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“Sold Out”: New Report Follows Lobbying Money Trail Behind Deregulation that Helped Cause Financial Crisis

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In a new report, Robert Weissman of Multinational Monitor points to twelve deregulatory steps that led to the financial meltdown. It also does an analysis of the amount of money Wall Street poured into Washington in campaign contributions and lobbying over the last ten years. Their answer? A staggering $5.1 billion over the past decade. [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

AMY GOODMAN: The Obama administration is making a concerted effort to boost confidence in the US economy amidst waves of continued layoff announcements, negative economic data, downward-spiraling markets. On Monday, the Dow Jones Industrial Average dropped below 7,000 for the first time in eleven years. The market has now lost almost a quarter of its value this year and more than half since its high in October 2007.

Speaking to reporters yesterday after meeting with the British Prime Minister Gordon Brown, President Obama said he was sure the US economy would rally back.

    PRESIDENT BARACK OBAMA: I’m absolutely confident that credit is going to be flowing again, that businesses are going to start seeing opportunities for investment. They’re going to start hiring again. People are going to be put back to work. What I’m looking at is not the day-to-day gyrations of the stock market, but the long-term ability for the United States and the entire world economy to regain its footing.

AMY GOODMAN: The Obama administration officials appeared before Congress Tuesday seeking to reassure lawmakers about the economy. Treasury Secretary Timothy Geithner and Peter Orszag, the director of the Office of Management and Budget, testified before separate House committees that the President’s massive spending bill would benefit working Americans. Meanwhile, Federal Reserve Chair Ben Bernanke testified before the Senate Budget Committee about the potential impacts of stimulus.

While the Obama administration is looking to turn around the economy with its stimulus plan and budget proposal, what about the issue of financial regulation, what some people point to as the fundamental cause of the crisis? A new report points to twelve deregulatory steps that led to the financial meltdown. It also does an analysis of the amount of money Wall Street poured into Washington in campaign contributions and lobbying over the last decade. Their answer? A staggering $5.1 billion over the past decade.

Rob Weissman is the author of the report. It’s called “Sold Out: How Wall Street and Washington Betrayed America.” He is director of Essential Action, editor of the Multinational Monitor, joining us from Washington, D.C.

Good morning, Rob Weissman. Talk about what you think were the steps that brought us here.

ROBERT WEISSMAN: Well, we saw over the last decade and really the last three decades, with both parties in power in Congress and the executive branch, this long series of deregulatory moves. And as you go step-by-step through them, you see that those are the things that really paved the way for the current financial collapse.

Perhaps the signature move was the 1999 repeal of the Glass-Steagall Act, which had prevented co-ownership of commercial banks and securities firms, investment banks. That was precipitated by and directly authorized the creation of Citigroup, which is now sucking so much public taxpayer money and has really been at the cutting edge of driving the financial crisis we’re now in.

You can go forward another year and see that Congress, with the Clinton administration authorization, prohibited the executive branch agencies from regulating financial derivatives, the instruments that no one can really understand or get a handle on but which have multiplied the problem from the housing crash many-fold over. So we now have $600 trillion in financial derivatives being traded around the world, with no one having a handle on what they are, who owes whom, and all of this requiring us to pour tens of billions of more dollars more every day, it seems, into AIG.

You can step forward and look at the failure to enforce rules against predatory lending, beginning with the Clinton administration, but really accelerating in a really terrifying way with the Bush administration, so that there were about three actions taken by federal regulators in the peak period of predatory lending — three — against some of the commercial lenders and mortgage brokers who were undertaking some of the most abusive predatory lending activities. And on and on it goes.

And there was, of course, over the last three decades a real surge in deregulatory ideology. And perhaps the people who were putting this stuff forward believed in it. But it also makes sense to think that, maybe a little bit, they were influenced by the staggering amounts of money that the financial sector was pouring into Washington, as you said, more than $5 billion in campaign contributions and lobbying money. And, you know, they got a good return on investment, and it was good for them while it lasted. It’s turned out to be quite a disaster for them but, more importantly, for the rest of the country and the world.

AMY GOODMAN: Rob Weissman, I want to keep going through these steps and then talk about the money that Wall Street’s poured into Washington. The SEC’s voluntary regulation regime for investment banks?

