Everybody knows the worst kept secret in Washington is that many, if not most, politicians work more at the behest of the interests of Wall Street than the interests of the American people.
It’s not just hyperbole. It’s not a conspiracy. It’s simply business as usual.
This is the third installment of my series on the Occupy Wall Street movement, the protest movement that has grown around the country and the world expressing dissatisfaction with the status quo and the way Wall Street operates.
I promised last time to explore the collusion between Washington and Wall Street and to try to explain how politicians paved the way for the financial crisis with their mantra of deregulation.
Wall Street lobbying
According to Wall Street Watch, a non-partisan consumer advocacy group, the financial services industry spent over $5 billion to peddle its lobbying influence in Washington from 1998 to 2008, 55 percent of which went to Republicans and 45 percent went to Democrats.
In 2007, the year before the financial crisis, there were approximately 3,000 officially-registered Wall Street lobbyists who influence policy makers in Washington — that’s five lobbyists for every one member of Congress.
Wall Street is also the lead contributor to presidential campaigns. In 2008, Wall Street firms made up the top contribution slots of both the Obama and McCain campaigns.
The top contributor to the McCain campaign was Merrill Lynch with JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs taking the next top slots, and Bank of America, Wachovia, UBS AG and Lehman Brothers all made the top 20.
Through the revolving door
There’s also an endless revolving door between Wall Street and Washington.
President Clinton’s Treasury Secretary Robert Rubin had once worked at Goldman Sachs and after leaving office, went to work for Citigroup, even serving as the chairman of the company from 2007 to 2009.
Larry Summers, who succeeded Rubin as Treasury Secretary, later worked as managing director for the hedge fund D. E. Shaw and, in 2008, was paid $2.7 million in speaking fees by Wall Street firms such as JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch.
Henry Paulson, who served as Treasury Secretary under President George W. Bush, had worked at Goldman Sachs since 1974 before taking office, even serving as the company’s chairman and CEO from 1998 to 2006.
Current Treasury Secretary Timothy Geithner worked as the head of the New York Federal Reserve before taking office. And who took Geithner’s place at the New York Fed? That would be William C. Dudley, the chief economist for Goldman Sachs from 1984 to 2007.
Geithner’s current Chief of Staff is Mark Patterson, who before taking office worked as a lobbyist for Goldman Sachs.
How about Gary Gensler, the current chairman of the Commodity Futures Trading Commission, the federal regulatory agency tasked with regulating futures and options markets?
Gensler spent 18 years of his life working for — yep, you guessed it — Goldman Sachs.
Is it really any wonder why these Wall Street firms got the largest government bailout in history following the financial crisis of 2008? And the Obama administration has surrounded itself with the very same architects of said bail-out.
Now let’s look at some of the ways Washington has done the bidding of Wall Street.
Repeal of Glass-Steagall
In 1998, the banking giant Citicorp merged with the insurance giant Travelers Group to create Citigroup. At the time, this merger was illegal under the Glass-Steagall Act of 1933.
Congress passed the Glass-Steagall Act after the Great Depression, in part, to create firewalls between commercial banks, investment banks and insurance companies.
Part of the idea of this act was to prevent conflicts of interest that could arise from lending institutions using their customers’ credit to make risky investments. It also hoped to prevent the consolidation of these industries into megalithic investment companies.
But in 1999 Congress passed the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act, which repealed key provisions of the Glass-Steagall Act.
Congress drafted and passed this legislation, in part, to retroactively make the Citigroup merger a legal consolidation. It also paved the way for endless Wall Street mergers and acquisitions to come.
In the wake of the financial crisis of 2008, many have cited the repeal of the Glass-Steagall Act as the catalyst that created the legal framework for investment banks becoming “too big to fail.”
In 1975, the Securities and Exchange Commission, the federal regulatory agency tasked with enforcing securities laws, instituted what was known as the “net capital rule,” a financial regulation that, among other things, dictated the leverage ratio of lending institutions.
Leverage is the ratio of a bank’s debt or assets to a bank’s equity, basically meaning how much cash they keep on hand in accordance with how much cash they borrow.
The SEC used to cap the leverage ratio at 12-1. But in 2004, the SEC succumbed to pressure from the financial services industry’s campaign, led by Goldman Sachs, to authorize investment banks to develop their own capital requirements.
In the run-up to the financial crisis, some of the largest investment banks were operating with a leverage ratio of 40-1, meaning for every $40 in assets, there would only be $1 to cover potential losses.
The Financial Crisis Inquiry Commission’s report noted that “less than a 3 percent drop in asset values could wipe out a firm.”
The FCIC report characterized the situation as such using the investment bank Bear Stearns as an example: “Bear Stearns had $11.8 billion in equity and $383.6 billion in liabilities and was borrowing as much as $70 billion in the overnight market. It was the equivalent of a small business with $50,000 in equity borrowing $1.6 million, with $296,750 of that due each and every day.”
It was another egregious example of government regulators failing to do their job and, instead, surrendering to pressure from the financial services industry and their lobbyists.
As I explained in the last installment, it was Wall Street’s investment in the derivatives market that perhaps contributed to the financial crisis more than anything else.
Also recall that in 2002, Warren Buffett referred to derivatives as “financial weapons of mass destruction,” and as “time bombs” that could be “potentially lethal.”
But even before Buffett’s dire warning, in 1998, Brooksley Born, who was the then-head of the Commodity Futures Trading Commission, pleaded with Congress to allow the CFTC to regulate the derivatives market.
Born warned Congress about the risk derivatives “might pose to the U.S. economy and to financial stability around the world.”
But Born was rebuffed in her efforts by none other than Alan Greenspan (who has been wrong about nearly every prediction he ever made), then-chairman of the Federal Reserve, who told Congress, “the degree of supervision of regulation of the over-the-counter derivatives market is quite adequate to maintain a degree of stability in the system.”
Greenspan was joined by then-Treasury Secretary Robert Rubin to applaud the stability of derivatives and fight against regulation. Of course, they would prove to be disastrously wrong and Born would prove to be presciently correct.
However, Congress didn’t listen to Born, and in 2000, it passed the Commodities Futures Modernization Act, which ensured the deregulated of the derivatives market, and laid the groundwork for the creation of the complex, unregulated financial derivatives instruments such as collateralized debt obligations and credit default swaps that were so instrumental in the financial collapse of 2008.
When it comes to Wall Street, Washington should act as watchdogs with government oversight to protect the American people against these financial schemes and machinations instead of kowtowing to its corporate sponsors.
It may be business as usual, but this business model has become dangerously unsustainable. And this is part of what the Occupy Wall Street movement is about, to begin to untangle the stranglehold Wall Street has on our democratic process and return Washington to the people.
W. Paul Smith