Gut Check Time on Shackling Wall Street

The administration has rolled out its financial reform plan, which the president accurately calls the "the boldest set of reforms in financial regulation in 75 years."

Rep. Barney Frank, the chair of the House Banking Committee, promises to act rapidly, hoping to pass reforms by the end of the year. Best to move now while the banks are weak, goes the argument, than try to take them on when they are back on their feet.

The banking lobby has reacted like wasps whose hive has been hit by a stick, swarming out to fend off the threat. First target of their sting is the proposed Consumer Financial Protection Agency, designed to defend consumers from the serial abuses of credit card companies, payday lenders, mortgage brokers and the like. Ed Yingling, president of the American Bankers Association, decries even the idea of the agency, saying banks are "dumbfounded" by its scope, suggesting that it would "blow up the system"

This assault on the consumer agency reveals how much the banking lobby has already won. Most notable about the administration's plan is what was left out. Nothing real is done about compensation schemes. Exotic derivatives and credit default swaps are not banned. Rating agencies are still paid by the financial houses they are supposed to rate. Banks too big to fail are to be monitored, not broken up. Oversight of the system is entrusted to the Federal Reserve, which was designed to insulate money center banks from the democracy. No mention is made of a tax on securities transactions that would both put a damper on excessive speculation and raise a ton of money to help repay some of the staggering costs of the crisis the speculators caused.

Sadly, the whole notion of urgency is based on the false assumption that the banks are weak since they are on the public dole. But, as we've seen over the past months, the banks, even on life support, have big time clout in Washington. They blocked the effort to give bankruptcy judges the right to renegotiate mortgages of distressed families. They torpedoed legislation to put a lid on credit card interest rates. "It's hard to believe," Senator Dick Durbin said in frustration, but the banks are "still the most powerful lobby on Capitol Hill. And they frankly own the place."

So what can alter the balance of forces in Washington?

We have one lesson from history: the Pecora Commission in the New Deal. Ferdinand Pecora, the fearless chief counsel of the Senate Banking Committee, led hearings that dragged the barons of Wall Street before a riveted public, exposing their insider dealings, their ponzi schemes, and their excesses. By the time he was done, Time Magazine was calling them banksters, the public was demanding reform, and Congress located its backbone and enacted the Securities Exchange Act, the Glass Steagall Act and much more. (For a good summary see Kate Phillips piece here).

These real reforms helped the US escape the cycle of financial crises that previously had convulsed the economy about every ten years. It was only when these protections were dismantled from Reagan on that the bankers once more became "masters of the universe," and replayed the sorry saga of casino and crash.

Modern day Pecora hearings are waiting to happen. Led by Speaker Nancy Pelosi, the Congress passed legislation setting up a Financial Crisis Commission with subpoena power and the mandate to probe and exposed the roots of the current crisis. Senate leader Harry Reid and Pelosi each have the power to name three commissioners, with the Republican leaders of the House and Senate naming two each. Pelosi and Reid name the chair.

With strong and independent leadership -- say if it were chaired by Elizabeth Warren, the brilliant Harvard Law Professor who has chaired the Congressional Accountability Panel that helped expose the follies of the bank bailout -- the Commission could transform the debate in Washington.

It could hold hearings in the epicenters of the housing crisis, exposing the systematic fraud practiced by lenders like Countrywide and fostered by the banks that bought up the mortgages. It could expose how the banks and rating agencies colluded to transform garbage NINJA (no income, no job, no assets) mortgages into triple A securities. It could subpoena the barons to show how they profited personally and turned their eyes as the banks took ever greater risks, gambling with ever higher levels of borrowed money. It could make the case for adult supervision.

Americans are eager for this. Pollster Celinda Lake found that 71 percent of voters want Congress to hold investigations into the "events leading up to the Wall Street financial crisis." We want to know who caused this mess, who made out like bandits, who brought down the house. Public hearings would gain national attention. Leads winnowed out by the Commission would be pursued by muckrakers and bloggers. Congressional committees would be stirred from their lethargy. Time magazine would start talking about banksters again. Then real reform might be possible.

It is now up to Pelosi and Reid. The law was passed weeks ago. They have the power. They can choose to name aggressive and independent commissioners or to turn the commission into a pro forma review that creates a report for the shelves a year from now.

The banking lobby is no doubt pushing hard to neuter the commission. And here we see another cost of the Geithner decision to subsidize the banks rather than reorganize them. If his plan fails, we'll be like Japan with the recovery burdened by zombie plans. If the plan works, we'll end up with the banks "too big to fail." And while we're deciding whether it works or not - as we are now -- there's immense pressure not to "undermine confidence." The banks are given stress tests and allowed to pass by cooking their books (not marking their toxic assets to market). The Treasury Secretary announces that they are "healing." They trumpet independence by repaying billions to the Treasury, even while they are still mainlining a range of subsidies from Federal Reserve. That same pressure makes Geithner and Summers unlikely allies of a strong, independent and public investigation (to say nothing of Summers' involvement in the deregulatory follies of the 1990s).

