TheCenterLane.com

© 2008 – 2019 John T. Burke, Jr.

Widespread Disappointment With Financial Reform

Comments Off on Widespread Disappointment With Financial Reform

Exactly one year ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade.  The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public.  My essay included the reactions of five commentators, who were similarly dismayed.  I concluded the posting with this remark:

The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective.  Once this 2,000-page farce is signed into law, watch for the reactions.  It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.

During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government’s “financial reform” effort was nothing more than political theater.  Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed “just a little or no confidence” that the financial reform bill would make their financial assets more secure.  Forty-seven percent believed that the bill would do more to protect the financial industry than consumers.  The American public is not as dumb as most people claim!

This past week brought us three great perspectives on the worthlessness of our government’s financial reform facade.  I was surprised that the most impressive presentation came from a Fed-head!   Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University’s Stern School of Business, concerning the future of “systemically important financial institutions” or “SIFIs” and the Dodd-Frank Act.  (Bill Black prefers to call them “systemically dangerous institutions” or “SDIs”.)   After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed “safety net”, which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:

Following this financial crisis, Congress and the administration turned to the work of repair and reform.  Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision.  The Dodd-Frank reforms have all been introduced before, but financial markets skirted them.  Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.

Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries.  To this end, there are two principles that should guide our efforts to restore such boundaries.  First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.

Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market.  This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.

Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January.  On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to “revise the historical narrative” of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized.  Angelides didn’t pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:

If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse.  You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy.  Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.

*   *   *

If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened.  You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it.  Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.

David Sirota wrote a great essay for Salon entitled, “America’s unique hatred of finance reform”.  Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – “Sweden’s Mexico”:

On one hand, Europe’s politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability.  As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with “socialist” epithets — has the kind of economy the U.S. can now “only dream of:  growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced.”  It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.

*   *   *

After passing an embarrassingly weak financial “reform” bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation.  At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that “Washington and the regulators are there to serve the banks” — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.

Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.

Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.


wordpress stats


The Poisonous Bailout

Comments Off on The Poisonous Bailout

June 10, 2010

The adults in the room have spoken.  The Congressional Oversight Panel – headed by Harvard Law School professor Elizabeth Warren – created to oversee the TARP program, has just issued a report disclosing the ugly truth about the bailout of AIG:

The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace.

Note the present tense in that statement.  Not only did the bailout have a poisonous effect on the marketplace at the time –it continues to have a poisonous effect on the marketplace.  The 300-page report includes the reason why the AIG bailout continues to have this poisonous effect:

The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.

And that, dear readers, is precisely what the concept of “moral hazard” is all about.  It is the reason why we should not continue to allow financial institutions to be “too big to fail”.  Bad behavior by financial institutions is encouraged by the Federal Reserve and Treasury with assurance that any losses incurred as a result of that risky activity will be borne by the taxpayers rather than the reckless institutions.  You might remember the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009:

.  .  .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out.  In short, you are the definition of moral hazard.

With particular emphasis on the AIG bailout, this is what Senator Bunning said to Bernanke:

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton.  First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio.  Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated.  Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par.  In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined.  I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut.  Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks.

Hugh Son of Bloomberg BusinessWeek explained how the Congressional Oversight Panel’s latest report does not have a particularly optimistic view of AIG’s ability to repay the bailout:

The bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer through swaps or securities lending.

AIG owes about $26.6 billion on the credit line and $49 billion to the Treasury.  The company returned to profit in the first quarter, posting net income of $1.45 billion.

‘Strong, Vibrant Company’

“I’m confident you’ll get your money, plus a profit,” AIG Chief Executive Officer Robert Benmosche told the panel in Washington on May 26.  “We are a strong, vibrant company.”

The panel said in the report that the government’s prospects for recovering funds depends partly on the ability of AIG to find buyers for its units and on investors’ willingness to purchase shares if the Treasury Department sells its holdings.  AIG turned over a stake of almost 80 percent as part of the bailout and the Treasury holds additional preferred shares from subsequent investments.

“While the potential for the Treasury to realize a positive return on its significant assistance to AIG has improved over the past 12 months, it still appears more likely than not that some loss is inevitable,” the panel said.

