Just over a year after the financial meltdown spurred government bailouts, loans and guarantees worth a staggering $17.5 trillion to the financial industry, leaders in the field are finally paying consumers back.
How? They’re fighting hard against a Consumer Financial Protection Agency and gutting what reform advocates say is any meaningful oversight of the wild-and-wooly $450 trillion “derivatives” market that sunk the world economy.
The House Financial Services Committee will be marking up the bills addressing these controversies this week.
“This is a David and Goliath fight,” says Heather Booth, executive director of the Americans for Financial Reform coalition, which includes major labor groups and aims to push for genuine reform. “The biggest banks that created the circumstances that led to greater misery, people losing their jobs and seeing their communities deteriorate, those circumstances have not been changed and there needs to be real reform and structural change.”
The financial industry has already found willing Democrats and Republicans on that key House financial committee, often boosted with large campaign donations, willing to help water down key elements of the President’s reform proposals. Among other measures that have been stripped out already is a provision guaranteeing that consumers can get simplified, “plain vanilla” loans, and now there’s a push underway to exempt in practice most derivatives from oversight through an assortment of clever loopholes.
As Public Citizen reported, there have been plenty of opportunities to get the industry perspective since lobbyists affiliated with the industry have hosted 70 fundraisers for members of Congress since inauguration day through June, and these TARP-receiving execs and their DC lobbyists have forked over at least $6 million in campaign donations during the same time period.
One of the leading recipients is Rep. Melissa Bean (D-IL), who received 43% of her $640,000 in donations in 2009 from the financial services industry, according to the Sunlight Foundation. Coincidentally, she’s also a leader of the centrist New Democrats in Congress working in a few ways to weaken the president’s plans: by exempting derivatives from regulatory oversight if they’ve been issued for vaguely defined “risk management” purposes, and undermine the goal of the consumer protection agency by allowing it to pre-empt stronger state laws and enforcement.
And some observers, including the reformist former IMF economist Simon Johnson , say the political will for sweeping changes has ebbed as the stock markets and big banks have stabilized — even as unemployment, foreclosures and credit shortages mount. So there’s a daunting public awareness, messaging and mobilizing challenge that lies ahead for progressives.
This week before the House Financial Services Committee could be an important first test of the clout of President Obama and grassroots groups to secure a strong consumer agency against the wishes of sophisticated, well-funded business lobbyists who are draping themselves in the mantle of reform. Even while saying they’re for reform, the Chamber of Commerce is spending $2 million in attack ads claiming that the new agency would hamstring even your local butcher (as if they still exist) from extending you credit for a week. It’s the “death panels” approach brought to the even more arcane issue of financial reform.
Obama essentially called out the Chamber of Commerce Friday in a speech renewing his demand for reform that was, unfortunately for advocates, largely swamped by the far bigger news of the President winning the Nobel Prize for Peace:
“They’re doing what they always do — descending on Congress and using every bit of influence they have to maintain a status quo that has maximized their profits at the expense of American consumers,” Obama said in televised remarks made at the White House. “That’s why we need a Consumer Financial Protection Agency that will stand up not for big banks and financial firms, but for hardworking Americans.”
The president reserved his harshest criticism for the U.S. Chamber of Commerce, which he said “is spending millions on an ad campaign to kill” the proposal. The Chamber of Commerce launched an ad campaign opposing the proposal, featuring a butcher and baker concerned about its possible impact on their businesses.
“This, of course, is completely false — and we’ve made clear that only businesses that offer financial services would be affected by this agency,” Obama argued.
House Financial Services Committee Chairman Rep. Barney Frank oversees hearings mid-week on an already-weakened protection agency proposal from the President – and strikingly lax trading rules for the exotic “derivative” instruments that were supposedly designed to hedge risk while enabling price speculation.
The financial services industry has already spent $223 million in the first half of this year on lobbying, and it’s been money well-spent: their lobbyists defeated earlier in the year modest efforts to allow judges to renegotiate mortgages, even as foreclosures worsen.
For instance, on last Friday’s Bill Moyer’s Journal, Rep. Mary Kaptur (D-OH), pointed out:
Foreclosures in my area have gone up 94 percent. And we know the basic rules of economics. Housing leads us to recovery. Housing was the precipitating factor in this economic downturn. Unless you deal with the housing sector, you aren’t going to have growth in this economy.
Unfortunately, there’s no major mortgage reform bill being actively considered even as part of this financial reform package, and the President’s modest program for relief that’s already been implemented is doing relatively little to save those most in need, the Congressional Oversight Panel on the bailout reported last week. The administration plan, the panel found, would leave millions vulnerable to losing their homes, and in the “best case,” would only prevent “fewer than half the predicted foreclosures.”
The upshot of what’s been happening in Washington, as Simon Johnson told Bill Moyers, is an unprecedented bid for both increased power and reduced financial risk for the industry that has imperiled the rest of us:
Remember Wall Street convinced us that trading derivatives without any regulation, that all these kind of crazy housing loans, which are very dangerous for consumers. That all of this was sensible. All of this was a good way to sustain growth. That was wrong. That wasn’t it. That’s not the end of the story. In the crisis, when things got bad, they also convinced the key people in Washington that they, the bankers, the big bankers, the Wall Street bankers, who are really responsible for all of these problems, they should be saved. Not just their banks, but they individually should be saved. Their jobs, their pensions, all their perks. It’s an extraordinary moment…
They persuaded us to allow them to take incredible risks. And then they pushed all the downside, all those losses onto us, the taxpayer, at the same time as really hammering hard all the people who were duped, essentially, into taking out loans. People lost their houses. It’s an absolute tragedy. This combination cannot go on. And yet, the opportunity for real reform has already passed.
