Read the report: ""Sold Out: How Wall Street and Washington Betrayed America"

[Better Believe It]

12 Deregulatory Steps to Financial Meltdown
by Robert Weissman
March 7, 2009

What can $5 billion buy in Washington?

Quite a lot.

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

"Sold Out: How Wall Street and Washington Betrayed America," a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade -- each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available at: www.wallstreetwatch.org/soldoutreport.htm.) Combined, these deregulatory moves helped pave the way for the current financial meltdown.

http://www.commondreams.org/view/2009/03/07-3
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For Release:
Weds., March 4, 2009 For More Information:
Robert Weissman, 202-387-8030; 202-360-1844 (cell)
Harvey Rosenfield, 310-345-8816

$5 BILLION IN POLITICAL CONTRIBUTIONS BOUGHT WALL STREET FREEDOM FROM REGULATION, RESTRAINT, REPORT FINDS

Steps to Financial Cataclysm Paved with Industry Dollars

March 4 - The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, "Sold Out: How Wall Street and Washington Betrayed America," shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.725 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation. Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act to stop predatory subprime lending.

"The report details, step-by-step, how Washington systematically sold out to Wall Street," says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. "Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price -- trillions of dollars -- for that betrayal."

"Congress and the Executive Branch," says Robert Weissman of Essential Information and the lead author of the report, "responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape."

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

Here are 12 deregulatory steps to financial meltdown:

In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.

Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.

The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.

Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.

The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.

Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."

Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.

Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.

Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.

Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.

The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.

Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Financial Sector Political Money and 3000 Lobbyists Dictated Washington Policy

During the period 1998-2008:

Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).

The betrayal was bipartisan: about 55 percent of the political donations went to Republicans and 45 percent to Democrats, primarily reflecting the balance of power over the decade. Democrats took just more than half of the financial sector's 2008 election cycle contributions.

The financial sector buttressed its political strength by placing Wall Street expatriates in top regulatory positions, including the post of Treasury Secretary held by two former Goldman Sachs chairs, Robert Rubin and Henry Paulson.

Financial firms employed a legion of lobbyists, maintaining nearly 3,000 separate lobbyists in 2007 alone.

These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, "Sold Out" finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.

* * *

Essential Information is a Washington, D.C. nonprofit that seeks to curb excessive corporate power. The Consumer Education Foundation is a California-based nonprofit that supports measures to prevent losses to consumers.


- The above article is a public news release, not copyrighted material -


For a full pdf copy of "Sold Out: How Wall Street and Washington
Betrayed America," click here (warning: large document - 3 MB)
http://www.wallstreetwatch.org/reports/sold_out.pdf

The executive summary is here.
http://www.wallstreetwatch.org/reports/executive_summary.pdf

Highlights of the report's campaign contribution and lobbyist data is here.
http://www.wallstreetwatch.org/reports/part2.pdf

The report introduction by Harvey Rosenfield is here.
http://www.wallstreetwatch.org/reports/introduction.pdf

[RandomThoughts]

1. I think most Americans agree

That the interests of big money, is not the same as the American people, and for that reason those things will be reversed, the age of Wall Street and big money corruption is over.

And if the interests of normal people are not served, then the interests of the few are not either, so there is a 100% majority agreement that things need to change.

[Fire1]

8. It's over until the next group of slugs take over the WH.

[JayMusgrove]

2. This is a great and very informative article! Thanks!

I never had noticed all those changes over the past 10 years, (and yes, Bill C. was President for 2 of those, and started down the slippery slope, but never would have allowed all the other disastrous changes, IMO).

When we were paying more attention to the war in Iraq, and to Afghanistan, and the Abu Ghraib, and to GTMO, and to our 401K's, we didn't notice the slow slippery slope that led to this worldwide economic disaster, IMO.

Time for reconning, time for facts.

Thanks again.

[Spoon]

3. The entrenchment is thorough.

The economic malaise prevalent since late 2008, attributed to all the reasons in the OP (and then some), was put in motion even before the repeal of Glass-Steagal in '99 - as the repeal had roots in the 80's.

There are VERY few people we can trust in Washington that are not on the take, Dem or Repub. These are incredibly dark days for America indeed.

The only realistic hope I can see is ex-Fed chairman and current Obama advisor Paul Volcker. He was vocal in his opposition to the defanging and eventual repeal of Glass-Steagal.

I pray Obama comes to his senses and kicks Rubin protégé Big Bank Turbo Tax Timothy Geithner to the curb immediately, and gets Volcker in as Secretary of the Treasury. He may be our last hope. While a player, I believe he actually has morals.

Obama's long term plans are solid, but we may not have an economy to implement them in if the duress continues. This slow motion but oppressively persistent decline of our markets since October is dangerous and almost unprecedented, and we are very much on the precipice of total collapse. It would not take much of an event to instigate a total meltdown, whether the trigger is economic (a high profile BK), political (another country getting jumpy and going after resources), or natural (earthquake/hurricane/etc).

As a slight aside, here is the run-up to the eventual repeal of Glass-Steagal as reported by PBS Frontline:

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

[flpoljunkie]

4. Congress 'danced with the ones that brung 'em.' Nothing will change without public financing!

[RepublicanElephant]

7. exactly! time to stop all this corporate protection money being paid! nt

[polichick]

9. Public financing and term limits!

[Joe Chi Minh]

14. Deleted for reasons of prudence.

[slipslidingaway]

5. How the Rules Were Rigged

I've only glanced at the report, but I do not thing it covers the changes in the bankruptcy bill and how that may have played a role in the bank / insurance bailouts.

http://www.talkingpointsmemo.com/archives/2009/03/im_sure_the_knowledgeable_people.php

"I'm sure the knowledgeable people already know this. But it turns out that one of the features of the 2005 Bankruptcy bill was to put derivative counter parties at the front of the line ahead of other creditors in bankruptcy proceedings. Actually, from what I can tell, they don't just go to the head of the line. They got to skip the line entirely. As the Financial Times noted last fall, "the 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company's assets until a court decides how to apportion them among creditors." As the article notes, ironically, this provision which Wall Street pushed for and got to protect investment banks actually ended up hastening the collapse of Lehman and Bear Stearns last year.

Down in the article there are also the mentions of the entertainingly named "International Swaps and Derivatives Association", one of the lobbies that helped get the change in place..."

[formercia]

6. RICO n/t

[ProSense]

10. The most critical of these happened on Clinton's watch

In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.

Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.

The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.

Let's hope Obama reverses all of this.

[polichick]

11. Thanks for posting - depressing but important!

[leftstreet]

12. 'No one could have anticipated...'

K&R

[uponit7771]

13. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the...

...banks that issued the original loan.

[Exilednight]

15. They bitch about raising taxes, but have no problem spending billions on lobbying. n/t