"Ultimately there is no dividing line between Main Street and Wall Street. We rise or we fall together as one nation. So I urge you to join me," President Obama to Wall Street Executives at Cooper Union, April 22, 2010.
Now, in the wake of the Goldman Sachs lawsuit, is a golden moment for President Obama to rein in Wall Street -- and let the American public know whose side he's really on. But it seems he's working from a flawed theory: "There is no dividing line between Main Street and Wall Street. We are all in this together as one nation." Really?
It's hard to feel warm and cuddly about this togetherness. In March, according to the Bureau of Labor Statistics, the financial sector's unemployment rate was 7.7 percent. For manufacturing workers it was 24.9 percent. No dividing line? Wall Street "earned" $150 billion in bonus money in 2009 (thanks to taxpayer bailout support). Meanwhile over 29 million Americans were out of work or forced into part-time jobs. Rise and fall together?
The entire story of this crisis is about how we are not in this together. For the past three decades we have become more and more a nation divided between the super-rich and the rest of us. In 1970 the ratio of compensation of the top 100 CEOs to the average worker was 45 to one. By 2008 it was a whopping 1,081 to one.
Our tax system also reflects the dividing line. We are now allowing hedge fund honchos to be taxed at rates lower than their secretaries. The top 25 hedge fund managers in 2009 earned as much as 658,000 entry level teachers. But the teachers are too expensive -- they're getting laid off --- due to the crisis caused by Wall Street.
We could overlook President Obama's imagery of togetherness if, in fact, he was taking on the financial industry. Unfortunately, though, the administration's focus has been on "restoring investor confidence" by any means necessary. It started with Obama's first appointments: It's really hard to tell the difference between the Clinton, Bush and Obama administrations' key advisors. Summers, Geithner, Bernanke (with Robert Rubin in the background) would be (or were) at home in any of those administrations. (For a chilling account of this situation, see Bob Kuttner's Presidency in Peril.) It's hard to resist the feeling that the largest financial players (Goldman Sachs, JP Morgan Chase and Citigroup) engineered a financial policy coup d'etat.
But okay, here we are in April 2010, probably on the eve of financial reform. Maybe these money guys have had a change of heart. Maybe, after all we've been through, we'll see some substantive changes.
But how can we tell? Here are five yardsticks for measuring whether the proposed reforms will make a difference:
1. Will the reforms break up financial institutions that are too big to fail? This question seems to be taboo among the key administration officials and Congressional committee chairs. But Senators Sherrod Brown (D-OH) and Ted Kaufman (D-DE) have the right idea by proposing strict size limits on financial institutions. Some economists, like Paul Krugman (and Ben Bernanke), don't think size matters. [No wisecracks, please.] They point to the Great Depression, when thousands of smaller banks went under -- and that was even worse. But they don't want to talk about the other downsides: these gargantuan financial institutions horribly distort "fair market practices" and undermine the political process with their truckloads of cash. Even conservative president Howard Taft understood that we had to bust up the great "trusts" of the early 20th century. Power is even more concentrated right now -- on Wall Street. Unfortunately, the Administration is not likely to support the Brown-Kaufman amendment.
2. Will the reforms prevent banks from speculating with our deposits? Glass-Steagall was a good idea in the 1930s and still is. Right now financial institutions that gamble can stake themselves with our deposits which are insured by the government. That's a very profitable way to play the game, and very risky for the system as a whole. The proposed Volker Rule in the reform bills attempts to recreate some of the strict separation that we need between commercial banking (where our money is) and investment banking (where the hot casino games are). We can be sure an army of bank lobbyists are out to eviscerate anything like Glass Steagall.
