Obama's False Financial Reform Is Nothing But Smooth Talk and Some Fuzzy Plans

By William Greider, The Nation. Posted June 25, 2009.

Likewise, banks were allowed to play these games by legislative creation of "off-balance sheet entities" where they can park their holdings -- debts or assets -- beyond the view of casual observers. This is essentially the same accounting trick that empowered Enron and other corporations to hide their true condition (then collapse). The biggest bankers played roughly the same game. In fact, it was the bankers who taught Enron and others these tricks. What public purpose is served by these devices except to conceal reality from public investors? For that matter, what is the public purpose of letting corporations, banks and wealthy individuals park their wealth in the Grand Cayman Islands? Everyone in Wall Street knows the answer. It allows them to evade "legally" US regulations and tax law.

Summers-Geithner suggest the shadowy banks like GE Capital or major insurance companies can be regulated by the Fed as "Tier 1 Financial Holding Companies." No real details available. As Joe Nocera recently noted in the New York Times, "Tier 1" sounds like the new name for "Too Big to Fail." The Fed will watch them (we are assured) to prevent "systemic risk" that could lead to national breakdown. But that is what the Federal Reserve was supposed be doing already as the "lender of last resort" charged with defending the "safety and soundness" the banking system. The Securities and Exchange Commission, likewise, is supposed to monitor hedge funds and private-equity firms that thrive on secrecy. Since the SEC failed miserably to police regular corporations, it does not sound reassuring.

Another example of extremely wishful thinking is the proposed rule on securitization of mortgages. The method of bundling home mortgages and turning them into saleable bonds was supposed to reduce risk but did the opposite. The mortgage lenders were able to execute dubious, even fraudulent loans, collect their profits up front and then sell the package to unwitting investors around the world. Obama's answer is to require the originating lender to retain a 5 percent interest in the mortgage and pass on the rest. That seems ludicrous and innocent of how that cutthroat world actually works. The financial geniuses who created the subprime mortgage scandal could hide 5 percent of the mortgage value with a couple of keystrokes -- adding fees, closing costs or other dodges. To hold lenders genuinely responsible, they should be made to hold onto something like 50 percent of liability for the original loan with perhaps the other 50 percent assigned to whatever bank or investment house packages the mortgage security and sells it to financial markets. That would be "responsibility" with old-fashioned force.

The one great bright spot in Obama's plan is the new regulatory agency he recommends to protect consumers on financial products. This was inspired by Elizabeth Warren, the Harvard professor who has been a brave and brilliant critic of the credit-card industry and other forms of predatory rip-offs. While it depends entirely on the details, this innovative agency could become the new tiger among tired, toothless regulators -- especially if Obama has the courage to name Warren as the inaugural chair. The bankers hate this idea and will fight to kill it. They know this regulator will not be captive to them, at least not yet.

The essence of what's missing in the Obama plan is the presence of hard rules -- the classic quality of laws that command private behavior by prescribing "thou shalt" or 'thou shalt not." Drawing up concrete prohibitions and commandments is obviously a tougher challenge because it requires deeper understanding of the dysfunctional qualities in the financial system. You cannot design organic reforms until you understand what really led to the breakdown. Since the government has avoided that kind of serious examination, the limp response is to turn these explosive issues over to expert regulators -- the same experts who failed to see the trouble coming.

Right now, I think the political imperative is to slow down the rush to weak solutions. The political leaders understandably want to do something swiftly and get the subject off the table, but Congress would do well to drag its feet and insist instead on deeper investigations. (Rep. John Dingell and others have proposed establishing a Pecora-like commission to investigate the crisis.)

Give subpoena power to Elizabeth Warren the Congressional Oversight Board she chairs. Hire some of those investigative reporters who have no political investment in digging deeper into the mulch. What exactly went wrong? Who has bloody hands? Where are the fundamental reforms? If the economy returns to "normal' rather soon, the ardor for serious reform might dissipate with much left undone. That is a small risk to take, especially if the alternative is enacting the bankers' pallid version of reform.

See more stories tagged with: obama, banks, wall street, fed, financial crisis, greider, summers, geithner, financial reform

William Greider is the author of, most recently, "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country (Rodale Books, 2009)."

Liked this story? Get top stories in your inbox each week from Corporate Accountability and WorkPlace! Sign up now »