Outrage is back -- and long overdue. Now, what to do with it?
First, tune out the self-interested lectures from all those guilty elites who tell taxpayers to "stay calm" while the greedy gorge on our money. Thieves don't usually make good therapists.
Then, let's channel this backlash into more than crisis-driven policymaking. The American International Group bonus uproar can drive structural change -- from strengthening genuine shareholder authority to forcing transparency on the legislative process -- to stop politicians from voting in public and reversing themselves in secret.
Even as Congress finds its taste for accountability and reform, however, there is another key task for policymakers -- and the media. Let's recognize some of the people who got these issues right from the beginning. Many were ignored -- or worse, vilified. They deserve our attention and respect. We might even learn something from them.
The truth tellers
One group of public servants spotted the derivatives problem way back in 1994. The staff of the Government Accountability Office spent two years on a meticulous report concluding that without better regulation, derivative trading could trigger "liquidity problems" for the "financial system as a whole."
The systemic risk was too large for markets to mitigate, the report explained, so "in cases of severe financial stress," the nation would be stuck with a "financial bailout paid for by taxpayers." Got that?
Before the report was even released, however, a corporate attack campaign blasted the GAO and its recommendations. Then leading reporters "largely parroted industry" complaints when covering the issue, as Columbia Journalism Review's Elinore Longobardi details in a new 12-page analysis.
The old quotes might turn your stomach. Derivative losses would not require a bailout, declared then-Fed Chairman Alan Greenspan. A Washington Post editorial falsely claimed that the GAO report was not only "reassuring," but it also supported the existing derivative system. "If this were the obvious reading of the report," Longobardi dryly notes, "the derivatives industry would hardly have been so up in arms about it."
The media and political establishment should have given more weight to the disinterested conclusions from the GAO's exhaustive, nonpartisan study -- not the reflexive, self-interested attacks from its regulatory targets.
The good cop
Eliot Spitzer drew the wrath of Wall Street for his crusade against financial fraud, cronyism and greed.
As New York's attorney general, he was the first to take on AIG, using the state's Martin Act to step up where President George W. Bush's Securities and Exchange Commission had buckled. Spitzer forced out AIG's CEO and drew attention to the company's fraudulent accounting.
"AIG is at the center of the web," Spitzer told CNN this past weekend, advocating a tougher stance on the company's sweetheart deals for Goldman Sachs.
Spitzer resigned from the New York governorship a year ago after a prostitution scandal. Yet in a galling demonstration of Washington's tangled priorities, leaders in both parties still refuse to tap Spitzer's expertise for policymaking and enforcement in the current crisis, while the administration has tapped plenty of people tied to AIG, Citigroup, Lehman and Goldman.
Finally, in a lopsided battle that Washington would rather forget -- "looking backward" can be dicey -- consider the massive bank deregulation bill that passed in 1999.
Sen. Byron Dorgan led the lonely opposition of eight senators. He argued that deregulation would spur bank consolidation, increase moral hazard and facilitate risky derivatives trading.
"What does it mean if we have all this concentration?" Dorgan asked in his 1999 floor speech opposing bank deregulation. "The bigger they are, the less likely this government can allow them to fail," he said, cautioning that the list of banks considered "too big to fail" had already jumped from 11 to 21.
His other big concern was derivatives: "Federally insured banks in this country are trading in derivatives out of their own proprietary accounts. You could just as well put a roulette wheel in the bank lobby." Dorgan not only fought deregulation, he also tried to protect regular investors. He introduced an amendment to ban banks from using proprietary accounts for derivative speculation and a plan to regulate hedge funds under the Investment Company Act of 1940.
The Senate crushed both amendments with a voice vote, exempting senators from taking public stances on those sensible precautions.
Noting that those who "cannot remember the past are condemned to repeat it," Dorgan closed his speech with a warning eerie in its prescience. For once, the reformer gets the last word:
With respect to the regulation of risky hedge funds and derivatives in this country -- $33 trillion, a substantial amount of it held by the 25 largest banks in this country ... -- we must do something to address those issues. That kind of risk overhanging the financial institutions of this country one day, with a thud, will wake everyone up and lead them to ask the question: Why didn't we understand that we had to do something about that? How on earth could we have thought that would continue to exist without a massive problem for the American people and for its financial system?