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The Wall Street financial meltdown of 2007-08 that began with the housing-mortgage crisis in mid-year 2006 and that still persists in mid-year 2012 set in motion a regimen of regulatory reforms not seen since the Great Depression.
Had the regulatory regime of the past engaged in better risk management, the current financial crisis might not have occurred in the first place. Had the financial collapse not occurred, then the uncomfortable sequence of bailouts and exceptional favors for a privileged banking oligopoly “to right the U.S. system” would not have happened.
Now consider that Dodd-Frank was passed to rein in Wall Street risk-taking and oversized bonuses, to end bailouts and too-big-to-fail, and to prevent future financial meltdowns.
Dodd-Frank—consisting of 243 new formal rules and 2300 pages of regulations—was also designed to help protect consumer interests. However, these as-yet-to-be-implemented rules all but ignore the speculative bubbles that caused the financial debacle.
While authorizing studies on the subject, Dodd-Frank is silent about how the newly reformed agencies are to recognize these problems in the future. Similarly, while the new law has also introduced numerous legal reforms, these still represent only a starting place for a dialogue on how to move our financial system safely into the twenty-first century.
Before and after the Wall Street meltdown and the passage of Dodd-Frank, the self-regulating organizations (SROs) of financial institutions remain critically underdeveloped as a means of preventing future similar crises. For a variety of reasons, the regulation of securities and securities fraud by the SEC continues not to be up to the task of controlling Wall Street behavior. Meanwhile, the criminal prosecution of high-stakes securities fraud by the states or the feds has been virtually nonexistent.
This leaves self-help vis-à-vis private-civil litigation as a viable option for obtaining some measure of relief for a few relatively wealthy investors. In stark contrast, the vast majority of small time investors through their mutual or pension funds are denied class action status to pursue compensation for fraudulent losses. There are also millions of indirect victims of the financial implosion who have found themselves, for example, with homes “under water” or worth less than what they owe on their mortgages. Very few of these folks have any recourse to recover money for their suffered damages due to the financial implosion of 2007-08. The state of contemporary financial relations could be better.
On markets and regulation – a little history
Markets and regulation have always gone hand-in-hand. The two were more or less invented together during the emergence of modern capitalism in the 17th century. For markets to exist they have always needed to disconnect transactions from relationships and to formalize those into rules and regulations. So, “free” markets require both trust in the rules and trust in distant strangers to uphold the rules. Over time, periods of regulatory innovation have occurred in waves that are followed by longer periods of relative inattention. Each period generally involves a financial collapse of one kind or the other, a loss of faith in financial institutions, and an attempt at re-regulation.
Historically, financial regulation of banks and stocks can be traced back to the collapse of the tulip market in1637 when the Dutch government shut down the speculative flower market. In 1720, the stock market crashes in both France and the UK were responsible for the establishment of new rules and regulations in an effort to prevent the recurrence of future crashes. Those early financial implosions also introduced the term “bubble” referring to the lack of substance or to trade irrationally based on nothing more than air. In the United States the stock market crash of 1929 led to the recognition of behavioral and systemic risks to the financial system. The Great Depression that followed also prompted massive increases in financial regulation. After World War II, a period of financial and economic stability over subsequent decades helped to support an intellectual drift toward the belief in the natural well-functioning of markets and to the eventual dismantling of many regulatory controls.
In the 1970s and 1980s deregulation was aided by anti-Keynesian macroeconomic theory known as “monetarism” and by the “efficient markets” theory. Together, these two theories argue that markets work best when they are free of human intervention or regulation. Unproven to this day, these so-called theories still serve as part of the ideological mantra that spurs on both privatization and a climate of financial deregulation. The latter recently peaked with the passage of the 1999 Gramm-Leach-Bliley Act and its ultimate evisceration of Glass-Steagall (1933), which separated retail from investment banking in the U.S. In turn, this law also known as the Financial Services Modernization Act enabled the housing bubble and bust of 2000-2006 that eventually caused the Wall Street financial collapse of 2007-08. However, Dodd-Frank with all of its new rules and regulations does not repeal Gramm-Leach-Bliley or reinstate the key rule of Glass-Steagall, which made it a felony to engage in or combine the activities of both investment and commercial banks.
This short history begs a couple of related questions that will be the subject of the rest of this article and which were raised in my earlier essay in CrimeTalk. First, what difference has Dodd-Frank or The Wall Street Financial Reform and Consumer Protection Act of 2010 made on those institutional practices that were responsible for the ongoing financial crisis in the United States? Second, despite the missed opportunity to restrucuture the financial markets after the recent collaspe and pending the sudden arrival of the next crisis, what can be done in the pursuit of altering the unchanged economic relations of unregulated financial capital?
