In voting down the bailout proposal 228-205 yesterday, the House of Representatives struck a small blow for democracy. They refused to be steamrolled by Wall Street and its agents in Congress and the administration.

As usual, in the run up to the vote, the administration met in secret with the Congressional leadership, worked out some vague plan, gave the House members just a few hours to see the bill, and then ordered the House members to vote for it or else, saying “Trust us, we know what is best. If you immediately don’t do what we say, the world will come to an end.”
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In this next-to-last post in this series (but probably not on this topic), I want to look at how senior Wall Street executives saw their profession as some sort of game in which the goal was to extract more personal benefit than the next executive, leading to a leap-frogging of various forms of compensation packages that would leave ordinary people gasping.

These executives were taking risks with other people’s money that left many ordinary people ruined while they themselves were benefiting:

The chairman of Lehman Brothers, Richard Fuld, still has his mansion in Greenwich, CT, his oceanfront estate on Jupiter Island in FL, and his Park Avenue co-op in Manhattan.

Many at Lehman blame Fuld for dallying while his investment bank went bust, taking risks with other people’s money while he cleared over $40 million in salary and stock in the last year alone.
. . .
Fuld isn’t the only top executive who remains well-off despite his firm’s collapse. Former Bear Stearns CEO Alan Schwartz collected more than $38 million in salary and bonuses in the last three years for which figures are available.

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A large number of economists were quick to express their dislike of the Paulson plan and have been vociferous in urging Congress to not be stampeded by the administration but to use this opportunity to put back into place some of the regulations that were dismantled over the last three decades.

Meanwhile on NPR this morning, Allan Meltzer, a former Fed economist and a professor at Carnegie Mellon University says that he does not see that this ‘crisis’ hurts anyone other than a few major players on Wall Street and that all the scaremongering about a global financial catastrophe if nothing is done are nor warranted.

Meanwhile a group of 150 economists have also weighed in, saying that there is no need for this mad rush and we should think things through carefully before committing ourselves to the Paulson plan or some minor variation of it.

As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. . . .
2) Its ambiguity. . . .

3) Its long-term effects. . . .
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.

I am not optimistic that these cautions will be heeded. The administration and Congressional leadership is deep in the pockets of Wall Street and will find some face-saving way to give them everything they want.

Alexander Cockburn walks us through some of the highlights of the bipartisan deregulation that resulted in Wall Street firms playing fast and loose with other people’s money for their own benefit. One key person who appears repeatedly in this sordid story is Phil Gramm, the former Senator from Texas who is now economics advisor to John McCain and reportedly his preferred choice to be Treasury Secretary. As US senator from Texas, he pushed through some of the key legislation that resulted in this mess.

In 1999 John McCain’s friend and now his closest economic counselor, then a senator from Texas, was the prime Republican force pushing through the Gramm-Leach-Bliley Act. It repealed the old Glass-Steagall Act, passed in the Great Depression, which prohibited a commercial bank from being in the investment and insurance business. President Bill Clinton cheerfully signed it into law.

A year later Gramm, chairman of the Senate Banking Committee, attached a 262-page amendment to an omnibus appropriations bill, voted on by Congress right before a recess. The amendment received no scrutiny and duly became the Commodity Futures Modernization Act which okayed deregulation of investment banks, exempting most over the counter derivatives, credit derivatives, credit defaults, and swaps from regulatory scrutiny. Thus were born the scams that produced the debacle of Enron, a company on whose board sat Gramm’s wife Wendy. She had served on the Commodity Futures Trading Commission from 1983 to 1993 and devised many of the rules coded into law by her husband in 2000.

Somewhat stained by the Enron debacle Gramm quit the senate in 2002 and began to enjoy the fruits of his own deregulatory efforts. He became a vice chairman of the giant Swiss bank UBS’ new investment arm in the US, lobbying Congress, the Federal Reserve and the Treasury Department about banking and mortgage issues in 2005 and 2006, urging Congress to roll back strong state rules trying to crimp the predatory tactics of the subprime mortgage industry.

