Reading the long take-out in this Sunday’s New York Times Business Section on Wall Street’s meltdown, “What Created This Monster?“, I couldn’t help but be struck by a few things.
For example, Rep. Barney Frank admits that it wasn’t until sometime last year that he realized that all the deregulation pushes of the 1990s had loosed the creation of a “shadow banking system” that was undermining the whole financial system. “Not only did Wall Street have so much freedom, but it gave commercial banks an incentive to try and evade their regulations,” Mr. Frank says. When it came to Wall Street, he says, “we thought we didn’t need regulation.”
And then there was this episode, described in the article:
A milestone in the deregulation effort came in the fall of 2000, when a lame-duck session of Congress passed a little-noticed piece of legislation called the Commodity Futures Modernization Act. The bill effectively kept much of the market for derivatives and other exotic instruments off-limits to agencies that regulate more conventional assets like stocks, bonds and futures contracts.
Supported by Phil Gramm, then a Republican senator from Texas and chairman of the Senate Banking Committee, the legislation was a 262-page amendment to a far larger appropriations bill. It was signed into law by President Bill Clinton that December.
Mr. Gramm, now the vice chairman of UBS, the Swiss investment banking giant, was unavailable for comment. (UBS has recently seen its fortunes hammered by ill-considered derivative investments.)
“I don’t believe anybody understood the significance of this,” says Mr. Greenberger, describing the bill’s impact.
Oh come on! Back in the fall of 1999, here’s what I wrote in a bulletin I was writing with my colleague Nancy Watzman, for Public Campaign, on the deleterious effects of money on politics. We didn’t come up with this analysis on our own, either, but were relying on many outspoken critics of financial deregulation, who unfortunately were completely outgunned in the one currency that buys attention in Washington.
Friday, October 22, 1999 should go down in history as the day that big money in politics won its biggest victory ever. That was the day that White House and Senate negotiators worked out a final, late-night deal engineering the repeal of a critical Depression-era law, the Glass- Steagal Act, that for six decades has kept the banking, securities and insurance businesses separate from each other.
The ramifications of this change are huge. First, insurance companies, brokerage houses, banks and credit card companies will be allowed to merge, a process that has been already taking place in dribs and drabs through regulatory waivers, but now will be vastly accelerated. Glass-Steagal had forced commercial banks out of the hyper-risky business of stock speculation and set up the Federal Deposit Insurance Corporation (FDIC) to protect individuals from bank failures. Now, despite promises otherwise, the U.S. Treasury and the taxpayers will be in the position of bailing out speculators in the event that their risky plays in the securities business threaten the solvency of the soon-to-be-formed mega-banks. [emphasis added]
And, the least-remarked-upon result of the new law: political money will become concentrated to an unprecedented degree. From 1997 to present, contributions from the banking, insurance and securities industries in the form of PAC money, soft money and large individual donations ($200+) to federal candidates and party committees totaled more than $175 million, according to the Center for Responsive Politics. These three industries reported spending another $163 million on lobbying in 1997-98.
Key players in the final deal are also top recipients of campaign cash from the financial sector. Senator Gramm has raised $2.07 million from it from 1993-98; Senator Charles Schumer (D-NY), $1.71 million; Senator Chris Dodd (D-CT) $1.38 million.
And who are we relying on now? As Paul Krugman points out today, Phil Gramm is one of John McCain’s top economic advisers. And, he notes,
In retrospect, it’s clear that the Clinton administration went along too easily with moves to deregulate the financial industry. And it’s hard to avoid the suspicion that big contributions from Wall Street helped grease the rails.
Last year, there was no question at all about the way Wall Street’s financial contributions to the new Democratic majority in Congress helped preserve, at least for now, the tax loophole that lets hedge fund managers pay a lower tax rate than their secretaries.
Now, the securities and investment industry is pouring money into both Mr. Obama’s and Mrs. Clinton’s coffers. And these donors surely believe that they’re buying something in return. Let’s hope they’re wrong.
UPDATE: My old pal Tom Ferguson (working with a new collaborator, Robert Johnson–formerly of Soros Fund Management), extend the story here:
It is high time for someone to start raising questions about the public interest here. The caterwauling from Bears’ shareholders about price is overshadowing a critical point: Since the first deal was announced, J.P Morgan Chase’s stock has rallied smartly. With its enormous market capitalization, that translates into a gigantic increase in market value. If the deal unravels, the stock price might — indeed, almost certainly will — fall again, but that is precisely our point: markets considered the deal that the Fed and Morgan tried to cut a very good one for Morgan.
The question that needs to be asked is why none of that increase in value is ever to flow back to the public, whose money is critical to the deal. This would be easy to arrange and it does not risk reviving the Soviet Union’s Gosplan: the Fed or the federal government could simply have taken some stock in J.P. Morgan Chase. Or, as in the Chrysler bailout, there could have been warrants issued, guaranteeing the government the right to buy stock at a low price. At some point in the future, when J.P. Morgan Chase’s management and investors are again comfortable lecturing the rest of us about the magic of the marketplace and the urgent need to cut the size of government, the stock or the warrants could be sold off or redeemed, to pay for the rescue.