More than two years after the collapse of Bear Stearns, the House and Senate finally ironed out their differences on Wall Street reform in the wee, small hours of Friday morning. The bill now goes back to both the House and Senate for final approval, but it's fate in the Senate is uncertain following the defection of Tea Party Sen. Scott Brown (R-MA).
Last week, the Securities and Exchange Commission filed fraud charges against Goldman Sachs and underscored what most Americans have believed for some time: Wall Street has rigged the economy in its own favor, and will stop at nothing-not even outright theft-to boost its profits. What's worse, Goldman's scam could have been completely prevented by better regulations and law enforcement.
Goldman's heist
Let's be clear. "Financial fraud" means "theft." Goldman Sachs sold investors securities that were stocked with subprime mortgages and had been cherry-picked by a hedge fund manager named John Paulson. Paulson believed these mortgages were about to go bust, so he helped Goldman Sachs concoct the securities so that he could bet against them himself.
Goldman Sachs, like Paulson, also bet against the securities. But when Goldman sold the securities to investors, it didn't tell them that Paulson had devised the securities, or that he was betting on their failure. By withholding crucial information from investors, Goldman directly profited from the scam at the expense of its own clients. If ordinary citizens did what the SEC's alleges Goldman did, we'd call it stealing.
As Nick Baumann emphasizes for Mother Jones, the SEC's suit against Goldman is just the tip of the iceberg. During the savings and loan crisis of the late 1980s, literally thousands of bankers were jailed for financial fraud. Today's crisis was much larger in scope, yet the Goldman allegations are among the first serious charges of legal wrongdoing to emerge (other complaints have been filed against Regions Bank and former Countrywide CEO Angelo Mozilo). If the SEC or the FBI are doing their jobs, we should see many more of these cases.
Bust 'em up.
How do banks get away with these kinds of shenanigans and still secure epic taxpayer bailouts? It's all about their political clout, as Robert Reich notes for The American Prospect. So long as banks are so enormous that they can ruin the economy with their collapse, the institutions will always carry tremendous political clout.
Even in the case of Goldman Sachs, which is too-big-to-fail by any reasonable standard, the SEC's fraud case is being filed three years after the company's alleged offense. That's well after the company rode to safety on the Troubled Asset Relief Program, the AIG bailout and billions more in other indirect assistance-and only after multiple journalists made Goldman's offensive transactions general public knowledge.
If we don't break up the big banks, politically connected Wall Street titans will make sure they get bailed out when the next crisis hits, regardless of whatever laws we have on the books.
Fix the derivatives casino
If Congress doesn't soon pass a bill to break up behemoth banks, it will be neglecting the gravest problem in our financial system today. But several other reforms are needed if Wall Street is ever going to serve a useful economic function again.
As Nomi Prins emphasizes for AlterNet, much of the Wall Street profit machine has been divorced from the economy that the rest of us live in. These days, banks make most of their money from securities trades and derivatives deals. Their actual lending business is taking a beating. That means big banks have very little incentive to promote economic well-being for every day citizens. We need to create these incentives by banning economically essential banks from engaging in securities trades, and make sure all derivatives transactions are conducted on open, transparent exchanges, just like ordinary stocks and bonds.
Better derivatives regulations could help protect against fraud. If Goldman Sachs' sketchy subprime deal had been subject to market scrutiny on an exchange, it's very unlikely that any investor would have bought into it. Goldman Sachs almost got away with it because the deal was secretive and beyond the scope of most regulatory oversight.
Protect whistleblowers
The Goldman case also raises significant questions about the government's enforcement of existing financial fraud laws. Bradley Birkenfeld, a banker for Swiss financial giant UBS, helped the Department of Justice bring the largest tax fraud case in history against his company, which was helping rich Americans hide money from the IRS in offshore bank accounts.
For his cooperation, Birkenfeld was rewarded with a four-year prison sentence, even though nobody else at UBS-nobody-has been sentenced to prison over the scam. As Juan Gonzalez and Amy Goodman emphasize for Democracy Now!, Birkenfeld's imprisonment could have something to with who exactly is hiding money with UBS.
Gonzalez discusses an interview with Birkenfeld, in which the former banker notes that the bank had a special office to handle the accounts of "politically exposed persons"- American politicians. Moreover, the top brass at UBS includes key advisors to top politicians in both parties. This is exactly the kind of influence smuggling that breaking up the banks would help fix. UBS is a multi-trillion-dollar institution with no less than 27 U.S. subsidiaries.
But protecting Birkenfeld would accomplish still more-by jailing him, the Justice Department is actively discouraging others from coming forward, and making it more difficult for regulators to enforce the law.
