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According to the report, government regulators, Congress and the
executive branch have, on a bipartisan basis, spent the past three
decades steadily eroding the regulatory system that restrained the
financial sector from acting on its own worst tendencies.
From 1998-2008, Wall Street investment firms, commercial banks, hedge
funds, real estate companies and insurance conglomerates made political
contributions totalling $1.725 billion and spent another $3.4 billion
on lobbyists -- a financial juggernaut aimed at undercutting federal
regulation.
"Congress and the Executive Branch responded to the legal bribes from
the financial sector, rolling back common-sense standards, barring
honest regulators from issuing rules to address emerging problems and
trashing enforcement efforts," said Robert Weissman of Essential
Information and the lead author of the report.
"The progressive erosion of regulatory restraining walls led to a flood
of bad loans, and a tsunami of bad bets based on those bad loans," he
said. "Now, there is wreckage across the financial landscape."
The report documents a dozen distinct deregulatory moves that, in concert, led to the financial meltdown.
For example, the "rise of the culture of recklessness" was aided by the
repeal of the Glass-Steagall Act. The Financial Services Modernization
Act of 1999 formally repealed the 1933 statute and related laws, which
prohibited commercial banks from offering investment banking and
insurance services. Erasing them from the books helped create the
conditions in which banks invested monies from checking and savings
accounts into creative financial instruments such as mortgage-backed
securities and credit default swaps -- investment gambles that rocked
the financial markets in 2008.
The report also said that banking regulators retained authority to crack
down on predatory lending abuses, which would have protected homeowners
and lessened the current financial crisis if the regulators hadn't "sat
on their hands." The Federal Reserve took just three formal actions
against subprime lenders from 2002 to 2007. The Office of Comptroller of
the Currency, which has authority over almost 1,800 banks, took three
consumer-protection enforcement actions from 2004 to 2006.
Another deregulatory federal law that benefited mortgage lenders at the
expense of the public deals with assignee liability. It states that with
limited exceptions, only the original mortgage lender is liable for any
predatory and illegal features of a mortgage -- even if the mortgage is
transferred to another party.
The report points out that this arrangement effectively immunized
acquirers of the mortgage ("assignees") for any problems with the
initial loan, and relieved them of any duty to investigate the terms of
the loan. Wall Street interests could purchase, bundle and securitise
subprime loans, including many with pernicious, predatory terms, without
fear of liability for illegal loan terms.
The arrangement left victimized borrowers with no cause of action
against anyone but the original lender, and typically with no defenses
against being foreclosed upon.
Other misdeeds that led to the financial crisis include prohibitions on
regulating financial derivatives; a voluntary regulation scheme for big
investment banks; and the repeal of regulatory barriers between
commercial banks and investment banks.
The report presents data on financial firms' campaign contributions and
disclosed lobbying investments, which supports its claim that "political
decisions were influenced by political expenditures and extraordinary
lobbying," as Weissman put it.
For example, securities firms invested more than $504 million in
campaign contributions, and an additional $576 million in lobbying,
while commercial banks spent more than 154 million dollars on campaign
contributions and invested $383 million in officially registered
lobbying.
Individual firms spent tens of millions of dollars each. During the
decade-long period Goldman Sachs spent more than $46 million on
political influence buying; Citigroup spent more than $108 million; and
the now defunct Merrill Lynch spent more than $68 million.
According to the report, the financial contributions were bipartisan:
about 55 percent of the political donations went to Republicans and 45
percent to Democrats, primarily reflecting the balance of power over the
decade. Democrats took just more than half of the Wall Street's 2008
election cycle contributions.
The financial sector also bolstered its political strength by placing
Wall Street expatriates in top regulatory positions, including the post
of Treasury Secretary held by two former Goldman Sachs chairs, Robert
Rubin and Henry Paulson.
Financial firms employed a legion of lobbyists -- maintaining nearly
3,000 separate lobbyists in 2007 alone. Insurance companies had 1,219
lobbyists working for them; Real estate interests hired 1,142.
These firms drew heavily from former government officials in choosing
their lobbyists. Surveying 20 leading financial firms, the report found
that 142 of the lobbyists they employed from 1998-2008 were previously
high-ranking officials or employees in the executive branch or Congress.
"It's very important to identify the causes of the crisis if we are to
fix it and prevent it from occurring again," Weissman told IPS, speaking
to the report's relevance.
He adds that one of the ways through which many deregulatory moves were
justified was the claim that they facilitated "financial innovation -- a
buzz word on Wall Street and Washington."
"Our review suggests that while there may be some innovations that are
socially beneficial, in general (financial innovation has served as) a
code word for complexity," he explained. "It has been a means for Wall
St. to confuse consumers and investors, extract money from them and the
overall economy, and build up a house of cards that has now tumbled down
to disastrous effects."
The report calls on Congress to adopt the view that Wall Street has no
legitimate seat at the table. "This time, legislating must be to control
Wall Street, not further Wall Street's control," it says.
"The first substantive recommendation we make is to undue the deregulatory decisions that we have profiled," said Weissman.
Other recommendations include prohibiting some forms of financial
instruments, as well as a financial transaction tax to slow down
speculation and curb the turbulence in the markets.
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