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The Bailouts are Getting in the Way of Reform |
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Wall Street looks set to dig in its heels and fight President Obama’s financial reforms, reports Michael Hersh in Newsweek:
With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration-along with other key authorities like the New York Fed-appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.
At issue is whether trading in credit default swaps and other derivatives-and the giant, too-big-to-fail firms that traded them-will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington-all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it’s very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month.
The financial industry isn’t leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of “over-the-counter” derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash.
This is unfortunate, but not unexpected. Unfortunately, I agree with Hersh’s conclusion - Wall Street will dig in and Obama will cave. The question, of course, is why, and the answer is one of politics. Digby gets close to my view:
I have heard people argue that reforming the financial system, as opposed to propping it up, is not a liberal priority and will eat up too much political capital at the expense of more important priorities like health care. I have also heard that fundamentally reforming the system is a political impossibility if it requires that congress appropriate money for more bailouts. (Considering the likelihood of more bailouts anyway, this strikes me as weak.) Many people make the connections, as is mentioned in the piece, that Obama is too close to people who run Wall Street — or more broadly, that the entire political system is too close to those who run Wall Street — and therefore, they are failing to see the forest for the trees.
At this point, it does seem like Barack Obama is between a rock and a hard place. How did we get to this point? Bailouts.
Nobody but Wall Street likes bailouts. Liberals think they’re giveaways to corporate thieves. This was amply demonstrated at the A New Way Forward protest I attended in DC this afternoon, watching people brave the rain to hear FDL’s Jane Hamsher, among others, speak out against the banksters. Conservatives, since their come-to-Jesus moment on fiscal responsibility - think bailouts are too much spending, and I expect to see lots of this message at the Tax Day Teabaggery on April 15th. And they’re both right. Spending taxpayer money bailing out the banks instead of investing in productive areas of our economy is a waste, pure and simple.
But bailouts are more damaging than just wasteful. Bailouts obscure the real reforms that are necessary in our financial system and sap political capital for getting those reforms passed. It’s more important to reform our financial system to make sure the latter-day robber barons can’t prey on the middle class anymore (and to make sure this situation - “too big to fail” - never happens again) than it is to bail out a few banks. But Obama decided to do the bailouts first (because they were sooooo urgent) and take his time on the reforms. That’s really the opposite of how it should have happened, or at the very least, they should have gone through at the same time.
The bailouts pissed off just about everyone except for Wall Street, and now Wall Street is predictably double-crossing Obama when he goes for the reforms. Having already turned off everyone else in the country on financial matters, and by appointing Wall Street hacks like Geithner and Summers to lead the charge, Obama may have screwed the chances for reform. And that hurts, because that’s the most important piece.
Now, the other point to throw into this is the view that Obama is too close to Wall Street, and that’s why he’s doing what he’s doing. It doesn’t take a genius to see that Wall Street is literally screwing Obama over by taking bailout money it needs to stay afloat and then refusing to cooperate with regulations and reforms. Maybe Obama keeps on this course because he does actually like Wall Street. Or maybe he was optimistic about their willingness to go along, made the mistake of doing bailouts first, and now finds himself in a political bind. Either way, we’re likely to see more bailouts and less reform if things keep going how they’re going, and that’s going to become a big problem for Obama as it eats away his political capital, making things like health care and energy that much harder to pass.
Someone needs to stop these bailouts and make reforms happen. I hope Congress is up to the task, though I have my doubts.