Cockburn points out that the enabling of Wall Street shenanigans has always been a bipartisan affair.

But is [Gramm} Exhibit A? No. That honor should surely go to Robert Rubin and to the economic course he set for his boss, the eagerly complicit Bill Clinton. Gramm has been the hireling of the banking industry. Rubin is at the beating heart of Wall Street finance, and he and Lawrence Summers at Clinton’s Treasury, were the guiding forces for financial deregulation.

Obviously the Republicans hoped that the roof wouldn’t fall in on their watch, and the crisis could be deferred to 2008 and then blamed on the Democrats. But their insurance policy was that if the roof did cave, as it has now, the rescue policy would be identical in both cases. That’s why Obama has collected more money than McCain from the big Wall Street houses.

The gang that successfully got out of Dodge in time was the Clinton-Rubin-Summers gang, just before the last bubble -–the stock market bubble — burst in March of 2001. They knew what was coming.

Rubin is one of Obama’s advisors, Gramm is McCain’s so whoever becomes president, as usual Wall Street has its friends in high places. They make money from public investments when the going is good and make money directly from the taxpayers when the going is bad. The only way their hands can be taken out of the till is if the public angrily tell their representatives that there should be no bailout until massive reforms and regulations are put into place so that people’s money is safeguarded from these rapacious predators.

This episode illustrates better than any civics class exactly who runs the country and for whose benefit.

POST SCRIPT: Jon Stewart on the Paulson plan

I have described before how the subprime mortgage debacle lies at the root of this mess. But how did it come about that mortgage lending, once the most conservative and transparent and regulated of banking practices, became the basis of a massive shadow economy in which trillions of dollars flowed around, free from any oversight? And what is the government bailout meant to do?

The foundations of the mess lies with the neoliberal deregulation policies that began under the Carter administration and was enthusiastically followed by every subsequent administration of both parties. The driving idea behind all this loosening was that the banking and investment sector was being shackled by too many regulations and too much oversight. The protective firewalls that had been put up between banks and investment houses following the excesses that led to the Great Depression were targeted. It was argued that if the banks were freed from these onerous restrictions, capitalism would bloom.
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I have been getting increasingly suspicious that this so-called financial crisis may be a bogus one to enrich this administration’s base of Wall Street cronies before Bush leaves office. While I am not an economist and do not have the inside knowledge that Henry Paulson (Treasury Secretary) and Ben Bernanke (head of the Federal Reserve) have, there is something about this mad rush to pass major legislation that strikes me as very suspicious. It reminds me too much of the way the administration flat-out lied about the danger that Iraq posed in order to get Congressional authorization for the invasion.

People like Paulson and Bernanke lied when they said they had the situation under control earlier when they bailed out Bear Stearns, Fannie Mae, Freddie Mac, and AIG. How do we know that they are not lying again now in order to push a covert agenda? While I accept that the financial sector is in trouble, what I want to know is what evidence has been produced that we need to act immediately. The stock market might go down if no immediate action is taken but that is not sufficient reason because they are betting on a bailout and their potential disappointment is not a reason for throwing more money into their trough.
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I wrote last Friday of the reasons behind the current financial mess. Over the weekend, as everyone is aware by now, the US government issued a plan to put up a huge amount of money (initially about $700 billion but likely to grow to well over a trillion) to bail Wall Street out of the financial difficulties caused by its own greed and recklessness.

The public and the Congress are being stampeded with ‘the sky is falling’ rhetoric into giving the Treasury Secretary Henry Paulson a blank check, with no oversight and almost no reforms, to dole out money to his cronies in the financial sector so that they can continue the reckless practices that have led to the present situation. We should not forget that Paulson spent almost his entire career (over three decades) at Goldman Sachs, one of the investment banks at the center of the current mess.
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