$5 Billion in Lobbying for 12 Corrupt Deals Caused
the Multi-Trillion Dollar Financial Meltdown
What can $5 billion buy in Washington?
Quite a lot.
Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal
campaign contributions and lobbying expenditures. (WALL STREET BRIBING
all CANDIDATES and most of CONGRESS)
By Robert Weissman, Multinational Monitor
Posted on March 9, 2009, Printed on March 9, 2009
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 guaranteed to create a 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The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall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merged on the expectation that Glass-Steagall would be repealed.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
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
5. SEC removes capital limits on investment banks and the voluntary regulation
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
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
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."
* * * * * * * * * * * *
Will this happen again?
If you want the present to be different from the past, study the past.
Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor,
and director of Essential Action. © 2009 Multinational Monitor All rights reserved.
View this story online at: http://www.alternet.org/story/130683/
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