Everyone Agrees We Need to Reform Wall Street... Just Like After Enron

Remember how during the 2008 campaign there came a moment when candidates hoping to win the White House realized they had to declare that, like Obama, they were all in favor of "change"? Hillary did it. McCain did it. So did Romney. Giuliani too.

In the same way, today everyone agrees that we need reform of our financial system. Even Wall Street knows it is inevitable.

So the question becomes: are we going to get real reform or are we going to get the DC version of "reform"?

For a snapshot of what DC reform looks like, take a look at the 26-page memo that Frank Luntz put together to show Republicans how to kill health care reform. Here is his unequivocal advice: "You simply MUST be vocally and passionately on the side of reform." The trick, he says, is to "be for the right kind of reform" -- ie the kind of reform that doesn't reform anything.

We've seen this movie before, just a few years ago. Back then the stars of the show were Enron, Tyco, Global Crossing, and WorldCom. After their orgy of greed and fraud was exposed, everyone suddenly demanded reform. But what we got instead were window-dressing changes and band-aid legislation. And the prevailing philosophy that the free market would regulate itself was, in effect, allowed to remain in place. Indeed, it was given even freer rein.

So now it's déjà vu all over again. You know the drill: first comes the shock, then the outrage, then a few high-profile show trials, then the punishment of a few culprits, then some half-measure reforms, and then we all move on... until it starts again.

Right now we find ourselves in the middle of that cycle. The financial bandits believe that if they just lay low for a bit, the storm of outrage will blow over. They can just wait it out, feed the people a few Luntzian reformist scraps, and then return to the party.

And they may well be right.

As we wait for the Obama administration to announce its plan for comprehensive reform of the financial regulatory system, the signs don't look promising.

For starters, the rise in the stock market (even though anyone who knows anything knows that it says next to nothing about the real economy) has taken the edge off the sense of crisis and the need for fundamental reform.

Second, Tim Geithner is still running the show. During a recent interview with the Washington Post, Lois Romano asked him about "the fault lines" that led to the economic meltdown. "Who do you think bears the greatest responsibility?" she asked. "Is it the banks for pushing these loans? Is it the consumer for borrowing over their means? The regulators?"

In his answer, Geithner spread the blame around, but there was one glaring omission: the regulators. Not a good blind spot to have when you are in charge of reforming the regulatory system. As Calculated Risk put it: "Either Geithner misspoke or he still doesn't understand what happened -- and that is deeply troubling."

Equally troubling is Geithner's continued reliance on the guidance of the Wall Street players who led us into the mess we're currently in. Isn't that like sticking with the travel agent who just sent you on a vacation to hell?

But that is apparently what Geither did when formulating the plan to regulate over-the-counter derivatives that he rolled out on May 13th. According to a document leaked to Bloomberg News, Geithner's plan bore a marked resemblance to a plan drawn up by Goldman Sachs, JP Morgan, Credit Suisse, and Barclays, and sent to the Treasury department in February.

According to financial analyst Brad Hintz, the banks' plan seeks "to protect their profitable market conditions." What a surprise.

So, should we be worried that the banks' relentless attempts to game the system will undermine Geithner's professed desire to create "a robust regime of prudential supervision and regulation"?

Not according to Treasury spokesman Andrew Williams, who assures us that the banks' proposal "had little impact on our final result." In the same way that campaign donations never have any impact on public policy, I suppose.

One of the biggest challenges facing Obama's economic advisors is deciding how to overhaul the way Wall Street is regulated. Do they consolidate agencies? Reshuffle responsibilities? Create additional agencies? Blow the whole thing up and start over?

At the moment, the administration seems to be leaning towards giving the Fed more regulatory power -- perhaps even folding the SEC and the Commodity Futures Trading Commission into a new, super-sized Fed.

The idea of bringing together the hodgepodge of regulatory agencies is a good one. We certainly don't need companies being able to shop around for the most clueless regulatory agency, as AIG did when it placed itself under the not-very-watchful eye of the Office of Thrift Supervision. But is the Fed, which just delivered an epic failure in both its monetary policy and regulation of banks really the best choice to become our top financial watchdog?

And it certainly shouldn't be the SEC, which was so weakened during the Bush years that it is now too far gone to be saved -- even by a good commissioner like Mary Schapiro.

Just how bad things are at the SEC was made jaw-droppingly clear in an astonishing report on the agency released earlier this month by the Government Accountability Office. Reading it, the idea that Bernie Madoff got away with what he did for so long becomes less surprising than the fact that there was only one Bernie Madoff.

