03.21.10

Up Next: Wall Street

Now that health care’s been settled, Charlie Gasparino says we must begin a new debate about Wall Street’s sweetheart deals and “too big to fail,” or we’re in for another meltdown.

On Monday, the Senate Banking Committee approved sweeping legislation promising to overhaul the rules that have long governed finance. Now that health care’s been settled, Charlie Gasparino says we must begin a new debate about Wall Street’s sweetheart deals and “too big to fail,” or we’re in for another meltdown.

As Congress put the finishing touches on a massive overhaul of health care, I was reminded of an interesting statistic: Health care represents around 16 percent of the U.S. economy, but in the fall of 2008, the big financial firms nearly destroyed 100 percent of our financial system. And yet, a new banking-reform bill spearheaded by Senator Chris Dodd—a bizarre choice to reform the system given his own connections to the bubble-tainted mortgage lender Countrywide Financial—may soon be the law of the land with very little real public debate.

And if the reform’s main provisions are rammed through the Democrat-controlled Congress, and signed by President Obama, the new law may once again encourage excessive risk-taking and set the stage for another economic meltdown.

FDIC Chief Sheila Bair said in a recent speech that the way the Dodd bill is written, there could be “back-door bailouts” of systemically important firms, meaning the spirit of Too Big to Fail lives on.

The Dodd bill, which is now being vetted by Senate Republicans—most notably, ranking budget committee member Richard Shelby—has taken a backseat to the prolonged debate over health care. It shouldn’t. Let’s not forget that the 9.7 percent unemployment rate that has devastated the economy, and left virtual economic ghost towns in areas of upstate New York and the Midwest—basically, any place that doesn’t employ massive numbers of subsidized government workers or bail out subsidized Wall Street bankers and traders—began with the implosion of the financial system in 2007 and 2008.

In other words, financial reform is a big issue, and the debate on how to shape it will begin in earnest Monday, when the Republicans add their two cents to what Dodd has come up with— including a consumer protection agency, provisions to wind down troubled banks, and something designed to erase the notion that no bank is ever again deemed “too big to fail.”

The last item in my view is the most important, and at least there’s been some progress in that both Dodd and the Republicans recognize that when a bank knows it’s too big to fail, it will take risks that put its future in jeopardy. This kamikaze strategy is part of the bizarre logic of Wall Street: When bankers and traders know taxpayer money is on the line, they act less prudently not more, and don’t think twice about gambling away their firms in the process.

That said, as I understand the bill that Senator Dodd presented to Richard Shelby, the ranking minority member of the banking committee, is still unclear in the way it ends Too Big to Fail. People who have seen the Dodd bill say it still contains a provision that allows the Fed to step in and bail out “systemically important” firms. (In other words, companies that the bureaucrats in Washington believe to be vital to the overall economy would still be protected.) If that sounds like we’re back to square one on Too Big to Fail, you’re right. After some criticism, Dodd now says the provision has been removed. But others are skeptical: FDIC Chief Sheila Bair said in a recent speech that the way the Dodd bill is written, there could be “back-door bailouts” of systemically important firms, meaning the spirit of Too Big to Fail lives on.

Why would Dodd say one thing and do another? My view: He’s a creature of Washington who has feasted off his ties to Wall Street for years.

The big bankers, meanwhile, like to call themselves capitalists, but they love having the backing of the American taxpayer via politicians like Dodd when things get rough. Just study the last 30 years of risk-taking on Wall Street as I did in my book The Sellout. The partnership between Wall Street and Washington worked just fine for the politicians and bankers. Meanwhile, as the campaign contributions flowed in, taxpayers were financing Wall Street’s dice rolling either through low interest rates by the Fed or through direct bailout money.

Whether you support health-care reform or not, one of the great things about the process was that it was actually debated. No one knows how much debate financial reform will have, and how much hardball the Democratic majority will play this time around. Will Dems go for a straight up-or-down vote as they did in health care, or will they work with Senator Shelby, who once said: “In my view, ‘too big to fail’ is an indefensible, flawed concept. It is clearly undemocratic—treating financial institutions and their creditors unequally. It picks winners and losers and privileges the large over the small.” Still, as late as Friday, Republican staffers in Washington had no idea where Shelby will come out. “He’s keeping things pretty close to the vest,” one told me.

One thing is certain: We need a little more debate of this bill. Here’s hoping the Republicans take strong, principled opposition to the Too Big to Fail provision and exactly how it’s supposed to eradicated by the new law. This way, even if we get a replay of the health-care cramdown, banking reform will at least get a full hearing and can be unwound at some later date, just as health care might be if Republicans regain control of Congress.

If it doesn’t, 100 percent of the economy will once again be put in jeopardy.

Charlie Gasparino is a senior correspondent for Fox Business Network. He is a columnist for The Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His new book about the financial crisis, The Sellout, was published by HarperBusiness.