[R-G] We Told You So

[Sid Shniad]

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We Told You So 

By Robert Weissman 

March 12, 2009 

Is it fair to complain about the actions of the financial deregulators? 

Could anyone reasonably have foreseen the consequences of a decades-long 
regulatory holiday for the financial sector? 

In a word, yes. 

In preparing "Sold Out: How Wall Street and Washington Betrayed 
America," <http://www.wallstreetwatch.org/soldoutreport.htm> a report 
that documents a dozen deregulatory steps to financial meltdown, it was 
remarkable to see that, at almost every step, public interest advocates 
and independent-minded regulators and Members of Congress cautioned 
about the hazards that lay ahead. Those ringing the alarm bells were 
proven wrong only in underestimating how severe would be the 
consequences of deregulation. 

Policymakers ignored the warnings. Good arguments could not compete with 
the combination of political influence and a reckless and fanatical zeal 
for deregulation. $5 billion -- the amount the financial sector invested 
in the financial sector over the last decade -- buys a lot of friends. 

Example: Consumer groups warned of a growing predatory lending scourge 
at the beginning of this decade (and even in the 1990s), before the 
housing bubble inflated. 

"While many regulators recognize the gravity of the predatory lending 
problem, the appropriate -- and politically feasible -- method of 
addressing the problem still appears elusive," wrote the National 
Consumer Law Center and the Consumer Federation of America in January 
2001 comments submitted to the FDIC. 

What was needed, the consumer groups argued, was binding regulation. 
"All agencies should adopt a bold, comprehensive and specific series of 
regulations to change the mortgage marketplace," the groups wrote, so 
that "predatory mortgage practices are either specifically prohibited, 
or are so costly to the mortgage lender that they are not economically 
feasible." 

Example: In 1999, Congress passed the Gramm-Leach-Bliley Act, which 
eliminated the Glass-Steagall and Bank Holding Company Acts' 
longstanding ban on combining commercial banks and investment banks, or 
commercial banks and other financial service providers. This law paved 
the way for the creation of Citigroup, a merger of Citibank and 
Travelers Insurance, and helped infuse the speculative go-go culture of 
investment banks into commercial banks. 

When Citibank and Travelers announced their merger in 1998 -- a marriage 
that could only be consummated if Glass-Steagall and related rules were 
repealed -- my colleague Russell Mokhiber and I wrote, "Expect to see 
lots of bad loans, bad investment decisions, teetering banks and 
tottering insurance companies -- and a series of massive financial 
bailouts of new conglomerates judged 'too big to fail.'" We didn't 
envision exactly how the Citigroup and Wall Street debacle would play 
out, but we got the outline right. Our predictions echoed the warnings 
from consumer advocates. 

Example: In 1998, the Commodity Futures Trading Commission (CFTC) 
suggested the need for regulation of financial derivatives. In a concept 
paper, the CFTC wrote that, "While OTC [over-the-counter] derivatives 
serve important economic functions, these products, like any complex 
financial instrument, can present significant risks if misused or 
misunderstood by market participants." The agency suggested a series of 
modest potential regulations that might have restrained the 
proliferation of financial derivatives and required parties to set aside 
capital against the risk of loss (a policy that likely would have saved 
taxpayers tens of billions or more in the AIG bailout). 

But the CFTC initiative was crushed by the then-Committee to Save the 
World (so designated by Time Magazine) -- Treasury Secretary Robert 
Rubin, Deputy Secretary Larry Summers and Federal Reserve Chair Alan 
Greenspan. In 2000, Congress passed a statute prohibiting the CFTC from 
regulating financial derivatives. 

Example: In 1995, Congress passed the Private Securities Litigation 
Reform Act, which made it harder for defrauded investors to sue for 
relief. Representative Ed Markey, D-Massachusetts, introduced an 
amendment that would have exempted financial derivatives from the terms 
of the Act. Representative Chris Cox, R-California, who would go on to 
head the Securities and Exchange Commission under President Bush, led 
the successful opposition to the amendment. 

Markey anticipated many of the problems that would explode a decade 
later: "All of these products have now been sent out into the American 
marketplace, in many instances with the promise that they are quite safe 
for a municipality to purchase. ... The objective of the Markey 
amendment out here is to ensure that investors are protected when they 
are misled into products of this nature, which by their very personality 
cannot possibly be understood by ordinary, unsophisticated investors. By 
that, I mean the town treasurers, the country treasurers, the ordinary 
individual that thinks that they are sophisticated, but they are not so 
sophisticated that they can understand an algorithm that stretches out 
for half a mile and was constructed only inside of the mind of this 26- 
or 28-year-old summa cum laude in mathematics from Cal Tech or from MIT 
who constructed it. No one else in the firm understands it. The lesson 
that we are learning is that the heads of these firms turn a blind eye, 
because the profits are so great from these products that, in fact, the 
CEOs of the companies do not even want to know how it happens until the 
crash." 

There was nothing inevitable, unavoidable or unforeseeable about the 
current crisis. 

At every step, critics warned of the dangers of further deregulation. 
But with the financial sector showering campaign contributions on 
politicians from both parties, investing heavily in a legion of 
lobbyists, paying academics and think tanks to justify their preferred 
policy positions, and cultivating a pliant media -- especially a 
cheerleading business media complex -- the sounds of clinging cash 
registers drowned out the evidence-based warnings from public interest 
advocates and independent-minded government officials. 


Robert Weissman is editor of the Washington, D.C.-based Multinational 
Monitor, <http://www.multinationalmonitor.org> and director of Essential 
Action <http://www.essentialaction.org>. 

(c) Robert Weissman 

This article is posted at: 
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