Will Congress hold the big banks responsible for the economic crisis?
Finally, there's a Tea Party for the rest of us.
Starting Tuesday, large numbers of irate Americans will channel their ire at the parties that are actually responsible for our economic crisis: the big banks. On that day, a coalition of union, clergy and community groups are set to demonstrate in San Francisco outside Wells Fargo's annual shareholder meeting. The next day, a similar demonstration is slated to unfold at Bank of America's shareholder meeting in Charlotte. And the day after that, the AFL-CIO plans to lead the largest such demonstration into the belly of the beast -- Wall Street. Further protests are planned for Wall Street's lobbyist row -- Washington's K Street -- in May.
"We're trying to create a which-side-are-you-on moment for Congress," George Goehl, executive director of National People's Action, a group that has long labored to rein in predatory lending, told me a week ago, just hours before the Securities and Exchange Commission filed suit against Goldman Sachs -- the moment when it became exquisitely awkward for members of Congress to come down on the banks' side.
The Goldman scandal is clearly something of a tipping point. In the wake of allegations of fraudulent misrepresentation from Wall Street's foremost investment bank, all the Democrats on the Senate Agriculture Committee, joined by Iowa Republican Charles Grassley, voted Wednesday to send a bill from Arkansas Democrat Blanche Lincoln to the full Senate. Lincoln's is the first bill to get this far that would really clamp down on Wall Street's casino. It would require almost every derivative deal to be traded publicly on an exchange, as stocks are traded. It would mandate that the participants have some skin in the game -- putting up funds to cover the deals should they go south (as AIG, which we all bailed out to the tune of $180 billion, did not).
Above all, banks that our government backs up with deposit insurance and access to the Federal Reserve's discounted interest rates would no longer be able to put taxpayers on the hook for their speculative bets: They could either continue as derivative-trading casinos or as governmentally insured banks, but not both. In fact, Lincoln's bill goes a good deal of the way toward former Fed chairman Paul Volcker's proposal to remove banks' proprietary trading from under the umbrella of federal protection.
The same day that the Agriculture Committee was passing Lincoln's bill, Democratic Sens. Sherrod Brown (Ohio) and Ted Kaufman (Del.) introduced a bill of their own to limit the size of banks -- imposing a 10 percent cap on any bank's share of the total insured deposits in the United States and limiting their liabilities to 2 percent of gross domestic product. Since 1995, the assets of the six biggest banks have grown from less than 20 percent of GDP to more than 60 percent -- a concentration of wealth and power that threatens the world economy, as we all now know, whenever one such bank gets in trouble. Brown and Kaufman plan to offer their bill -- the most purely Jeffersonian piece of legislation that Congress has seen in decades -- as an amendment to the omnibus financial reform bill on the Senate floor.
There's one further reform we still need to disarm the threat that the big banks pose to our economy: a flat-out ban on their gambling. What really brought the economy down in 2008 was the banks' "synthetic" derivatives -- bets that a certain set of securities will either rise or fall but in which the bettors don't own the securities. These aren't hedges, as farmers or airlines make, locking in the prices they'll later get for their crop or pay for their oil, respectively. They're wagers, pure and simple, which can imperil the economy without actually investing anything in a productive economic endeavor.
As things stand, those members of Congress who want to keep the big banks as they are will probably not try to change the bill where the public can see them doing it. Sen. Kirsten Gillibrand (D-N.Y.) opted not to introduce her amendment weakening Lincoln's requirement that the banks spin off their swaps operations during Wednesday's Agriculture Committee meeting. "This kind of thing can best go on in conference," one senior congressional staffer told me. Connecticut Democrat Chris Dodd, the omnibus bill's author and floor manager, has even resisted incorporating Lincoln's language into his bill.
Financial reform advocates are also concerned that Treasury Secretary Timothy Geithner and Obama economic honcho Larry Summers, who have declined to endorse much of Lincoln's bill, will work discreetly to defeat it. As Bill Clinton's Treasury secretary, Summers blocked attempts to regulate derivatives a decade ago. "We could be looking at the same damn Larry Summers move 10 years later," one Democratic legislator frets. The conflict is between those who want to nudge Wall Street and those who want to shrink it. In the next couple weeks, senators and representatives will let us know which side they are on.