Let me be clear, as the President often says. I am not an economist; I’ve never taken a course in economics; I’m very good at saving money and spending it, but not at earning it in any significant quantity. I’ve been wrestling with the bailout process, and my head is spinning— partly because I am so out of my comfort zone and even more because what I’ve learned about how we got here and what we’re doing about it is deeply disturbing.
About how we got here: Elizabeth Warren, chair of the Congressional Oversight Panel on TARP (Troubled Assets Relief Program— as the multi-billion-dollar— and growing— bailout is known), gave Jon Stewart a history lesson this week.

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From 1792 to the Great Depression, Warren said, the U.S. experienced a financial crisis every 10-15 years. In 1933 Congress passed legislation intended to interrupt the boom-and-bust cycle. The Glass-Steagall Act set up the FDIC (Federal Deposit Insurance Corporation), which prevents runs on failing banks by insuring bank deposits, and eliminated conflicts of interest by prohibiting commercial banks from handling investments. The Securities Act regulated the offer and sale of securities.

These reforms and innovations worked so well that 50 years later, people who’d never lived through a credit freeze or a financial crisis were chafing at the nuisance and expense of the regulatory frame and began to dismantle it in 1980. The first casualty was the savings and loan crisis of the 80s, when 745 banks failed. The 90s saw the spectacular failure of Long-Term Capital Management, and Enron’s collapse followed in 2001. The Glass-Steagall Act was repealed in 1999, and during this entire period Congress continued to weaken the regulations that had protected investors since the Great Depression.

As the regulatory mechanism unraveled, the financial sector grew increasingly profitable. In a much-cited article in the Atlantic, former IMF (International Monetary Fund) Chief Economist Simon Johnson gives these statistics:

  • From 1973 until 1985, the financial industry’s share of domestic corporate profits was never more than 16 percent
  • In 1986, it was  19 percent
  • In the 90s, it had reached between 21 and 30 percent
  • Under George W. Bush,  it reached 41 percent.
  • “Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007,” Johnson writes.

As their wealth grew, so did the political power of the financial titans. The nexus between Washington and Wall Street is practically incestuous as executives move back and forth between government and industry. Robert Rubin, for example, former CEO of Goldman Sachs, was Clinton’s Treasury secretary, and afterwards chairman of Citigroup’s executive committee, writes Johnson. All of Obama’s economists— Geithner (Treasury secretary), Summers (senior advisor) and Orzag (budget director) were protégés of Rubin, reported the New York Times.
Another Goldman CEO Johnson mentions is Henry Paulson, who served as Treasury secretary under former President Bush: “These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street.”

Salon’s Glenn Greenwald takes it even further. “People like Rubin [and] Summers,” he writes, “shuffle back and forth from the public to the private sector and back again….  When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards….  Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government.  Then, when their party returns to power, they return back to government….”

Johnson asserts that the political power of the financial sector also resides in “a kind of cultural capital—a belief system” because “Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.”

Now that much of what these institutions did in those years has been shown to be gossamer, whom are we hiring to repair the damage?

I shook my head when I read this week about Brooksley Born, former head of the Commodity Futures Trading Commission, who had tried to curb the financial derivatives market (a huge source of income and also a key factor in the current economic crisis) in the 1990s. Born was thwarted by Summers, Rubin and Greenspan, who insisted that “the sheer act of contemplating regulation … would cause widespread chaos in markets around the world.”

But President Obama’s choice for Born’s old job is former Goldman executive Gary Gensler, “who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets),” writes Greenwald.

Second, what are they doing after we hire them?

Bill Black, Reagan-era S&L regulator and current professor at the University of Missouri,  talked to Bill Moyers and gave numerical clout to what many of us felt when we heard about new bank profits, not a month after those banks received bailout money:

Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion because they have masses [massive] losses, and that they’re fine.

Black further charged that “The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson’s firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion.” When Congress demanded to know the names of AIG’s counterparties, the companies it was paying off with taxpayer money, Paulson created a panel, including a Goldman representative, to advise the Treasury about AIG.

MOYERS: Even though Goldman Sachs had a big vested stake.
BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn’t be allowed in civilized society.

Black told Moyers that he was speaking out now, despite his longtime support of President Obama, because “first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they’re refusing to obey the law. “

What are we to make of this?

When Stewart asked Warren (in the clip at the top) how much money has been given to troubled companies so far, the head of the COP on TARP said, “We think it’s about $590 billion. … There’s a little dispute over some of the numbers.” Warren continued, “We started this process when Secretary Paulson basically said ‘Here’s $350 billion’ to the financial institutions, and he did it on a kind of ‘Don’t ask, don’t tell’ policy.” She explained that Paulson said Americans would in effect be making an investment in the banks, freeing up credit and receiving stock in return. Paulson promised, “The American taxpayer won’t lose anything,” reported Warren.

“You’re telling us this is a fair deal,” Warren wrote to Paulson. “You bet,” he answered. So the COP “crunched a bunch of numbers” and consulted some academics, “And it turns out, after he told us it’s even, dollar for dollar, it turned out that for every $100 we put into these companies we got back stock and warrants that on the day we got them were worth $66. And when you do that enough times, it turns out that we gave away $78 billion,” Warren told Stewart. (Hello? Thirty-four percent of $350 billion is $119 billion down the rabbit hole by my reckoning.)

And that’s not all the taxpayers have lost, Warren added.

“Actually, we’re down more than that, because the value of the stock dropped, and the value of the $66 actually shrank after that,” Warren added.
“To what?” asked Stewart.
“We don’t actually have—” she began, hesitatingly.

“They’ve told you nothing!” Stewart exclaimed.

Warren admitted that without subpoena power the best she can do is make the public aware of what is going on.

The following day, the President delivered another major speech on the economy. Obama admitted that though he believes there are problems “with some of the ways the TARP program was managed,” he knows it’s imperative to ”provide banks with the capital and the confidence necessary to start lending again.” Addressing critics of the bailout plan like Paul Krugman and Simon Johnson who advocate nationalization or restructuring of failing banks, Obama asserted his belief that “preemptive government takeovers” are ultimately more costly and “more likely to undermine than to create confidence.” He denied eschewing nationalization “because of any concern we have for the management and shareholders whose actions have helped cause this mess.”

I for one would like to believe him. He is eminently reasonable. I believe he’s right to make long-term investments on health care, renewable energy and education, that the economy can’t recover or prosper without addressing and correcting those issues.

But I keep worrying that there’s something we don’t know, that Obama’s advisors will perpetuate the hold on Washington of the financial elite to which they belong. I worry, still, that the president still hasn’t recognized, or insisted that they do, the extent to which their greed has devastated the economy and deprived an ever-increasing share of the population from participating in their prosperity.

Trained as a medievalist, Diane Vacca taught medieval literature, Spanish and Italian at several universities before becoming a journalist with specialties in politics, the arts and New York City. Her work can also be found at Talking Points Memo.com, Obit-mag.com, and New York City weekly Chelsea Now, where she covers everything from education and public housing to landmark designation and the arts. She lives in midtown with her husband, Salvatore Vacca; they have two children and three grandchildren.

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  • Jan Cooper April 21, 2009 at 5:17 pm

    I love Elizabeth Warren – she’s a hoot, and Tivo Stewart & Zaccharia (fascinating). Both Ed and I thought your article was lucid and disturbingly true. More frightening every day, this economy and our lack of control. And today we are talking about Barak’s body, when there is such a frightening situation in Pakistan!

    Keep it up.