Money generally means power. And so it is with the American financial system.
Just take a look at what’s happened since we experienced our national financial meltdown in 2008.
Through the Emergency Economic Stabilization Act, the government spent billions of taxpayer dollars to bail out Ford, Chrysler and GM, Fannie Mae and Freddie Mac, the banking industry and American International Group (AIG).
Much of the financial turmoil that rocked virtually every part of our economy was brought about by the trading of financial instruments known as derivatives or credit default swaps keyed to highly risky subprime mortgages that were unchallenged by the rating agencies.
For an excellent primer on how these off the radar securities were packaged and sold to unwitting investors, see Frank Partnoy’s book, “F.I.A.S.C.O.: Blood in the Water on Wall Street.”
As housing prices collapsed and as untold numbers of homeowners defaulted on their mortgages, AIG and the banks that bet on the risky paper lost those bets – bigtime – as did their clients.
In March 2009, after AIG – revived through the government’s (read: taxpayers’) largesse – awarded multi-millions of dollars in executive bonuses, President Obama griped that it was “hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?”
Obama and Democratic leaders declared they would not stand for further erosion of the 2010 Dodd-Frank Act designed to toughen regulation of the banking sector and one aspect in particular that, as The New York Times put it, a rule that “tried to chip away at some of the implied taxpayer subsidies that banks’ derivative operations enjoy.”
So what happened? Citigroup, the recipient of $45 billion in government bailout funding in exchange for stock, was allowed to insert a rider to Congress’s Omnibus spending bill that clears the way for banks to continue – without limitation – derivatives trading.
Again there were further protestations by Democrats like Sen. Sherrod Brown of Ohio who described the erosion of Dodd-Frank as “morally reprehensible” and Sen. Dick Durbin of Illinois who said that “Wall Street banks … want to park themselves under the mistletoe when it comes to this bill ….”
But when it came down to it, the Senate voted 93-4, with 3 abstaining, to go along with the Citigroup language, which was tucked away at the bottom of a bill titled “Terrorism Risk Insurance Program Reauthorization Act of 2015.”
Only two Democrats – Elizabeth Warren of Massachusetts and Maria Cantwell of Washington State – voted against the bill, along with independent Bernie Sanders and Republican Marco Rubio.
Actually, as MSNBC points out, the regulation that was repealed probably wasn’t that great a controlling mechanism to begin with since it would “actually increase risk by forcing Wall Street to move swaps activity from subsidiaries with government- insured deposits to those that are subject to less oversight.”
Still, with the Citigroup provision, banks are pretty much free to do as they wish with derivatives trading and if there should be another big financial crisis, look out!
Mother Jones magazine quoted Michael Greenberger, a former derivatives regulator at the Commodity Futures Trading Commission, on that prospect. Here’s what Greenberger said:
“It’s very dangerous [because] if banks lose on this type of trading and that causes a disruption in the markets, the taxpayer will be confronted with whether to let the banks fail or bail them out to the tune of trillions of dollars.”
Here in New Jersey, though, we’ve got nothing to worry about. Our Attorney General has recommended taking $250 million in a settlement with Exxon over how much the Garden State should expect to collect for the petroleum company’s refinery pollution in Bayonne and Linden instead of the nearly $9 billion in damages the state Department of Environmental Protection originally estimated. And Gov. Christie will likely be taking $50 million or so off the top to help balance the state budget.
Can you say P E N S I O N S?
Dept. of Corrections:
In the column on baseball that I wrote two weeks ago, I said that not long after the game’s first – and only – player fatality resulting from a beaning, baseball’s establishment soon after directed that players wear helmets. I was way off. Although some teams compelled players to wear headgear in the years following, the use of helmets did not become mandatory – and enforced – until 1970: a half-century later. I blame my faulty memory on having been hit in the head with a softball a few times too many. Chalk up a big “E” on the literary scoreboard.
– Ron Leir