Wall Street’s Best Investment: Ten Deregulatory Steps to Financial Meltdown

By Robert Weissman and James Donahue

Wall Street has no one but itself to blame 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 popping 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, and caused the financial crisis itself.

This article documents 10 specific deregulatory steps (including failures to regulate and failures to enforce existing regulations) that enabled Wall Street to crash the financial system. Wall Street didn’t obtain these regulatory abeyances based on the force of its arguments. At every step, critics warned of the dangers of further deregulation. Their evidence-based claims could not offset the political and economic muscle of Wall Street. The financial sector showered campaign contributions on politicians from both parties, invested heavily in a legion of lobbyists [see “By the Numbers” on page 12], paid academics and think tanks to justify their preferred policy positions, and cultivated a pliant media — especially a cheerleading business media complex.

1. The Repeal of Glass-Steagall and the Rise of the Culture of Recklessness

2. Hiding Liabilities: Off-Balance Sheet Accounting

3. The Executive Branch Rejects Financial Derivative Regulation

4. Congress Blocks Financial Derivative Regulation

5. The SEC’s Voluntary Regulation Regime

6. No Predatory Lending Enforcement

7. Federal Preemption of State Regulation and Consumer Protection Laws

8. Escaping Accountability: Assignee Liability

9. Merger Mania

10. Rampant Conflicts of Interest: Credit Ratings Firms’ Failure

Robert Weissman is editor of Multinational Monitor. James Donahue is an attorney with the Washington, D.C.-based Essential Action. This article is based on a February report, available in full with citationns at www.wallstreetwatch.org, published by the Consumer Education Foundation and Essential Information, the parent organization of Multinational Monitor. Harvey Rosenfield, Jennifer Wedekind, Marcia Carroll, Peter Maybarduk, Tom Bollier and Paulo Barbone assisted with writing and research.

By the Numbers:
Throwing Money at the Political Process

How did Wall Street manage over the decades to achieve such an across-the-board rollback of existing regulations, suspension of new regulation and abeyance of regulatory enforcement?
There were many factors, but surely a leading explanation was the extraordinary amount of money that financial firms invested in political influence purchasing.
The financial sector spent more than $5 billion on federal campaign contributions and lobbying in the United States over the last decade. That number comes from a Multinational Monitor analysis of campaign donation and lobbying disclosure statements. The Monitor analysis draws on campaign donation and lobbying spending tallies prepared by the Center for Responsive Politics, as well as lobby disclosure statements filed with the Congress.

The entire financial sector (finance, insurance, real estate) drowned political candidates in campaign contributions, spending more than $1.725 billion in federal elections from 1998-2008. Primarily reflecting the balance of power over the decade, about 55 percent went to Republicans and 45 percent to Democrats. Democrats took just more than half of the financial sector’s 2008 election cycle contributions.
The industry spent even more — topping $3.3 billion — on officially registered lobbyists during the same period. This total certainly underestimates by a considerable amount what the industry spent to influence policymaking. U.S. reporting rules require that lobby firms and individual lobbyists disclose how much they have been paid for lobbying activity, but lobbying activity is defined to include direct contacts with key government officials, or work in preparation for meeting with key government officials. Public relations efforts and various kinds of indirect lobbying are not covered by the reporting rules.

During the 10-year period, commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying. Accounting firms spent $68 million on campaign contributions and $115 million on lobbying; hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle); and $16 million on lobbying; insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying; private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying.

Individual firms spent tens of millions of dollars each. During the 10-year period, Goldman Sachs spent more than $45 million on political influence buying; Merrill Lynch spent more than $67 million; Citigroup spent more than $100 million; Bank of America devoted more than $38 million; and JPMorgan Chase invested more than $59 million. Accounting giants Deloitte & Touche, Ernst & Young, KPMG and Pricewaterhouse spent, respectively, $31 million, $36 million, $26 million and $54 million.

The number of people working to advance the financial sector’s political objectives is startling. In 2007, the financial sector employed a staggering 2,996 separate lobbyists, more than five for each Member of Congress. The securities/investment industry alone had 1,023 lobbyists on their payroll.
A great many of those lobbyists entered and exited through the revolving door connecting the lobbying world with government. Surveying only 20 leading firms in the financial sector (none from the insurance industry), we found that 142 industry lobbyists during the period 1998-2008 had formerly worked as “covered officials” in the government. “Covered officials” are top officials in the executive branch (most political appointees, from members of the cabinet to directors of bureaus embedded in agencies), Members of Congress and congressional staff.

Nothing evidences the revolving door — or Wall Street’s direct influence over policymaking — more than the stream of Goldman Sachs expatriates who left the Wall Street goliath, spun through the revolving door, and emerged to hold top regulatory positions. Topping the list, of course, are former Treasury Secretaries Robert Rubin and Henry Paulson, both of whom had served as chair of the investment bank Goldman Sachs before entering government.
— R.W.
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