Taxpayers and working families losing their jobs and their homes "will not benefit" from the huge $700 billion TARP bailout that saved banks and Wall Street firms a year ago, the Treasury Department's Special Inspector General Neil Barofsky reported Wednesday. As he told CBS News and the PBS News Hour:
"As far as restoring lending, helping homeowners, helping small businesses, that hasn't materialized yet. So, we still have to wait and see..."
His report said taxpayers view the Troubled Assets Relief Program, or TARP, with "anger, cynicism and distrust." He blamed a "lack of transparency" in the program and "less-than-accurate statements." And he said Treasury should have made banks explain publicly how they used the rescue funds.
But the $17.5 trillion in bailouts, loans and guarantees that's propped up Wall Street has found its way to at least one group of struggling Americans: the often ex-homeless people hired to wait in line on behalf of high-priced lobbyists for financial firms.
Early in the morning outside the House Financial Services Committee hearing room in the Rayburn office building last week, there were scruffy ex-homeless and other low-income folks, wearing their dreadlocks or sloppy jeans, mixed in with the pin-striped reps for the financial industry. They were all seemingly lining up to see what $223 million in financial lobbying in the first six months of this year could buy in thwarting real reform on Capitol Hill. And they were hoping to get the few dozen public seats available inside the room for a critical 10 a.m. hearing marking up a bill that was supposed to regulate the now-private market in complex "derivatives," those secret, unregulated bets on investments sold by the likes of AIG.
The down-and-outers in the narrow hallway, of course, were there as place-holders in the line for the most elite lobbyists and Washington representatives of the even bigger, post-meltdown investment and commercial banks like Goldman Sachs and J.P Morgan Chase; such firms are now on track to pay their employees a record $140 billion this year. So the sleek, blonde J.P Morgan lobbyist in a smart gray suit set off by a brightly colored scarf was able to saunter in shortly before the doors opened for the hearing to see just how many more loopholes weakening the bill could be added. (She declined to identify herself.)
Like the evicted family in Michael Moore's new film being hired by the bank to clean out their own home, the banking industry lobbyists in D.C. have at long last created the ultimate trickle-down effect from the bailouts. They've hired the jobless ( for $11 to $35 an hour) to hold their places in line to make sure there's no effective federal crackdown preventing more job-destroying speculation in credit default swaps and other derivatives. (In fact, commercial banks earned over $5 billion by trading
derivatives in the second quarter of this year, up 225% from the same period last year.)
How quickly Wall Street chooses to forget: As Heather Booth, the director of the Americans for Financial Reform (AFR) coalition, observes, "Unregulated derivatives trading was a major cause of the economic crisis and loss of homes, jobs and retirement savings."
(You can read the full story about the uphill battle for financial reform in my article at AlterNet.)
Those controversial derivatives are nominally worth at least $450 trillion worldwide, with $555 billion in credit at risk in the U.S. banking industry. (Derivatives are forms of insurance or bets on underlying assets, such as now-toxic subprime mortgages, supposedly designed to manage risk.) No wonder Warren Buffett called them "financial weapons of mass destruction."
These economy-wreckers could have been regulated as far back as the late 1990s, but two leaders of Obama's financial team, White House economic advisor Lawrence Summers and Treasury Secretary Tim Geithner, were part of a high-powered, successful effort in the Clinton Administration to block any oversight and transparency, as described in a shocking new PBS Frontline report, "The Warning." It's a mindset they apparently still share in some ways, if their approach to the bailout and derivatives is any guide.
Of course, Administration officials are now finally talking tough on executive pay, but they haven't been nearly as aggressive in dealing with the wild-and-wooly trading in derivatives that helps swell those huge bonuses. As the AP and New York Times reported Wednesday on a plan to rein in executive pay: "Under the plan, which will be announced in the next few days by the Treasury Department, the seven companies that received the most assistance will have to cut the cash payouts to their 25 best-paid executives by an average of about 90 percent from last year." And on this past Sunday's talk shows, administration officials blasted Wall Street executives for paying big bonuses.
While it may be a sop to public anger, their rhetoric on pay hasn't been matched by a unified, strong effort to rein in unregulated derivatives trading, Hill sources say. Those risky investment vehicles are exemplified by the toxic "credit default swaps" AIG used to help sink the economy.
And with $15 billion in profits from derivatives trading in the first half of 2009, according to Treasury Department figures, it's still a major source of huge bonuses for investment bankers.
But the Administration has instead put its shrinking political capital behind saving the consumer financial agency this week from the assaults of Republicans, the Chamber of Commerce and community bankers who claim, as usual, that it means job-killing over-regulation.
And it seems to have paid off: a sweeping amendment originally proposed by centrist Democrat Rep. Melissa Bean (D-Ill) to pre-empt tougher state enforcement seems, surprisingly, failed. Indeed, the committee on Wednesday passed a compromise amendment that gives more leeway to the states to crack down on lending abuses. And, after a battle between progressive groups and auto dealers, House Democrats set the stage for regulating auto dealerships that sell or securitize loans, the Wall Street Journal reported.
Yet the administration's purportedly high-priority agency legislation is already much weaker on protecting consumers from deceptive or confusing loans than originally proposed. Even so, Heather Booth said after Wednesday's mark-up of the bill, "It's an improvement on the current situation, but it still needs work."
Unfortunately none of the major financial reform measures being considered in Congress now directly address the problems of the ongoing foreclosure crisis, job loss and stalled credit for businesses. That's why the banks' decisions to pay themselves $140 billion in bonuses and pay are especially galling. "It's our money," Booth points out. "They're taking bailout money, paying for bonuses while there are rising foreclosure rates and rising levels of unemployment."
