Obama Can't Be Trusted on Wall St. Reform -- Here's How to Forge a Finance Bill That Doesn't Suck
Let’s pretend that, sometime in 2002, thousands of cars started exploding. In our pretend world, oil refineries added a new chemical to gasoline that was supposed to make it burn more slowly but in fact caused horrific explosions.
And let’s say that in response to these explosions, then-President George W. Bush angrily lashed out at the “pollutifying” oil companies and demanded that the government “intensifize its scrutinimany” of Big Oil.
This populist tirade would come despite the fact that Bush had received millions of dollars from the oil and gas industries and that Bush himself began his post-alcoholism career as a Texas oil man. While it’s possible that some poor suckers would take Bush’s newfound distaste for the oil industry seriously, I think the vast majority of reactions would range from laughing to guffawing to ROFLing to OMGWTFLMAOing.
Sadly, America faces a similar situation today with President Barack Obama’s relationship with Wall Street. Put simply, when Obama smiles and tells us in his hopiest, changiest voice that he really, really wants to rein in Wall Street and make banking safer for Main Street, we should not believe him.
Why? Well, let’s start with the most obvious reason Obama does not deserve our trust: campaign contributions. Look at the insane amount of cash that employees of the major financial institutions forked over to Obama during his 2008 presidential campaign. Citigroup employees donated over $700,000; JP Morgan employees donated $695,000; and Morgan Stanley employees donated over $500,000. Employees of Goldman Sachs, the vampire squid itself, donated a whopping $995,000 to the Obama campaign in 2008, making the squid’s employees the second-largest contributor to Obama’s campaign.
As if that weren’t enough, consider the people he’s surrounded himself with. Former President Clinton recently acknowledged that he received “the wrong advice” about regulating derivatives from former Treasury Secretary Larry Summers in the late ‘90s. That would be the same Larry Summers who recently pooh-poohed the idea of breaking up our oligarchic megabanks since doing so would allegedly “hurt the competitiveness of the United States.” For those of you not paying attention, Summers currently serves as... the director of the White House’s National Economic Council! Before taking the job, Summers raked in $5.2 million working part-time for the D.E. Shaw hedge fund.
Meanwhile, current Treasury Secretary Timothy Geithner is a protégé of Bob Rubin, whom Clinton says also gave him bad advice on derivatives regulation. Geithner, you may recall, was the financial genius who came up with a cunning plan last year to provide private investors with government guarantees in exchange for buying worthless mortgage-related assets from the biggest banks. Goldman Sachs’ “Timberwolf” CDO may indeed have been a shitty deal, but you can bet there are lots like it that are now potential liabilities for U.S. taxpayers thanks to Geithner’s handiwork.
And finally, consider the general Obama approach to governance. During the 2008 presidential campaign, Obama promised to use the magical powers of both hope and change to help people put aside their ideologies and govern in a civil, bipartisan fashion. Obama has kept this promise, in a manner of speaking. But instead of bringing people from all walks of life together to work cooperatively, Obama has governed by bringing together every special interest in Washington and handing them all important favors in exchange for holding their fire on his initiatives. Consider the recent health care fight in which the Obama administration ditched a public insurance option to appease insurance companies and then worked to undermine a drug reimportation amendment to appease the pharmaceutical lobby, among other things. Letting Big Pharma continue gouging consumers? Yes we can!
Unsurprisingly then, the financial reform bill currently being considered by the Senate suffers from being far too friendly to the big banks. You can read this detailed takedown of the current proposals from Nomi Prins for all the wonky details, but the basic problem with the Obama-Dodd-Frank approach is that it puts far too much faith in the same regulators who completely missed the housing bubble until it had already popped. For instance, Prins notes that the Dodd bill attempts to contain systemic risk to the banking system by creating “a new Financial Stability Oversight Council led by the Treasury Secretary to help the Fed develop better standards regarding the biggest banks it oversees.” In other words, the Dodd bill assumes that the 2008 financial crisis would never have happened had Alan Greenspan and John Snow gone out to lunch more often.
So that’s the bad news. The good news, there is a very strong and viable alternative to the plan the Obama-Dodd-Frank axis has been pushing so far. Sens. Sherrod Brown and Ted Kaufman have written a strong piece of legislation called the Safe Banking Act of 2010 that would place a hard cap limiting banks’ total liabilities to 3 percent of GDP. In other words, it would force the banks deemed “too big to fail” in the last financial crisis to break up into smaller banks that could fail without wrecking the economy.
The beauty of this legislation is that it understands that the financial crisis was caused not just by the banks’ economic power but by their political might as well. As Simon Johnson and James Kwak document in their book 13 Bankers, American megabanks have routinely used their influence over regulatory policy to game the system in their favor at the expense of consumers, investors and the government itself. To understand the magnitude of power that these institutions currently have over the government, consider that:
- The country’s largest banks – JPMorgan Chase, Wells Fargo, Citigroup, Bank of America, Goldman Sachs and Morgan Stanley –spent a combined $6.9 million lobbying Congress in the first quarter of 2010 alone. In 2009, the finance, insurance and real estate lobbies spent a total of $467 million lobbying Congress. By comparison, labor unions spent less than one-tenth that amount.
- As the New York Times reported this year, there are now 125 former Congressional aids and lawmakers working for the finance lobby to either kill or water down the financial reform package. Included among those lobbyists are two former House majority leaders, Dick Gephardt and Dick Armey.
- Despite the banks’ destroyed reputations, heads of major banks still feel emboldened to issued veiled threats against the government if it goes too far in reforming Wall Street. JPMorgan CEO Jamie Dimon – himself a longtime pal and consultant to President Obama – recently argued that if the government were to make banking rules too strict, then “capital will move somewhere else, where there is more money to be earned, for example non-regulated markets… is that what regulators want?”
The Kaufman-Brown legislation is the only way to break up this hold that the financial industry has on Washington. The proposed legislation has even received surprising bipartisan support, as Republican Senator Jim “I Drink Your Unemployment Benefits” Bunning has signed on for the time being. Bunning, in his endorsement for Johnson and Kwak’s book, said that ending “too big to fail” banks and reforming the Federal Reserve were “essential for our nation’s future economic prosperity and, more fundamentally, our democratic system.”
And while I don’t agree with Jim Bunning on very much, he’s absolutely right that leaving these gigantic financial institutions in their current state imperils our economy. To borrow a metaphor from Matt Taibbi: when you have a vampire squid wrapped around the face of humanity, the solution isn’t to feed it some cupcakes and hope it stops jamming its blood funnel at you. The solution is to get the damn squid off your face – and the only way to do that is to chainsaw the sucker into pieces.