Delamaide: Wall Street 3, U.S. public 0

WASHINGTON – You win some, you lose some.

That seems to be the attitude of many in the mainstream media to recent events in the great battle of federal regulators against the financial industry.

There was the news last week, which apparently goes in the “win” column for regulators, that all but one of the country’s eight biggest banks still have not come up with a credible plan for liquidating themselves in the event of crisis – the so-called “living wills.”

Also last week, Goldman Sachs agreed to pay a $5 billion settlement for misleading investors about mortgage-backed securities during the housing bubble. Score another win for the regulators, right?

Earlier this month, however, the unsealing of a ruling in favor of MetLife showed the judge blasting the government as “arbitrary and capricious” for claiming that the insurance giant is of such a size it poses a risk to the entire financial system and should be subject to stricter regulation. A win for the industry!

The Washington Post cheered the mixed results as “the kind of effort a moderate, democratic capitalist society undertakes in pursuit of a middle path to financial stability, consistent with the rule of law.”

In the New York Times, star business journalist Andrew Ross Sorkin concluded that the MetLife decision is a sign that “too big to fail” may be “too tricky to judge” for generalists like him and you and me and maybe even the judge.

“I’ve tried to make sense of it,” Sorkin wrote, “but it is a highly complicated puzzle and to make such a determination with any degree of certainty requires mathematically projecting how money will flow between hundreds of institutions around the globe.”

Nonetheless, he gives the benefit of the doubt to Judge Rosemary Collyer’s opinion that the government’s designation of MetLife as a “systemically important financial institution” (SIFI) was “fatally flawed” as she criticized the government for deeming “every possible effect of MetLife’s imminent insolvency” as “grave enough to damage the economy.”

The nerve. That the heads of all the federal regulatory agencies grouped in the Financial Stability Oversight Council chaired by Treasury Secretary Jack Lew should decide after months of reflection that MetLife was indeed a SIFI is no doubt another example of government overreach.

Or maybe not. Maybe it was just the belated effort of regulators to implement the letter and spirit of the Dodd-Frank financial reform legislated in reaction to a financial crisis brought on by deregulation, reckless and criminal behavior by the financial industry, and a laissez-faire ideology championed at the top by longtime Federal Reserve Chairman Alan Greenspan.

Financial regulation is not a game of win and lose, but an effort to safeguard savers and investors against the devastating losses resulting from the crisis – a devastation that still plagues our economy.

Regulators did not “win” any of these battles. Rather, the American public was the loser in each case.

The fact that six years after Dodd-Frank was signed into law federal banking regulators are still dragging their feet on getting credible living wills from the megabanks is hardly a sign of a vigorous democracy.

Rather it is an indication of a strong financial lobby and regulators weakened by a revolving door of professional opportunity that aligns their interests with those of the industry.

Regulatory agencies from the Fed on down should have long since implemented the sanctions called for in Dodd-Frank if banks can’t or won’t produce credible liquidation plans – namely, to direct them to sell off certain operations and become smaller, more manageable institutions.

There is a school of thought – championed by Massachusetts Sen. Elizabeth Warren and Democratic presidential hopeful Sen. Bernie Sanders, among others – that banks the size of JPMorgan Chase, Bank of America and Goldman Sachs can never produce a liquidation plan that is believable and the only solution is to break them up.

The Goldman Sachs settlement is just the latest in a string of multibillion-dollar settlements against the financial industry, acknowledging fraud and wrongdoing by penalizing shareholders with a small portion of the company’s cash flow while not finding any evidence of criminal behavior in the executives who masterminded this fraud.

This cost-of-doing-business type of fine, that banks are all too willing to cough up in the absence of criminal prosecution, only proves the point that far from being a “smear,” as the Post would have it, Sanders’s charge that Wall Street’s business model is based on fraud is not that far from the mark.

As for Judge Collyer’s ruling on MetLife, bank critic and former regulator Bill Black notes that D.C. District Court Judge Collyer is a Republican appointee. Moreover, the D.C. Circuit Court of Appeals – where any appeal to her decision must be heard – is packed with a large majority of Republican appointees who have demonstrated a hostility to regulation.

Even Sorkin acknowledges that “at least in certain places she appears off base.” Whatever formula the FSOC might use, he adds, there is no straight formula than can predict a 100-year storm.

The problem with this metaphor is that, as with the real climate, 100-year storms in the financial world are now likely to occur a lot more often than once a century. As Black points out, with total assets of $878 billion, MetLife, on the basis of size alone, “poses a massive risk to the global system should it fail.”

Treasury’s Lew complained vigorously about the court’s ruling after the details were disclosed.

“In overturning the conclusions of experienced financial regulators, the court imposed new requirements that Congress never enacted, and contradicted key policy lessons from the financial crisis,” he said in a statement. “This decision leaves one of the largest and most highly interconnected financial companies in the world subject to even less oversight than before the financial crisis.”

In its editorial cheering of “long, grinding and conflictual process of stabilizing the U.S. financial sector, without neutering it altogether,” the Post favorably cited Lew’s praise of the depth and transparency of U.S. capital markets in a recent Foreign Affairs article, but somehow neglected to mention his strenuous objection to the MetLife decision.

There is winning and losing going on in the regulatory battle – but mostly it is Wall Street winning and the American public losing.

Columnist Darrell Delamaide — @ddelamaide on Twitter — has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service among others.