By Raymond Vickers
Prior to the financial meltdown of 2008, America had the most elaborate bank regulatory system in the world. Despite eight decades of ever-increasing authority and regulatory agencies, the sheer magnitude of the recent banking crisis proved that the regulatory system, relying exclusively on regulators operating behind closed doors, cannot police the largest banks, which continue to threaten the global economy with a systemic banking collapse. The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010 merely added to the already sweeping regulatory power.
But once again the muscular lobbying of the banking industry continued to impose the prohibition of transparency in the bank regulatory system. As Senator Richard Durbin, Democrat of Illinois, observed in a moment of unusual candor, in April 2009, “the banks—hard to believe in a time when we're facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.”
Soon after the S&L crisis of the 1980s and then again after the Enron debacle of 2001, Congress reorganized the bank regulators and increased their power. During the most recent speculative mania, regulators were armed with the power to stop the corrupt practices at the nation’s largest banks. Because Congress failed to provide regulatory transparency, the bankers were able to continue the plunder in secret.
The banking secrets of the 1930s, which are now public records, reveal how bankers and businessmen violated their fiduciary duties in a desperate effort to save their personal fortunes. Those records contain many lessons for today, the most important of which is the urgent need to provide transparency in the bank regulatory system. The bank regulatory records should be available to the public through the Internet, so that a depositor or investor has only to type in the name of a bank to have immediate access to its regulatory records.
Fully disclosing reckless financing schemes and dubious loans immediately after bank regulators criticize them would accomplish far more than the Sarbanes-Oxley Act of 2002, which failed to sound the alarm bell before the 2008 collapse. Posting their banks’ examination reports on the Internet would have a chilling effect on freewheeling executives who would breach their fiduciary obligations to their stockholders and creditors in order to enrich themselves.
In this moment of anxiety, taxpayers have the power to force openness in the banking industry. Transparency would strike at the alliance between banks and politicians, and provide the necessary information to make the markets function properly. There is no doubt that releasing the secrets of the banking industry would provide a wrenching adjustment among insiders. But secrecy and the lack of information about the fraud and insider abuse in the financial system led to the 2008 fiasco, which caused the worst recession since the depression in the 1930s. Not addressing this problem now invites financial upheavals in the future.
Raymond B. Vickers, an attorney and economic historian, is the author of Panic in the Loop: Chicago's Banking Crisis of 1932. He was formerly the top appointed banking and securities regulator for the state of Florida. As an attorney, he has represented more than a hundred financial institution.