Lost Opportunity

The financial crisis presented an opportunity for reform. This time, however, it was the banks -- instead of the people -- who were protected.
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Midway into his second term, President Franklin Roosevelt reflected on the effect of the 1929 stock market crash: "Unfortunately, a catastrophe seems to have been necessary to focus people's attention once more on ideals in government and on its proper relationship to its citizens."

As president, FDR did much to turn that catastrophe into an opportunity for significant reform. The financial collapse of 2008 was another such opportunity, one also preceded by a period of speculation, deregulation, rising economic inequality, and worship of wealth. If it was "unfortunate" that New Deal reform depended on a national catastrophe, it is even more unfortunate when a nation's leaders pass up such an opportunity, allowing abuses to persist.

Frighteningly similar to the subprime home loans that led to the 2008 meltdown, subprime automobile loans have been growing apace. Particularly in areas without adequate or affordable public transportation, people have little choice but to borrow beyond their means. Like subprime mortgages, these loans are often made with incorrect information about borrowers who would otherwise not qualify for loans. Here, too, loans often exceed the resale value of the property, owing, in the case of cars, to debt from a previous purchase being rolled over into the next loan. No wonder default is common.

Another similarity to subprime home mortgages is that many of these auto loans are bundled into complex bonds and sold as securities by banks to insurance companies and mutual funds. Thus, investors are continuing to trade in risky securities like those that led to financial collapse. Currently, securities underpinned by subprime auto loans are valued at a fraction of those created by Wall Street in the run-up to the burst of the housing bubble. Consequently, the subprime auto loans are less likely to jeopardize the economy. Whatever the magnitude, however, such predatory lending continues to put vulnerable consumers at risk. Indeed, subprime auto loans have escaped regulatory reform. As a result of an amendment pushed by Congressional Republicans, the great majority of auto dealers were exempted from oversight by the Consumer Financial Protection Bureau established by the Dodd-Frank financial reform legislation. The Consumer Financial Protection Bureau penalizes offending banks, but it is the dealers who negotiate the loans, and they are largely outside the law.

Another regulatory omission was recently exposed by New York Times financial analyst, Gretchen Morgenson. Banks engaging in financial advisement and leveraged buyouts must register as "broker-dealers" and are thus subjected to strict regulation by the Securities and Exchange Commission. However, when doing much the same work, private equity firms, like Mitt Romney's Bain Capital, are not required to register and are under much less scrutiny by the SEC. This Morgenson describes as a "free pass" for the private equity firms. According to a New York Times review of a whistleblower submission by a private equity executive, the 57 largest private equity firms received more than $3.5 billion in fees from 2002 to 2013 while engaging in unregistered and scantly regulated broker-dealer activities.

A financial sector, no less culpable for economic collapse than its 1929 counterpart, has been subjected to far less castigation and regulation by the nation's leaders. In reining in the bankers, FDR played a leading role, beginning with his famous first inaugural indictment of "the money changers":

Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men...

They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.

Early in his term as president, Barack Obama referred pejoratively to "fat cat bankers" drawing $10 and $20 million salaries while the nation went through the worst economic year in decades. Later, however, Obama voiced approval of big bonus bankers such as the chief executives of J.P. Morgan Chase and Goldman Sachs: "I know both those guys; they are very savvy businessmen. I, like most of the American people, don't begrudge people success or wealth. This is part of the free market system." Compare Roosevelt's definition of the profit motive: "No wise man has any intention of destroying what is known as the profit motive; because by the profit motive we mean the right by work to earn a decent livelihood for ourselves and for our families."

It was not only with words that FDR took on the financial sector. During the famous Hundred Days of the New Deal, he signed the Truth in Securities Act to protect investors from fraud and misrepresentation and the Glass-Steagall Act to separate commercial from investment banking, a measure resulting in the breakup of several of the nation's largest banks. Both laws were greatly aided by the Pecora Investigation of the Senate Banking Committee (named after chief counsel Ferdinand Pecora) that, during weeks of hearings, revealed widespread fraud on Wall Street and the speculative excesses of the banks. FDR, for his part, encouraged the Senate Banking Committee to allow Pecora to continue his probe of banking fraud. According to economist Timothy Canova, there has been a dearth of official hearings since 2008. Instead of the Pecora Hearings, we've had "a tamped-down Senate committee and the Financial Crisis Inquiry Commission (the Angelides Commission), with only a few days of public hearings to question Wall Street executives." (1)

Progressives like former Labor Secretary Robert Reich, have called for more strenuous regulatory reform such as bringing back the Glass- Steagall Act. But that was highly unlikely, given the determination of Obama's Treasury Secretary Timothy Geithner and other financial advisors to President Obama to protect the banks. In an article, "What Timothy Geithner Really Thinks," Andrew Ross Sorkin gives evidence of this. According to Senator Elizabeth Warren, Geithner "believed the government's most important job was to provide a soft landing for the tender fannies of the banks." According to Neil Barofsky, former special inspector general of the Troubled Asset Relief Program (TARP), "Geithner, Bernanke [Chairman of the Federal Reserve Board], and [former Treasury Secretary] Paulson consistently put the interest of the banks over those who were supposed to be helped, like struggling homeowners." According to The Huffington Post, Obama recently held that further reform was needed to regulate bank excesses, but the White House later said he had no specific regulations in mind.

Once again, the financial crisis presented an opportunity for reform. This time, however, it was the banks -- instead of the people -- who were protected.

(1) For more on New Deal banking reform, see Timothy A. Canova, "The Bottom-Up Recovery: A New Deal in Banking and Public Finance," in Sheila D. Collins and Gertrude Schaffner Goldberg, eds., When Government Helped: Learning from the Successes and Failure of the Deal (Oxford University Press, 2013), pp. 51-85.

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