Swap losses show 'our capital system is broken'
Sen. Heinz's old policy watchdog is still hammering bankers who play with the nation's money instead of putting it to work
Richard Bryers, an aide to the late Sen. John Heinz, R-Pa., and since then a policy adviser to a string of politicians, read my recent post on Philadelphia School District's millions of dollars in interest-rate swap losses (which featured one of his clients, PA Auditor General Jack Wagner) and was moved to write:
"Our capital system is broken and dysfunctional. If it does not work properly, then our country is cooked.
"The essential problem with our capital markets is that they are not performing their function of providing many sources of competing capital, and many kinds of competing capital (loans, stock issuance, private equity, etc.), so that borrowers can access appropriate costs of capital for long term investments.
"We are going in the opposite direction. There are fewer sources of capital and fewer types of competing capital available, and little reward is provided for long term productive investments, because the short term profits are so immense. The game is short-term flipping among non-productive asset classes. And that is because we have public policies in place encouraging the behavior.
"As you may know, Heinz served (on the Senate Banking and Finance committees) so these are issues we dealt with regularly.
"We had a major financial modernization (debate) in the early 1980s... The only reason that Glass-Stegall (the Depression-era law separating commercial and investment banking) was not repealed by Reagan's Treasury Secretary Don Regan was because John Heinz stopped it dead against immense pressure from his Chairman, Jake Garn (R-Utah) and the White House and Wall Street.
"Heinz was not convinced it was a wise move. Critics thought he was being stubborn and old fashioned. His judgement seems borne out by our post-repeal experience.
"The one area of financial modernization (Heinz) gave in on was the new business lines for the S&Ls. He gave that as a compromise to the Southern and Western Senators who were pushing for these institutions which were much more dominant in that area of the country... He regretted that compromise. After the S&L debacle, Heinz was a leader in seeking criminal prosecutions, enhancing prosecutorial power and widening opportunities to seize and recover diverted assets.
"He also had a great idea to allow 'bounty hunter' lawyers to take up civil cases against bad actors on behalf of the taxpayer and keep some of the recovered funds." Compare that to the mild sanctions against the bank-wreckers of 2007-08.
"The reaction of the current and past two Congresses and the past three Administrations to the fraud in the system has been to leave all the public policies in place which encourage the fraud and short term behavior and to let the malefactors go their merry way. I don't believe that Heinz would have agreed to that abject posture of submission...
"The other area where Heinz was a leading voice was on trade... His views were not in line with then-current or present day intellectual consensus about what a great thing it is to destroy our industrial base and middle class jobs." As befits a Pittsburgh factory owner.