|This successful mind-bending began, of course, with Reagan's era of massive de-regulation but the current crisis started with a dry run in 1998 when the implosion of Long-Term Capital Management nearly took the global financial system down with it. LTCM at the time was the biggest hedge fund and it dealt not in the market for equities but the far larger market for debt. Their innovative mathematical manipulations created "epic profits" which grew from high leverage by borrowing enormous amounts of money at low interest rates, and then gambling these huge sums that the "spread" between, say, the prices of two similar bonds would narrow so that LTCM would make a bundle, pay back their loans and revel in spectacular profits.
When the spreads began to widen rather than narrow, LTCM had to use its own capital to pay off their loans, and a terrible crash appeared to be imminent as the firm ran out of money. Miraculously, the New York Federal Reserve Bank suddenly forced most of Wall Street to participate in providing money for a bailout because LTCM was "too big to fail." Wall Streeters then promised not to indulge in high leverage like LTCM---- a crass lie since the big firms totally ignored the promise, and actually spent the next 10 years not only frustrating reform efforts but "lobbying relentlessly to expand leverage, complexity, regulatory forbearance, and risk."
1) The Financial Services Modernization Act of 1999 killed the 1933 Glass-Seagall Act which had built a firewall between commercial banking (stick to safe activities with their government-backed funds) and investment banks (do riskier business but if they failed, they were on their own); now all banks were allowed to gamble with their customers' money for their own profit, turning banks essentially into the "world's largest hedge funds."
2) The Commodity Futures Modernization Act of 2000 pre-empted (cancelled) state laws restricting gambling by investors on securities they did not own, thus unleashing banks to bet on anything, turning Wall Street into a gigantic casino.
Even more egregious in a way is what Drum calls "the Paycheck Lobby" composed of the "FIRE" lobby (finance, insurance, real estate, that is, anyone who makes money by handling money) and that means a zoo of mortgage brokers, credit card issuers, private equity firms, credit unions, trade associations like the International Swaps and Derivatives Association, and so on. As financial instruments became more byzantine and the gambling more intense, the practitioners paid themselves ever larger bonuses and rewards (example: hedge fund managers are paid 2 percent of the value of their funds' assets and 20 percent of the profits, but do not share in any losses). These bonuses and rewards would normally be considered ordinary income by the IRS, taxed at 35 percent, but an intense lobbying effort (including literally millions of dollars paid to both Republicans and Democrats) resulted in legislation which termed such rewards and bonuses "capital gains" which is taxed at 10 percent.
After receiving TARP (bailout) funds during this most recent crash, big Wall Street firms reported profits, and the Obama pay czar announced a cap on the salaries of 25 executives, but continued to allow big stock bonuses and "did nothing to address the culture of rewarding folks who sowed our economic destruction." Drum then provides a chart of a few of the players who, unlike the rest of us, profited mightily from the bubble, bust, and bailout:
Joseph Cassano, AIG Financial Products Executive (1987-2008), 2008 bonus $34 million, his haul 2000-2008 $280 million, AIG's TARP $69.8 billion plus additional bailout $112 billion, total $181.8 billion;
Vikram Pandit, Citigroup CEO 2007-present, his haul 2008 $10.8 million, CITI's TARP plus additional bailout $373.7 billion;
Robert Rubin, Citigroup Board of Directors (1999-2009), his haul 1999-2009 $124 million;
Ken Lewis, Bank of America CEO and President (2001-2009), his haul 2008 $10 million, his haul 2001-2007 $145 million, B of A's TARP plus additional bailout $63.18 billion;
Jamie Dimon, JP Morgan Chase CEO and President (2005-present), his haul 2008 $19.7 million, his haul 2005-2007 $95.7 million, JPMC"s TARP plus additional bailout $98.1 billion (TARP $25 billion was repaid);
Lloyd Blankfein, Goldman Sachs CEO and Chairman (2006-present), his haul 2008 $42.9 million, his haul 2006-2007 $114.4 million, Goldman's TARP $10 billion (repaid) plus additional bailout $43.4 billion;
John Mack, Morgan Stanley CEO (2005-2009) and Chairman (2005-present), his haul 2008 $1.2 Million, his haul 2005-2007 $77.7 million, Morgan's TARP $10 billion (repaid) plus additional bailout $25.9 billion
(You can get an up close and personal view of these gentlemen, and their vocabularies, which seem to consist mostly of the "F" word when under pressure, during the meltdown of 2007-2008 in the revealing book Too Big to Fail by Andrew Ross Sorkin) You can also decide for yourself if they really deserved such astronomical sums for their contributions to the global financial system and the American economy---- or not.