Greenspan's failure
It's abundantly clear that almost every major regulatory agency charged with curtailing financial excess failed to prevent the Crash of 2008. But that failure doesn't mean that effective regulation is impossible-it only shows that the regulators in power failed. The top bank regulator in the U.S., John Dugan, was a former bank lobbyist.
As Christopher Hayes demonstrates for The Nation, former Federal Reserve Chairman Alan Greenspan has never had any interest in regulation whatsoever. After the crash, Greenspan insisted that nobody could have seen it coming. But as Hayes notes, many people did-Greenspan simply didn't listen to them. These days, Greenspan is revising his story, claiming that he did in fact see the crisis coming, but that nobody could have prevented it. That is simply not credible.
Hayes draws a useful parallel Hurricane Katrina, a problem sparked by a natural event that became a catastrophe when regulators failed to take the necessary precautions. The lesson from both Katrina and the financial crash is not that government always screws up-we have plenty of examples of government preventing floods and economic calamity. The lesson we should learn is that people who don't believe in government will never do a good job governing. As Hayes notes:
If Greenspan couldn't figure things out, that doesn't mean others can't. In fact, developing systems for doing just that is called-quite simply-progress, and Alan Greenspan continues to be one of its enemies.
That is exactly the task that now presents itself before Congress: Developing a system to prevent and constrain economic destruction wielded by Wall Street. The U.S. had a system that did exactly this for more than fifty years. For the last thrity years, it has been systematically dismantled. How well Congress lives up to that challenge will define much of our economic future for decades to come.
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A new study by Economist Emmanuel Saez revealed this week that income inequality in the U.S. is more severe today than at any time since World War I, and the current recession is taking its heaviest toll on the worst-off members of our society. As our government rebuilds the financial sector using taxpayers' money, it's important to remember that both financiers and the government are responsible to our communities, not just bank shareholders. If we want to strengthen our country's economic foundation, we need to demand better wages for workers and an end to all kinds of predatory lending.
Saez's new data on income inequality is, as Paul Krugman put it, "truly amazing." Saez, who teaches at the University of California at Berkeley, found that the top 0.01% of U.S. earners had 6% of total U.S. wages, more than double the level in 2000. Earners in the top 10%, meanwhile, took home an astonishing 49.7% of all wages. That gap is larger now than during the Great Depression or the Gilded Age of the Roaring '20s.
"We're seeing Depression-era inequality again-only now it's slightly worse," writes Steve Benen for The Washington Monthly. Benen also notes that this level of inequality is not an inevitable consequence of a market economy: It's an extreme historical aberration. In the U.S., prosperity for much of the 20th Century was shared. But in 2007, at the economic bubble's peak, the wealthy simply got wealthier.
In that context, it is beyond absurd that the government is allowing 8-figure bonuses to be doled out by bailed out banks. Writing for Salon, Robert Reich dissects the policy implications of Citigroup's plans to pay its top executives an average of $10 million this year and award over $100 million to its top trader, a man who literally owns a castle in Germany. Citigroup was one of the most reckless U.S. banks during the housing bubble, a major subprime offender that received $45 billion in direct bailout money, as well as hundreds of billions in federal guarantees. How much is $45 billion? With the median U.S. home price at $174,100, that's the full market price of over 258,000 foreclosed homes. The company says that $10 million a head is necessary to attract and maintain top "talent," which Reich notes is a somewhat misleading term, given recent history. The problem is not just that Citigroup and other Wall Street firms are paying tons of money to a few people, it's that these people are being rewarded for the same kind of activities that got us into this mess to begin with: Risky, highly leveraged securities trading.
"Over the last several years Wall Street has exhibited a truly astonishing lack of talent," Reich says, noting that, "The Street is back to the same, relentlessly untalented tactics that made it lots of money before the meltdown-which also forced taxpayers to bail it out, caused the world economy to melt down, and tens of millions of people to lose big chunks of their life savings."
In truth, Reich argues, most large financial firms in the U.S. are much more like public utility companies than private-sector businesses. Even in good times, they depend on government guarantees and other support systems to function. In bad times, we bail them out. Instead of paying financiers tens of millions of dollars to reinforce a flawed system, Reich argues that we should impose rules that result in salaries similar to the public utilities sector, where top earners are generally restricted to 6-figure incomes.
