This article is a follow-up to my recent piece on “America’s Financial Oligarchy” which was a synopsis of Simon Johnson’s “The Quiet Coup” on how the financial industry has effectively captured our government. It is an edit and review of a lengthy 231-page report prepared in March 2009 by the Consumer Education Foundation (see wallstreetwatch.org/reports/sold_out.pdf) on how, over the years, the ‘Money Industry’ as they refer to the financial oligarchy, sold out America to gain such control. Like Simon’s article the Consumer Education report deserves much more exposure than it will receive in its original format and hence my effort to distill it into a 3-page summary, with my comments where warranted, for your quick review.
The ‘Money Industry’ Bought Control of America for $5.2 Billion
Harvey Rosenfield, President of the Consumer Education Foundation, contends that “Over the last decade, Wall Street (i.e. the entire financial sector consisting of commercial banks, accounting firms, insurance companies, securities firms including hedge funds and private equity firms) showered Washington with over $1.738 billion in supposed ‘campaign contributions’ and another $3.441 billion on 2,996 officially registered lobbyists (more than five for each Member of Congress) whose job it was to press for deregulation. In return for the investment of this $5.179 billion, the Money Industry was able to get rid of many of the reforms enacted after the Great Depression and to operate, for most of the last ten years, without any effective rules or restraints whatsoever.”
The Transfer of Power Took 25 Years
• Beginning in 1983 with the Reagan Administration, the U.S. government acquiesced to accounting rules adopted by the financial industry that allowed banks and other corporations to take money-losing assets off their balance sheets in order to hide them from investors and the public.
• Between 1998 and 2000, Congress and the Clinton Administration repeatedly blocked efforts to regulate “financial derivatives” — including the mortgage-related credit default swaps that became the basis of trillions of dollars in speculation.
• In 1999, Congress repealed the Depression-era law that barred banks from offering investment and insurance services, and vice versa, enabling these firms to engage in speculation by investing money from checking and savings accounts into financial “derivatives” and other schemes understood by only a handful of individuals.
• Taking advantage of historically low interest rates in the first few years of this decade, mortgage brokers and bankers began offering mortgages on egregious terms to purchasers who were not qualified. When these predatory lending practices were brought to the attention of federal agencies, they refused to take serious action. Worse, when states stepped into the vacuum by passing laws requiring protections against dirty loans, the Bush Administration went to court to invalidate those reforms, on the ground that the inaction of federal agencies superseded state laws.
• The financial industry’s friends in Congress made sure that those who speculate in mortgages would not be legally liable for fraud or other illegalities that occurred when the mortgage was made.
• Egged on by Wall Street, two government-sponsored corporations, Fannie Mae and Freddie Mac, started buying large numbers of subprime loans from private banks as well as packages of mortgages known as “mortgage-backed securities.” (See my article entitled “Our Worst Nightmare: The Puncture of the U.S. Housing Bubble” which outlined their house of cards approach.)
• In 2004, the Securities and Exchange Commission, now operating under the radical deregulatory ideology of the Bush Administration, authorized investment banks to decide for themselves how much money they were required to set aside as rainy day reserves. Some firms then entered into $40 worth of speculative trading for every $1 they held.
• With the compensation of CEOs increasingly tied to the value of the firm’s total assets, a tidal wave of mergers and acquisitions in the financial world — 11,500 between 1980 and 2005 — led to the predominance of just a relative handful of banks in the U.S. financial system. Successive administrations failed to enforce antitrust laws to block these mergers. The result: less competition, higher fees and charges for consumers, and a financial system vulnerable to collapse if any single one of the banks ran into trouble.
• Investors and even government authorities relied on private “credit rating” firms to review corporate balance sheets and proposed investments and report to potential investors about their quality and safety. But the credit rating companies had a grave conflict of interest: they are paid by the financial firms to issue the ratings. Not surprisingly, they gave the highest ratings to the investments issued by the firms that paid them, even as it became clear that the ratings were inflated and the companies were in precarious condition. The financial lobby made sure that regulation of the credit ratings firms would not solve these problems.
None of these milestones on the road to economic ruin were kept secret, says Rosenfield. The dangers posed by unregulated, greed-driven financial speculation were readily apparent to any astute observer of the financial system but few of those entrusted with the responsibility to police the marketplace were willing to do so and those officials in government who dared to propose stronger protections for investors and consumers consistently met with hostility and defeat. The power of the Money Industry overcame all opposition, on a bipartisan basis.
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