Consider how not only Congress serves the interests of Wall Street financiers. The Federal Reserve, actually run by bankers for bankers, dragged its feet when it came to reining in credit card companies in such scandals as overdraft fees on credit cards by ruling that overdraft fees are not classified as loans and therefore are not subject to the Truth in Lending Act. The Fed ignored community groups' protests about abusive mortgage lending as well as a warning from the FBI as early as 2004 about mortgage fraud. Consider also how credit card issuers spent $100 million to buy themselves a punitive anti-consumer bankruptcy bill, and how Senator Roth of Delaware (now deceased) slashed tax audits on the super rich, or how mortgage brokers got away with steering borrowers into higher-interest loans for which they were not qualified.... and so it goes.
It is not only the power of the Big Idea which commands subservience from the US Government. It has help from Big Money. The financing lobby contributed $475 million to politicians during the 2008 election cycle, making them number one; health care was number two at a mere $167 million; the farm lobby gave $65 million, and the defense lobby a paltry $24 million. Check out OpenSecrets.org.
Princeton economist Hyun Song Shim tracked the flow of money through the economy and made some interesting discoveries, published in a paper in June 2009. From 1954 to 1980 every sector of the American economy grew at the same pace, growing about tenfold,
"But in1980, after the great financial deregulation of the Reagan era began, his charts show a sudden discontinuity---- while households, corporations, and commercial banks grew another tenfold between 1980 and 2008, the securities sector grew a hundredfold. This was the financialization of America, as Wall Street evolved from providing financial services to creating products---- junk bonds, credit default swaps, subprime loan securitization, collateralized debt obligations---- designed to allow Wall Street itself to prosper."
At the height of the credit bubble the financial industry earned 40 percent of all corporate profits in the United States. De-regulation allowed the financiers to earn enormous profits, and the profits enabled the financiers to lobby for and receive further de-regulation, and even created abject fawning by the very institutions designed to protect the public and regulate the financial industry; this is called "regulatory capture." After 30 solid years of financial industry's lobbying, the SEC, other regulatory agencies, members of Congress, and the American people themselves have absorbed and internalized the Big Idea that the financial sector's success is measured not by how well it serves us, but by how much money they make for themselves, that this is good for the economy, and it is unpatriotic to expect anything else. This is called "intellectual capture." It is also a kind of Stockholm Syndrome, where the hostages have converted themselves into advocates for their captors.
Where do we go from here? The Big Banks and banksters have arrogantly returned to exactly the behavior that caused the meltdown, including the re-slicing and re-dicing of mortgage securities, now called RE-REMIC (resecuritization of real estate mortgage investment conduit). President Obama has promised to re-regulate the financial industry---- but is this possible in the face of three decades of "intellectual capture," especially when so many of his advisors are members of the Wall Street Big Money class themselves? Already we see the financial industry marshaling against the proposed Consumer Financial Protection Agency, doing their usual maneuver of watering down, taking away in fine print and amendments the promise in the headline title, creating exceptions that swallow the whole, gutting the bill. So far the proposed legislation has been stripped of requirements that banks must offer standard products like 30-year fixed mortgages and low-interest, low-fee credit cards as well as those newer, fancier, rather bizarre options; and then 98 percent of all US banks (meaning those with less than $10 billion in assets) were exempted from CFPA entirely.
Thanks to the success of the bailout, the "sense of crisis" has disappeared, and with it went the political will to face down Wall Street. As Drum says,
"Even after nearly destroying the world economy, the finance lobby is, still, simply too big to fight."
Mother Jones Jan-Feb edition includes: Joe Stiglitz addresses the problem of blatant "Moral Hazard," David Corn in "Thank You, Sir, May We Have Another?" reveals the real size of the bailout, wondering why the populace hates the bailouts but not those who caused it, Erin Arvedlund looks at the Madoff bunch, asking why only Bernie has so far been jailed, Andy Kroll writes "Always Foreclosing" about mortgage sharksters, and Kevin Drum explains it all in "Capital City." Every concerned citizen should read them all. Then take a pill for high blood pressure.