The American Prospect features two pieces emphasizing problems in the current financial sector. Under a law known as the Community Reinvestment Act (CRA), enacted in 1977 we require banks to make loans in communities where they collect deposits. The loans have to be to dependable borrowers and they have to be relatively inexpensive. The law works very well-institutions covered by it made only a tiny fraction of the high-interest subprime loans that brought down the financial sector, as National Community Reinvestment Coalition President John Taylor notes for the Prospect. But CRA only applies to actual banks. You know, the places where you deposit your paychecks. CRA does not apply to subcompanies owned by the same corporation, and it does not apply to giant Wall Street securities firms like Bear Stearns and Goldman Sachs. Taylor says we need to expand CRA to cover these other big players in the financial world.
Why? As Alyssa Katz details in a piece for the Prospect funded by The Nation Institute, many Wall Street firms are bidding on foreclosed properties and selling them at rip-off rates to low-income borrowers.
But as Mary Kane notes for The Washington Independent, banks have also devised several methods of making money without making a loan. By charging tremendous fees on borrowers for minor infractions, banks generate billions of dollars without producing anything of social value. One of the worst forms of abuse, Kane writes, comes in the form of overdraft fees. When you withdraw too much money from your bank account, the bank fronts you the money, and then charges you a fee for this "protection." The trick is, banks almost never tell you that this has occurred, and often play around with the timing of your charges and deposits to maximize the fees they collect. Banks are on track to collect $38.5 billion in such fees this year alone. The worst part is, the fees come from the poorest customers-rich people don't overdraw their bank accounts, because they have tons of money.
In the case of credit cards, banks routinely slap borrowers with outrageous fees and interest rate hikes when the borrowers are making payments on time. Over the years, banks have targeted younger and younger credit card customers, as Adam Waxman notes for WireTap. After years of declining wages for all but the wealthiest citizens, consumers have been turning to pricey plastic to finance basic necessities.
Sadly, corporate America does not seem very focused on helping workers establish their financial independence. The Real News talks with Richard Wolff, an economist with the New School who emphasizes that, while worker productivity has jumped in recent months, wages have not made the corresponding increases. Quarterly productivity numbers tend to jump around a lot, but the trend of not compensating workers for improved efficiency has been around for years.
In a consumer-driven economy, major problems can't be fixed by giving lots of money to a few people, especially if those few people are already rich. To support broad, meaningful economic growth, we need to tailor our policies that empower those on the lower rungs of the economic ladder. And when we bail out giant corporations with taxpayer money, we need to make sure those companies arrange their business to improve the lot of taxpayers.
It seems like after an initial period of uncertainty by those of us who are not consummate economic experts (and even some who are, like Phd economists Duncan "Atrios" Black and Paul Krugman), the zeitgeist of the netroots has turned against the current direction of the bailout, and is coming to see it as a gigantic plunder. I agree.
Mainly my scepticism is based on having absolutely no faith in any of the chief actors responsible for making the decisions on how to resolve this. These are the disaster capitalists that Naomi Klein wrote about, and more specifically, this is the Bush White House where politics always dictates policy. The only questions I have is how they will take advantage of this crisis and then how to stop them.
(This piece is by Drum Major Institute Senior Fellow Mark Winston Griffith)
It's hard to imagine that there could be a serious presidential candidate who would declare a "no-action" position on the subprime loan and foreclosure crisis. John McCain, however, holds that dubious distinction.
Not a day goes by that we don't hear another grim announcement about the downward spiral of the economy, or how homeowners with subprime loans are losing their homes in record numbers. Estimates of likely foreclosures over the next few years related to subprime mortgages have ranged between two and three million. In some parts of the country, foreclosures are outpacing home sales. Recession looms and the National Association for Business Economics recently declared the subprime foreclosure crisis as the greatest threat to the American economy.
The scariest part is that hundreds of thousands of subprime loans are scheduled to re-set in the latter part of this year and into 2009, which means that the economic policies of the next president will have a profound impact on the lives of ordinary working- and middle- class Americans.
How has John McCain responded to this call to leadership? By essentially saying that nothing should be done. In his remarks at a conference in Santa Ana, California on Tuesday, McCain rejected any broad policy response and actually staked out a far weaker role for the federal government in addressing the foreclosure crisis than even the Bush Administration has offered. Although he was quick to blame homeowners and "rampant speculation", there was scant recognition by McCain of exhaustively documented predatory lending practices or the scandalous oversight failures of federal regulators, legislators and a president who arguably encouraged abusive lending practices through his ownership society".
To the extent that McCain offered any specific "solutions" at all, it was to encourage mortgage lenders to reach out to distressed borrowers - something that banks working with Secretary Paulson under the Hope Now alliance are supposedly doing already. His other bright idea was "to convene a meeting of the nation's accounting professionals to discuss the current mark to market accounting systems."
Great. Just what homeowners and the economy need: The formation of a committee of accountants.
