be able to operate more freely in already deregulated financial markets. Their general rationale was that distinctions between loans, securities, and deposits were already blurred. And they further asserted that our once mighty commercial banks were gradually losing market share to securities firms that were not so strictly regulated, as well as to foreign financial institutions operating without much restriction from the Act.

    Congressional leaders in both parties and President Clinton swallowed this special interest advocacy bait like hungry fish. It was naively suggested that the dangerous conflicts of interests created by the end of Glass-Steagall could be controlled by…… our government. By simply enforcing existing legislation that separated the lending and credit functions through the forming of “distinctly separate subsidiaries,” we were told our financial system could continue to function properly with commercial banks both underwriting and trading securities for their own accounts.

    Lower Risks, Diversification, and Fairness - President Clinton and the majority of members of Congress reassured skeptical industry experts that the underwriting and securities trading activities that these depository banking institutions were seeking to engage in as part of the end of Glass-Steagall, were “low-risk.” It was further asserted that the end of Glass-Steagall would lead to the reduction of the total risk to federally-insured deposits thanks to the broad benefits of diversification. In the end, the clever lawyers resorted to an all-too-familiar version of law school 101…..a bamboozle strategy. Cloaking their arguments in the timeless virtue of “fairness,” they argued that Glass-Steagall had become a needless impediment that was keeping our banks from doing what nearly everyone else was doing.

Elected Officials and Mortgage Lending - Not long after the protections of Glass-Steagall were torn down, our campaign contribution driven system of government continued to bring the worst it has to offer to the foundations of sound lending practices. Caught on film in hearing after hearing were members of congress who, in the sorriest traditions of American-style politics, cloaked themselves in a heightened sense of “fairness.” Simply put, elected officials relentlessly pressured regulators of government sponsored entities (Fannie Mae and Freddie Mac) into allowing a dramatic loosening of mortgage underwriting standards. As a result, loan approvals became an entitlement for most mortgage applicants, regardless of their personal creditworthiness. Tomorrow we will go farther in defining the Fat Cat.

Fat Cats I