$5 Billion in Lobbying for 12 Corrupt Deals Led to the Multi-Trillion Dollar Financial Meltdown

By Robert Weissman, Multinational Monitor. Posted March 9, 2009.

What can $5 billion buy in Washington?

Quite a lot. (A financial coup d’état!!)

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

"Sold Out: How Wall Street and Washington Betrayed America," a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade -- each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available at: www.wallstreetwatch.org/soldoutreport.htm.) Combined, these deregulatory moves helped pave the way for the current financial meltdown.

Here are 12 deregulatory steps to financial meltdown:

1. The repeal of Glass-Steagall

The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 and related rules, which prohibited banks from offering investment, commercial banking, and insurance services. In 1998, Citibank and Travelers Group merged on the expectation that Glass-Steagall would be repealed. Then they set out, successfully, to make it so. The subsequent result was the infusion of the investment bank speculative culture into the world of commercial banking. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.

2. Off-the-books accounting for banks

Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is. Accounting rules -- lobbied for by big banks -- permitted the accounting fictions that continue to obscure banks' actual condition.

3. CFTC blocked from regulating derivatives

Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffett's warning that they represent "weapons of mass financial destruction" has proven prescient -- they have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. During the Clinton administration, the Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives, but the agency was quashed by opposition from Robert Rubin and Fed Chair Alan Greenspan.

4. Formal financial derivative deregulation: the Commodities Futures Modernization Act

The deregulation -- or non-regulation -- of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act. Its passage orchestrated by the industry-friendly Senator Phil Gramm, the Act prohibits the CFTC from regulating financial derivatives.

5. SEC removes capital limits on investment banks and the voluntary regulation regime

In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt to-net capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks -- led by Goldman Sachs, and its then-chair, Henry Paulson -- and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. This super-leverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments -- so that their individual failures, or the potential of failure, became systemic crises.

6. Basel II weakening of capital reserve requirements for banks

Rules adopted by global bank regulators -- known as Basel II, and heavily influenced by the banks themselves -- would let commercial banks rely on their own internal risk-assessment models (exactly the same approach as the SEC took for investment banks). Luckily, technical challenges and intra-industry disputes about Basel II have delayed implementation -- hopefully permanently -- of the regulatory scheme.

7. No predatory lending enforcement

Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

8. Federal preemption of state enforcement against predatory lending

When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds -- responding to commercial bank petitions -- jumped to attention to stop them. The Office of the Comptroller of the Currency and the Office of Thrift Supervision each prohibited states from enforcing consumer protection rules against nationally chartered banks.

9. Blocking the courthouse doors: Assignee Liability Escape

Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable, including Wall Street investors who bought bundles of mortgages (even if the investors had no role in abuses committed by mortgage originators). With some limited exceptions, however, assignee liability does not apply to mortgage loans, however. Representative Bob Ney -- a great friend of financial interests, and who subsequently went to prison in connection with the Abramoff scandal -- worked hard, and successfully, to ensure this effective immunity was maintained.

10. Fannie and Freddie enter subprime

At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets -- at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision. In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying -- including especially but not only of Democratic friends of the institutions -- enabled them to divert from their traditional exclusive focus on prime loans.

Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

11. Merger mania

The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit rating agency failure

With Wall Street packaging mortgage loans into pools of securitized assets and then slicing them into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated.

The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk -- as subsequent events have revealed. The credit rating agencies have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers.

This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards -- even if the SEC knows those standards to be flawed.

From a financial regulatory standpoint, what should be done going forward? The first step is certainly to undo what Wall Street has wrought. More in future columns on an affirmative agenda to restrain the financial sector.

