THE BLOG
06/25/2009 05:12 am ET | Updated May 25, 2011

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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