McCain has buried his head in the sand all along about the role of the federal government in the foreclosure crisis. In December 2007 he told the editorial board of New Hampshire's Keene Sentinel that he is "not smart enough" to offer a "specific solution". While this might qualify in McCain's book as "straight talk", it's also shockingly weak-kneed and irresponsible.
In comparison, Clinton and Obama have presented specific proposals that have been subjected to intense scrutiny. Clinton has called for billions in government assistance, a foreclosure moratorium, and rate freezes. Obama has proposed a universal mortgage credit, the establishment of a mortgage refinance fund, and greater loan disclosure. While critics on the left and right may take issue with these approaches, Clinton and Obama have at least acknowledged the severe financial distress confronting homeowners and would offer Americans specific plans to address it.
But a different legacy is in store for McCain if he is elected president. As a member of the Keating Five, that notorious group of Senators accused of currying favor for Charles Keating, chairman of the failed Lincoln Savings and Loan Association, McCain became a face of the Savings and Loan crisis of the eighties and nineties. With breathtaking irony, McCain is poised to associate himself with another banking meltdown by sitting idly by, in Herbert Hoover-esque fashion, as working class Americans and communities are devastated by the effects of homeowner displacement, property devaluation, family asset depletion, and the loss of real estate tax revenue.
One possible explanation for McCain's hands off approach is that some of the biggest names in the subprime mortgage industry, Citibank, Goldman Sachs, Merrill Lynch and Lehman Brothers, for example, have been among McCain's largest campaign contributors.
But these Wall Street giants have figured just as prominently in Clinton and Obama's campaigns. And unlike during the S&L debacle, McCain, now the presumptive Republican presidential nominee, has gained the moral authority and opportunity to actually intervene.
So the issue isn't whether John McCain is "smart" enough to propose government actions and market reforms that could relieve some of the nation's financial pain while attempting to make predatory mortgage lending a thing of the past. The question is; does he care enough to bother.
As the housing/mortgage crisis intensifies, some courageous Democrats like Rep. Brad Miller (D-NC) are trying to let judges help people stay in their home and stop foreclosures. Unfortunately, as my new nationally syndicated newspaper column out today shows, Miller is facing serious opposition not just from Republicans, but from "conservative" Democrats.
Miller's bill, HR 3609 (which you can find out about here), would improve the 2005 Bankruptcy Bill by simply giving regular homeowners a few of the same protections that millionaire mansion owners and Enron executives have. Yet, the Blue Dog Democrats, citing their supposed "conservatism," are trying to stop the legislation dead in its tracks. Somehow, we are expected to believe that the social/cultural conservatism of their rural and exurban districts mean their constituents want Congress to help banks throw people out of their houses.
I've blogged a bit on mortgage reform, noting that Bush Dogs are trying to block changes to the Bankruptcy Bill out of fealty to their corporate donors. The housing crisis is hitting swing areas like Florida's central corridor viciously, so getting on this topic as the economy becomes one of the two top issues in 2008 is extremely important for Democrats going into 2008.
One of the reasons the situation is so messed up is that mortgage brokers have an incentive to lie and steal from their clients. This is couched in a complicated term called the 'yield spread premium'. What this basically means is that if you are a mortgage broker and you get a client to take a loan that costs more than it should, with higher penalties and interest rates, you get a kickback from the bank.
Ergo, lots of people got crappy loans they can't afford. It hurts minorities disproportionately, and it's bad for everyone. There's more detail here and here. The Democrats are trying to do something about it and ban the practice, but mortgage brokers have organized and are phoning Congress off the hook because apparently stealing is profitable. And now, Barney Frank is considering axing the change because the groups pushing for the change - NAACP, the Urban League, La Raza AARP, the AFL-CIO and SEIU - probably didn't expect this to be a major point of contention.
If you have a moment, write your representative and ask him/her to support HR 3915, the "Mortgage Reform and Anti-Predatory Lending Act of 2007."
It's fucking ridiculous that Congress doesn't stand up to the mortgage industry after they have ripped off millions of borrowers and are in the midst of destroying communities all over the country. Write your rep.
Scratch one more item from the Bush Administration's already short list of accomplishments: by the time President Bush leaves office, about 700,000 fewer Americans will own their own homes than when he entered office.
The foreclosure rate is already the worst it's been in at least twenty-five years, and soon may be the worst it's been since the Great Depression. Lehman Brothers estimates that 30 percent of the subprime mortgages entered last year will end in foreclosure.
Perhaps 2.2 million American families will lose their homes to foreclosure in the next couple of years. When a family loses their home to foreclosure, they lose their life's savings, and they lose their membership in the middle class, probably forever. Millions more will see the value of their homes collapse when neighbors lose their homes to foreclosure.
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