But Reid and Pelosi have a significant stake in creating a hard-hitting commission. Politically, Democrats need to hold the Wall Street barons accountable, not just bail them out. Americans are furious at the hundreds of billions that are going to save the richest people in America while workers lose their jobs. As the party of "no," Republicans are being taught by Newt Gingrich on how to disingenuously disavow any responsibility and posture as fake populists. Democrats need to show that they are not in the pocket of the Wall Street.

Moreover, this isn't just about politics. Fundamental financial reform is essential to the future of the economy and the country. President Obama is correct when he says we can't go back to an economy where finance captures 40% of the profits of the country. He's right when he condemns a culture of "arrogance and greed" that can't be tolerated.

If we don't get comprehensive reforms now, we'll have created an even greater peril -- banks and hedge funds officially recognized as too big to fail, assuming that they can pocket their winnings and the public will cover their losses. That is a recipe for another crackup a few years from now, as avarice once more clouds memory.

Will we get a modern day Pecora? Harry Reid and Nancy Pelosi have the power. They could appoint truly independent commissioners, give them the budget to gear up, and the mandate to tell the people. It's time for them to step up.

Comments

[colbee]

Inserting payday lending into this bill is like inserting steroids into you-know-where. It's an artificial additive there to make Congress look tough against Wall Street. Then they can say they've gone after predatory lenders when all they did was push around a fringe branch of the finance industry. Last time I checked, this crisis was caused by fraudulent mortgages and dubious securities derivatives.

[darker]

Bankers and the "nanny state for the rich & corporate welfare queens" do not know
THE MEANING OF "NO". And they carry on as if they will not stand for it.

They want PERPETUAL CODDLING by government and taxpayers.
They deserve NO MORE YEARS of such coddling privileges.

Bankers' MYSTIQUE is totally gone after THEY blew up their own system!

[noneIn2008]

Good thing the Dems have Obama to get stuff done. Look at what he has accomplished in months, that Reid and Pelosi just talked about for years. Finally some competence for action in the Dem party.

[Javani]

"Politically, Democrats need to hold the Wall Street barons accountable, not just bail them out."

I presume you mean Wall Street Finance.

Why would Democrats hold them accountable? They own the Democrats, the Democrats are the Party of Finance Capital. The Republicans follow along because they support anything that sounds like it will make rich people richer.

You need some new parties.

[mountainweb]

Sadly you are on target, they bought and paid for the democrats and Barney can huff and puff all he wants but they are not going to bite the hand that is feeding them! Just my opinion but Democratic unity has never been weaker and more divided....

[FearlessFreep]

In the long run, accountability will actually restore confidence in US financial institutions.

[ProfessorDuh]

And it's the only thing that will. Republicans were always too stupid to realize that FDR SAVED capitalism for them.

[Yurasis Dragon]

Long run? In the short run it would do more to create good confidence than all that has been done in the past year!
EVERYONE believes the bankers and their lobbyists are running this show. The ONLY way the politicians are going to act responsibly is when/if they see THEIR job is in jeopardy!

If you want to hold the Bankers responsible for their action, HOLD THE CONGRESS RESPONSIBLE!

[thperson]

Speek with your money. Withdraw it from the big banks and deposite in a local small credit uniions that invest in and care about your communities. If done in mass that will get the attention of the executives at the banks and certainly change their behavior.

[ProfessorDuh]

The massive Wall Street bailouts are tribute demanded of and paid by serfs to their masters in the ruling class.
Quite literally.
"Too big to fail" also means "Too big to correct" and "Too big to disobey," as it turns out.

[maddy48]

If the Dems, especially leadership, would just start seeing themselves as the party of Truth, Justice & the American Way we could move this old battleship into the 21st century w/ a meme that is quite powerful. Needs to be said over & over the way Family Values, Boot Strap pulling-up, with us or against us has been used for decades. OK. Pelosi & Reid can skip the slogan but they must act as though those are Democratic principals & act upon them, vigorously & rightiously. Bankers need to be educated to the new American way or take their flag pins off & relocate.

[j-tho]

well said!

[lilpeg]

I am STILL waiting for the world to CHANGE.

[dsws]

"Nothing real is done about compensation schemes."

Corporate governance is broken in general, not just as to compensation. I don't know how to fix it, but I have some ideas. Voting rights could be attached not to stock but to a forward position in the stock, with restrictions on trading so that only genuine activist-s­hareholder­s use it. Executive pay could be paid into escrow where shareholders (and creditors in bankruptcy) could claw it back under specified circumstances.

"Exotic derivatives and credit default swaps are not banned."

I'm not convinced they should be banned across-the-board. Maybe they should, or maybe some should be standardized enough to get traded on exchanges while others are regulated as insurance.

"Rating agencies are still paid by the financial houses they are supposed to rate."

The white paper calls on authorities "to promote adequate practices and procedures for managing conflicts of interest in CRAs [Credit Rating Agencies] and to maintain the transparency and quality of the ratings process", but provides no specifics. That probably can't be done without changing how CRAs are paid.

"Banks too big to fail are to be monitored, not broken up"

Regulated, not just monitored iiuc. But probably not adequately.

[robbrian]

Robert, your laser-like clarity is refreshing.