3. Will the reforms outlaw "financial weapons of mass destruction"? You know we're in serious trouble when Warren Buffet and George Soros agree with me: We just have to outlaw financial instruments that are too complex to understand, starting with synthetic CDOs. It's absolutely crazy to allow financial institutions to sell the same assets again and again through synthetic products that even financial industry insiders can't parse. These fantasy finance products are precisely what took down the economy. (See the Looting of America for a layperson's explanation.) Unfortunately, the proposed reforms include no such ban. Instead they would either lightly regulate "customized" derivatives (including just about every kind of synthetic CDO) -or not regulate them at all. This will represent a major victory for Wall Street and a major blow for the rest of us.
4. Will the reforms end obscene executive compensation? When cows fly. The proposed legislation gives the idea a half-hearted wave. Some new rules would make it a bit harder for companies to rig the compensation game. Shareholder would be given a bit more say about executive pay. But the only effective way to stop the billion-dollar bonuses is to suck more profit out of the industry in the first place. It should not account for 40 percent of all corporate profits. There are two efficient ways to do that. We can put a financial transaction tax on short term speculative plays and/or we can slap very large windfall profits tax on financial sector compensation. Let's be very honest about this. Wall Street would have earned next to nothing last year had we not bailed them out. And lest we forget, these are the very people who tore a gaping hole in our economy, costing us millions of jobs and trillions of dollars. It's only fair and reasonable to go back to the 90 percent Eisenhower era tax on the150 billion bonus pool on those earning 3 million or more. Will proposals like these be part of the reform package? No.
5. Will the reforms provide a truly independent and powerful Consumer Financial Protection Agency? This one ought to be easy. Even shameless bank lobbyists find it very hard to argue in behalf of predatory lending, usurious interest rates, hidden fees and outright fraud. It's kind of like saying that mortgage brokers have a constitutional right to screw us. But by waving the bloody flag of Big Government (and Protect Financial Innovation), the lobbyists are doing a pretty good job of taming this new agency. For me the test is simple: Will this agency end up in the Federal Reserve? Can you imagine putting such an agency inside a bank? If they pull that off, Bernanke should get the Nobel prize for chutzpah.
6. Will the reforms lead to more jobs for the American people? Perhaps the gravest disconnect between the big Wall Street players and the rest of us concerns our understanding of what a bank is. Most of us think that banks are supposed to invest our savings in solid industries with the best returns. But that's not nearly as profitable for big banks as running an enormous casino for the super-rich. A quick review of Goldman Sachs near-record profits last quarter shows that they made most of their money by trading, not by investing working people's hard-earned money in the real economy. So how are they creating more jobs? Bloomberg just reported:
"Equities-trading revenue rose 18 percent to $2.35 billion from $2 billion a year earlier, Goldman Sachs said. Gains from principal investments, which includes the company's stakes in Industrial & Commercial Bank of China Ltd. as well as real estate and other companies, were $510 million compared with a net loss of $1.41 billion in the first quarter of 2009. Investment-banking revenue climbed 44 percent to $1.18 billion from $823 million last year. ...Compensation and benefits, the firm's biggest expense, increased 17 percent to $5.49 billion in the quarter..." Bloomberg News
Unfortunately, the financial reform bills won't shut down or even significantly regulate this casino.
This is the second chance we've had to get the big job done. The first was when the banks were on their knees begging for taxpayer money in the fall of 2008. We opened up the public trough for Wall Street, but we didn't have the nerve to make access to that trough contingent on meaningful reforms -- reforms that the American public would have gladly supported. Instead Wall Street took our money and used it to reboot their bonuses and hire an army of lobbyists to kill any and all reforms. We missed that moment (and helped spark the Tea Party movement in the process).
Now Goldman Sachs is giving us another chance. But it would be a monumental error to expect the Administration and Congress to do any heavy lifting. We need to get into gear to show how we feel about the financial travesty called Wall Street. The "Make Wall Street Pay" demonstration organized by AFL-CIO president Rich Trumka on April 29th on Wall Street needs our support.
They're hoping for 10,000 protestors. A million would really do the trick. If President Obama wants his financial reforms to pack some punch, he should exhort us all to take the train to Wall Street....and step onboard himself.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.