Robert Weissman, president of Public Citizen, among other reform leaders, doesn’t believe the game is over before it’s really even begun, especially with the president’s vocal backing. Ironically, they have one strategic advantage over healthcare reformers: the anti-consumer agency Swift Boating hasn’t reached the level of awareness of the assaults on healthcare reform, so there’s an opportunity to raise public support for financial reform. “We’re trying to counter the industry’s propaganda and deception, and tell the truth to the both the public and members of the committee,” he says.
On top of that, they’re seeking to raise alarm bells on the little-noticed (to the public) derivatives proposal that doesn’t even provide transparency, its critics say, let alone tough regulation. That’s in part because of so many exemptions for the derivatives – if they’re “customized,” traded overseas, offered to “manage risk,” and countless other loopholes – that have already been accepted by Chairman Barney Frank, who indicated he might tighten the bill after federal regulators denounced it as so full of holes that it could potentially regulate nothing, a “null set.” As Bloomberg News reported:
“As just about all swaps could be defined as being used for risk management purposes, we’re concerned that unintentionally the category of ‘major swap participant’ could have been narrowed so significantly, or even to a null set,” CFTC [Commodity Futures Trading Commission] Chairman Gary Gensler told reporters after the hearing.
“Major hedge funds” may be excluded from oversight, as may the mortgage-finance companies Fannie Mae and Freddie Mac “because of course the government-supported enterprises use swaps for risk management purposes,” Gensler said.
Frank should eliminate the “risk management” exclusion altogether, Gensler said.
As Heather Booth pointed out before hearings last week on the bill that will be marked up this week: “Unregulated derivative trading was a major cause of the economic crisis and loss of homes, jobs and retirement savings. Now the big banks want us to look the other way and let Wall Street continue these practices.” And they’re being helped, reformers say, by both Blue Dogs and centrist Democrats whom Rep. Frank is seeking to mollify in his gambit to get this bill – and the consumer protection agency – through committee.
But the showdown this week also raises broader questions about the big banks, Wall Street and their responsibility to the broader society. As New York Times financial columnist Joe Nocera put it in a biting column this weekend: “Have Banks No Shame?”
The administration’s outline for this new agency — which would regulate mortgages, credit cards, debit cards, installment loans and any other product issued by a financial institution — was sent up to Capitol Hill in July. Since then, Barney Frank, the committee chairman, has made a number of substantial changes, none of which, I have to say, have strengthened the proposed legislation. He stripped the bill of the much-promoted “plain vanilla” provision, which would have forced, say, mortgage brokers to offer customers a 30-year fixed mortgage alongside any exotic option A.R.M. mortgage.
He has changed the nature of an oversight panel, so that it would consist of the top bank regulators — the very same regulators who did such a miserable job looking out for consumers during the housing bubble they wanted to push…
Saddest of all — at least from where I’m sitting — he abandoned the so-called reasonableness standard, which would have forced bankers to make sure their customers both understood the products they were buying and could afford them…
Part of the reason Mr. Frank made those changes is that he needs the support of conservative Democrats if he hopes to turn this bill into law. But it is also because he felt a need to mollify, at least to some extent, the bank lobby, especially the community bankers who populate every Congressional district in the country. Indeed, in a recent missive to its members, the American Bankers Association trumpeted its success in helping make the bill more palatable to the banking industry…
After outlining all the ways the original proposal has been watered down, Nocera wonders, while still favoring its passage:
Yet even now, despite its success in reining in the proposed agency, the banking industry is still lobbying fiercely against it…
To which one can only ask: Have they no shame?
To the author of It Takes a Pillage, Nomi Prins, whom I interviewed on the web radio show I co-host, and the leaders of the recently formed 200-group Americans For Financial Reform organization, the answer is clearly “No.” The banking and Wall Street CEOs aren’t ashamed. In fact, they’ve been emboldened by the government’s willingness to assume so much of their risk and reward them for irresponsible practices while asking practically nothing from them in return – even how the money we gave them was spent.
Prins has observed, “We still have a bizarre and misplaced faith that huge corporations – which are designed for the sole purpose of making profits – are somehow able to act ethically and restrain themselves.”
That’s why like-minded leaders are seeking to mobilize support for a rally for reform against the American Bankers Association in Chicago in late October, and are pushing to hold their ground this week in the House on the relatively modest reforms President Obama originally proposed this summer.
Cheered by the President’s speech on reform last week, Booth declared, “The biggest banks and Wall Street cannot be allowed to take our economy to the brink of collapse ever again…We join with the President encouraging Congress to quickly pass strong financial reform, including a Consumer Financial Protection Agency. “
But unless there’s a grass-roots outpouring, joined by effective advocacy by progressive groups in Washington that will catch up to the lobbying of the financial industry, that may not be the outcome of the fight that starts this week in the House. Even so, awareness is building and the economy remains slow, so a renewed drive for reform on Wall Street could indeed be mobilized.
And, as Heather Booth reminds audiences, in the David vs. Goliath battle, “We know how that turned out.”