However, I've had all I can stand now of the "apologists" for Obama. Give him time, they say. Hell we don't have time. He's the one pushing the wagon with a thousand issues. He's the one creating the sound bites of assurance for this or that every other day. He's the one who clutters the agenda of change with pusilanimous promises and hypocritical hat tricks.

The "Reform" is going to give more impetus to the "one world currency-one world bank" of the "Masters of the Universe."

He knows he could step into Abraham Lincoln's shoes or those of JFK's and mandate return to a debt free currency. Instead he salivates over the crumbs and the title bestowed upon him by the Masters of the Universe. He hides behind the wall of the status quo, fearful of supporting the proposition that the Fed needs to relinquish control of America's currency which is America's sovereignty.

He cares not that his children will be debt slaves to central and eventually a one world bank. He cares not that history will record his complicity in the dissolution of America as a beacon of freedom and hope.

So yes, it is Pathetic, and it may even be criminal that he has a way out for all of us and refuses to use it. He could not do more to give aid and comfort to our enemies than to thrust America further into unreedemable debt.

[02bmw76]

Right on...

[Hank007]

Will the One World Bank have free checking and ATM's everywhere?

[gavrielle]

We'll get nothing until the real crack up happens. The last Great Depression (1933 not 1873) didn't start until 3 years after Wall Street crashed. And it is coming. The banks, being short-sighted in the extreme, will see to that. Oh, the government will call it something else. Heaven forbid we call a spade a spade in this day and age. But it's only a matter of time before the financial weight of those without jobs, credit, homes or health care bring the economy down. And all because the banksters and politicians refuse to do the right thing.

[Robert L. Borosage - Huffpost Blogger]

This reflects the irony of Obama's situation. Unlike FDR coming in when the crisis was longstanding and deep and the banks falling like flies, he takes office in the equivalent of 1930, not 1933. That makes fundamental reform harder, opposition greater, Democratic unity weaker.

But the challenge, obviously, is to get the reforms done without the Depression. Sure, if we really crack up, we'll get real reform. But our task is more likely to be one of exacting reform when the economy is stagnant, the recovery weak or spotty, the banks not belly up but zombies.

[j-tho]

let's hope the President's people read HuffPo!

[gavrielle]

True, this might be a repeat of Japan, and I'd like nothing more than to see the zombie banks dealt with now. I just don't think that's going to happen. I believe that cultural differences will greatly alter the outcome we can expect for the nation's economy. Bankers in the US do not apologize and resign after losing face because they destroyed the economy. They do not go along with government program (no matter how good or bad it might be) for fear of the shame they will force their families to endure if the fail. They blame the other guy and move in for the kill.

Whatever regulations Obama may get passed will likely be extremely weak, and possibly do more harm than good if the banks have anything to say about it. And they have lots to say about it. As well as the clout to create gaping loopholes that will allow them to shamble along destroying smaller, healthier banks in their wake. I fully expect them to finish the job they started by stripping the nation of its wealth and getting control of the Treasury. To paraphrase an American businessman of the early 20th century: They don't want to rule the world, they want to own it.

[GardenerNorCal]

Let the commissions and investigations begin. Everyone I know wants those responsible held accountable not sitting in their posh homes continuing to run our country into the ground.

[Retrofuturistic]

Pelosi and Reid didn't step up to impeach Bush and Cheney, so why would they step up now?

Nothing will happen until the American people take to the streets.

[dsws]

I went to the A New Way Forward rally in Boston. I didn't think to count, but I guessed afterward that there were about twenty of us. With that kind of numbers, the streets aren't looking very promising.

[nickels]

The real crime is what was left out by the Wall St. cronies in Congress. The whole thing is a sham designed to get Wall St. right back where it was. It is going to be wheeler dealer land all over again.

[ClarcKing]

The Wall St. monetary financial operation has done so much damage to the United States' physical economy that I can not see the justification of re-inflating the bubble under any circumstances or regulations. Whatever they did, they were not supposed to hurt anyone. They have done a lot more damage than anyone can imagine.Too much time and money is being spent on the Banksters, Financiers and Investors. Our political leadership can not discern financial warfare in front of them. Meanwhile the administration is doing nothing regarding the continued economic contraction within general population's physical economy. A wartime job mobilization policy with the goal to get 500,000 citizens back to work each month is a start.

[petef59]

I'd add psychological warfare to that list. Many fellow citizens may not have wanted to believe their lives are mere variables in ultra-elites money making and power grabbing schemes, but the outcomes are bringing clarity. Many of the elite 1% could care less if you end up homeless with no social safety net: after all, they are mainly predators.

[gavrielle]

Exactly. The "let them eat cake" attitude resulted in the French and Russian Revolutions which the elites, for all their pricey education, seem to forget. It was only when they learned to keep the poor well bribed with social safety nets and regulated their business dealings so as not to make too much money that we let them live in peace. It's time they were reminded that the peasants have pitch forks and a starving, outraged mob cares as little about them and theirs as they care about us and ours. More angry protests on Wall Street, outside the major banks and in Washington need to be held. Fear is the only emotion that has ever induced the elites to change their ways in the name of self-preservation.