Yves Smith Naked Capitalism  (hat tip)

OCC Gives Banks Another Blow Job

Posted: 22 Jun 2011 01:37 AM PDT

The acting head of the Office of the Comptroller of the Currency, John Walsh, has unwittingly revealed himself to be running a heretofore stealth operation: The Ministry of Truth According to Banks. In the past, his remarks have had just the right combination of occasional intersection with the truth plus lots of nebulous phrasemaking for him to be able to sound dimly plausible as a regulator, provided you were on reader craazyman’s preferred cocktail of Xanax and Jack Daniels.

Of course, what Walsh really has going for him is the optics: he is the straight-out-of-central-casting image of the head of a largish financial firm somewhere in the heartlands. Given that no one who has been awake in America in the last five years trust banks, and most people have already reasoned from that that a banking regulator who sounds a lot like a banker is probably not such a hot idea either, Walsh’s looking so much the part ought to set off alarm bells. But the conditioning of seeing well preserved middle aged white men with gravitas and decent tailoring as trustworthy has been so deeply programmed into most Americans that it is pretty hard to overcome.

Having said that, Walsh is usually sufficiently adept at shllldom that it takes a bit of doing to decode his bullshit; you can see a recent example where he straightfacedly makes the ludicrous argument that making banks pay pretty modest fines for the horrific damage their servicing and foreclosure misdeeds would hurt them. And of course, since having banks discomfited would be a horrific result, we can’t possibly expect them to make any meaningful restitution for the damage they have done.

Walsh has finally stooped to offering up straight up unadulterated bullshit, as opposed to the perfumed and heavily packaged variety that he typically serves up. I don’t know whether that is because he was having an off day or whether he is so confident that the banks have won that he no longer feels he needs to go through the mental gymnastics of making his arguments, such that they are, sound plausible.

As we noted last week, central banker have suddenly started getting religion about asking financial firms, particularly the large, connected, TBTF variety, to hold more capital. This is a surprising turn of events, given that the direction of virtually everything that has happened since the crisis is to decide to enact not very strong and overly complicated regulations, and then water them down further in the “working out all the gory details” phase.

This reversal suggests that the authorities have realized, now that their minds have been focused by the possible meltdown of the Eurozone, that they’ve let the banks remain far too wobbly. And some might even be cheesed off by banksters paying themselves egregious compensation by virtue of super low interest rates and lots of regulatory largesse, and they’ve realized belatedly that they have to be more directive if they want large capital markets players to firm up their balance sheets.

So what does Walsh have to say about this salutary turn of events? Per the Financial Times, which unduly dignifies this tripe with the headline, “Warning on bank rules reform“:

Calling existing capital levels “extraordinarily high” and proposing a “fundamental rethink” of international liquidity standards, Mr Walsh, acting comptroller of the currency, said: “My view is that we are in danger of trying to squeeze too much risk and complexity out of banking as we institute reforms to address problems and abuses stemming from the last crisis.”

I suspect this claim that capital levels are “extraordinarily high” will go down in history as being on a par with Irving Fisher’s October 1929 remark, “Stock prices have reached what looks like a permanently high plateau.” But Fisher had put his money where his mouth was; he was wiped out in the Great Crash and forced to move in with a relative. He though hard about how he had been so wrong and devised the now widely accepted theory of debt deflation, although his reputation never recovered during his lifetime. I doubt Walsh will have this sort of comeuppance.

Notice the call for a “fundamental rethink”. That sounds well intended but it isn’t. A favorite lobbyist tactic for guaranteeing nothing changes is to stymie reforms by instead calling for voluminous studies of the problem. And he also knows full well that there is no will to take fundamental action, so what is the point of a fundamental rethink?

Back to the FT:

Mr Walsh said that he was in favour of higher capital and liquidity standards and supportive of some reforms to bank structure. But he said the new rules risked going too far. “We don’t know how all of these new approaches will work in practice, how they may interact with one another, and what their cumulative impact will be. In an ideal world, we would take the time to find out and be sure we have it right, but clearly we are not living in that world right now,” he said.

What Walsh is saying, in effect, is all these new rules that pretty much everyone who is not bought and paid for by the banking industry deems to be too wimpy might nevertheless interact synergistically and produce an outcome that is too tough.

Guess what? The director of financial stability, Andrew Haldane, has already thought about the issue. And he has concluded that the sort of rules being proposed inherently will fall short. Haldane reminds us that there are two approaches to companies that produce externalities, like pollution and financial crises: taxation or prohibition. Which is appropriate depends on the level of private costs versus social costs. When social costs are high relative to private costs, prohibition makes more sense. Haldane did a back of the envelope calculation that showed that taxation was grossly inadequate as a remedy.

Capital charges or any measures that operate by changing the industry’s economics fall in the taxation bucket. An example of prohibition would be: “No banks will be permitted to be bigger than $250 billion in assets in five years. We’ll revoke the charters and the access to central bank facilities of anyone who is too large.” Glass Steagall was a prohibitive measure.

Senator Carl Levin had the right response to Walsh:

Mr Levin said: “It is past time for the president to nominate new leadership at the OCC to protect American families and businesses from the excesses of Wall Street.”