To call the SEC a cesspool of incompetence, inefficiency, ineptitude, and disorganization would be an insult to cesspools everywhere. Click here to read the gory details, which TPM's Moe Tkacik sums up as "scenes from the ninth circle of financial bureaucracy" wherein the SEC is featured "in an absurdist Office Space comedy about how the crisis happened."

The media are often an enabler of the transformation of real reform into DC "reform." An editorial in Saturday's Los Angeles Times offers a particularly egregious example of this. It might as well have been written by industry lobbyists (the way many "reform" bills are). Let's start with the subhead: "Stung by the excesses of the financial services industry, Congress is striking back."

Actually, it wasn't Congress that was "stung" by those "excesses" -- it was the entire world. And why is regulation of out-of-control markets "striking back"?

It gets worse: "Rather than trusting market forces, Democrats in Congress and the administration argue that unbridled capitalism has victimized consumers."

Who wrote this, the "teaparty" organizers? Glenn Beck? Since when do things like setting ground rules and demanding transparency mean you no longer believe in "market forces"?

Apparently, according to the LA Times, the call for reform is now a "backlash" in which "Democratic majorities in Congress" are going to "clip the financial industry's wings." And this is bad because reform means "raising costs and limiting the freedom of savvy investors and borrowers."

Really? I wonder just how many of those "savvy investors" made money in, say, 2008, when they were blissfully free of all the wing-clipping regulations the LA Times is so afraid of? Not many -- and that's because all investors, savvy and non-savvy alike, are victimized when the entire financial system is destabilized. In fact, I believe I've heard something about the crisis affecting the LA Times, too.

The closer we get to actual reform, the more hysterical the debate surrounding it becomes. The banking and financial industry's pushback becomes more desperate; the turf wars between entrenched agencies trying to keep their power become more heated; the mainstream media's habit of internalizing bad faith arguments in the name of "balance" becomes more pronounced; and the public interest loses out to the interests of the established financial/political class.

But it doesn't have to. It all depends on whether the political will to implement real reform exists -- or can be created. Without it, we'll get more tough-sounding-but-ultimately-toothless "reform" that allows the cancer of greed and corruption plaguing our financial and political systems to continue to spread.

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Comments

[MartynStrong]

Capital markets are unstable. In the past there was no way to make them stable. But today we have computer power that can be used to make them stable.

By using the greater computer power of today we can have a much higher turn over of capital in the capital market. This higher turnover will make the market harder to game or control and the market will no longer have the unstable run ups or declines. Who can change or control the market when say 20% of the capital is trading each day?

So now that we have the compute power to provide for all these transactions that will smooth out the market how do we force people to turn over at a rate of 20% a day? Easy, put a cap gains tax of 0% (zero) on all gains of 7 days or less and put a cap gains tax of 90% of all gains of more than 7 days.

The likes of Yahoo, Micosoft and/or Sun Micro Systems will give us the systems that will provide automated software agents to support turning over one's investments every 7 days (based on the specs you give the agent).

A system like this will make the financial markets work as smoothly as the local fruit market.

[UNCLEJOE]

We have two titanic gladiators at war with each other; Money Lenders vs. the Producers of Real Wealth; in more specific terms, represented by the Federal Reserve Bankers (Fed) vs. the Social Security Workers (SSW).

The surreptitious goal of the Fed Gladiator is to reduce the SSW Gladiator to a Medieval Serf. Unfortunately, the SSW Gladiator is totally unaware of the Fed's real intent

This Undeclared War has been going on since 1913 when the Fed obtained its Charter from the US Congress under the insidious pretense of guaranteeing to stabilize the US Economy. And "Since its inception, it has presided over the crashes of 1921 and 1929; the Great Depression of '29 to '39; the recessions in' 1954, '57, '69, ;75., and '81, a stock Market "Black Monday" in '87, and a 1,000% inflation which has destroyed 90% of the dollar's purchasing power." (The Creature from Jekyll Island by G. Edward Griffin, page. 20)

And add onto this list of financial crashes, the recessions of 2002, and this last crash of 2008.

The problem the Fed gladiator has in destroying the SSW gladiator is the resiliency of the SSW; new middle class entrepreneurs arrise from the ashes of their forebears and begin to procreate new producing SSW Gladiators.

However, this Fed problem has finally been solved: using the same stratgy that wiped out the Middle Class in Germany after the First World War that was a perfect environment for a dictatorship: Run-away Inflation.