It's a welcome development that there's a growing realization among experts and even some in the Obama Administration that all those billions spent on the direct bailout haven't done anything to promote lending or help Main Street. And so the President was forced by a still-crippled economy to announce Wednesday yet another set of plans to free up loans to job-generating small businesses -- one of the many ostensible justifications of the original TARP plan; that bailout turned into an unmonitored boondoggle for bankers . Now the strategy is to spur lending by using additional funds to help community banks and expand the size of Small Business Administration loans.
But all these proposed measures -- even if they don't get watered down -- only tinker at the edges of a range of structural problems in our financing system. Banks have become too big to fail, and the Federal Reserve is too dominated by Wall Street firms and commercial banks, so the public interest is ignored, Booth and other advocates say. "We need not just reforms, but a change in governance," she says.
On top of all that, influential bankers and economists are starting to challenge the administration's concensus view that the huge banks created by shotgun mergers can be held in check by current and pending regulations. As former International Monetary Fund banker-turned-reformer Simon Johnson writes in his blog Baseline Scenario:
In contrast [to the administration's view], in an interview reported in the NYT this morning, [former Federal Reserve chairman] Paul Volcker argues that attempts to regulate these banks will fail:
"The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company."
Volcker may not have the ear of the President (as the NYT points out), and Alan Greenspan - also arguing for bank breakup, but along different lines - might also be ignored. But watch Mervyn King closely.
Mervyn King is governor of the Bank of England and a hugely influential figure in central banking circles. Time and again he has proved to be not only ahead of his peers in terms of thinking about the latest problems, but also the person who is best able to frame an issue and articulate potential solutions so as to draw support from other officials around the world.
Mervyn King also does not mince words. In a major speech last night, he said, "Never in the field of financial endeavour has so much money been owed by so few to so many. And, one might add, so far with little real reform." (full speech)
He hits hard (implicitly) at the White House's central idea on large banks: "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion". And he lines up very much with Paul Volcker's views - breaking up big banks is necessary, doable, and actually essential.
Remember and repeat this Mervyn King line: "Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are."
So it's even more striking that the Obama Administration's relatively mild regulatory approaches face so much resistance from business interests. The latest loophole-laden bill making its way through the House Financial Services Committee aims, in theory, to reduce the conflicts-of-interest between rating agencies that blessed shoddy investment vehicles with triple-AAA ratings and the investment banks that paid for their services. But as McClatchy reports:
A key House of Representatives committee is set to vote soon on legislation that would overhaul financial regulation and produce greater transparency for investors, but as it's now written it fails to address many of the credit-rating agency missteps that helped fuel the global financial crisis...
As part of a broad regulatory overhaul proposed by the Obama administration, House and Senate banking panels are trying to fix what went wrong, especially at the ratings agencies, whose blessing on a bond or security tells investors that it's trustworthy.
The draft legislation proposed by Rep. Paul Kanjorski, D-Pa., goes farther than the administration's recommendations, but it doesn't address some of the ratings agencies' most egregious abuses.
``I think that it's well-intentioned, but I'm afraid it will have little practical effort,'' said Eric Kolchinsky, who was a managing director in Moody's structured finance division from January to November 2007, when he was purged, he said, for questioning ratings methodology. (Moody's denied that.)
``It does little to alter the fundamental flaws of the rating agencies' role in financial markets,'' Kolchinsky said of the bill.
The details of the loopholes are so complicated, though, that financial lobbyists are the ones best able to preserve them in order to protect the insider games of rating agencies. Even though a failure to pass a strong legislative package could set us up for an even worse meltdown -- because trillions of new taxpayer funds are potentially at risk -- it's hard to expect most activists to be motivated to fight on behalf of strengthening this bill or any other arcane financial legislation, such as oversight of derivatives. That's in part why the easier-to-grasp Consumer Financial Protection Agency became the main focus of grass-roots lobbying for financial oversight. So, Booth's AFR coalition, for one, still faces a major challenge on promoting reform: "It's much more daunting to make this all clear to the public."
UPDATE: The House Financial Services Committee passed the financial protection agency by a largely party line vote on Thursday. Heather Booth said in a statement afterwards:
The action by the House Financial Services Committee marks a major turning of the tide against decades of big banks' systematic dismantling of the financial protections put in place after the Great Depression...
In the face of the economic catastrophe that has befallen this country - a catastrophe that was both foreseeable and preventable with regulation - the fact that some of the Chairman and the President's priorities had to be compromised speaks not to legitimately competing interests but to the mind-boggling sums of money the U.S. Chamber of Commerce, the American Bankers Association and other special interests spent lobbying against the interests of the rest of us. We fought them to a draw on many fronts including around allowing states to raise standards above the federal floor where necessary. There are other places where the bill needs to be strengthened...
"The power of the big banks in Washington is old news. What's new is that ordinary Americans have come together to fight back, forming a powerful alliance and working together to preserve the essential structure of a new Consumer Financial Protection Agency."
To read more about the progressives' fight with Wall Street over how to reform the current mess, you can take a look at this AlterNet article: "The Battle Against Letting Wall Street Continue to Make a Killing on Derivatives."
And to bring yourself up to date quickly on just where the bailout, financial reform and the Administration's new economic efforts stand now, check out this useful news account from the PBS News Hour, featuring a provocative interview about the failures of the bailout with Neil Barofsky: