Selling Out America to Wall Street – by Stephen Lendman
Project Censored’s top 2010 story was “US Congress Sells Out to Wall Street,” highlighting that since 2001, “eight of the most troubled firms have donated $64.2 million to congressional candidates, presidential candidates and the Republican and Democratic parties.” It’s no surprise that they own them, what Wall Street Watch.org showed in a March 2009 Essential Information and Consumer Education Foundation report titled,”Sold Out: How Wall Street and Washington Betrayed America.”
The accompanying press release said:
Over the past decade, “$5 billion in political contributions bought Wall Street freedom from regulation, (and) restraint.” From 1998 – 2008, “Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates (the FIRE sector)” spent over $1.7 billion in political contributions and another $3.4 billion on lobbyists, in return for which:
— they were freed from regulation;
— could speculate on financial derivatives and an alphabet soup of securitized garbage, including asset-backed securities (ABSs), mortgage-backed securities (MBSs), collateralized mortgage obligations (CMOs), collateralized debt obligations (CDOs), collateralized bond obligations (CBOs), credit default swaps (CDSs), and collateralized fund obligations (CFOs) – combined, sliced, diced, packaged, repackaged, and sold in tranches to sophisticated and ordinary investors, many unwittingly through mutual funds, 401(k)s, pensions, and the like;
— could merge commercial and investment banking and insurance operations;
— bilk investors and the public through fraudulent schemes; and
— get trillions of bailout dollars when the economy crashed.
For decades, Wall Street and successive governments colluded to defraud the public, using various schemes to transfer wealth from them to the privileged. Carter spearheaded deregulation Nixon and Ford began by hiring Alfred Kahn to head the Civil Aeronautics Board (CAB). The 1978 Airline Deregulation Act followed. It dissolved the CAB, removed industry restraints, eased consolidation, and subsequent bills deregulated trucking and railroads – the 1980 Motor Carrier Act and 1980 Staggers Rail Act, following the 1976 Railroad Revitalization and Regulatory Reform Act.
Carter also phased out interest rate deposit ceilings, and gave the Fed more power through the 1980 Depository Institutions and Monetary Control Act, removing New Deal restraints and enabling subsequent administrations to go further.
Under Reagan, energy deregulation followed, notably oil and gas, then electric utilities under GHW Bush and Clinton, the result being high prices, brownouts, and Enron-like scandals. In the 1980s, the 1982 Alternative Mortgage Transactions Parity Act led to exotic feature mortgages with adjustable rates or interest-only. They carry low “teaser” rates for several years, after which they’re adjusted much higher, often making loans unaffordable, especially for low-income, high-risk borrowers using subprime and Alt-A loans.
The 1982 Garn-St. Germain Depository Institutions Act deregulated thrifts and fueled fraud, so much that the Savings and Loan crisis followed, hundreds of banks failed, and taxpayers got stuck with most of the $160 billion cost. In 1987, the Government Accountability Office (GOA) declared the S & L deposit insurance fund insolvent because of mounting bank failures.
In 1988, global regulators imposed minimum bank capital requirements, known as the Basel Accord or Basel I, enforced in the G-10 countries.
In 1989, the Financial Institutions Reform and Recovery Act abolished the Federal Home Loan Bank Board and FSLIC, transferring them to the Office of Thrift Supervision (OTS) and FDIC. It also created the Resolution Trust Corporation (RTC) to liquidate troubled assets, assume Federal Home Loan Bank Board insurance functions, and clean up a troubled system.
Clinton era telecommunications deregulation let media and telecommunication giants consolidate, gave new digital television broadcast spectrum space to current TV station owners, and let cable companies increase their local monopoly positions.
His 1994 Reigle-Neal Interstate Banking and Branching Efficiency Act let bank holding companies operate in more than one state. In 1996, the Fed reinterpreted Glass-Steagall to let bank holding companies earn up to 25% of their revenue from investment banking. The 1998 Citicorp-Travelers merger followed, combining a commercial/investment bank with an insurance company ahead of the 1999 Financial Services Modernization Act, also called the Gramm-Leach-Bliley Act (GLBA) authorizing it.
During the Great Depression, the Bank Act of 1933 (Glass-Steagall) created the FDIC, insuring bank deposits up to $5,000 and separating commercial from investment banks and insurance companies, among other provisions to curb speculation. Senator Carter Glass was its prime mover and got Senator Henry Steagall to go along by including his amendment to protect deposits. Glass believed banks should stick to lending, not speculate, deal, or hold corporate securities. He blamed them for the 1929 crash, subsequent bank failures, and the Great Depression. The Bank Act of 1933 passed quickly to curb them.
