SEATTLE - Reckless greed on
Wall Street is a dog-bites-man story. Still, the renewed feeding frenzy
of the alpha dogs of finance in the embers of the bonfire of their own
vanities has inspired amazement and disgust across the political
spectrum.
Despite the damage it yet may cause, though, the
spectacle does seem to be helping to disarm some of the banksters'
ideological weaponry. In the debate over why the financial system
collapsed and how to rebuild it, economic assumptions that have enjoyed
hegemony for the past 30 years are being questioned, and a swelling
chorus is supporting a return to stronger regulation.
David Stockman, President Ronald Reagan's director of the
Office of Management and Budget, recently weighed in: "The baleful
reality is that the big banks, the freakish offspring of the Fed's easy
money, are dangerous institutions, deeply embedded in a bull market
culture of entitlement and greed."
Stockman welcomed President Barack Obama's proposed tax on banks
because its message is that "big banking must get smaller because it
does too little that is useful, productive or efficient."
While the United States economy remains mired in a weak,
jobless recovery, the financial sector has used its political clout and
government largesse to once again go for the gusto. In the third
quarter of 2009, according to economist Dean Baker, finance grabbed 34
percent of all U.S. corporate profits, a far bigger share than at the
peak of the housing bubble.
In the political arena, too, Wall Street is back in force. As Congress
debates proposals for financial re-regulation, the financiers have
cried "Havoc" and let slip the canines of K Street against the reforms.
At Goldman Sachs, the leader of the pack, any embarrassment
over the savaging of the global economy is well-hidden. The investment
bank, popularly dubbed "Goldman Calf", reportedly has given its
employees some 13 billion dollars in bonuses for 2009. That nearly
triples its largesse in 2008 when, according to the Wall Street
Journal, 953 employees received bonuses of over one million dollars
each.
The bank reported earnings of 13.4 billion dollars for 2009, nearly
matching the 15 billion dollars combined total of the five other
biggest banks. Its net profit margin was 23.85 percent.
Goldman received 10 billion dollars in funds from the U.S.
government's Troubled Asset Relief Program in 2008, which it paid
back with interest in 2009. The firm also benefited from other forms
of government generosity, including an estimated 12.9 billion dollars
as a counterparty of AIG.
The failed insurance behemoth used bailout funds to pay off credit
default swaps and other complex wagers on bond markets at allegedly
inflated values to Goldman and several other U.S. and European
financial giants. For some time before the crash, GS had reportedly
been betting against the mortgage market.
The apotheosis of Goldman Sachs has relied on a revolving door
between the firm and lofty precincts of the federal government. Henry
Paulson, the George W. Bush administration's secretary of the Treasury
responsible for TARP, formerly served as the firm's CEO. Robert Rubin,
Treasury Secretary under President Bill Clinton, and many other power
brokers in both major parties are also alumni.
A long year after the industry's near-death experience,
Goldman's glass is either full or overflowing, depending on how you
look at it. So is popular anger against it. Rolling Stone magazine
writer Matt Taibbi celebrated the investment bank as "a giant vampire
squid wrapped around the face of humanity, relentlessly jamming its
blood funnel into anything that smells like money."
Satirist Andy Borowitz reported tongue-in-cheek that Goldman
was in talks to buy the Treasury Department. He quoted an apocryphal
Treasury spokesman as saying that the merger would create efficiencies
for both because of the high volume of employees and money already
flowing back and forth between them. The only hard part, the spokesman
said, "is trying to figure out which parts of the Treasury Department
we don't already own."
Belatedly, Obama and the Democrats seem to have decided that
popular anger on the right and the left churned up by the financial
industry may be a political wave they can ride.
In December, the House of Representatives passed a bill that
would create an independent financial protection agency for consumers,
a measure long lobbied for by Harvard law professor Elizabeth Warren,
director of the Congressional Oversight Panel for the bank bailout.
The legislation would also increase banks' capital
requirements and limit their leverage, the extent of their reliance on
borrowed funds. And by requiring lenders to hold on to some proportion
of the loans they make, the law would restrict securitization, the
practice of bundling mortgages into complex derivatives that frequently
have turned toxic, dragging down financial institutions that hold them.
In the Senate, though, prospects for 60 votes to break a
potential filibuster look dubious. Republicans appear to be nearly
unanimous in their opposition to the reforms.
In the wake of the loss of a Democratic Senate seat in
Massachusetts, Obama has gone on the offensive on the issue. The
president urged the Senate to approve the financial consumer protection
agency, and proposed a new tax of 0.15 percent on the non-deposit debts
of the biggest financial conglomerates, to recover all taxpayer losses
from the bailout.
In a Jan. 21 speech, he called for structural reforms of the financial
system, including limiting the size and financial risk-taking of banks.
On Jan. 31, Paul Volcker, chair of his Economic Recovery
Advisory Board, vigorously championed the president's proposals in an
opinion piece in the New York Times.
Volcker, chairman of the Federal Reserve Bank under Presidents
Carter and Reagan, reached back two centuries to recall that Adam Smith
had advocated for keeping banks small. He proposed regulations to
eliminate the possibility of a few banks growing "too big to fail." And
he echoed the president's complementary proposal to once again restrict
commercial banks from involvement in high-risk activities such as hedge
funds, private-equity funds and proprietary trading.
An earlier firewall between commercial and investment banks,
first erected by the Glass-Steagall Act of 1933, was eliminated by the
Gramm-Leach-Bliley Act of 1999.
Volcker also called for a public "resolution authority" with
the power to step in when major financial institutions are in imminent
danger of failure, take over, and arrange an orderly liquidation or
merger.
Although the proposal didn't address some remaining dangers
such as the "potentially viral network of derivatives contracts,"
according to financial columnist Gretchen Morgenson, it "moves us
closer to resolving pieces of the 'moral hazard' issue, that
uncomfortable state of affairs that occurs when companies don't worry
about bet-the-ranch risks because they know that someone (usually the
taxpayer) is waiting in the wings to save them if they blow it (as they
so often do)."
Financial regulation in one country, even the home of the
dollar, risks being circumvented by globe-spanning players. Recognizing
this, other governments are contemplating similar curbs on financial
excesses and discussing joint action.
The City of London has given Wall Street a run for its money
in the insolvency sweepstakes. Surveying the wreckage, U.K. financial
officials are weighing a levy on banks for an insurance fund to cover
future cleanups and a tax on financial transactions to limit excessive
speculation. France, too, has supported raising international capital
requirements for banks.
On a global scale, the International Monetary Fund is
contemplating the creation of an insurance fund into which it would
require banks around the world to pay.
"The financial sector is creating a lot of systemic risks for the
global economy," Managing Director Dominique Strauss-Kahn told The
Telegraph. "It is fair that such a sector should pay some of its
resources to help mitigate the risks they are creating."
