A month after President Obama and the Democrats put the government in charge of America’s private healthcare system, they’re about to subject the U.S. financial industry to the most sweeping federal regulatory controls in its history.
After the lengthy legislative healthcare battle ended in March, giving the government unprecedented new powers over every aspect of our medical care, the administration and the Democratic majority have set their sights on a much bigger, more far-reaching power grab: the nation’s entire financial infrastructure from Wall Street to Main Street.
The legislation that is now headed to the Senate floor would dramatically broaden and toughen federal rules, restrictions and regulations over the nation’s banks, investment firms and other sectors of the financial industry in the wake of the subprime mortgage debacle that plunged the economy into one of the severest recessions in decades.
In a letter signed by all 41 Senate Republicans, GOP leaders said last week that the legislation amounted to regulatory overkill that “allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks.”
More than that, it would stymie financial innovation, impose earnings constraints on Wall Street that will hurt every investor and will undermine U.S. competitiveness in the global financial economy.
Republicans, who have just enough votes to prevent the regulatory bill from being considered, said the measure’s $50 billion slush fund will make bailouts a permanent feature in financial regulation. So much so that the White House has asked Democrats to drop the provision that the Heritage Foundation said was, in effect, a continuation of the $700 billion in bailout policies in the Troubled Asset Relief Program (TARP) in both the Bush and Obama Administrations.
“This fund is certain to be used for bailing out any politically significant financial institution and is nothing less than a permanent TARP program,” Heritage financial analyst David C. John wrote in a recent memo analyzing the bill’s provisions.
The White House and the Democrats, on the other hand, are attempting to frame the debate as a battle to end Wall Street excesses and corruption that they maintain led to the stock market’s plunge in the subprime collapse that shook the financial sector.
Some observers here thought it was more than a coincidence that the government’s Securities and Exchange Commission filed fraud charges against Wall Street giant Goldman Sachs last week just as debate over the legislation was about to begin in the Senate.
The civil suit charges that the Wall Street investment bank sold investors a subprime mortgage investment that the SEC alleges was designed to fail, allowing the firm to earn big fees from a client’s engaging in short selling that bets the value of the investment will fall. But many in the financial industry at the time were buying and selling bundled subprime mortgage securities in the belief that housing values would continue to rise, and short-selling is a perfectly legal practice.
Goldman Sachs has flatly denied the government’s allegations, saying, “The SEC’s charges are completely unfounded in law and fact, and we will vigorously contest them and defend the firm and its reputation.”
But what is really at stake in this latest legislative battle is an attempt by the Obama Administration to exert more intrusive controls over every part of the Wall Street’s financial dealings and the larger financial community—the last sector of nation’s free-market system that to a large extent has managed to elude the heavy hand of government in its financial dealings.
The bill would create a new Consumer Financial Protection Bureau that could extend its regulatory reach far beyond Wall Street into seemingly innocuous financial issues, including, for example, practices by doctors who allow their patients to spread their payments over a number of months, according to the U.S. Chamber of Commerce which opposes the bill.
Crafted by Connecticut Democratic Sen. Chris Dodd, chairman of the Senate Bank Committee, the bill largely leaves the government’s overlapping structure of financial regulatory agencies intact.
But the fine print in the bill’s 1,336 pages—which took all of 22 minutes to clear Dodd’s committee—would give regulators much broader powers than they have now that “is nothing less than an attempt to seize control of the financial services industry and to micromanage it,” John says in his memo.
If the Democrats are successful in getting through the Senate, “the result would be an all-powerful bureaucracy that would do little to address the real problems in the industry and actually make future crises—and bailouts—more likely,” he adds.
Meanwhile, there is already division within administration about how far the bill should go in banning certain exotic financial transactions among the big banks.
A bill by Senate Agriculture Committee Chairman Blanche Lincoln (D.-Ark.), one of the most endangered Democrats in this fall’s midterm elections, would ban investments in derivatives by the big banks, a $25 trillion business in the global marketplace that is a key part of the U.S. banking system’s economic strength.
Lincoln wants to attach the derivatives ban to the Dodd bill if it is taken up by the Senate, but in a two-page letter to Lincoln last week, Treasury Secretary Timothy Geithner said tougher controls should be “at the core” of the financial reform bill, but stopped short of endorsing her outright ban.
Lincoln’s bill is seen as even more restrictive and dangerous to the U.S. economy than the Dodd plan. Sen. Judd Gregg (R.-N.H.) said it was “about as far ‘left’ as you could get on the issues of derivatives.”
While all of this pre-debate legislative jockeying has been going on, the Financial Crisis Inquiry Commission, created by an act of Congress, has been busy investigating the causes of the subprime financial calamity. It comes as no surprise that the people who occupied positions of power in government and among the big banks that either collapsed or needed to be bailed out were not taking any responsibility for the economic fiasco.
Charles Prince, former Citigroup chief executive expressed shame and contrition, repeatedly saying he was “sorry” for what had happened, but said he did not foresee the “unprecedented market collapse.”
Former Treasury Secretary Robert Rubin, who led Citigroup’s executive committee, said his role in the company was peripheral, despite being one of its highest-paid executives. Rubin maintained he “wasn’t a substantive part of the decision-making process.”
At one point in his testimony this month, Phil Angelides, who chairs the commission, scolded Rubin, saying, “I don’t know that you can have it two ways. Either you were pulling the levers or asleep at the switch. Leadership and responsibility matter.”
Rubin’s weak and evasive reply: As a result of “all the problems,” he had forgone any bonus in 2007 and 2008.
Former Federal Reserve Chairman Alan Greenspan stoutly defended his tenure at the Fed and said he was blameless in the subprime debacle that followed. He acknowledged that he had underestimated the “state and extent” of the financial risks born by the subprime securities implosion and the ability of the private sector’s financial system to adequately assess those risks.
“The notion that somehow my views on regulation were predominant and effective at influencing Congress is something you may have perceived. But it didn’t look that way from my point of view,” he said.
No one expects the panel to come up with any new information about the causes of the subprime mortgage disaster that led the economy into a recession.
“It may be a fun to watch people yelling at people, but the fact is they haven’t found anything that you can’t find in any one of six best-selling books,” said David John.
“I don’t see anything coming out of this. The battle lines are drawn between the regulators and those who would rather see better regulations,” he said.