The shortcomings of Dodd-Frank
While short of any structural reform of the financial markets, Dodd-Frank does provide some useful modification to protect consumers in small-scale financial dealings. Beyond these minor concessions, most pundits, politicians, and policy wonks agree that Dodd-Frank will have little impact on the critical areas of corporate governance and executive compensation as the Citigroup shareholders discovered when 55 percent of them voted to reject awarding more than $54 million in compensation to executive officers because the bank’s performance simply did not justify it. Ignored by Citigroup, shareholders are now suing over the matter.
Moreover, the law, as presented to an array of regulatory bodies was really only a work in progress as it left it up to various entities to interpret, implement, and effect. Most notably, Dodd-Frank made available several escape clauses for reproducing the history of banking on the Federal Reserve. Forcing bankruptcy, breaking up the too-big- to-fail institutions, ending taxpayer bailouts, and eliminating certain types of derivatives, for example, were not fixed. These were all left conditional and subject to negotiation when the next financial collapse occurs.
Until these legal loopholes are eliminated from the law, they stand in the way of hedging against or reducing moral hazards, high-risk betting, or the next financially driven bubble. Like other regulatory legislation, Dodd-Frank is conspicuously silent on the workings of the financial contradictions of a legal/justice system wherein numerous exemptions and waivers from criminal punishment for mega-scale securities frauds are the rule. Drowning out this legal silence is the political silence of elected and appointed officials who with rare exceptions have all but ignored the crimes of Wall Street.
The shortcomings of electoral politics
As the 2012 presidential race moves into the general election, despite months of Occupy Wall Street protests, and other Occupy demonstrations of anger at home and abroad, the regulation of Wall Street securities remains peripheral to the electoral discourse of incumbent President Barack Obama and his Republican challenger Mitt Romney. Though both candidates incessantly discuss the fixing and healing of the depressed and sluggish economy in general, each has taken a “hands off” approach to re-regulating high-stakes financial markets. And neither Obama nor Romney is willing to publicly discuss the question or feels the need to restructure the financial markets as envisioned, for example, by one political and administrative insider, economist Lawrence Summer . It is well-known that back in early 2009, Summer and the current Treasury Secretary, Timothy Geithner, privately argued back and forth for six hours before the President and his Council of Economic Advisors on the nature of Wall Street regulatory reform. Summer made the case for restructuring or breaking up the commercial and investment banking industry and Geithner made the case for what would eventually become the basis of Dodd-Frank’s reorganizational approach to financial securities.
These backstage disagreements over regulation, deregulation, and re-regulation were not confined to the Executive office. These political disagreements continue to play out in the U.S. Congress to the present day. In fact, since the Wall Street financial debacle and within the confines of the existing regulatory regime, there has been much Congressional infighting and hundreds of millions of lobbying dollars spent on Democratic and Republican efforts to pass/defeat, alter/ reform, and stymie/repeal Dodd-Frank. After all, there are hundreds of billions of dollars in risks and profits for Wall Street traders plus the gains and losses for average tax-paying Americans. So far, with or without the full implementation of Dodd-Frank, life remains fundamentally the same for Wall Street traders as it was before the financial meltdown.
Presently, the Tea Party, the Republican Party, and Mitt Romney call for the repeal of Dodd-Frank as part of their knee-jerk aversion to any kind of regulation. Comparatively, the Democrats are divided on the subject of re-regulation. Most favor the existing law. A minority, joined by many legal-economic critics, including the folks from Occupy the SEC, argues that Dodd-Frank has not engaged in enough strategic regulation and control of financial markets. These “re-regulators” would like to see the resurrection of Glass-Steagall as well as other structural changes. Meanwhile, President Obama has stood pat with Dodd-Frank, as it poses no financial threat to the business as usual interests of Wall Street.
All of this, however, is pretty much a political sideshow because whether the regulatory reforms of Dodd-Frank are eventually operationalized or not, or whether the Act is repealed sooner or later, the opportunity for real structural reform of the securities markets has already come and gone. This is especially true of a bipartisan Congress that is beholden to enormous campaign contributions courtesy of Wall Street. Concerning the neglected sanctioning of high-stakes securities fraud that caused the housing market implosion now in its sixth year of financial decline, both the SEC and the Department of Justice have been of limited value in compensating a tiny fraction of the millions of U.S. homeowners with substantial losses in their home equities. Combined with the U.S. Supreme Court decision Citizens United, the subsequent establishment of political Super PACs , and campaign financing in general, the only way that the financial industry might possibly structurally reregulate is through a mass social movement that pressures the entire system for a more equitable, democratic, and humanistic financial capitalism.
