MADDOX: Wall Street banks on amnesia

Do you remember 2008? That’s the year we learned the Big Banks had made massive bets with their depositors’ money on complicated derivatives that were ultimately backed by thousands of bogus mortgages that should never have been loaned in the first place.

Do you remember what resulted from Wall Street’s big bets’ going bust? Just a little economic disturbance we now call the Great Recession, which caused massive job losses, huge market losses, business closures and general unhappiness along Main Street that many still feel today.

Do you remember the federal government’s reaction to the Great Recession? It started with a $700 billion bank bailout that became known as TARP. Since the banks had made crazy bets with depositors’ money on complex and risky derivatives called swaps, the entire banking system was at risk of failing. The federal government had no choice but to step in and shore up the collapsing system with our taxpayer money. Too big to fail was now a reality.

But Congress didn’t stop there. Many Americans believed that whatever caused the Great Recession should not be permitted to happen again. Most of the country seemed to agree that Wall Street’s reckless gambling with depositors’ money should never again be able to threaten the jobs and livelihoods on Main Street.

So in 2010, Dodd-Frank was passed, stopping banks from using depositors’ funds to speculate on these complex and speculative derivatives. It was still OK if the banks wanted to make these risky bets with their own money, but they simply couldn’t use their customers’ funds and put the entire banking system at risk yet again.

Fast forward to 2014, a mere four years after Dodd-Frank was passed and six years since Wall Street marched the world up to the precipice of financial Armageddon. The Dodd-Frank provision prohibiting commercial banks from using depositors’ funds to speculate on risky derivatives was removed as part of the recent congressional budget bill.

The shock is, Wall Street is now allowed to make the exact same risky bets that almost brought the whole system down a mere six years ago.

This is unfortunately the way history repeats itself in the world of financial regulation. You can count on Wall Street to strive to maximize its profits, no matter how much harm it does to its customers or the system. Congress or regulators crack down for a few years. Wall Street then aggressively lobbies the federal government to pull back the tougher regulations. Then the whole ugly cycle repeats again.

I will never accept that one of the federal government’s main priorities is to help Citigroup or JP Morgan achieve greater profits.

It should be protecting the interests of all its citizens. It should be protecting the depositors of our commercial banks from reckless conduct by the banks’ top officers. It should be protecting taxpayers from having to bail out “too big to fail” banks from their own speculative bets. And government should have the gumption to criminally prosecute the “too big to jail” Wall Street criminals for their misconduct.

Unfortunately, Wall Street has invested so much money in the federal government that it now owns both political parties, and can effectively write its own legislation, as it did with the budget bill. We are all at the mercy of the Wall Street titans more than ever before.•

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Maddox is managing partner of Maddox Hargett & Caruso. A former Indiana securities commissioner, Maddox represents investors in securities litigation and arbitration matters. Send comments on this column to ibjedit@ibj.com.