Too Big To Fail

by dday

So the Treasury Secretary called for a "sweeping overhaul" of financial rules, and the cheerleaders on the business channels are predictably calling this some kind of radical change, whereas Paul Krugman rightly explains this as rearranging deck chairs.

Anyone who has worked in a large organization — or, for that matter, reads the comic strip “Dilbert” — is familiar with the “org chart” strategy. To hide their lack of any actual ideas about what to do, managers sometimes make a big show of rearranging the boxes and lines that say who reports to whom.

You now understand the principle behind the Bush administration’s new proposal for financial reform, which will be formally announced today: it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive.

I think what we've seen is the belief in deregulation of financial markets and massive corporate consolidation in general working in tandem. This created huge financial institutions of the likes of Bear Stearns, which then became too big to allow to fail no matter how speculative they became. And so they could engage in whatever risky operations they wished, full with the knowledge that they would never experience a full washout of their assets. The result is a safety net for massive corporations only at the expense of the social safety net for individuals.

Without a vote of the Congress or a public debate, the Bush administration and the Federal Reserve have made government the guarantor of the shadow banking system – the unregulated, unhinged hedge funds and investment houses whose compulsive excesses now threaten the global economy. They say necessity is the mother of invention, but we seen only a part of the new machine, not surprisingly, the part that buttresses Wall Street. They have scrambled to put this together in an emergency, behind closed doors, without a hint of the necessary regulatory changes that must rationally accompany such guarantees. That is what the fight in the coming months will surely be about [...] The shadow banking system now must be brought out of the shadows. After all we are constantly told that finance serves the economy, and the market system is the best means to solve our social goals. It feels very uncomfortable when our servant's servant becomes our master's master as Wall Street has been permitted to become in America in recent years by contribution- hungry elected officials.

Barack Obama explicitly connected the current crisis to the bipartisan practice of deregulation. This is part of a culture of laissez-faire economics that has shifted risk to individuals and removed risk from corporations, and Obama's speech talked about the need to radically change that midset with actual regulation instead of putting new names on the same old ineffective regulatory agencies. Corporations for too long have, as Bob Borosage said, been given "the freedom to gamble with other peoples’ money ... protected by lavish campaign contributions and powerful lobbies."

One thing we all know is that John "Let's Schedule A Meeting Sometime" McCain would offer the same Hoover-like do-nothing approach. But it's striking how many connections there are between McCain allies and surrogates and every aspect of the financial crisis. After all, some top campaign advisors of his lobbied for the shady lender Ameriquest, one of his top surrogates Carly Fiorina is a welfare queen whose company paid off her mortgage between 1999 and 2003, the most recent RNC chair is saying that his non-plan to deal with the mortgage crisis is incomplete, and his top economic advisor is perhaps most responsible for the crisis itself:

The general co-chairman of John McCain’s presidential campaign, former Sen. Phil Gramm (R-Texas), led the charge in 1999 to repeal a Depression-era banking regulation law that Democrat Barack Obama claimed on Thursday contributed significantly to today’s economic turmoil.

“A regulatory structure set up for banks in the 1930s needed to change because the nature of business had changed,” the Illinois senator running for president said in a New York economic speech. “But by the time [it] was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.”

Gramm’s role in the swift and dramatic recent restructuring of the nation’s investment houses and practices didn’t stop there.

A year after the Gramm-Leach-Bliley Act repealed the old regulations, Swiss Bank UBS gobbled up brokerage house Paine Weber. Two years later, Gramm settled in as a vice chairman of UBS’s new investment banking arm.
Later, he became a major player in its government affairs operation. According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006.

During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.

For his work, Gramm and two other lobbyists collected $750,000 in fees from UBS’s American subsidiary. In the past year, UBS has written down more than $18 billion in exposure to subprime loans and other risky securities and is considering cutting as many as 8,000 jobs.

The regulation referred to here is the Glass-Steagall Act, and after its demise investment banks grew larger and larger, essentially becoming invulnerable. It's so clear that lack of regulation gave the investment banks a license to steal, and that Phil Gramm and his puppet Presidential candidate, who doesn't know or care about the economy, want the theft to continue.

UPDATE: See also emptywheel deconstructing the Treasury Department's fallacious rhetoric.