Book Club Minutes for August 27, 2011 at Yarborough Public Library
Present: Joanne Richards, Tanya Tussing, Stewart Snider, Mike Ignatowski, Dave Rawlins, Ceryta Lockett, Ham Richards, Gordon C Fossum, Marion Alsup, Gayle Roark
Book under discussion: 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson and James Kwak
facilitated by Tanya Tussing
Tanya opened our exploration of the causes of the financial meltdown of 2008 with a discussion of the appeal to investors of leverage, the term of art for investing with borrowed money, which amplifies an investment’s potential for both profit and loss. In the lead-up to the crash, the banks’ levels of leverage reached 50:1, four times the prudent ratio of 12:1. Combined with the financial institutions’ extensive and convoluted interconnectedness, their high levels of leverage meant that the slightest reduction of their assets’ value put all of the banks in jeopardy of collapse.
At the same time, one of the financial innovations of which the banks were proudest was the securitization of mortgages. Instead of holding mortgages on their own books, banks and mortgage companies sold them to investors in impenetrable packages whose risk was impossible to gauge. Having no concern for the borrowers’ ability to repay their debts, the mortgage grantors were soon giving mortgages to anyone with a pulse. And the fuse was lit.
Watching this menacing situation develop, most of the government’s financial regulators were unconcerned. Thanks to the revolving door between Wall Street and Washington agencies, the conventional wisdom was that the investment community consisted of intelligent people who could take care of themselves. The few who saw the disaster coming, such as the Commodity Futures Trading Commission’s Brooksley Born, were met with howls of outrage.
The discussion was livened by Tanya’s selection of quotes from the book, which provoked many challenging questions. After much discussion, Stewart suggested we all think of measures to prevent such a crash from happening again. The following steps were proposed:
- Reduce the risk to taxpayers by tougher regulation of the Too Big To Fail (TBTF) financial institutions.
- Require full disclosure of all political contributions, to reveal the extent to which financial institutions are influencing legislators.
- Require TBTF institutions’ upper management to invest a majority of their personal compensation in their own institutions, Having “more skin in the game,” they would be less likely to engage in risky speculation with the money entrusted to them.
- Split TBTF institutions into pieces too small to bring down the entire financial system.
- Break up TBTF media oligarchy so they can no longer promote risky policies that benefit only the media upper management.
- Reinstate the Fairness Doctrine, which required broadcasters to devote some of their airtime to discussing controversial matters of public interest, and to air contrasting views regarding those matters.
- Institute a 21st Century version of the 1933 Glass-Steagall Act, which separated commercial banks from investment institutions.
- Reform the Corporate Charter process:
- Reinstitute 18th Century legal constraints on corporate charters.
- Reverse the Supreme Court decision that granted corporations the 14th-amendment rights of natural persons.
- Require corporate charters to produce public or social benefits.
- Require sunset review of corporate charters.
- Limit the number of corporate boards on which an individual director can serve.
- Limit financial institutions’ leverage to 12:1.
- Promote respect for the Common Good over the individual by understanding the benefits of community commons as the responsibility of all.
- Reform the election process to eliminate the potential for wholesale electronic fraud.
The meeting was adjourned at 1:55 PM.
Dave Rawlins, Secretary
Ham Richards, Webmaster