No more deceit — strictly regulate Wall Street

Also last week, the Senate
conducted hearings on failed Washington Mutual following a report by
a Senate subcommittee that found the bank’s lending operations rife
with fraud, including fabricated
loan documents. 

This deceit illustrates that
America’s largest financial institutions can’t be trusted to refrain
from crashing the world economy again. In fact, when the big banks announced
their first quarter earnings
recently — Citigroup $4.4 billion; Bank of America, $4.2 billion; Goldman
Sachs $3.46 billion, and JPMorgan $3.3 billion; Morgan Stanley $1.8
billion – it turned out that much of that money was made by their
trading divisions – the very ones that dragged them – and the U.S.
economy – down during the crisis in 2008. These are the same risky
trading practices that cost taxpayers a $700 billion bank bailout, their
savings, their jobs, their businesses.  

Clearly, these bankers can’t
control themselves. And the “free market” has failed to moderate
their behavior. Strict regulation is essential, including re-instituting
the Glass-Steagall Act and other rules that will prevent financial firms
from growing too big to fail; forcing the banks themselves to pay for
liquidation of big financial institutions; placing on open markets trades
of those secretive derivatives that brought down AIG and that the SEC
says Goldman used fraudulently; and creating an independent consumer
financial protection agency to stop practices like predatory lending,
usurious interest rates and hidden fees. 

Congress lifted bank regulations
over the past three decades, including the Glass-Steagall Act passed
after the 1929 stock market crash to reduce speculation and conflicts
of interest and to prevent “too-big-to-fail” financial institutions
by forbidding the combination of investment and commercial banks. Like
gullible investors in subprime mortgage bonds, the politicians who reversed
those rules bought the argument that the free market would regulate
itself. This is the same argument 1,500 Wall Street lobbyists are using,
along with millions of dollars, right now in attempts to persuade lawmakers
to stop worrying their little heads about seriously regulating Wall
Street. 

Main Street, where foreclosures
continue at a record pace and unemployment remains painfully near 10
percent, desperately needs its own 1,500 lobbyists and millions in influence
dollars. It will have the power of thousands of voices at a
“Make Wall Street Pay” rally April 29
in the heart of New York City’s financial district, one of several
protests across the country organized by the AFL-CIO. 

On Main Street the need to
forcefully re-regulate to prevent another Great Recession is clear;
it’s not in Washington, D.C. In fact, weakening the already-too-soft
financial regulation bill proposed by Sen. Chris Dodd is a crusade for
Senate Minority leader Mitch McConnell, whose campaign coffers have
received more money from security and investment firms than from any
other category — $1.3
million. Like a
Wall Street banker, McConnell is using deception. For example, he harped
all last week that an “orderly liquidation fund” in the Dodd bill
was a “bailout fund.” 

It’s
not. It would be
created with fees on banks – not taxpayers. And it’s not for bailouts
that preserve banks. It is for bank liquidation. It would pay for the
orderly closing of too-big-to-fail banks. Ezra Klein of the Washington
Post ridiculed
McConnell’s claims,
and Katrina vanden Heuvel, editor of the Nation, described McConnell’s attacks on the bill
as fraudulent.  

All
of the sudden on Monday, McConnell
changed his mind about Dodd’s bill. Coincidentally, that was three
days after the SEC filed the fraud suit against Goldman Sachs, making
railing against financial reform appear not quite so politically wise
to Republicans anymore. It’s all about the politics in Washington,
D.C. 

McConnell said he had new optimism
that Wall Street reform would pass because Democrats had resumed bipartisan
talks and, he said: 

“I’m convinced now there
is a new element of seriousness attached to this, rather than just trying
to score political points.”

Listening to McConnell is like
hearing Lehman’s Fuld, who got a $22 million bonus six months before
his financial firm filed for bankruptcy, swear to Congress he knew nothing
about the “Repo” accounting procedure Lehman used to conceal $50
billion in debts. Following his testimony, Anton R. Valukas, the examiner
in the Lehman bankruptcy, told
Congress that his
investigators found a person who had discussed Repo with then-CEO Fuld
and e-mails to Fuld describing it.

The problem with McConnell
and his new-found eagerness to pass “bipartisan” legislation is
that the Dodd bill needs to be strengthened, not weakened with compromises
thrown to Senate Republicans, all 41 of whom signed a letter last week
saying they’d vote against it.

Before compromises remove from
this bill the power to effectively regulate, Congress needs to review
what Goldman is accused of doing. Ezra Klein of the Post described it
best:

“Goldman Sachs let hedge-fund
manager John Paulson select the subprime-mortgage bonds that he thought
likeliest to explode and put them into a package called Abacus 2007-AC1.
Paulson, who guessed early that the market was heading for a crash,
wanted to bet against these bonds. But he needed someone on the other
side of the bet. So Goldman went out and found him some suckers, or,
as Goldman called them, “counterparties.” . . .But here’s the
rub: Goldman didn’t tell the counterparties that Paulson had picked
the bonds. ‘Goldman wrongly permitted a client that was betting against
the mortgage market to heavily influence which mortgage securities to
include in an investment portfolio, while telling other investors that
the securities were selected by an independent, objective third party,’ 
said Robert Khuzami, the director of the SEC’s division of enforcement.”

Khuzami’s description makes
Goldman’s behavior sound a lot like lying.

The real economy in this country
– the one that manufactures, builds and produces tangible products
– can’t afford a Wild West financial economy. The real economy depends
on banks to finance business expansion and everyday transactions. All
of that froze in the Fall of 2008 because of Wall Street’s reckless,
inadequately-regulated gambling.

In a speech in New York City
on Thursday, President Obama reinforced that that some bankers “forgot
that behind every dollar traded or leveraged, there is family looking
to buy a house, and pay for an education, open a business, save for
retirement.”

Obama also referenced the issue
of dishonesty when he said this in New York:

“A free market was never
meant to be a free license to take whatever you can get, however you
can get it.”

If McConnell-style deceit about
the financial reform bill continues in the Senate, serious regulatory
reform won’t happen. Half measures won’t work. Only robust financial
reform will end Wall Street’s freedom to deceive.