The last time Congress took up major financial regulatory legislation they got it completely wrong. The result created a virtual certainty that within ten years we would face a combined economic and financial crisis the likes of which we had not experienced since the Great Depression.
It was 1999, and Senator Phil Gramm (R-TX) — now a vice chairman of the global banking giant UBS — had ascended to the chairmanship of the Senate Banking Committee in the Republican-controlled Congress. It was Gramm who became the point man for the financial industry and chief sponsor of the deregulation plan known as Gramm-Leach-Bliley, the so-called Financial Services Modernization Act. Today, of course, there are many who point to the passing of that bill, and the following year’s Commodity Futures Modernization Act, as having played a key role in eliminating many of the regulatory controls over a financial industry that was then allowed to run amok.
Unfortunately, at the time there were not many in Congress who didn’t buy the line being peddled by the big bankers and investment firms and their lobbyists: that “modernization” was needed to encourage the financial “innovations” that would enhance the “competitiveness” of America’s superior “free markets”. That’s why, they argued, we needed to dismantle many of the core regulatory standards and provisions that had been put in place in the wake of the 1929 Crash and subsequent Depression-era banking crisis — including, for example, the 1933 Glass-Steagall Act which prohibited bank holding companies from owning other financial firms and separated commercial banks from securities firms and investment banks.
One of a handful of Senators who opposed Gramm-Leach-Bliley and the whole blind march toward financial deregulation was Senator Byron Dorgan (D-ND). On May 6, 1999, as Senator Gramm brought his deregulation plan to the Senate floor, Dorgan sought time to speak. Given what we’ve gone through in the last three years especially, with the disastrous excesses of the financial sector and the utter failure of regulators and policymakers previously to rein them in, only a fool wouldn’t listen to those whose warnings at the time have since proven so correct.
So with the help of C-SPAN’s new digital video library we offer the following clips from the Senate remarks by Byron Dorgan on May 6, 1999.
Clip 1 (0:52)
Gramm appears annoyed that Dorgan seeks time to speak.
Clip 2 (4:08)
Calling the legislation “a terrible idea” Dorgan details the recent 1998 wave of bank mergers, including that of Citibank with insurance giant Travelers, and the ongoing concentration of bank assets in fewer and bigger banks.
Clip 3 (8:13)
In this, the longest running clip, Dorgan discusses the 1998 meltdown and subsequent Fed-led bank bailout of the unregulated hedge fund Long Term Capital Management; Glass-Steagall and the lessons of the 1920s; the dangerous growth (mild by today’s standards) of unregulated derivatives; and the problem of having banks that are “too-big-to-fail”.
Clip 4 (1:34)
Dorgan recalls what happened in the late 1970s and early 1980s after the Savings and Loans were deregulated and hundreds of billions in S&L bailouts.
Clip 5 (1:55)
The legislation then under consideration, Dorgan says, would “raise the likelihood of future massive taxpayer bailouts.”
Clip 6 (1:11)
“The horses are out of the barn”
Clip 7 (0:32)
Dorgan describes the dangers of allowing banks to engage in proprietary trading in derivatives, and predicts that someday we will ask why we didn’t understand the consequences.
Clip 8 (0:59)
Saying he knows that Gramm’s deregulation plan — the Financial Services Modernization Act of 1999 — is going to pass, Dorgan warns “you are begging for trouble.”
Later that same night the Senate passed Gramm’s bill by a near party line vote of 55 to 44. Dorgan was pleasantly surprised at the time that all but one Democratic Senator voted with him. But the fix was in, as it were. Inside the Clinton administration, those who had been resisting the push for financial deregulation, such as Clinton’s first Labor Secretary Robert Reich and former Council of Economic Advisors chairman Joseph Stiglitz, were now gone. On July 1st the House passed its version, which had been sponsored by Republicans Jim Leach of Iowa and Thomas J. Bliley, Jr. of Virginia.
The next day Lawrence Summers — now director of the National Economic Council in the Obama administration — became Secretary of the Treasury. Summers had replaced his mentor Robert Rubin, previously CEO of Goldman Sachs, who left Treasury to join the Board of Directors of Citigroup. Rubin, along with Summers and Federal Reserve chairman Alan Greenspan, had been busy serving the deregulation ‘Kool-Aid’ for several years, under the guise that “modernization” would bring “innovation” and greater “competitiveness.” As recently as last month Rubin was still saying “virtually nobody” saw the financial meltdown coming.
Because the House and Senate-passed versions of the 1999 Gramm-Leach-Bliley bill differed, it was sent to a conference committee to come up with a single version. In an effort to get more Democratic votes in Congress, the administration pushed some modifications that ostensibly were designed to strengthen some anti-redlining provisions under the Community Reinvestment Act, thereby making loans more available in lower-income communities. And they passed around the ‘Kool-Aid’ on that. It is clear now, of course, that the bill simply made it easier for banks and other financial institutions to pursue predatory lending practices.
