An important new report–“Sold Out: How Wall Street and Washington Betrayed America“–shows that the financial sector invested more than $5 billion over the past decade in lobbying and campaigning for deregulation and other policy changes that led to the current financial crisis. The report was prepared by jointly by Essential Information and the Consumer Education Foundation, two nonprofits that have a long history of working to expose corporate crime.
The following excerpt for the report’s executive summary gives a good summary of what the report covers:
“Blame Wall Street for the current financial crisis. Investment banks, hedge funds and commercial banks made reckless bets using borrowed money. They created and trafficked in exotic investment vehicles that even top Wall Street executives — not to mention firm directors — did not understand. They hid risky investments in off-balance sheet vehicles or capitalized on their legal status to cloak investments altogether. They engaged in unconscionable predatory lending that offered huge profits for a time, but led to dire consequences when the loans proved unpayable. And they created, maintained and justified a housing bubble, the bursting of which has thrown the United States and the world into a deep recession, resulted in a foreclosure epidemic ripping apart communities across the country.
But while Wall Street is culpable for the financial crisis and global recession, others do share responsibility.
For the last three decades, financial regulators, Congress and the executive branch have steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies.”
Government Enabled Crisis
While the report’s authors argue that the report has one overriding message–that financial deregulation led directly to financial meltdown–it is clear that the United States government supported the changes due in large part to lobbying and campaign contributions from the financial industry. The changes were made with bipartisan support in response to pressure from the financial sector.
According to the report, the financial sector (finance, insurance, real estate) spent a staggering $5.1 billion over the past decade to influence the political debate. This includes $1.7 billion on candidates in federal elections and $3.4 billion on lobbying federal officials.
By industry, the break down and totals include:
- Accounting firms spent $81 million on campaign contributions and $122 million on lobbying;
- Commercial banks spent more than $155 million on campaign contributions, while investing nearly $383 million in officially registered lobbying;
- Insurance companies donated more than $220 million and spent more than $1.1 billion on lobbying;
- Securities firms invested nearly $513 million in campaign contributions, and an additional $600 million in lobbying.
Moreover, the election spending went to both parties. 55% went to Republicans, while 45% went to Democrats. In the 2008 election, Democrats took in over half of the contributions from this sector, reflecting the changing political winds. This should also be seen as an effort to shape upcoming legislation, in which the financial sector hopes to preserve many of the practices that led to the current crisis.
Similarly, many of the lobbyists employed by the financial sector were formerly Congressional and presidential staffers. At the same time, those who were tasked with implementing regulatory changes were drawn from the financial sector. The report cites Treasury Secretaries Robert Ruben and Henry Paulson as examples.
Twelve Regulatory Changes Led to Economic Crisis
The report cites twelve specific regulatory changes that eroded the regulatory system and paved the way for the current crisis. These are elaborated on in the 231-page report as well as in the executive summary, but they are reprinted briefly below:
- 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. 12. 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.
The report argues that along the way many critics warned that these changes could lead to financial disaster, but those critics were drowned out by the money coming into Washington.
While the majority of the report focuses on the failings of the government and Wall Street, it does offer some ideas that could be implemented to change the system. It makes a series of recommendations in the areas of “Restitution,” “Regulation,” “Reform,” Responsibility,” and “Return.”
Among the changes, it says that the government must demand that taxpayer money handed over in the financial industry bailout is paid back fairly. On the bailout, the report also says that it should be reworked to allow for greater oversight and disclosure.
The report says that further regulation of Wall Street is clearly needed as voluntary regulation has not worked. Among the measures, it suggests banning derivatives, barring further mergers of financial industry titans under antitrust laws, and breaking up industry monopolies once the economy has recovered. It further argues that CEOs should be held accountable for their actions. The economy should also shift from being so dominated by the speculation of the money industry to a focus on real and tangible goods.
Finally, the report argues that Americans need to “revolt” and demand an end to “business as usual” on Wall Street and in Washington.