In the most unexpected demonstration of the thesis that all things are interconnected in a myriad of nonobvious ways, I received an e-mail today from a now-retired reporter named Stephen Pizzo.
Back in 1995, Pizzo and I were colleagues at the Pleistocene-era online magazine Web Review, a daring experiment in the new world of online journalism bankrolled by computer book publisher O'Reilly & Associates. I was a freelancer who was writing madly about the Internet for anyone who would pay me. Pizzo was an established reporter who had coauthored a well-received book on the savings-and-loan crisis. His honed hard-news reporting chops were a welcome complement to the rest of the staff's geeky cyber-enthusiasms.
Pizzo had been reading my coverage recently of Wall Street's economic misadventures, and wanted to draw my attention to testimony he gave in Congress in 1991, at a hearing exploring proposed legislation aimed at deregulating the commercial banking industry.
Prescient is too mild a word to describe Pizzo's testimony. I recommend reading it in its entirety, so as to savor the full flavor of his brimstone and fire. But here is a choice excerpt, featuring Pizzo's prediction as to the likely baleful consequences of allowing commercial banks to play with securities.
As we autopsied dead savings and loans, we were absolutely amazed by the number of ways thrift rogues were able to circumvent, neuter, and defeat firewalls designed to safeguard the system against self-dealing and abuse. One of the favorite methods was to link up like-minded thrifts in the daisy chains through which they could circulate inflated assets and hide their rotten loans to each other and to each other's customers from regulators.
Banks that need to get money to a troubled securities affiliate will do exactly the same thing. By linking up three or more banks, each with its own securities subsidiary, a daisy chain will facilitate a round robin of reciprocal loans in times of need. Then, the next time we have a Black Monday on Wall Street, this daisy chain will swing into action as a handful of mega-banks try to prop one another's securities subsidiaries and their customers as the market plummets.
In such a scenario, billions of federally insured dollars will disappear in the twinkle of a few program trades.
That will happen, not might happen but will happen, and when it does these too-big-to-fail banks will have to be propped up with Federal money. In the smoking aftermath, Congress can stand around and wring its hands and give speeches about how awful it is that these bankers violated the spirit of the law, but once again, the money will be gone, the bill will have come due, and taxpayers will again be required to cough it up.
Nice work, Stephen. Too bad they didn't listen to you.