The final version was taken up and passed on November 4, 1999. The Senate vote was 90 to 8. Among those currently in the Senate only Democrats Byron Dorgan (ND), Barbara Boxer (CA), Russ Feingold (WI), Tom Harkin (IA), Barbara Mikulski (MD) and Republican Richard Shelby (AL) voted against it. The House vote was 362 to 57, with Bernie Sanders of Vermont, now a Senator, among those voting “Nay”.
Unfortunately, Senator Dorgan has announced he will retire from the Senate at the end of this year. So has Senator Ted Kaufman (D-DE) and current Banking Committee chairman Chris Dodd (D-CT). With the myriad problems that must be directly and effectively addressed in a new financial reform plan, these three Senators are among those that stand to play key roles in crafting the specifics of that plan. They and their colleagues need to put in place the toughest possible rules and a framework to get the financial system to do what it’s supposed to do — invest in the growth of the economy for the benefit of all Americans. Dorgan, Dodd and Kaufman should “not go gentle into that good night”. This time it’s crucial that they get this right.
First, to proffer some informed and informative entertainment, thanks to Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee last night on Countdown With Keith Olbermann:
And now, in the interest of informing readers on the substantive policy issues involved in financial regulatory reform, we offer the following compendium — and suggest that the reader Bookmark this page for reference.
Thanks to the The Commodity Futures Modernization Act of 2000 (CFMA), the universe of structured derivatives were completely exempt from ALL regulation. Whether it was Collateralized Debt Obligations (CDOs) or Credit Default Swaps (CDSs), the CFMA put them into the world of shadow banking.
How? The CFMA mandated it. No supervision was allowed, no reserve requirements for potential future payouts were mandated, no exchange listing requirements were put into effect, all capital minimums were legally ignored, there was no required disclosures of counter-parties. Derivatives were treated differently from every other financial asset — stocks, bonds, options, futures. They were uniquely unregulated.
Senator Ted Kaufman (D-DE) on the need to separate federally insured banks from risky investment banks, the need to set statutory size and leverage limits on banks and nonbanks, and the need to put in place reforms for derivatives and other qualified financial contracts.
The rundown from Demos on the recent Senate Banking Committee’s legislative actions.
Former Labor Secretary Robert Reich on why the SEC should be enforcing the Sarbanes-Oxley Act to hold Wall Street executives accountable right now, instead of waiting for new regulatory reforms.
And the Make Markets Be Markets collection of videos and writings from the Roosevelt Institute, which includes presentations by Nobel Prize economist Joseph Stiglitz, Elizabeth Warren on consumer protection, Michael Konczal on a 21st Century Glass-Steagall, and former chief economist for the Senate Banking Committee Robert Johnson on a resolution authority.
In a conversation last week, a member of the House Financial Services Committee told me that Democrats expect to get some Republican support for financial regulatory reform in the Senate. I don’t see it. And it appears that Paul Krugman agrees with me.
The White House is optimistic, because it believes that Republicans won’t want to be cast as allies of Wall Street. I’m not so sure.
Perhaps Democrats are simply stretching a political canvas in hopes that some Republicans will either add a few brushstrokes or just paint themselves into a corner. But back in December when the House passed the Wall Street Reform and Consumer Protection Act(summary) it received not a single Republican vote.
Then last week when the Senate Banking Committee approved the Restoring American Financial Stability Act(summary) it too received no Republican support. In recent interviews Republican Senator Bob Corker (TN) has stated his continued opposition to the committee’s reform plan and that he prefers to slow things down.
Where have we heard that before?
Last Sunday The New York Times reported that Wall Street and the financial industry, along with their business and conservative allies, were gearing up to spend “tens of millions of dollars” in a “campaign to scale back or block” Democratic financial reform plans. Still, they purport to favor reform.
Wall Street executives say that although they support increased regulation, the changes sought by Democrats could exacerbate the problems that emerged in the 2008 economic crisis rather than fix them. Among the targets of their criticism are the creation of a consumer fiscal protection agency, the establishment of a multibillion-dollar fund to head off bailouts of companies deemed “too big to fail,” and the regulation of derivatives as well as other high-risk trading instruments.
That wouldn’t seem to leave a whole lot of room for any real reform, though, would it?
There are actually two fights shaping up here. One is a political fight, foremost in the Senate. On that front all indications point to Republicans and Wall Street wanting to drag things out — appearing to “come to the table” and then walking away — while trying to ensure that neither substantive rules nor enforcement “teeth” make their way into a final package. And they’d prefer to keep postponing any action in hopes the public will tire of it all — or even turn it into a Democratic liability.