None of this will be easy, however. Wall Street may be disgraced, but it is not prostrate. Financial sector lobbyists continue to roam the halls of Congress, former Wall Street executives have high positions in the Obama administration, and financial sector propagandists continue to warn of the dangers of interfering with "financial innovation."

http://www.alternet.org/workplace/130683/$5_billion_in_lobbying_for_12_corrupt_deals_caused_the_multi-trillion_dollar_financial_meltdown/

No Tough Love for Wall Street

Posted on Feb 10, 2009

AP photo / Lawrence Jackson

Treasury Secretary Timothy Geithner stands tight-lipped during a press conference at which he outlined the administration’s plan for economic recovery. The briefing was held Tuesday at the Treasury Department in Washington.

By Robert Scheer

What an insipid anticlimax! Rising to “a challenge more complex than our financial system has ever faced,” Treasury Secretary Timothy Geithner promised on Tuesday to give trillions more to the very folks who profited from that malignant complexity. For all the brave talk about transparency and accountability in the banking bailout, he gave the swindlers who got us into this mess yet another blank check to buy up the “toxic assets” they gleefully created.

According to the Congressional Oversight Panel created by Congress to monitor the bailout, the Bush Treasury Department overpaid by $78 billion of our money in the first 10 purchases of those assets. Yet Geithner tells us “Congress acted quickly and courageously” in throwing that money at Wall Street without requiring any accountability. At the same time, there is still no commitment to directly help what Geithner admits are the millions of homeowners already foreclosed out of their homes, with millions more to come. The leaks from Treasury promise that $50 billion will eventually be allocated directly to helping homeowners, which is a day late and a dollar short in chump change compared to the trillion dollars that Geithner on Tuesday committed to the purchase of more bad bank debt. 

The Geithner speech betrayed the buildup to it offered by President Obama in his press conference the day before. I was such a sucker I found myself cheering at almost every line, agreeing that Republicans acted with total irresponsibility in opposing Obama’s plan to stimulate an economy that was wrecked on their watch. But then came the hangover reality of Geithner’s talk. Instead of the promised transparency we were treated to yet another “trust Big Brother” hustle.

How wonderful that Geithner, who as head of the New York Federal Reserve was in on the first wasted $350 billion, now promises a brand new Web site to help us taxpayers follow the action. It means nothing, given that he specifically ruled out any of the serious means of holding Wall Street accountable. 

The New York Times got it right: “… the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis. …” Geithner and White House economic czar Lawrence Summers won out over David Axelrod and other Obama advisers more loyal to the wishes of grass-roots voters; “… as intended by Mr. Geithner, the plan stops short of intruding too significantly into bankers’ affairs even as they come onto the public dole.” 

The word dole is usually applied heartlessly to welfare mothers sustained in their dire poverty by meager government handouts, not to the top bankers now ripping off the taxpayers. But as opposed to welfare mothers, who must survive stringent monitoring, the bankers will be largely self-monitoring. No wonder that welfare rolls, because of onerous eligibility rules, are not rising commensurate to the degree of misery out there. There is no such tough love for bankers.

Much has been made of the proposed $500,000 pay cap that applies only to the most senior executives, who, rest assured, have already salted away massive fortunes made while hustling unsuspecting consumers with teaser loans. But there is nothing from Geithner about replacing those top executives, who presided over the disintegration of financial institutions that the taxpayers must now salvage. Nor is there any “moral hazard” pain planned for the shareholders in those Ponzi-scheme companies of the sort reserved for ordinary folks losing their homes.

Believe it or not, I fully expected this morning to write a cheerleading column hailing Geithner’s reversal of course. Surely the man who as head of the New York Fed sat idly by while the Wall Street giants he was supposed to be monitoring imploded would have learned the error of his ways. Otherwise why would Obama have appointed him?

I don’t have the answer. The Obama of Monday’s press conference, a president in the tradition of Franklin Delano Roosevelt, seemingly deeply feeling the average person’s pain as he movingly speaks of the laid-off workers of Elkhart, Ind., was absent from the next day’s speech by his treasury secretary.

If like me you still get those chatty e-mails from the Obama campaign, it is time to remind them that we voted for the caring community organizer from the streets of Chicago and not some hack carrying water for the predators of Wall Street.  

http://www.truthdig.com/report/item/20090210_no_tough_love_for_wall_street/