Said without Joy: We Told You So

Is it fair to complain about the actions of the financial deregulators?

Could anyone reasonably have foreseen the consequences of a decades-long regulatory holiday for the financial sector?

In a word, yes.

In preparing "Sold Out: How Wall Street and Washington Betrayed America,"
a report that documents a dozen deregulatory steps to financial
meltdown, it was remarkable to see that, at almost every step, public
interest advocates and independent-minded regulators and Members of
Congress cautioned about the hazards that lay ahead. Those ringing the
alarm bells were proven wrong only in underestimating how severe would
be the consequences of deregulation.

Policymakers
ignored the warnings. Good arguments could not compete with the
combination of political influence and a reckless and fanatical zeal
for deregulation. $5 billion -- the amount the financial sector
invested in the financial sector over the last decade -- buys a lot of
friends.

Example: Consumer groups warned of a growing predatory lending
scourge at the beginning of this decade (and even in the 1990s), before
the housing bubble inflated.

"While many regulators recognize the gravity of the predatory lending
problem, the appropriate -- and politically feasible -- method of
addressing the problem still appears elusive," wrote the National Consumer Law Center and the Consumer Federation of America in January 2001 comments submitted to the FDIC.

What was needed, the consumer groups argued, was binding regulation.
"All agencies should adopt a bold, comprehensive and specific series of
regulations to change the mortgage marketplace," the groups wrote, so
that "predatory mortgage practices are either specifically prohibited,
or are so costly to the mortgage lender that they are not economically
feasible."

Example: In 1999, Congress passed the Gramm-Leach-Bliley Act,
which eliminated the Glass-Steagall and Bank Holding Company Acts'
longstanding ban on combining commercial banks and investment banks, or
commercial banks and other financial service providers. This law paved
the way for the creation of Citigroup, a merger of Citibank and
Travelers Insurance, and helped infuse the speculative go-go culture of
investment banks into commercial banks.

When Citibank and Travelers announced their merger in 1998 -- a
marriage that could only be consummated if Glass-Steagall and related
rules were repealed -- my colleague Russell Mokhiber and I wrote,
"Expect to see lots of bad loans, bad investment decisions, teetering
banks and tottering insurance companies -- and a series of massive
financial bailouts of new conglomerates judged 'too big to fail.'" We
didn't envision exactly how the Citigroup and Wall Street debacle would
play out, but we got the outline right. Our predictions echoed the
warnings from consumer advocates.

Example: In 1998, the Commodity Futures Trading Commission (CFTC) suggested the need for regulation of financial derivatives. In a concept paper, the CFTC wrote
that, "While OTC [over-the-counter] derivatives serve important
economic functions, these products, like any complex financial
instrument, can present significant risks if misused or misunderstood
by market participants." The agency suggested a series of modest
potential regulations that might have restrained the proliferation of
financial derivatives and required parties to set aside capital against
the risk of loss (a policy that likely would have saved taxpayers tens
of billions or more in the AIG bailout).

But the CFTC initiative was crushed by the then-Committee to Save the
World (so designated by Time Magazine) -- Treasury Secretary Robert
Rubin, Deputy Secretary Larry Summers and Federal Reserve Chair Alan
Greenspan. In 2000, Congress passed a statute prohibiting the CFTC from
regulating financial derivatives.

Example: In 1995, Congress passed the Private Securities
Litigation Reform Act, which made it harder for defrauded investors to
sue for relief. Representative Ed Markey, D-Massachusetts, introduced
an amendment that would have exempted financial derivatives from the
terms of the Act. Representative Chris Cox, R-California, who would go
on to head the Securities and Exchange Commission under President Bush,
led the successful opposition to the amendment.

Markey anticipated
many of the problems that would explode a decade later: "All of these
products have now been sent out into the American marketplace, in many
instances with the promise that they are quite safe for a municipality
to purchase. ... The objective of the Markey amendment out here is to
ensure that investors are protected when they are misled into products
of this nature, which by their very personality cannot possibly be
understood by ordinary, unsophisticated investors. By that, I mean the
town treasurers, the country treasurers, the ordinary individual that
thinks that they are sophisticated, but they are not so sophisticated
that they can understand an algorithm that stretches out for half a
mile and was constructed only inside of the mind of this 26- or
28-year-old summa cum laude in mathematics from Cal Tech or from MIT
who constructed it. No one else in the firm understands it. The lesson
that we are learning is that the heads of these firms turn a blind eye,
because the profits are so great from these products that, in fact, the
CEOs of the companies do not even want to know how it happens until the
crash."

There was nothing inevitable, unavoidable or unforeseeable about the current crisis.

At every step, critics warned of the dangers of further deregulation.
But with the financial sector showering campaign contributions on
politicians from both parties, investing heavily in a legion of
lobbyists, paying academics and think tanks to justify their preferred
policy positions, and cultivating a pliant media -- especially a
cheerleading business media complex -- the sounds of clinging cash
registers drowned out the evidence-based warnings from public interest
advocates and independent-minded government officials.