More specifically, this struggle is about finding new economic, political, and social rules to implement at a multitude of governmental/public and nongovernmental/ private levels. Yale economist Robert Shiller in particular contends that the key to reregulation is a matter of making our financial markets better able to respond to the way people actually think and act regarding financial institutions, so that individuals are naturally incentivized to take proper actions to deal with real risks. At the same time, even if there were some kind of neuro-cognitive agreement and a political consensus around those governing principles for democratizing and humanizing financial capital as Shiller refers to them, their implementation and enforcement would still be subject to the diversity of competing capitalist and regulatory interests as well as to the contradictions of bourgeois legality and justice.
Nevertheless, the materialization of these ideas could indeed alter some of the contemporary relations of finance capitalism. I argue that this will not occur without at least the next major financial crisis and/or a mass political movement to restructure the financial markets back to the days of separate institutions for investment and commercial banking. This re-regulation or, the essence of Glass-Steagall, is assumed to be part of the necessary fix not only for reducing sizable risks and non-productive profits, but also for enhancing the movement away from speculative and proprietary betting and toward investor well-being and reinvesting in tangible financial products and human services.
Organizing the 99% as the only way to restructure financial markets short of the next financial collapse
As part of the need to restructure financial markets post Dodd-frank, to realize the principles of democratizing finance capital for the 21st century, and to prevent future Wall Street securities meltdowns, stockholders, investors, occupiers, unions, churches, and other community-based groups have to coalesce together in opposition to the economic and political interests that dominate the United States today. Without the development of a full-fledged, grassroots social movement capable of transcending the partisan system of conventional politics, the odds of successfully reregulating securities and securities fraud are slim at best and non-existent at worst. Without a growing national movement on behalf of the 99 percent, Wall Street looting and federal regulatory colluding will continue to place the American people at risk of another major economic collapse.
On April 24, 2012, for example, 1000 protesters and activist shareholders met Wells Fargo’s CEO John Stumpf as he prepared for the annual shareholders meeting in San Francisco. Operating under the “99% Power” banner, the demonstrators included labor groups, community activists, and a coalition of 30 San Francisco religious leaders who led a pray-in with readings from the Bible and Koran. Stump’s speech to the shareholders was interrupted with a “mic check” of demands that Wells Fargo halt foreclosures, divest investments in prison-management companies, end high-interest payday lending, and forgive debts of struggling borrowers with underwater mortgages. On the same day, just as many people in Detroit mobilized for the annual General Electric shareholders meeting. These activists demanded that GE do more to rebuild the national economy. During the meeting, dozens of people disrupted CEO Jeff Immelt’s remarks with chants of “pay your fair share” of taxes.
Perhaps more significantly on May 1st, labor, immigrant, and Occupy activists gathered in nationwide actions and demonstrations. This was the first time in several decades that the citizens of this nation have joined in the international celebration of workers around the world on May Day. Although smaller than organizers would have liked, the day did signal that the OWS movement is back. In fact, this May 9th, look for large concerted demonstrations at Bank of America offices across the national landscape in conjunction with the annual shareholders meeting in Charlotte, North Carolina.
Short of any kind of long-term success of these kinds of direct democratic actions to politically alter market securities relations and politics as usual in Washington DC, the next viable opportunity to re-regulate Wall Street will come only with the next financial catastrophe or the next one after that. By now, though the fundamental lessons of financial re-regulation are several centuries old, the bipartisan subordination of the Executive and Congressional branches of the U.S. government to the banking oligopoly of Wall Street, impedes the political chances of our elected officials doing the fair things for the many instead of for the few.
 Lawrence Summers served as the U.S. Secretary of the Treasury from 1999 to 2001 under President Bill Clinton and as Director of the White House Economic Council for President Barack Obama from January 2009 until November 2010.
 Super PACs are a type of political action committee created in July 2010 following a federal court decision, SpeechNow.org v. Federal Election Commission, which allows these super PACs to raise unlimited sums of money from corporations, unions, associations, and individuals.
Gregg Barak is a Professor of Criminology & Criminal Justice at Eastern Michigan University. Rowman & Littlefield will publish his latest book, Theft of a Nation: Wall Street Looting and Federal Regulatory Colluding in August 2012.
The first part of this series was published here as Financially Respectable Crimes of Wall Street.
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