Wall Street's financial aftershocks
Like earthquakes, Goldman Sachs can strike anytime. Its work can slumber undetected for years, only to erupt, unanticipated, with catastrophic consequences.
Consider: In 2001, Goldman set up some opaque financial transactions for the Greek government, the New York Times reported last month. Last year, when a new government took office, it found that Greece's debt was far greater than the old government had acknowledged, thanks to deals that allowed borrowing to be treated as currency swaps rather than as loans. It also turned out that Greece's deficit wasn't 3.7 percent of gross domestic product but 12.7 percent.
The role of Goldman Sachs and other U.S. investment banks in helping the Greek government hide its debt is being investigated. But the results of these revelations were Earth-shaking. The Greek government is downsizing, which will deepen that nation's recession. The euro, the continental currency that Greece employs, has come under attack by currency traders. The other members of the European Union have been compelled to keep Greece from defaulting -- which has stirred up a backlash within affluent E.U. nations that threatens the entire project of a united Europe.
All in a day's work on Wall Street.
It's not as though these kinds of transactions hadn't already wreaked havoc with the world economy. It was AIG's inability to make good on such deals (many of them with Goldman and its ilk) and Lehman Brothers' accumulation of dubious derivatives that kicked off the Great Recession through which we will be stumbling for years to come.
So you might expect Congress would have regulated the derivatives market, which it exempted from regulation in 2000. But you would be wrong. The financial reform bill the House passed last year required these derivatives to be traded on an exchange, so that regulators and potential buyers could track the deals and prices and interest rates, so that future Lehmans -- and perhaps Greeces -- wouldn't blow up. But in the face of opposition from Republicans and some center-right Democrats, the House voted to exempt roughly half the derivatives market from the requirement that they be listed on an exchange. There was no remotely plausible case for this, but the six big depositor and investment banks that dominate the derivatives trade wanted the exemption, and they got it.
Whether the Senate's version of financial regulation, on which Chris Dodd is laboring, will do any better than the House's remains to be seen. There are, however, strong reasons for doubt. Already, Dodd has abandoned the idea of a free-standing Consumer Financial Protection Agency (CFPA) that could set and enforce rules on mortgages and credit cards. In hopes of winning the few Republican votes he needs for passage, Dodd is proposing to put the agency within the Federal Reserve, with rule-setting and enforcement powers that may not amount to much.
Historically and characteristically, the Fed's concern for consumers has seldom been detectable. Placing a weakened CFPA within the Fed could be like putting the Food and Drug Administration inside, say, Pfizer.
But then, most every Obama administration proposal to rein in the financial sector has hit a wall. Its proposal to strip banks of their federally subsidized middleman role in doling out student aid -- which would significantly cheapen the costs of college education -- is stuck in the Senate. Its proposal to ban federally insured depositor banks from proprietary trading -- Paul Volcker's attempt to limit the public's liability for banks engaged in high-risk investments -- was dead on arrival.
It's not as if Wall Street is popular, or has compelling arguments on its side. An NBC-Wall Street Journal poll from late January showed that 74 percent of Americans believed not enough had been done to regulate the banking industry. Despite their ability to purchase the best public relations firms in the galaxy, investment banks such as Goldman have not made the case that their sophisticated financial innovations of recent decades have done anything to help Main Street's economy. The high-tech start-ups of the past 30 years relied on venture capital companies, not Wall Street. The chief achievements of Wall Street's math whizzes have been to enable the firms to make more money in their own trading activities and to structure the kinds of deals that have brought Greece to ruin.
But none of that apparently matters on Capitol Hill, where Republicans oppose all reforms and center-right Democrats carve out lovely loopholes, as they both scramble for the mega-contributions the bankers dole out.
Over the past two years, no group has received more government support, or has more rigidly opposed government regulation, than the banks. Compared to Wall Street, the health insurance and pharmaceutical industries are pushovers.