Thursday the President pronounced that "because of this [financial reform] bill the American people will never again be asked to foot the bill for Wall Street's mistakes."
As if to prove him wrong, Goldman Sachs simultaneously announced it had struck a deal with federal prosecutors to pay $550 million to settle federal claims it misled investor -- a sum representing a mere 15 days profit for the firm based on its 2009 earnings. Goldman's share price immediately jumped 4.3 percent, and the Street proclaimed its chair and CEO, Lloyd ("Goldman is doing God's work") Blankfein, a winner. Financial analysts rushed to affirm a glowing outlook for Goldman stock.
Blankfein, you may recall, was at the meeting in late 2008 when Tim Geithner and Hank Paulson decided to bail out AIG, and thereby deliver through AIG a $13 billion no-strings-attached taxpayer windfall to Goldman. In a world where money is the measure of everything, Blankfein's power and influence have grown. Presumably, Goldman can expect more windfalls in future years.
Although the financial reform bill may have clipped some of Goldman's wings -- its lucrative derivative business may require Goldman to jettison its status as a bank holding company, and the access to the Fed discount window that comes with it -- the main point is that the Goldman settlement reveals everything that's weakest about the financial reform bill.
The American people will continue to have to foot the bill for the mistakes of Wall Street's biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking. It does not even link the pay of their traders and top executives to long-term performance. In other words, it does nothing to change their basic structure. And for this reason, it gives them an implicit federal insurance policy against failure unavailable to smaller banks -- thereby adding to their economic and political power in the future.
The bill contains hortatory language but is precariously weak in the details. The so-called Volcker Rule has been watered down and delayed. Blanche Lincoln's important proposal that derivatives be traded in separate entities which aren't subsidized by commercial deposits has been shrunk and compromised. Customized derivates can remain underground. The consumer protection agency has been lodged in the Fed, whose own consumer division failed miserably to protect consumers last time around.
On every important issue the legislation merely passes on to regulators decisions about how to oversee the big banks and treat them if they're behaving badly. But if history proves one lesson it's that regulators won't and can't. They don't have the resources. They don't have the knowledge. They are staffed by people in their 30s and 40s who are paid a small fraction of what the lawyers working for the banks are paid. Many want and expect better-paying jobs on Wall Street after they leave government, and so are shrink-wrapped in a basic conflict of interest. And the big banks' lawyers and accountants can run circles around them by threatening protracted litigation.
Why do you think Goldman got off so easily from such serious charges of fraud?
Reliance on the discretion of regulators rather than structural changes in the banking system plays directly into the hands of the big banks and their executives and traders who contribute mightily to Democratic and Republican campaigns. The flow of money virtually guarantees that regulatory agencies won't be adequately staffed to enforce the law, that penalties for violations won't be overly onerous, and that all loopholes (what's a "derivative"? what has to be listed on exchanges? exactly how much capital must be on hand for which transactions? How are the various forms of predatory lending to be defined?) will be easily stretched in future years. Wall Street lawyers will have a field day. The profit-for-nothing sector of the economy (law, accounting, finance) will continue to grow buoyantly.
Make no mistake: As long as there's no fundamental change in the structure of Wall Street -- as long as the big banks stay as big and are allowed to grow bigger, and have every incentive to invent new financial gimmicks with which to bet other peoples' money -- they will remain too big to fail, and too politically powerful to control.
Goldman's share price, as well as those of JP Morgan Chase, Citicorps, Morgan Stanley, and Bank of America, will no doubt soar the basis of the final bill because their future profits are almost guaranteed. The pay of their executives and traders, and of the managers of hedge funds and private-equity funds they deal with, will likewise accelerate. In the short term the economy will benefit, at least to the extent financial entrepreneurship is now the apex of American wealth and innovation. But over the longer term we will be much weaker for it.
Congress has labored mightily to produce a mountain of legislation that can be called financial reform, but it has produced a molehill relative to the wreckage Wall Street wreaked upon the nation.
This post originally appeared at RobertReich.org.
Rep. Alan Grayson: Lies, Damned Lies, and Rupert Murdoch
A good book on the market meltdown (written prior to the meltdown) is Richard Bookstaber's A Demon of our Design.
The Congress knows that the campaign contribution money will continue to flow from Wall Street.
Wall Street knows that tax payers will cover their losses.
Yet the president and congress will claim victory for passing “historic reform”.
