$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  The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall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  merged on the expectation that Glass-Steagall would be repealed.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
  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

  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.
--  Spinoza

  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/