A Republican Gift to Democrats?

Two thirds of Americans favor increasing federal oversight over the financial sector. With daily headlines about seeming ethical violations (if not legal ones) linking the collapse of the economy to mega-financial institutions like Goldman-Sachs, have the Republicans given a terrified Democratic Party facing mid-term elections an issue that might save at least a few Democratic House and Senate seats from the expected slaughter in November? Has the recent “filibuster vote” – a 41 vote (40 Republicans and 1 Democrat) managed to defeat a 57 vote (all Democrats) motion to bring the pending financial regulation bill to a vote on the Senate floor – given the Democrats a card they can play in fall elections? They did it on April 26^th and again the next day, just in case you thought they weren’t sure; this as reports showed a ma ssive shift in contributions by Wall Street regulars from Democratic to Republican candidates.

Make no mistake, if the Democrats lose control of the Senate in November, the very filibuster strategy (where it takes 60 votes to bring a bill to a vote) they decry today will be the same strategy they will apply, if they have 40 votes, if and when they are the minority party. But look at the Republican objections to the proposed Chris Dodd-drafted legislation. They opposed a $50 billion fund that would be used to unwind failing financial companies in a way that would minimize the risk to the economy – they describe this piece of the bill as extending the “bailout” mentality that voters hate. Aside from the fact that Democrats are willing to negotiate this provision, in Washington-speak, this sum is hardly enough to create much of a bailout, which would require ten to twenty times this amount to make a dent. It’s simply a way to stop a snowball from becoming an avalanche. We’ve had some avalanche problems before!

Or the objection that the bill’s focus on creating stronger consumer protection will interfere with big financial institutions’ freedom to move… the same freedom to move that pretty much destroyed our economy. And if I recall, most consumers are… well… voters. Put another way, this seems to say that Republicans really are not the party of the people, just the party of big business, a criticism that marks vulnerability at a time when Republicans seem destined to change the Washington power structure in November.

Or the most amazing part of the opposition – the regulation of derivatives – that Republicans want to keep outside of the regulatory schema because that’s where Wall Street snake-oil traders make the vast fortunes that annoy Americans the most. The worst offenders, in the eyes of even the most jaundiced analysts, are the so-called “naked” or “synthetic” derivatives – literally financial side bets where the players have absolutely no real ownership of or direct interest in the assets they are betting on. While Wall Street clings to the story that they are blood flow of business, creating jobs and enabling genuine economic growth, there isn’t even the slightest linkage between such financial instruments and a single job or the slightest value-creation to a real business that produces products or services. It is simply greed o n acid.

And it’s not like the financial institutions that we bailed out with TARP money have paid us back by reopening the desperately-needed small business credit markets. In fact there is an inverse relationship between such institutions and increasing the flow of credit: those that got TARP money actually lent less than those banks that did not, but they did manage to increase the compensation levels to their senior managers and traders to a higher level. That’s where Americans are really pissed about bailouts – rogue traders making mistakes got the mistakes covered by the taxpayers with no seeming offsetting balance to most Americans… and those same rogue traders are now making fortunes again, manipulating a very uneven playing field, while ordinary citizens suffer in the job and housing markets.

The financial industry has put the full court press on the Republican Party, no holds barred. But it’s not just the financial sector: “Far afield from Wall Street, the intense debate over the overhaul of financial regulations by Congress is attracting some unlikely but powerful players. More than 130 companies from the manufacturing, retail and service sectors have retained high-powered lobbyists to weigh in on, and often oppose, the regulatory system being debated this week in Washington, according to an analysis of lobbying records by The New Yo rk Times.” Times April 26^th. Companies like motorcycle manufacturer Harley-Davidson or candy maker Mars. Business fears change. Payday lenders are freaking out. Will the Republican “party of no” ride to an unstoppable victory in November or have they just stumbled from a seemingly easy victory?

Goldman Chairman Lloyd “Boom Boom” Blankfein claims that there was no real conflict of interest with clients and that the bank was simply prudently hedging its bets and changing its strategies over time (supported by a litany of self-serving testimony by Goldman traders in Senate hearings on April 27^th). But investigation into this mess continues to produce evidence that Goldman bankers knew the subprime derivatives they were pedaling were crap – a series of very incriminating internal emails (at the highest reaches of the company) brings this home very clearly – and that they knowingly bet against their own clients’ interest on instruments sold to such clients by Goldman. While some on Capitol Hill know that allowing huge financial players to dominate this sector can never be healthy – the concentration of power accelerated by bad judgment during both the Clinton and Bush administrations that took away the last barriers against the combination of increasingly bigger financial companies– the Democrats as a whole seem unwilling to propose the “break them up into smaller pieces before they ruin the country again” solution.

Fact: the existing financial regulatory system, created in another era, failed massively; it just didn’t and does not work. The economy collapsed due substantially to the machinations of a financial industry skating around regulations with new financial instruments that simply did not exist when our basic securities laws were created. What happens the next time? What happens when a country already saddled with unmanageable debt faces another financial collapse orchestrated by unbridled Wall Street greed… when there is no more public money to stem the hemorrhaging? Exactly what does it take to “make the bad man stop?”

I’m Peter Dekom, and we should all be concerned.