Reich said:
"But if history proves one lesson it's that regulators won't and can't. They don't have the resources. They don't have the knowledge. They are staffed by people in their 30s and 40s who are paid a small fraction of what the lawyers working for the banks are paid. Many want and expect better-paying jobs on Wall Street after they leave government, and so are shrink-wrapped in a basic conflict of interest."
Real change in this country is desperately needed and the middle class is going to blame the "change you can believe in" candidate for breaking his promise. Expect a Republican landslide because Obama did not turn out to be the serious reformer that we voted for.
They're on OPPOSITE ends on the substance. I think your post is insulting to the intelligence of progressives who have pushed this president without success. we can about the country, not one man. When the election rolls around, we will probably gel. But, you have to accept our opinions for what they are: very patriotic.
The DLC has hijacked this party. We know that.
It's explaining it to others that's the hard part...
Because you support your party leaders 100%, right or wrong.
You people are like sheep and are no different regardless what party you claim allegiance to. Reich as usual is correct and you unfortunately don't understand what he is telling you. Or you are too blinded by unquestioning loyalty.
He is absolutely correct about how government regulators work, which is why this "reform" means nothing. This bill is for the most part, is a fraud. It's for people like you to believe that something got done while the thieves continue to plunder and pillage.
Your overpaid wall street bankers thank you.
We were offered a whole warm pie. What we got was a sliver of reform. I'll take it but again.....but.
Too big to fail has been enshrined in the details of this bill. All the big banks can go to the Fed window to prevent a liquidity and solvency crisis. The only pushback is a suggestion that it can't be because of failed bets in derivatives. But, it's hard to prove at a mega-bank WHICH bet caused the solvency crisis and there is no procedure to determine it.
The loopholes are massive.
Well I know, and I'll explain it. "Too big to fail" means that when there are profits, the bank pays bonuses to the CEO. When there are losses - the taxpayer is saddled with them. Taxpayer funded, low interest loans are guaranteed for the banks which are deemed TBTF. These banks bankrupt and swallow their honest competitors on taxpayer dime, and we end up being oppressed by a parasitic financial monopoly.
Now the big banks are getting free money from the FED RESERVE at 0% and they lend it back to the GOVERNMENT (that means to US) at 5%. The taxpayer is on the hook for the interest, huge sums of money are being sucked out of the economy!!! That's why we ended up with 3.5 Trillion deficit in 1.5 years. This is on top of the interest the banks get from credit cards, etc. This is how the banks repay their losses at our expense. It's a simple scheme, but party loyalty blinds people for the truth.
The pathetic dem. politician critters policy is to avoid being responsible for the last 18 months at all costs.
Borrowing (foreign) money, they are about to stop, and the printing press are the reasons the economy has not collapsed.
Robert, you're giving me the impression that you're actually a right-wing plant! Ever since President Obama was elected, you've done nothing but criticize. If you aren't part of the solution then you have no right to throw stones.
The "Rome wasn't built in a day" in actually the ABA-banking propaganda to explain LACK of reform responsive to the crisis. This is what THEY say, especially to Democrats who don't know the ugly details of banking.
This was a bad bill in light of the crisis. It would have been a reasonable bill in 2006.
I firmly believe that the Finance Bill is a good start and will lay the groundwork for better regs in the future. That is, IF our beloved Senators and Reps ever come out of their comas and REALLY try to help the country, instead of just their jobs.
Rather than our collectively throwing up our hands in despair, and giving in to a growing consensus that there is even more convincingly 'nothing any of us can do about it', however, We, the People must begin to look for perhaps a more practical, if more radical approach to finding a solution to this, as well as other social problems linked to our current political system.
If the Democratic-Republican, single-party political system, that now serves the electorate so very little, unable to serve two masters, trapped as it is in a system in which it serves the almighty corporate dollar, then perhaps it is once again time for the emergence of a new political party.
This necessity has resulted in the emergence of new political parties throughout the course of American history, though Never more than Now... It is time for us, for We, the People, to change the course of history once more, and wrest the reins of government from the grip of corporate money politics.
The above said, I agree with what you're saying.
With most of the money behind this pair of parties coming from the same sources, you can expect strong and coordinated opposition by the Repub/Dem establishment to any serious talk about a third party (after all, having a third party would necessarily increase the expenses of the moneyed players by 50% since they'd now have a third bunch of candidates to pay off)