No Longer since the Neoliberal 1990s
Later weakened, it still curbed abusive practices until GLBA repealed it, let commercial and investment banks and insurance companies combine, and facilitated consolidated power, fraud and abuse that followed. Other deregulatory rules permitted off-balance sheet accounting to let banks hide liabilities.
In 2000, the Commodity Futures Modernization Act (CFMA) passed, legitimizing swap agreements and other hybrid instruments, at the heart of today’s problems by ending regulatory oversight of derivatives and leveraging that turned Wall Street more than ever into a casino.
In her book “It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street,” former insider Nomi Prins explained CFMA as follows:
“That act ushered in tremendous growth of unregulated commodity trades through its “Enron Loophole (for its Enron On-Line, the first Internet-based commodity transactions system to let companies) trade energy and other commodity futures on unregulated exchanges.”
“It also sparked growth in the unregulated credit derivatives trades that bet on defaults of corporations or loans, which became the main ingredient in the hot new Wall Street financial gumbo. Credit derivatives were a type of insurance contract written against not just one corporation or loan but on investments that scarfed up bunches of subprime loans (junk) and stuffed them into the unregulated CDOs that imploded and hastened the greater lending crisis.”
Credit default swaps became the most widely traded credit derivative. As unregulated insurance bets between two parties on whether or not a company’s bonds would default, financial writer Ellen Brown asked in her April 11, 2008 article titled, “Credit Default Swaps: Evolving Financial Meltdown and Derivative Disaster Du Jour:”
What if “the smartest guys in the room designed their credit default swaps (but) forgot to ask one thing – what if the parties on the other side of the bet don’t have the money to pay up?” In late 2007, when the financial crisis hit, they didn’t, causing a “supersized bubble” to deflate.
New Deal reforms were enacted to prevent it. Deregulatory madness made it inevitable and the subsequent global economic fallout that continues – compounded by what Danny Schechter explained in his book, titled “The Crime of Our Time,” calling the financial collapse “a crime story (involving) high status white-collar crooks.” Their schemes included:
— “Fraud and control frauds;
— Insider trading;
— Theft and conspiracy;
— Ponzi schemes;
— False accounting;
— Diverting funds into obscenely high salaries and obscene bonuses;
— Bilking investors, customers and homeowners;
— Conflicts of interest;
— Mesmerizing regulators;
— Manipulating markets;
— Tax frauds;
— Making loans and then arranging that they fail;
— Engineering phony financial products: (and)
— Misleading the public.”
Worst of all, they got away with it, still do, and got trillions of dollars in bailout money as a bonus, free money from the Fed plus interest on Fed held reserves.
The Absence of Regulatory Oversight
Earlier New Deal reforms were long gone, but for the most part worked when in place. The Securities and Exchange Act of 1934 followed the Securities Act of 1933, requiring offers and security sales to be registered, pursuant to the Constitution’s interstate commerce clause. Previously, they were governed by state laws, so-called “blue sky laws” to protect against fraud.
The 1934 law regulated secondary trading of financial securities and established the SEC under Section 4 to enforce the new Act, later under the 1939 Trust Indenture Act, the 1940 Investment Company Act, the Investment Advisors Act the same year, Sarbanes-Oxley of 2002, and the 2006 Credit Rating Agency Reform Act.
The SEC was established to enforce federal securities laws, the security industry, the nation’s financial and options exchanges, and other electronic securities markets and instruments unknown in the 1930s, including derivatives and other forms of speculation. In principle, it’s charged with uncovering wrongdoing, assuring investors aren’t swindled, and keeping the nation’s financial markets free from fraud and other abuses.
That was then, but no longer. Under George Bush, the SEC was more facilitator than enforcer, a paper tiger, not a guardian of the public trust. It:
— turned a blind eye to fraud and abuse;
— protected Wall Street, not investors;
— neutered its enforcement staff’s authority;
— adopted voluntary regulation;
— let investment banks hold less reserve capital;
— freely use leverage;
— incur much higher debt levels; and
— pretty much do what they pleased, only occasionally punishing an offender with a wrist-slap.