The other fight is over substance. Will enough specificity, rules and structural changes be put in place to make a real difference? And which ones? Will Wall Street be held accountable and made to pay to clean up the mess it created? Will we have learned the lessons of the Great Recession, of the dangers of the de-regulators and the fallacy of free market fundamentalism? Will we put in place strong consumer protections, as well as regulations that will help financial markets work in constructive rather than destructive ways?
For far too long the myopic, smug and rapacious financial elites have treated economic and regulatory policy as their private playground, as if the citizenry were incapable of understanding such complicated matters. Their paid economists and conservative pundits look to shroud matters in mystery.
But they are the ones who got it all wrong. And it’s not such a mystery after all. My next post will provide a compendium, of sorts, of useful links to resources and information to help us “bone up” for the financial regulatory reform battles ahead.
A year ago Wall Street’s financial rupture sent the economy hurtling into a massive crisis, crushing tens of millions of Americans in an avalanche of unemployment, underemployment, home foreclosures, reduced incomes and lost benefits. That financial rupture was caused by a combination of rapacious, mindless greed on Wall Street, the then-bloated housing bubble, and the failure of both regulators and of the financial regulatory structure.
Tomorrow the Senate Banking Committee will begin to take up Senator Chris Dodd’s (D-CT) proposals for sweeping financial regulatory changes. In a statement announcing the proposed legislation last week, committee chairman Dodd said:
“Over the past year, Americans have faced the worst financial crisis since the Great Depression. Millions of Americans have lost their homes, their jobs, and their savings – and yet, they’ve watched some of the people and institutions that caused this mess collect million dollar bonuses and receive billion dollar bailouts.”
“Those hard working Americans are asking, what is the government doing to ensure their economic security?”
“It is the job of this Congress to restore responsibility and accountability in our financial system to give Americans confidence that there is a system in place that works for and protects them.”
“We must create a sound foundation to grow the economy and create jobs.”
“The financial crisis exposed a financial regulatory structure that was the product of historic accident, created piece by piece over decades with little thought given to how it would function as a whole, and unable to prevent threats to our economic security.”
“For decades, Washington has failed to deliver the substantial reform we need. If we fail again this time, our economy will be vulnerable to another crisis.”
Both the Obama Administration and the House Financial Services Committee have developed separate regulatory reform plans. But in the view of most observers, Dodd’s proposals would go much further in establishing a fundamentally new regulatory structure and in imposing tighter controls on financial institutions, investment instruments and trading practices — particularly for derivatives.
In a statement released by the Senate Banking Committee, and at his press conference, Dodd marked his determination to succeed with this major regulatory overhaul:
“I will not stand for attempts to protect a broken status quo, particularly when those attempts are made by some of the same special interests who caused this mess in the first place.”
“The American people have been through a lot over the past year. I hear from them every day. They are business owners forced to shutter their doors and lay off workers because their credit dried up. They are senior citizens who have delayed their retirement because their 401(k) vanished. They are ordinary Americans who did nothing wrong, but are paying a steep price. They deserve an economy in which Americans can find jobs, manage their money, and build better futures for their families. They deserve the real and meaningful change in this bill.”
Discussing two of the most critical components of his plan, Dodd continued:
“Our plan will stop abusive practices by creating an independent Consumer Financial Protection Agency with one mission: standing up for consumers. Whether taking out a mortgage, getting a credit card, or investing for retirement, Americans deserve to receive clear and accurate information, to be protected from hidden fees and abusive terms, and to know that the financial products they’re being offered are safe.”
“We will end “too big to fail.” We cannot allow the collapse of a few firms to threaten our entire economy. Our plan will create an independent council of regulators to identify risks, so that government can act to prevent a crisis. We will have a mechanism in place to safely shut down large failing companies without destabilizing the financial system. No longer will the Federal Reserve’s emergency lending authority be used to prop up a failed institution.”
Other key provisions would create a single federal banking regulator; eliminate regulatory gaps for over-the-counter derivatives, hedge funds, asset-backed securities, and payday lending; require companies that sell mortgage-backed securities to keep “skin in the game” so investors won’t be sold worthless securities; and give shareholders a greater say in how executives are compensated.
Not surprisingly, the two biggest defenders of the financial status quo are not at all happy with Dodd’s regulatory reform plan. The American Bankers Association immediately attacked the Dodd plan saying it “would tear apart the existing regulatory structure only to create a new one”. And the U.S. Chamber of Commerce has launched an effort to kill the proposed Consumer Financial Protection Agency (CFPA). These and other powerful special interests and financial industry lobbyists will no doubt be working feverishly to kill Dodd’s reform plan outright, or slice and dice it until its substantative provisions are eliminated or fundamentally weakened.
