[corp-focus] We Told You So
Thu, 12 Mar 2009 13:04:00 -0400
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We Told You So
By Robert Weissman
March 12, 2009
Is it fair to complain about the actions of the financial deregulators?
Could anyone reasonably have foreseen the consequences of a decades-long
regulatory holiday for the financial sector?
In a word, yes.
In preparing "Sold Out: How Wall Street and Washington Betrayed
America," <http://www.wallstreetwatch.org/soldoutreport.htm> a report
that documents a dozen deregulatory steps to financial meltdown, it was
remarkable to see that, at almost every step, public interest advocates
and independent-minded regulators and Members of Congress cautioned
about the hazards that lay ahead. Those ringing the alarm bells were
proven wrong only in underestimating how severe would be the
consequences of deregulation.
Policymakers ignored the warnings. Good arguments could not compete with
the combination of political influence and a reckless and fanatical zeal
for deregulation. $5 billion -- the amount the financial sector invested
in the financial sector over the last decade -- buys a lot of friends.
Example: Consumer groups warned of a growing predatory lending scourge
at the beginning of this decade (and even in the 1990s), before the
housing bubble inflated.
"While many regulators recognize the gravity of the predatory lending
problem, the appropriate -- and politically feasible -- method of
addressing the problem still appears elusive," wrote the National
Consumer Law Center and the Consumer Federation of America in January
2001 comments submitted to the FDIC.
What was needed, the consumer groups argued, was binding regulation.
"All agencies should adopt a bold, comprehensive and specific series of
regulations to change the mortgage marketplace," the groups wrote, so
that "predatory mortgage practices are either specifically prohibited,
or are so costly to the mortgage lender that they are not economically
Example: In 1999, Congress passed the Gramm-Leach-Bliley Act, which
eliminated the Glass-Steagall and Bank Holding Company Acts'
longstanding ban on combining commercial banks and investment banks, or
commercial banks and other financial service providers. This law paved
the way for the creation of Citigroup, a merger of Citibank and
Travelers Insurance, and helped infuse the speculative go-go culture of
investment banks into commercial banks.
When Citibank and Travelers announced their merger in 1998 -- a marriage
that could only be consummated if Glass-Steagall and related rules were
repealed -- my colleague Russell Mokhiber and I wrote, "Expect to see
lots of bad loans, bad investment decisions, teetering banks and
tottering insurance companies -- and a series of massive financial
bailouts of new conglomerates judged 'too big to fail.'" We didn't
envision exactly how the Citigroup and Wall Street debacle would play
out, but we got the outline right. Our predictions echoed the warnings
from consumer advocates.
Example: In 1998, the Commodity Futures Trading Commission (CFTC)
suggested the need for regulation of financial derivatives. In a concept
paper, the CFTC wrote that, "While OTC [over-the-counter] derivatives
serve important economic functions, these products, like any complex
financial instrument, can present significant risks if misused or
misunderstood by market participants." The agency suggested a series of
modest potential regulations that might have restrained the
proliferation of financial derivatives and required parties to set aside
capital against the risk of loss (a policy that likely would have saved
taxpayers tens of billions or more in the AIG bailout).
But the CFTC initiative was crushed by the then-Committee to Save the
World (so designated by Time Magazine) -- Treasury Secretary Robert
Rubin, Deputy Secretary Larry Summers and Federal Reserve Chair Alan
Greenspan. In 2000, Congress passed a statute prohibiting the CFTC from
regulating financial derivatives.
Example: In 1995, Congress passed the Private Securities Litigation
Reform Act, which made it harder for defrauded investors to sue for
relief. Representative Ed Markey, D-Massachusetts, introduced an
amendment that would have exempted financial derivatives from the terms
of the Act. Representative Chris Cox, R-California, who would go on to
head the Securities and Exchange Commission under President Bush, led
the successful opposition to the amendment.
Markey anticipated many of the problems that would explode a decade
later: "All of these products have now been sent out into the American
marketplace, in many instances with the promise that they are quite safe
for a municipality to purchase. ... The objective of the Markey
amendment out here is to ensure that investors are protected when they
are misled into products of this nature, which by their very personality
cannot possibly be understood by ordinary, unsophisticated investors. By
that, I mean the town treasurers, the country treasurers, the ordinary
individual that thinks that they are sophisticated, but they are not so
sophisticated that they can understand an algorithm that stretches out
for half a mile and was constructed only inside of the mind of this 26-
or 28-year-old summa cum laude in mathematics from Cal Tech or from MIT
who constructed it. No one else in the firm understands it. The lesson
that we are learning is that the heads of these firms turn a blind eye,
because the profits are so great from these products that, in fact, the
CEOs of the companies do not even want to know how it happens until the
There was nothing inevitable, unavoidable or unforeseeable about the
At every step, critics warned of the dangers of further deregulation.
But with the financial sector showering campaign contributions on
politicians from both parties, investing heavily in a legion of
lobbyists, paying academics and think tanks to justify their preferred
policy positions, and cultivating a pliant media -- especially a
cheerleading business media complex -- the sounds of clinging cash
registers drowned out the evidence-based warnings from public interest
advocates and independent-minded government officials.
Robert Weissman is editor of the Washington, D.C.-based Multinational
Monitor, <http://www.multinationalmonitor.org> and director of Essential
(c) Robert Weissman
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