Financial fraud prosecutions dropped sharply, practically never against powerful, well-connected firms, the Bernie Madoff exception because he confessed to his sons, and they turned him in for running what he called a “giant Ponzi scheme.”
Obama exacerbated the worst bad practices. Wall gets a free ride. Foxes guard the hen house. Inmates run the asylum. Regulators don’t regulate. Investigations aren’t conducted. Criminal fraud is ignored. Nothing is done to curb it, and except for Madoff, only small fries need worry. Washington protects the big ones, Obama assigning Mary Schapiro the task as his SEC chief.
She’s a consummate insider, spent years promoting Wall Street self-regulation, headed the Financial Industry Regulatory Authority (FINRA), was the National Association of Securities Dealers’ (NASD) chairman, president, and CEO, ran the Commodity Futures Trading Commission, and is expert at quashing fraud investigations. Except for high profile cases too big to hide (like Countrywide’s Angelo Mozilo and Texas financier Robert Allen Sanford), she’s treaded lightly on the rich and powerful, is doing nothing to curb insider trading, front-running, market manipulation, and other abuses.
Even the Wall Street Journal, commenting on her appointment, said her regulatory record “shows she has infrequently pursued tough action against big Wall Street firms.” A year later, her job performance proves it, made easier by decades of deregulation.
In 2003, the Controller of the Currency, John Hawke, Jr. preempted state predatory lending laws (in violation of the 10th Amendment), meaning nationally chartered banks (including the nation’s biggest) would come under federal standards, not more stringent state ones. According to former New York Attorney General and Governor, Eliot Spitzer:
“Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.”
In 2004, Basel II replaced Basel I with more comprehensive guidelines, ostensibly to ensure banks hold capital reserves appropriate to their lending and investment practices. In other words, the more risk, the greater the reserves, but given lax regulatory oversight, banks pretty much do what they want, and Obama gives them free reign, all the easier with trillions in bailout dollars.
In 2007, the Fed’s Term Auction Facility extended loans to depository institutions with no public disclosure, unlike its discount window operations. In addition, global regulators let commercial banks set their own capital requirements, based on internal “risk-assessment models.”
Regulators ignored predatory lending practices. They:
— overrode state consumer protection laws to curb exploitive lending and other abuses;
— prevented victims from suing predatory loan issuing firms;
— freed Fannie, Freddie and giant Wall Street players to operate recklessly;
— let them hide toxic assets by off-balance sheet accounting; Financial Accounting Standards Board rules allow it, and the Security Industry and Financial Markets Association and the American Securitization Forum have lobbied furiously to keep them unchanged; in other words, to deceive the public by letting insolvent institutions look healthy;
— let them eliminate some of their own (Bear Stearns, Lehman Bros. and Merrill Lynch) to remove competition;
— abandoned antitrust and other regulatory principles;
— created too-big-to-fail institutions; and
— let them do anything they wished, free from meaningful oversight.
Credit rating agencies played their part as well because of their relationship with issuers. They ignored high-risk financial instruments, rated them highly, and duped investors to believe they were safe. The SEC could have intervened but didn’t. The 2006 Credit Rating Agencies Reform Act requires regulators to establish clear guidelines to determine which ones qualify as NRSROs (Nationally Recognized Statistical Rating Organizations).
The SEC is supposed to monitor their internal record-keeping and prevent conflicts of interest, but can’t regulate their methodology and must approve their standards even knowing they’re flawed.
One hand thus feeds the other. Conspiratorially, the regulator and credit agencies turn a blind eye to abuses, cry foul when it’s too late, then promise greater diligence next time. Change, of course, never comes, so next time is like last time until so extreme the whole system collapses, harming ordinary people the most.
After the 2008 Bear Stearns collapse, special lending facilities opened the discount window to investment banks, accepting a broad range of asset-backed securities, principally toxic ones, as collateral – what economist Michael Hudson called “cash for trash.” Numerous other programs followed, including:
— the 2008 Emergency Economic Stabilization Act (ESSA) establishing the Troubled Asset Relief Program (TARP) to trade bad assets for good ones;
— the 2008 New York Fed administered Term Asset-Backed Securities Loan Facility (TALF) to lend up to $1 trillion on a non-recourse basis to holders of certain AAA-rated asset-backed securities (ABS) backed by newly and recently originated consumer and small business loans;
— Fed purchases of money market instruments;
— the Public-Private Investment Program (PPIP) to subsidize toxic asset purchases with government guarantees; and
— trillions of dollars in bank bailouts; according to Neil Barofsky, the Special Treasury Department’s TARP Inspector General, banks got or were pledged up to $23.7 trillion, or the equivalent of an $80,000 liability for every American; in March 2009, Bloomberg reported that the Treasury and Fed “spent, lent, or committed $12.8 trillion” up to that point, and more was available for the asking, besides other free money at near zero percent rates plus interest on reserves held by the Fed.
