Home > Cande = Conjecture & Exaggeration, Fande = Fact & Evidence, The Economy > Wall Street wriggling its way out of reform with the help of Washington, D.C. enablers

Wall Street wriggling its way out of reform with the help of Washington, D.C. enablers

As Democrats apply the band-aids to heal the wounds of a battered economy under George W. Bush, Congressional Republicans continue to act out the Theatre of the Absurd by screaming “Bloody Murder!” when the bandages come out of the box.

How Wall Street Won by Matt Taibbi



That was the beginning of the end. The new deal allowed banks to keep their derivatives desks by moving them into subsidiary units and exempted whole classes of derivatives from regulation: interest-rate swaps (the culprits in disasters like Greece and Orange County), foreign-exchange swaps (which helped trigger a global crash after Long Term Capital Management imploded in 1998), cleared credit-default swaps (a big contributor to the AIG collapse) and currency swaps (also involved in the Greece mess). “About 90 percent of the derivatives market was exempted,” says [Michael] Greenberger, [a Clinton-era ­financial regulator].

In the end, this would be the ­entire list of derivatives that are subject to the new law: credit-­default swaps that have not been cleared by regulators and swaps involving commodities other than silver and gold.

Hilariously, even the few new regulations on derivatives that remained in the bill don’t seem to worry Wall Street. Just a few weeks after Lincoln agreed to gut the measure, famed JP Morgan executive Blythe Masters, often credited as one of the inventors of the credit-default swap – one insider calls her “the Darth Vader of the swaps market” – actually sounded psyched about the bill. The new law, she declared publicly, won’t even hurt energy commodities, one of the few classes of derivatives that Lincoln didn’t exempt.

“It’s not a big change for commodities,” Masters said. “It’s fine-tuning more than a material impact.” The so-called reforms, she concluded, “are actually going to be very beneficial for the industry.”

And that, ladies and gentlemen, is what the Obama administration is touting as the toughest financial reform since the Great Depression….

The Republicans, meanwhile, were predictably hysterical. They described the new law – officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act – as something not far from a full-blown Marxist seizure of the means of production. House ­Minority Leader John Boehner shrieked that it was like “killing an ant with a nuclear weapon,” apparently forgetting that the ant crisis in question wiped out about 40 percent of the world’s wealth in a little over a year, making its smallness highly debatable….

The few reforms that Congress didn’t ­reject outright it simply kicked into a ­series of “study groups” created by the bill. Along with promised studies on no-­brainers like executive compensation and credit-rating agencies, the bill even punts on the fundamental question of how much capital banks should be required to keep on hand as a hedge against meltdowns, leaving the question to the Basel banking conferences in Switzerland later this year, where financial interests from all over the world will gather to hammer things out in inscrutable backroom negotiations.

“The next phase of all this – the regulatory phase – is going to be supertechnical and complex,” says one Senate aide. “It raises questions about how journalists are going to keep the public the slightest bit interested. You might as well just hit the snooze button.”

Worst of all, some analysts warn that the failure to rein in Wall Street makes another meltdown a near-certainty. “Oh, sure, within a decade,” said [Simon] Johnson, the MIT economist. “The question: Is it three years or seven years?”

Johnson was part of a panel sponsored by the nonpartisan Roosevelt Institute – including Nobel Prize-winning economist Joseph Stiglitz and bailout watchdog Elizabeth Warren – that concluded back in March that the reform bill wouldn’t do anything to stop a “doomsday cycle.” Too-big-to-fail banks, they said, would continue to borrow money to take massive risks, pay shareholders and management bonuses with the proceeds, then stick taxpayers with the bill when it all goes wrong. “Risk-taking at banks will soon be larger than ever,” the panel warned.

Without the Volcker rule and the ­Lincoln rule, the final version of finance reform is like treating the opportunistic symptoms of AIDS without taking on the virus itself. In a sense, the failure of Congress to treat the disease is a tacit admission that it has no strategy for our economy going forward that doesn’t involve continually inflating and reinflating speculative bubbles. Which sucks, because what happened to our economy over the past three years, and is still happening to it now, was not an accident or an oversight, but a sweeping crime wave unleashed by a financial industry gone completely over to the dark side. The bill Congress just passed doesn’t go after the criminals where they live, or even make what they’re doing a crime; all it does is put a baseball bat under the bed and add an extra lock or two on the doors. It’s a hack job, a C-minus effort. See you at the next financial crisis.

For Perspective:

More from Matt Taibbi...




The situation worsened in 2004, in an extraordinary move toward deregulation that never even got to a vote. At the time, the European Union was threatening to more strictly regulate the foreign operations of America’s big investment banks if the U.S. didn’t strengthen its own oversight. So the top five investment banks got together on April 28th of that year and — with the helpful assistance of then-Goldman Sachs chief and future Treasury Secretary Hank Paulson — made a pitch to George Bush’s SEC chief at the time, William Donaldson, himself a former investment banker. The banks generously volunteered to submit to new rules restricting them from engaging in excessively risky activity. In exchange, they asked to be released from any lending restrictions. The discussion about the new rules lasted just 55 minutes, and there was not a single representative of a major media outlet there to record the fateful decision.

Donaldson OK’d the proposal, and the new rules were enough to get the EU to drop its threat to regulate the five firms. The only catch was, neither Donaldson nor his successor, Christopher Cox, actually did any regulating of the banks. They named a commission of seven people to oversee the five companies, whose combined assets came to total more than $4 trillion. But in the last year and a half of Cox’s tenure, the group had no director and did not complete a single inspection. Great deal for the banks, which originally complained about being regulated by both Europe and the SEC, and ended up being regulated by no one.

Once the capital requirements were gone, those top five banks went hog-wild, jumping ass-first into the then-raging housing bubble. One of those was Bear Stearns, which used its freedom to drown itself in bad mortgage loans. In the short period between the 2004 change and Bear’s collapse, the firm’s debt-to-equity ratio soared from 12-1 to an insane 33-1. Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

And the Fed isn’t the only arm of the bailout that has closed ranks. The Treasury, too, has maintained incredible secrecy surrounding its implementation even of the TARP program, which was mandated by Congress. To this date, no one knows exactly what criteria the Treasury Department used to determine which banks received bailout funds and which didn’t — particularly the first $350 billion given out under Bush appointee Hank Paulson.

The situation with the first TARP payments grew so absurd that when the Congressional Oversight Panel, charged with monitoring the bailout money, sent a query to Paulson asking how he decided whom to give money to, Treasury responded — and this isn’t a joke — by directing the panel to a copy of the TARP application form on its website. Elizabeth Warren, the chair of the Congressional Oversight Panel, was struck nearly speechless by the response.

“Do you believe that?” she says incredulously. “That’s not what we had in mind.”

Another member of Congress, who asked not to be named, offers his own theory about the TARP process. “I think basically if you knew Hank Paulson, you got the money,” he says….

That’s the essence of the bailout: rich bankers bailing out rich bankers, using the taxpayers’ credit card.

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