[mbaty]

A super-sized Fed? The puzzle pieces are coming together now.
But what's really ironic about this is that only with major reforms and regulations can the system be kept in place. So many of these big finance people want things to go back to how they were before the "recession." But things can't go back--the system was inherently flawed, and it was only a matter of time before it crumbled. Now they want to continue their usurious practices while pretending that they can prop up a system that has no structural integrity, the key word being Integrity. They are speeding the collapse of the systems that made them wealthy and hoping that their money will mean something when their looting is done. The only way to keep the system in place in any real and sustainable way is to tip the balance in favor of the consumer, of the consuming engine of the American economy. But we are still waiting for our bailout after already using our "stimulus" to pay usurious bills.

[The Political Moose]

At the heart of all regulatory inadequacies, is campaign finance.
The current campaign finance system is simply legal corruption. Even the most qualified and charismatic politicians wouldn’t be with 100 miles of an elected office if they weren’t approved by financiers with bags of cash. Money has become the lifeblood for US national politics, creating a two constituency system. Jon Q. Taxpayer is represented only at the mercy of the campaign financers.
Let’s face it, with enough money, misinformation and clever political maneuvering, Michael Richards could be elected to an all black congressional district.

[OneTop]

Until there is a profound change at all levels in the campaign finance laws there will be no meaningful regulations passed into law.

It just will not happen.

[regellner]

Food and Energy commodities need to be regulated as well. As our worldwide population increases, it will be critical to do so, otherwise countless numbers of people will suffer worldwide due to the greed of speculators.


Raymond Gellner – Charlotte Liberal Examiner at Examiner.com
http://www.examiner.com/x-11326-Charlotte-Liberal-Examiner

[henrywolff]

Let's try to get the regulations right, though.

Most of the stuff that came out after Enron was expensive, time-wasting godawful stuff--the 409A regs, Sarbox.

[NoOneSpecial]

The one thing I think that Obama underestimates is his own popularity.

Citizens would absolutely flock to his cause is he simply started calling all the BS in Washington for what it is, and using the "bully pulpit" aspect of the Presidency to demand accountability to the people, fairness to the middle class, and value for the taxes we pay.

But to do that, he would have to take on a very large segment of his own party's members in Congress. Not to mention all the moneyed corporate interests that have them in their pockets.

That's the rub.

[Alvarask]

It may turn out that Obama was just never on the side of the people at all. Maybe he lied. It certainly looks that way to me right now and it saddens me to no end.

[The Political Moose]

Obama got elected by accepting money from the very financial institutions which caused the economic collapse. As likeable as Obama is, he still has duel constituency obligations: the voters who elected him & the financiers who made it possible.

It sucks but thats the way it works

[iridium53]

There's an easy way to measure the Obama Administration effort and accomplishment in regard to producing legislation that will fix the financial problems we now face. Take a look at the legislation they've proposed.

Summers, Bernanke and Geithner were up to their neck in this fiasco. Have been for years. Bernanke is, supposedly, an expert on the first Great Depression. Surely they have ideas about what worked before and what might work now.

But, they've produced nothing. Introduced nothing. Done nothing.
Except, of course, given a lot of money to bankers.
And, we just keep on losing another 600k jobs each month.
While the fully employed executives spout optimism-biased platitudes - and lay off more people.

By contrast, FDR had Glass-Steagall II signed into law within 100 days of his inauguration.

So, is doing nothing a choice? Or, is doing nothing, but hoping of course, a strategy?
Or, is doing nothing just a sign of inability to accomplish anything substantive?

But, Obama is working hard. He says. I wonder how much trickle down stimulus effect his Air Force One trip to New York to see a Broadway play will have? Especially for this month's 600,000 newly unemployed.

[Wickywoo]

Wall St is a gambling casino that can, will, and has destroyed the economy and America

Ban it

Companies can sell stock, quarterly reports are banned, yearly only, but no more gambling with it. All transactions go through the company itself, and strict rules and regulations are put on it. People not playing poker are still able to make investments, while the destructors are kept out of the game

[PaHairO]

Change ? Where ?

The only change I'm seeing is the chump change the trickle down oligarchs who run the Federal Government are dribbling on the chumps.

(What has fallen is vastly devalued currency, so it's a wash at best anyway.).

Name one criminal from the last 8 years (official or not-so-much) that has any reason to fear for their future or repent their past.

Any issue. banks. torture. environment. no-bid contract corruption. treason. obstructing justice. Name anyone - besides Lyndie England and Martha-eff­ing-Stewar­t - who has been held accountable for anything.

[MBryant]

Frankly, although for political leadership and foreign policy I'd give Obama a tentative "A" on his work so far. For economics I'd give him "C" - and it would be lower except that his general optimism helps a lot. The stimulus included far too little infrastructure and construction/blue collar job money and too much social and creative, white collar, enterpreneural "fun" money. Jobs are the hemorrhage that must be staunched for the body to heal.

