"Going Back" to the Policies That Got Us Here Part I

Bill Clinton
Earlier this year President Obama railed against so-called “Fat Cats.” As the fall of 2010 campaign season winds down the president is warning voters not to make a choice that takes us "back" to the policies that led us into the financial crisis. Former President Clinton is also out on the campaign trail going from state to state and city to city echoing the same sentiments. It is time for an honest examination of history. How did we get to the point where Fat Cats could exploit our financial system on such a grand scale?
Robert Rubin
Ending Glass-Steagall - On November 12, 1999, President Clinton signed a bill into law that tore down critical financial system protections provided by the Glass-Steagall Act. The bill made it through Congress thanks to behind the scenes engineering by the former Goldman Sachs CEO and then Treasury Secretary, Robert Rubin. Naturally, like most government folly, this ill-advised reversal of a policy that dated back to the Great Depression, was completed only after an army of clever lawyers successfully sold shell game-like arguments to elected officials. Our domestic depository banking institutions, these advocates argued… deserved more “fair” treatment so they could be able to operate more freely in already deregulated financial markets. Their general rationale was that distinctions between loans, securities, and deposits were already blurred. And they further asserted that our once mighty commercial banks were gradually losing market share to securities firms that were not so strictly regulated, as well as to foreign financial institutions operating without much restriction from the Act.
Byron Dorgan (D- ND)
Despite impassioned pleas on the floor of the U.S. Senate by Byron Dorgan (D-ND) and a handful of other Congressional leaders from both parties, it President Clinton and Treasury Secretary Robert Rubin convinced congress to swallow this special interest bill hook, line, and sinker.
The great irony is Clinton naively suggested that the dangerous conflicts of interests created by the end of Glass-Steagall could be controlled by…… our government. By simply enforcing existing legislation that separated the lending and credit functions through the forming of “distinctly separate subsidiaries,” we were told by Clinton, Rubin, Senator Phil Gramm and others in both parties that our financial system could continue to function properly with commercial banks both underwriting and trading securities for their own accounts.
Lower Risks, Diversification, and Fairness - President Clinton and the majority of members of Congress reassured skeptical industry experts that the underwriting and securities trading activities that these depository banking institutions were seeking to engage in as part of the end of Glass-Steagall, were “low-risk.” It was further asserted that the end of Glass-Steagall would lead to the reduction of the total risk to federally-insured deposits thanks to the broad benefits of diversification. In the end, the clever lawyers resorted to an all-too-familiar version of law school 101…..a bamboozle strategy. Cloaking their arguments in the timeless virtue of “fairness,” they argued that Glass-Steagall had become a needless impediment that was keeping our banks from doing what nearly everyone else was doing.
Elected Officials and Mortgage Lending - Not long after the protections of Glass-Steagall were torn down, our campaign contribution driven system of government continued to bring the worst it has to offer to the foundations of sound lending practices. Caught in the historical video records in hearing after hearing were members of congress who, in the sorriest traditions of American-style politics, cloaked themselves in a heightened sense of “fairness.” Simply put, elected officials relentlessly pressured regulators of government sponsored entities (Fannie Mae and Freddie Mac) into allowing a dramatic loosening of mortgage underwriting standards. As a result, loan approvals became a entitlement payback from elected officials for many mortgage applicants. Regardless of their personal creditworthiness government sanctioned lenders flooded our system with sub-prime mortgages. Firms like Goldman Sachs began to understand how to take advantage of the folly using complex financial instruments. But in the end, even Goldman Sachs needed federal bailout money to re-capitalize and recharge its ailing balance sheet.



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