Capital requirements for investment banks, eh, have you already stopped reading. You shouldn’t. It’s the biggest financial issue on the table right now. One reason banks such as Merrill Lynch, or many dead banks, or insurer AIG, were able to badly damage the global economy is because they had very low, far less than needed capital requirements against the trash mortgages, derivatives and insurance swaps. Investment banks love low capital requirements because it means they can buy more and have lots more debt.
It’s a way to make some fast money for the banks. However, in recent years it allowed investment banks and insurers to pile up lots of fetid, stinking, rotting investments and accumulate huge pernicious debt instead. When these fetid, stinking, rotting investments collapsed, banks did not have the cushion that adequate capital requirements would have given them. With higher capital requirements, it’s possible that insurer AIG would still be independent or that tons of banks would not have needed bailouts paid by taxpayers. (Some investment banks actually saw the great recession coming and shorted these fetid, stinking, rotting trash investments and ended up with a pile of money. They did that even while pitching the fetid, stinking, rotting investments to investors. Incredibly, in WallStreetLand, that appears to be legal).
To get back to point, there has been a proposal that capital requirements for banks be as high as 14 percent. That’s a smart idea. It would cushion losses and prod Wall Street to be more fiscally prudent — in other words, it would be difficult to repeat the greed, corruption and ignorance that led to the Great Recession. But guess what — the banks don’t want a 14 percent capital requirement. At a recent House Financial Services Committee hearing, bank flaks, as well as Republicans on the committee, complained that the higher requirements would hurt them competitively. They won’t of course, what the 14 percent requirements would do is lead to a safer Wall Street, and more secure future for middle class Americans.
One harsh truth learned from the last 10 years is the evisceration of the myth that investment banking and Wall Street represented integrity, honesty, devotion to principle, concern for others, etc. Actually, today’s Wall Street is akin to a street thug who would take an injured old lady’s purse and leave her to fend for herself on the street. Unfortunately, these thugs have all the money, and the hearts of legislators, and they will probably win on stopping the higher capital requirements.
But that doesn’t mean we shouldn’t try to get the higher capital requirements. Contact lawmakers and banks. Let them know what side you’re on. And save money, and invest it wisely, because no matter what a financial services commercial tells you, you’re on your own when it comes to saving for retirement. (If you don’t believe, try buying $100,000 of overpriced Persian rugs on credit with only $3,000 in cash. Cut the rugs into little pieces, watch the resulting fiscal disaster, and then demand a personal bailout.)