ROBERT WEISSMAN: Yeah, there have been, for a couple of decades, a rule in place that required the big investment banks to hold onto a certain level of capital, so they couldn’t be — they couldn’t rely on too much borrowed money if they engaged in their speculative activity. In 2004, the SEC repealed that rule at the request of a consortium of the leading investment banks, led at the time by Goldman Sachs and Henry Paulson, soon-to-then-be the Treasury Secretary. And what that rule — what the new rule said was, well, let’s let the investment banks set the standards on their own for how much borrowed money they can use, based on their own internal risk assessment models, which no one could understand and turned out not to do a very good job. As a result, they were much more leveraged, that is to say, they used much more borrowed money, so they could gamble at much higher levels, and they created a much bigger house of cards, which we saw topple starting in 2007.

AMY GOODMAN: Glass-Steagall?


AMY GOODMAN: Glass-Steagall?

ROBERT WEISSMAN: Glass-Steagall was this Depression-era law from 1933, adopted because of the crisis — in response to the Great Depression and the previous bubble through the 1920s. And it said commercial banks and investment banks, and then later commercial banks and other financial service entities, ought to just be separate entities. Commercial banks have too important a role. They are husbanding depositor money, and they ought not to be engaged in speculative activity. They shouldn’t be using the depositor money for high-risk gambles that could endanger the depositors and the well-being of the financial system.

Under the guise of financial modernization, there was a decade-long effort by the investment banks and the big commercial banks to repeal that law. In 1998, Citibank and Travelers Group, the insurance company, announced that they were going to merge. That was a merger that was illegal under existing law, but they got a two-year exemption under a regulatory loophole. They then proceeded to force the repeal of the law that had prohibited their merger, and then the merger was subsequently consummated. Robert Rubin, who had been the Treasury Secretary, at the time was negotiating a new deal with Citigroup and then went on to be an executive with the now-merged Citigroup, was the central player making sure the Glass-Steagall repeal took place, that Citigroup moved forward, and with all the disastrous effects we are now familiar with.

AMY GOODMAN: Close adviser, of course, to President Obama. And what about Larry Summers and Timothy Geithner in that?

ROBERT WEISSMAN: Well, Geithner didn’t have such a central role, but Summers was really involved in the Clinton administration in a lot of these key decisions. Geithner was in the Clinton administration, more focused on international issues. But Summers, for example, was a very vociferous opponent of regulating financial derivatives. There was an effort within the Clinton administration’s executive branch to impose some really modest standards on financial derivative regulations — on financial derivatives, which at the time were beginning to explode but still weren’t at the level that we’re now familiar with.

Summers, Rubin and Greenspan banded together with Republicans in Congress, led by Phil Gramm, to prevent the efforts within the executive branch to regulate derivatives, and then in 2000, they passed a law — Congress passed a law, which Clinton signed into law, prohibiting the federal government from regulating financial derivatives at all, with the result that not only are they not regulated, not only are they not required to register to show that they serve some social purpose before they’re allowed onto the market, but no one has a sense of who owes what to whom.

In the course of — we’re bailing out AIG, because they have engaged in so many of these — hundreds of billions of dollars worth of these financial derivative arrangements. It’s clear now that AIG itself did not know who they owed — who they were going to owe, who they had entered into all these contracts for. They were engaged in such a wild speculative frenzy that they’d cut a deal with anybody. It turns out that the executives at AIG literally thought they would never have to pay out any money on these whatsoever. So they thought they were being paid to do nothing. Money for nothing, we’ve called it. And that turned out to be wrong. Unfortunately, the money that’s coming is not just coming from the AIG shareholders, but now, to the tune of almost $200 billion, from the US taxpayer.

AMY GOODMAN: I brought up Glass-Steagall again, because, well, I think it was seventy years ago — it was on this date that — or seventy-five years ago — that FDR was inaugurated and gave his “nothing to fear but fear itself ” address. Rob Weissman, your current piece that talks about the amount of money that Wall Street poured into Washington — who did it? Over how many years? This number, $5.1 billion.

ROBERT WEISSMAN: Well, what we did is look at the entire financial sector — so it’s the commercial banks, the investment banks, the insurance companies, the real-estate companies, the accounting firms, all of whom are heavily intermingled now, by the way — looked at their campaign contributions over the last decade. That total is more than $1.7 billion. They spent about twice that much, $3.4 billion, on lobbying, with the results that we’re talking about. So, more than $5 billion, and that is a way understatement on what they spent. It doesn’t include the money they’ve poured into state-level activities. It’s a narrowly defined definition of lobbying, only people who are officially registered lobbyists.