Simmi Aujla of the Politico reported on Elizabeth Warren’s contention that Treasury and Federal Reserve officials should have attempted to save AIG without using taxpayer money:

“The negotiations would have been difficult and they might have failed,” she said Wednesday in a conference call with reporters.  “But the benefits of crafting a private or even a joint public-private solution were so superior to the cost of a complete government bailout that they should have been pursued as vigorously as humanly possible.”

The Treasury and Federal Reserve are now in “damage control” mode, issuing statements that basically reiterate Bernanke’s “panic” excuse referenced in the above-quoted remarks by Jim Bunning.

The release of this report is well-timed, considering the fact that the toothless, so-called “financial reform” bill is now going through the reconciliation stage.  Now that Blanche Lincoln is officially the Democratic candidate to retain her Senate seat representing Arkansas – will the derivatives reform provisions disappear from the bill?  In light of the information contained in the Congressional Oversight Panel’s report, a responsible – honest – government would not only crack down on derivatives trading but would also ban the trading of “naked” swaps.  In other words:  No betting on defaults if you don’t have a potential loss you are hedging – or as Phil Angelides explained it:  No buying fire insurance on your neighbor’s house.  Of course, we will probably never see such regulation enacted – until after he next financial crisis.



wordpress visitor


Lev Is The Drug

Comments Off on Lev Is The Drug

January 14, 2010

The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected.  The stars of the show:  Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys.  However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question:  “WTF?”  A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”.  Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday:  Messrs. Greenspan, Bernanke, Paulson and Geithner.  Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008.  In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status.  I would have preferred to see Vikram Pandit of Citigroup in that seat.

As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis.  Mike Myers would be the obvious choice to portray Lloyd Blankfein.  Myers could simply don his Dr. Evil regalia and it would be an easy gig.  The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position.  Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles.  John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.

Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light.  Blankfein emphasized that Goldman Sachs still believes in marking its assets to market.  As expected, his theme of  “if we knew then what we knew now  . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons.  John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them.  Excuse me   . . .  but isn’t that the definition of the term, “worthless”?

Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis.  Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor.  “Don’t bite the hand that feeds you” was the order of the day.  All four panelists described the primary cause of the crisis as excessive leverage.  They acted as a chorus, singing “Lev Is The Drug”.  Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio.  The Dimon Dog’s theme was something like:  “We did everything right  . . . except that we were overleveraged”.  Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis.  Although many commentators whom I respect have made the same point, I just don’t buy it.  Why blame people who were led to believe that their homes would continue to print money for them until they died?  Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump.  Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.

The second panel from Wednesday’s hearing was equally, if not more entertaining.  Michael Mayo of Calyon Securities seemed awfully proud of himself.  After all, he did a great job on his opening statement and he knew it.  Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq.  Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day.  Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow.  If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.

I didn’t bother to watch the third panel for much longer than a few minutes.  The first two acts were tough to follow.  Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day.  Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC.  I wondered whether someone might ask her:  “Any hints as to what banks are going to fail tomorrow?”  On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.

The Commissioners themselves have done great work with all of the witnesses.  Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control.  Doug Holtz-Eakin and Brooksley Born have been batting 1000.  Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.

Who knows?  This commission could really end up making a difference in effectuating financial reform.  They’re certainly headed in that direction.



wordpress visitor


More Fun Hearings

Comments Off on More Fun Hearings

January 11, 2010

In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis.  A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides.  The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009.   The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry.  Like the Pecora Commission, the FCIC has subpoena power.

On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses.  The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday.  The witness list and schedule appear at The Huffington Post website.  Wednesday’s first panel is comprised of the following financial institution CEOs:  Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America.  Curiously, Vikram Pandit of Citigroup was not invited.

Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column.  Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:

Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph.  Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s.  The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009.  The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private.  The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.

A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post.  Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation.  Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations.  Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:

The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said.  Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.

*   *   *

Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing.  Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.

Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.

“There are a lot of people who still haven’t learned the lessons,” he said.

One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing.  Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:

There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner.  While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke.  It is time for a fresh start.

Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed.  As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.

Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):

1.  Banks do not face a liquidity crisis, rather they are massively insolvent.  Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis.  As such, they need to be shut down and resolved.  …

2.  Saving financial institutions does not save the economy.   …

3.  As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound.  Not because we cannot “afford” them but because they are dangerous.  Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street.  …

4.   Finally, we need an economic team that understands government finance.  The current team is hopelessly confused, led and misguided by Robert Rubin.  …

At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign.  The text version of this discussion appears at The Huffington Post.  Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:

We would like to see Geithner go now.

*   *   *

But there’s little chance this will happen.  The Obama administration cannot afford to show weakness.  If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority.  Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.

There’s also little political upside to getting rid of Geithner now.  It will not save Congressional Democrats any seats in the mid-term election.  Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.

All of this changes following the midterm elections, when Democrats will likely lose seats in Congress.  At that point, the administration will be looking for a fall guy.  Geithner will make an attractive fall guy.

Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.



wordpress visitor


Pay More Attention To That Man Behind The Curtain

Comments Off on Pay More Attention To That Man Behind The Curtain

October 15, 2009

Reading the news these days can cause so much aggravation, I’m surprised more people haven’t pulled out all of their hair.  Regardless of one’s political perspective, there is an inevitable degree of outrage experienced from revelations concerning the role of government malfeasnace in causing and reacting to the financial crisis.  We have come to rely on satire to soothe our anger.  (For a good laugh, be sure to read this.)  Fortunately, an increasing number of commentators are not only exposing the systemic problems that created this catastrophe – they’re actually suggesting some good solutions.

Robert Scheer, editor of Truthdig, recently considered the idea that the debate over healthcare reform might just be a distraction from the more urgent need for financial reform:

The health care issue should never even have been brought up at a time when the economy is reeling and we are running such immense deficits to shore up the banks.  Instead of fixing the economy by saving Americans’ homes and jobs, we are preoccupied with pie-in-the-sky rhetoric on a hot issue that should have been addressed in calmer times.  It came up now because, despite all the hoary partisan posturing, it is a safer subject than the more pressing issue of what to do with Citigroup, AIG and General Motors, which the taxpayers happen to own but do not control.  While Treasury Secretary Timothy Geithner plots in secret with the top bankers who got us into this mess, we are focused on the perennial circus of so-called health care reform.

There is an odd disconnect between the furious public debate over health care reform, with its emphasis on the cost of an increased government role, and the nonexistent discussion about the far more expensive and largely secretive government program to bail out Wall Street.  Why the agitation over the government spending $83 billion a year on health care when at least 20 times that amount has been thrown at the creators of the ongoing financial crisis without any serious public accountability?  On Wednesday, the Wall Street Journal reported that employees of the financial industry that we taxpayers saved are slated to be paid a record $140 billion this year.

Remember, taxpayers:  That $140 billion is your money.  The bailed-out institutions may claim to have repaid their TARP obligations, but they also received trillions in loans from the Federal Reserve — and Ben Bernanke refuses to disclose which institutions received how much.

William Greider wrote a superb essay for the October 26 issue of The Nation, emphasizing the importance of the work undertaken by the Financial Crisis Inquiry Commission, led by Phil Angelides, as well as the investigation being done by the House Committee on Oversight and Government Reform:

Even if Congress manages to act this fall, the debate will not end.  Obama’s plan does not begin to get at the rot in the financial system.  Wall Street’s most notorious practices continue to flourish, and if unemployment rates keep rising through 2010, the public will not set aside its anger.  The Angelides investigators could put the story back on the front page.

*  *  *

Beyond Ponzi schemes and deceitful mortgage lending, a far larger crime may lurk at the center of the crisis — wholesale securities fraud.  “Risk models” reassured unwitting investors who bought millions of bundled mortgage securities and derivatives like credit-default swaps.  But as Christopher Whalen of Institutional Risk Analytics has testified, many of the models lacked real-life markets where they could be tested and verified.  “Clearly, we have now many examples where a model or the pretense of a model was used as a vehicle for creating risk and hiding it,” Whalen said.  “More important, however, is the role of financial models for creating opportunities for deliberate acts of securities fraud.”  That’s what investigators can examine.  What did the Wall Street firms know about the reliability of these models when they sold the securities?  And what did they tell the buyers?