And Obama missed the opportunity to nationalize the banks to recapitalism them in a new, tax protected but managed market with low turnover. We should have never put the banks on wall street - they should be capitalized in a separate over the counter like market that isn't driven by minute by minute trading and quarter to quarter earnings but is patient and safe. We didn't fix anything when we had the chance - we just broke out a lot of band-aids...

[dianhow]

Exactly The GOP wants reform that MEANS NOTHING. They are masters of using language that seems to say all the right things- but will really screw us - all had been the case under GOP rule.
We have witnessed that for 8 long Bush / Cheney years. Actually since Reagan began deregulating everything- banks / Wallst etc- that policy has led us into this world wide meltdown. Yet many STILL DO REFUSE TO ADMIT THAT SIMPLE FACT ! wHY ? Perhaps they are listening to the same oLD GOP line we've heard for 20 of the last 28 years - many of those with a GOP congress.
BUSh had that for 6 years. Dems GOT elected in 2006- - and BUSH VETOED AND OR THREATENED
A FILIBUSTER. After all those years of GOP reigh - I'm ready to give the Dems a fair chance to see what they can do over the next 3 or so years. A respected official just came out and said what Cheney
has been saying about Obama and us noyt being safe IS ALL WRONG. That will not shut Cheney up - he will kep spreading lies and misinformation- 1/2 truths- until the corp owned fat cats that control our news media call his on it ! Don't hold your breath.

[Dennis]

I heard one of the titans of finance decrying the fact that regulation would "stifle the creation of innovative financial instruments." These people learned nothing.
Re-enacting Glass-Steagall and repealing the Commodity Futures Modernization Act of 2000 would both be huge steps in the right direction but, I haven't heard any one mention that.. In the end, we'll get D.C.-style reform: you'll have to file a form once a year stating that you have no intention of crashing the economy.

[dianhow]

Correct THe so called titans on Wall st - who caused much of this mess- with their incredible greed and unethical practices - will never admit they did wrong- why should they- they made out
just dandy. Not too different than MAdoff. - another Wallst creep. Sadly- Glass Steagal was signed by Clinton who was weak and caved to the GOP congress and ws busy with Monica.
But Reagan was the genesis of deregulation of banks & Wall st- and Bush / W kept it going and then some. Alan Greenspan said ' unfettered free market ' will handle the markets ! They sure did..
Before Reagan and his bunch- we had safe guards- that protected investors & the public. GOP said NO MORE. Bush admin even went to court to prevent regulation ! Free trade / free markets are just FINE BUT they have to be controlled and regulated. Thats just common sense.
Too bad voters voted in a guy - twice - who was th ' kinda fella you can have a beer with !!!
Is that our limited criteria for the leader of the free world ?
We have no one to blame but ourselves.

[GardenerNorCal]

I think it's high time that the creation of innovative finincial instruments was made illegal. Their very existence is why no one can actually value all those toxic assets. If an asset has no value when does it cease to be an asset?

[tomas0808]

First there was Separation of Church and State. What we need now is Separation of Business and State. I said it when the Enron thing happened, "They're just the ones who got caught."

Nothing changes. Their whole deal is about doing what's needed to get the profits pouring in again. Not a good plan for society as a whole. But then it never was, was it? Making the prison system into a business was always going to have one inevitable result-more criminals and prisoners/see California. Making healthcare into a business has one inevitable result-more sick people than ever. Neither are good plans for society but they just don;t care

It's happening again. And it will keep happening until there's a revolt

[dianhow]

Agreed !!! Do you recall that Mccain buddy - Sen Phil Gramm - pushed thru the Enron loophole '
that caused Enron workers to lose everything ? Wost part is Gramms wife - made 900 K off the Enron deal as a LOBBYIST ! THAT IS WHATS WRONG WITH DC . Obama is trying- but one man can't do it- It will take a political revolution. VOTERS DO have to REVOLT - PEACEFULLY !!!
at the polls - with e-mails- calls - letters - whatever to their DC reps- and vote OUT THE CROOKS- no matter what G D party ! Party loyality is a thing of the past - being an Amercan is all
that matters. Don't let the same old corrupt liars who have been on the public payroll forever
fool us again - in 2010 or 2012 . We will regret it if we do.
We don't have to agree with all Obama says or does- but judge him on the totality of his work...
in 2012 . Bush / Cheney lucked out - they got to dump all their ' toxic ' . problems on Obama.
Now Cheney has the gall to undermine this Pres and our safety ! What a poor excuse for a man. He had his chance- he blew it big time.