We saw that they had 3,000 separate people working as lobbyists for them in 2007. We looked at twenty different top firms in the financial sector. We found 144 who formerly had high-level positions in the US government. I mean, it’s epitomized by people like Rubin and Paulson, who came from Goldman Sachs, went into government — in Rubin’s case, he went back into the private sector — and who were driving policy on behalf of Wall Street and the big financial sector to the massive detriment of the American public and, as we now know, really the entire world.

AMY GOODMAN: What are the recommendations that you make, Rob Weissman?

ROBERT WEISSMAN: Well, the first thing is that all these deregulatory moves ought to be repealed. But beyond that, we think it’s time for a big picture look at this stuff, and we’re worried that, although Wall Street is obviously on its heels right now, they are not — they are not absent from Washington. This lobbying activity is ongoing, including on a variety of small things being debated in Congress today. But in the big picture, we think there has to — we can’t just get mired down in some of these details.

The financial sector itself ought to be much smaller. In the preceding three or four years, the financial sector was taking about a third of all corporate profits in the United States. It was way too big relative to the rest of the economy. It shouldn’t be more than ten percent. So it should be shrunk down.

There is a range of activities that ought to be prohibited altogether. A lot of these exotic financial derivatives, which serve no social purpose, should be just banned. Any new instruments that are put on the market ought to be required to get pre-approval from government regulators, just the way a new pharmaceutical product has to get pre-approval, be shown to be safe and serve some social benefit before it’s allowed on the market.

We ought to erect again regulatory walls and barriers that prohibit institutions from doing different kinds of things. Banks ought not to be engaged in these exotic derivatives. They should not be putting taxpayer-insured money at risk in this kind of stuff. Consumers need to be directly empowered to organize themselves, so that they are a counterbalance to the influence of the commercial financial sector.

And I think we ought to have a financial transactions tax, a speculation tax, so we slow down the level of speculative activity. That kind of tax would be highly progressive, because it’s only rich people who are engaged in mass transactions on Wall Street. It would bring in a lot of money, have major social benefits.

And finally, I think if you look back over what happened in the last four or five years or the last decade, it’s clear that a huge amount of money was made on Wall Street, but the firms themselves are now in complete crisis. They’re needing the taxpayer money. Some of them are going bankrupt. They’re being merged out of existence. So the companies themselves destroyed themselves.

Why did they do that? What were the incentives that led them to take such crazy risks that they actually destroyed themselves? And it’s very hard to avoid looking at the way individual people were compensated. They got massive bonuses, sometimes five, ten, twenty times their regular compensation level, based on what they did in the previous year. So I think we have to have compensation caps, for sure, on executives and others. But even more importantly, the incentive mechanisms can’t be that they get paid on how they did that year, when they can manipulate it or they can benefit from a bubble. It has to be, any compensation incentives that are going to be in the form of bonuses have to be tracked to a very long-term performance by these companies.

AMY GOODMAN: Rob Weissman, President Obama got millions from the finance industry, one of his largest contributors. Do you see this regulation happening? We only have about thirty seconds. Where do you see the pressure come from?

ROBERT WEISSMAN: Well, it’s up for grabs. His advisers, actually, of course, are very terrible on this. But we’ll see. They’re going to have to do something that’s very serious and to restrain the financial sector if they hope to bring the economy out of the problems it’s in. There were some good pieces in the budget. The financial sector is fighting them like crazy right now. For example, they want to eliminate the ability of companies to manipulate their taxes by relying on offshore subsidiaries. The insurance companies are going berserk and lobbying on Capitol Hill to try to stop that. The Obama administration, in this case, is trying to do the right thing.

AMY GOODMAN: Are the companies that are getting bailed out using some of that money to lobby in Washington right now or make campaign contributions?

ROBERT WEISSMAN: Well, they’re not using that money, but what’s the difference? They’re using some other money. So they’re still very engaged. There is an effort, for example, right now to —-

AMY GOODMAN: Five seconds.

ROBERT WEISSMAN: —- crack down on predatory lending. They are trying very hard to get that language eliminated from the appropriations bill that just passed.

AMY GOODMAN: Rob Weissman, thanks very much for being with us. His report is called “Sold Out: How Wall Street and Washington Betrayed America.”

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