*  *  *

Surely the political system itself is a root cause of the financial crisis.  The swollen influence of financial interests pushed Congress and presidents to repeal regulation and look the other way as reckless excesses developed.  Efforts to restore a more reliable representative democracy can start with Congress.  The power of money could be curbed by new rules prohibiting members of key committees from accepting contributions from the sectors they oversee.  Regulatory agencies, likewise, need internal designs to protect them from capture by the industries they regulate.

The Federal Reserve, having failed in its obligations so profoundly, should be reconstituted as an accountable federal agency, shorn of the excessive secrecy and insider privileges accorded to bankers.  The Constitution gives Congress, not the executive branch, the responsibility for managing money and credit.  Congress must reassert this responsibility and learn how to provide adequate oversight and policy critique.

Reforming the financial system, in other words, can be the prelude to reviving representative democracy.

At The Huffington Post, Robert Borosage warned that the financial industry is waging a huge lobbying battle to derail any attempts at financial reform.  Beyond that, the banking lobbyists will re-write any legislation to make it more favorable to their own objectives:

The banking lobby is nothing if not shameless.  They hope to use the reforms to WEAKEN current law.  They are pushing to make the federal standard the ceiling on reform, stripping the power of states to have higher standards.  Basically, they are hoping to find a way to shut down the independent investigations of state attorneys general like New York’s Eliot Spitzer and Andrew Cuomo or Illinois’ Lisa Madigan.

*  *  *

Historically, the banks, as Senator Dick Durbin decried in disgust, “own the place.”  And they’ve succeeded thus far in frustrating reform, even while pocketing literally hundreds of billions in support from taxpayers.

*  *  *

But this time it could be different.  Backroom deals are no longer safe.  Americans have been fleeced of trillions in the value of their homes and their savings because of Wall Street’s reckless excesses.  Then as taxpayers, they were extorted to ante up literally trillions more to forestall economic collapse by bailing out the banking sector.  Insult was added to that injury when the Federal Reserve refused to tell the Congress who got the money and on what terms.

Legislators would be well advised to understand the cozy old ways of doing business are no longer acceptable.  Americans are livid and paying attention.  Legislators who rely on Wall Street to finance their campaigns and then lead the effort to block or dilute reforms will discover that their constituents know what they have been up to.  Organizations like my own Campaign for America’s Future, the Sunlight Foundation, Americans for Financial Reform, Huffington Post bloggers will make certain the word gets out.  Legislators may discover that Wall Street’s money is a burden, not a blessing.

The most encouraging article I have seen came from Dan Gerstein of Forbes.  His perspective matched my sentiments exactly.  Looking through President Obama’s empty rhetoric, Mr. Gerstein helped provide direction and encouragement to those of us who are losing hope that our dysfunctional government could do anything close to addressing our nation’s financial ills:

The Changer-in-Chief long ago gave up on the idea of dismantling and remaking the crazy-quilt regulatory system that Wall Street (along with its Washington enablers) rigged for its own enrichment at everyone else’s expense.

*  *  *

Instead, Team Obama opted to move around the deck chairs within the existing bureaucracy, daftly hoping this conformist approach would be enough to prevent another titanic meltdown.

*  *  *

In the end, though, the key to success will be countering Wall Street’s influence and putting the politicians’ feet to the ire.  Members of Congress need to know there will be consequences for sticking with the status quo.      . . .  Make clear to every incumbent: Endorse our plan and we’ll give you money and public support; back the banks, and we will run ads against you telling voters you are for corrupt capitalism.

As I have said before, this is all about power.  Right now, Wall Street has the political playing field to itself; it has the money, the access it buys and the fear it implies.  And the public is on the outside, looking incredulous that this rigged system is still in place more than a year after it was exposed.  But if the frustrated middle can organize and mobilize a focused, non-partisan revolt of the revolted — as opposed to the inchoate and polarizing tea party movement — that whole dynamic will quickly change.  And so too, I’m confident, will the voting habits of our elected officials.

Fortunately, individuals like Dan Gerstein are motivating people to stand up and let our elected officials know that they work for the people and not the lobbyists.  Larry Klayman, founder of Judicial Watch, has just written a new book:  Whores: Why And How I Came To Fight The Establishment.  The timing of the book’s release could not have been better.



wordpress visitor