Here we are 19 months from the collapse of Lehman Bros. and the precipitous fall of almost every economic value in our nation, and we haven’t passed any significant regulatory reform statutes to stop or at least discourage the madness that brought us down this time. Democratic Senator Chris Dodd’s reform package is drafted, but there is staunch Republican opposition to any new governmental regulation; their bloc in the Senate believes that current laws, properly enforced, are sufficient. Notwithstanding a DOW that crossed 11,000 (there are skeptics who believe this to be unsustainable in the near term), there are experts who will not declare this “recession” to be over; they point to a credit freeze, long-term high unemployment, a real estate market in disarray from residential to commercial and sputteringly inconsistent consumer spending patterns (lots of down months with an occasional good one) and confidence levels.
The Dodd bill has drawn Republican ire, especially the appointment of a federal regulator who would have primary responsibility to protect consumers (particularly from questionable lending practices), and issues surrounding how to wind down big but failing financial institutions and how to control the complex world of derivatives. While “White House deputy communications director, Jen Psaki, wrote on a White House blog [April 13th] that under Dodd's bill, ‘taxpayers will never be asked to foot the bill for Wall Street's irresponsibility,’” Senate Minority Leader Mitch McConnell (R-Ky.) said of legislation that recently passed the chamber's banking committee on a party-line vote…: ‘The fact is, this bill wouldn't solve the problems that led to the financial crisis. It would make them worse… This bill not only allows for taxpayer-funded bailouts of Wall Street banks; it institutionalizes them’…[The official Obama Administration response:] ‘There are no more taxpayer-funded bailouts, period,’ said Deputy Treasury Secretary Neal Wolin. ‘Insolvent firms would go away. . . . The industry bears the financial burden, and the taxpayer bears none of it.’” Washington Post (April 14th). Obama himself countered saying: “Lo and behold, when he [referencing McConnell] returned to Washington, the Senate Republican leader came out against the common-sense reforms we’ve proposed… In doing so, he made the cynical and deceptive assertion that reform would somehow enable future bailouts — when he knows that it would do just the opposite.”
Bottom line: the pending legislation is not about bailouts (although it does have a $50 billion fund to allow the orderly liquidation of failing companies that impact the overall economy – not a large commitment by government standards); it actually is about accountability and regulation, but if you can convince taxpayers that this legislation is really hidden funding source for Wall Street – even if it isn’t – such rhetoric would make defeating such regulatory efforts appear to be noble and not simply a total appeasement to the financial sector that just doesn’t want new rules. Those aspects of the economy we fear most – unsubstantiated bubbles that burst – generate the kind of market volatility where traders can make fortunes, even as ordinary Americans suffer the economic consequences. Don’t believe me? Look at the massive profits in the last 6 months of the big trading institutions and compare that to the unemployment rate or home values. The ability to package obscure and hard to evaluate derivatives – a veritable Wall Street addiction – even creating derivatives that bet against your firm’ other derivatives (yea, play that back in your head) works better when there are no clear regulations or transparency requirements.
The evidence of malfeasance and untrustworthiness of our big financial institutions and credit ratings agencies has been hammered home for months. There cannot be the slightest doubt that unregulated, these institutions can turn “rogue” based on the simple premise that investment and merchant bankers, commercial bankers and traders are rewarded only for taking huge risks that pay off. We know that “flash trading” – using mega-computers physically located near the relevant exchanges preprogrammed to spot market trends in nanoseconds and implement advantageous trades instantaneously – has been banned, but since there are no penalties for the practice, do you really believe that our “boys & girls of greed” are behaving and letting the playing field be level? We all know about the other excesses reported months and months ago, but testimony about an abusive system continues to produce terrifying evidence of the complete lack of ethical backbone among those charged with running our major financial institutions. The unregulated derivatives marketplace has literally fractured financial credibility at the seams. Let’s look at three very recent reports that bolster the tsunami of evidence to support massive regulatory reform.
The April 13th Los Angeles Times reports on testimony from former Washington Mutual executives: “The executives testified at a hearing by a Senate panel investigating WaMu's downfall, the largest bank failure in U.S. history. After an 18-month review, the Senate's Permanent Subcommittee on Investigations found the company had created a ‘mortgage time bomb’ by making sub-prime loans they knew were likely to go bad and then packaging them into risky securities. Many of the problems stemmed from shoddy loans originated by WaMu's Southern California-based sub-prime unit, Long Beach Mortgage Co.” In short, the bank knew what it was doing, but the ability to dump bad loans to unsuspecting buyers of bundled mortgage-back securities (a nasty derivative when it com es to sub-prime mortgages) shifted the risk to others and kept the big bonuses to bankers based on volume flowing.
The WaMu experience is hardly unique. The April 16th Washington Post noted that fat-cat Goldman Sachs may finally get some comeuppance for their participation in the “greed is good” times preceding the big economic fall: “The Securities and Exchange Commission announced [April 16th] civil fraud charges against Goldman Sachs and one of its vice presidents. The agency alleges that the company marketed complex sub-prime mortgage securities and failed to disclose to investors that a major hedge fund had bet against the securities.” Yeah, there’s no ethical lapse when you bet against the success of the very same financial instruments you sold your clients!
But wait, there’s more. Apparently, Lehman Bros. (remember them?) had a controlled company (they actually owned 25%, and they controlled the board of directors), Hudson Castle, that they could use to transfer risky asset off their books to make their balance sheet look better, a loophole that was perfectly legal. The April 13th New York Times: “Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to sub-prime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.”
One observation: Wall Street’s no fool. Whom would you hire if you wanted the best lobbyists with the greatest insight as to how to defeat the regulators and turn back legislative efforts for financial reform? How about the very government workers, former Congressmen, staffers… well: “From anonymous mid-level workers to former House and Senate majority leaders, more than 125 former Congressional aides and lawmakers are now working for financial firms as part of a multibillion-dollar effort to shape, and often scale back, federal regulatory power, data shows. Indeed, some of the biggest players in Washington politics are lobbying now on the regulatory bills that are making their way through Congress.” New York Times (April 13th). Satisfying, huh?
For those who oppose regulatory reform, I ask a simple question: if enforcing current statutes and regulations are more than sufficient without new rules, how do you explain the legally-sanctioned fraud and lack of transparency that continues into the present day? It’s just plain unacceptable!
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