Wayne O'Leary

Financial Reform and the Democrats

One of the lingering, nagging thoughts worming its way around inside the heads of progressives is this: why, after a self-induced financial crash of epic proportions in 2008, do America’s big banks and their shadow-bank bedfellows continue to hold an honored position within our political and economic system? After all, Democrats have been nominally in charge of Washington since Wall Street’s speculative wheels came off, and according to political mythology at least, Democrats and bankers are like oil and water; they don’t mix.

It’s common knowledge that, five years on, the financial movers and shakers, the celebrated “masters of the universe,” have paid no real price for their malfeasance as corrupt and criminally negligent stewards of an economy dominated, for good or ill, by investment banking and its affiliated offshoots in the credit-and-debt industry — insurance and finance conglomerates, private-equity firms, and hedge funds. This parasitic “financial-services” sector, largely focused on securitization and derivatives trading in such exotica as collateralized debt obligations and credit-default swaps (the original sin leading to our enduring economic problems), is back doing business as usual — that is, redistributing existing wealth for the benefit of itself and its clients, not creating new wealth.

The electronic money changers, who by some accounts command up to half the nation’s economic assets and corporate profits (far outpacing genuinely useful activities, such as manufacturing), have left a trail of destroyed pensions, lost homes, and broken lives in their wake that is only now being slowly rectified — if, indeed, the Justice Department’s pathetic settlement providing pennies on the dollar for past illegal home foreclosures can be called rectification. Yet, there have been virtually no statutory prosecutions, only token fines, and precious little new regulation worthy of the name.

Washington’s famous “revolving door” of finance regulators, who shuttle back and forth from federal agencies like the Federal Reserve Board, the Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Currency (OCC) to the private fiefdoms they are charged with overseeing, is alive and well. The latest example is just-appointed SEC chief Mary Jo White, recently of the New York law firm Debovoise & Plimpton, which counts among its clients Bank of America, Morgan Stanley, and J.P. Morgan Chase. These and the handful of other “too-big-to-fail” (tbtf) institutions that precipitated the crisis are now bigger and more prosperous than ever; they really did get away with it, and they now essentially control the post-crisis economy, scrutinized by indulgent regulators sensitive to their every whim.

Market watcher and business columnist Joe Nocera argues convincingly that financial regulators, like White’s SEC predecessor Mary L. Shapiro, now of the Clinton-connected Wall Street consulting firm Promontory Financial Group, are, for the most part, in bed with the banks they are supposed to regulate — not literally bought, but sympathetically disposed toward their former clientele. In the case of Promontory Financial, The New York Times reports, two-thirds of the senior executives formerly worked at agencies, such as the OCC, that oversee the financial industry; they engage in special pleading for their banking clients and even interpret rules for the regulators.

The regulators, for their part, are said to respect the expertise of the consultants, actually outsourcing oversight to them on occasion, thereby allowing financial interests to, in effect, self-regulate. This bias is built into our regulatory system, which in recent decades has stopped issuing thou-shalt-not edicts (like the firm, unambiguous Glass-Steagall decree that once banned commercial banks with federally insured deposits from dabbling in risky investment banking or insurance, for instance) and instead relies upon various vested government agencies to interpret the broad, vague, often vacuous legalese of modern reform legislation and write the applicable rules.

That’s the operating philosophy behind the 2010 Wall Street Reform and Consumer Protection Act (Dodd-Frank), which bans few things outright and fatally depends on specific rule-making by compromised regulators to fill in the blanks, usually with the input of financial lobbyists, who influence the process and distort or dilute the final product. This sausage making can be seen in the slow evolution of the new banking law, over two-thirds of whose nearly 400 rules have yet to be even finalized three years after passage, while the rest bear to varying degrees the imprint of the industry itself.

Kept regulators are bad enough, though some of them (notably Gary Gensler, head of the Commodity Futures Trading Commission) at least try to make regulations work. Worse is a total lack of commitment by top government officials, many of whom never wanted tightened financial regulations from the start. It’s here that the modern Democratic Party has revealed its feet of clay by acquiescing in what might be termed 20 years of economic treason.

Oddly enough, the best recent guide to what’s happened to the Democrats at the highest levels when it comes to financial policy is a maverick Republican, former (2006-11) chairman of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair, whose riveting memoir Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself (Free Press, 2012) highlights the party’s unseemly ties to high finance, in general, and to mega-bank Citigroup, in particular.

The fateful decision not to break up the big banks and restructure the rogue industry in the aftermath of the 2008 crisis — to instead save it in its existing form, with special solicitude for Citigroup — was, Bair establishes clearly, a conscious choice of the Obama administration. In so doing, the Obamaites were following a flawed precedent set by the centrist Clinton Democrats over a decade earlier. What’s more, they were doing it with many of the same people in charge, people who, Bair concludes, were responsible for the regulatory errors that created the crisis in the first place. In short, “the relationship between Washington and Wall Street had become too cozy.”

[To be continued]

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He is the author of two prizewinning books.

From The Progressive Populist, August 1, 2013