The nation's financial regulatory system is a disgrace. It is a taxpayer's nightmare that has made the "too big to fail" institution a permanent feature of the financial industry. When one of these institutions gets into trouble, the taxpayer is left holding the bag.
But the system is a lawyer-lobbyist dream because its six competing agencies are a constant source of lucrative work.
The latest effort by Congress to improve regulation of banks and other large financial institutions, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has, if anything, made the regulatory regime more complicated by creating an independent consumer protection agency to go along with the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the Federal Reserve.
Dodd-Frank also created a regulatory minefield by delegating to these agencies the job of writing more than 400 regulations to implement the law. The New York Times recently reported that the regulations have in some cases weakened the law.
Exhibit A that the regulatory system is a mess is its failure for over a year to meet a deadline for instituting what is known as the Volcker Rule. The rule itself is simple. Banks that take deposits insured by the government should not be allowed to gamble with that money via what is known as "proprietary trading." But the draft regulations and all its variations have been disputed by regulators and lobbyists arguing over whether to allow some trading by banks. At last count, the regs are hundreds of pages long.
The Wall Street Journal reports, however, that the final rule is now ready for voting by the six federal regulatory bodies.
A vivid example of what can go wrong when banks gamble is the case of the "London Whale," who as a trader for J.P. Morgan Chase in 2012 lost over $6 billion trading a credit derivative.
In addition to its direct losses, the bank has paid over $1 billion in fines to four American regulatory agencies and Great Britain's Financial Conduct Authority, and has admitted to reckless conduct and market manipulation. The bank and two of its employees also face criminal charges.
But the bank's top leaders have not suffered any personal loss.
JPM did agree to fork over $13 billion - a record - to settle charges that it sold investors mortgage-backed securities without disclosing that some mortgages were unlikely to perform. In neither the defaults that occurred nor in the settlement did top bankers suffer personal losses.
If strictly interpreted, the Volcker Rule would create a wall between investment banking and deposit-taking banks like the one instituted in the 1930s by the Glass-Steagall Act.
However, that act was already a dead letter when its rule against combining investment banking and commercial banks was repealed in 1999. Big banks had avoided the rule by taking their trading operations overseas - a fact that undercuts the familiar argument that the repeal itself was the cause of the 2008 recession.
The long-awaited regulation should aim for a strict interpretation of the Volcker Rule, named for former Chairman of the Federal Reserve System Paul Volcker who proposed it. But the availability of a number of major offshore banking centers with differing rules suggests that big banks will find ways to get around the Volcker Rule unless they are deterred.
Making top bankers personally responsible for trading losses could be the remedy to deter risky trading and to simplify the regulatory oversight system.