Wall Street never had it so good. For the public, hard times are worsening as America sinks deeper into depression, a protracted one according to some experts hitting the needy and disadvantaged hardest. The land of the free is now the most callous, the result of what former Wall Street and government insider Catherine Austin Fitts calls a “financial coup d’etat.”
She explains the “pump(ing) and dump(ing) of the entire American economy,” duping the public, fleecing trillions of dollars, and it’s more than just “a process (to destroy) the middle class. (It’s) genocide (by other means) – a much more subtle and lethal version than ever before perpetrated by the scoundrels of our history texts.”
The scheme includes abusive market manipulation, “fraudulent housing (and other bubbles), pump and dump schemes, naked short selling, precious metals price suppression, and active intervention in the markets by the government and central bank” along with insiders trading on privileged information unavailable to the public. It’s part of a government – business partnership for enormous profits through “legislation, contracts, regulat(ory laxness), financing, (and) subsidies” – a conspiratorial plot to transfer household wealth to powerful special interests.
Here’s a taste of the consequences, courtesy of economist David Rosenberg on February 16.
He reported that “credit contraction continues unabated,” and the numbers are staggering:
— $30 billion in the past week;
— $100 billion in the first six weeks of 2010, “a historic 16% annualized decline;”
— since the crisis erupted in fall 2007, $740 billion, “a record 10% decline;” and
— “The fact that credit has dropped at a 16% annual rate since the turn of the year is testament to how the credit contraction is actually accelerating.”
And it’s broad-based:
— consumer loans down at a 12% annual rate year to date;
— real estate down 13.5% annualized;
— commercial and industrial loans down at a 19.3% annual rate; and
— short-term business credit down $14 billion year to date.
Rosenberg calls it “alarming,” especially “since the bulk of the fiscal and US dollar stimulus is behind us, not ahead of us….The era of the ‘green shoots’ is officially dead.”
Europe is mired in recession. Britain faces a possible 2010 sovereign debt crisis, spiking yields and raising borrowing costs, according to Morgan Stanley. Eastern European nations teeter on the brink of debt default. So do Greece, Spain, Portugal, Italy, and Ireland. A January 14 George Magnus Financial Times article titled, “Sovereign default risks loom” said:
“There is no peacetime precedent for the current speed and scale of public debt accumulation….The spectre of sovereign default, therefore, has returned to the rich world,” sparking fears of nonpayment, paying less than face amount, inflation, capital controls, special taxes that break private contracts, and/or currency devaluations, measures also threatening America given its crushing debt burden.
Yet according to Rosenberg, “the consensus community has no clue as to what the future holds,” forecasting rosy scenarios while Rome burns.
In fact, “the depression is ongoing even if the most recent recession has faded; and in our view, the next one is not too far away especially now that the stimulus is soon to subside.” The contagion will be global, the fallout catastrophic because the worst is yet to come, what economist Michael Hudson foresaw in early 2009 saying:
“The (US) economy has reached its debt limit and is entering its insolvency phase. We are not in a cycle but (at) the end of an era. The old world of debt pyramiding to a fraudulent degree cannot be restored,” only delayed for a more painful day of reckoning. It’s coming according to Austrian economist Ludwig von Mises (1881 – 1973) because:
“There is no means of avoiding a final collapse of a boom brought about by credit expansion.” It’s only a matter of sooner “or later as a final and total catastrophe of the currency system involved.”
Expect a deepening global depression; protracted economic, political, social, and institutional upheaval; mass unemployment, poverty, homelessless, and hunger; and severe repression to curb public anger. Blame it on decades of political influence buying yielding unprecedented returns for the privileged, but economic wreckage and catastrophic life changes for the rest. The price of excess is pain, lots of it for the world’s disadvantaged, the ones who always pay for rich peoples’ sins.
Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached at email@example.com.
Also visit his blog site at sjlendman.blogspot.com and listen to the Lendman News Hour on RepublicBroadcasting.org Monday – Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national issues. All programs are archived for easy listening.