On the Regulation of Wall Street
Two major developments in late March and April 2010
- One was the decision of the SEC to bring a civil law suit against Goldman Sachs. This re-opened the flood gates of criticism of morally (even legally) dubious Wall Street practices. Goldman Sachs stood accused of betting against some of its financial products, in particular against a package of mortgage-backed securities (Abacus 2007-AC1) designed by a hedge fund that was betting against their loss of value! In the ensuing investigation and long public grilling by Congressional committees, it became very clear that Goldman Sachs had profited significantly from the collapse of the US housing market by betting against its clients’ own investments. Prudent financial management, according to senior figures in Goldman Sachs. Dubious morality, according to the companies many liberal critics, including Senator Carl Levin, chair of the Senate banking committee. “Moral bankruptcy”, according to the then UK Prime Minister, Gordon Brown. Fraud, according to the SEC.
- The Goldman Sachs crisis provided the backdrop to the on-going Congressional battle to introduce meaningful financial regulatory reform. The House, we must remember, completed its reform package before Christmas. In the first third of 2010, the focus of the battle was entirely on the Senate, where a Republican filibuster could always block reform. Bipartisan negotiations stalled in late April, and the democrats brought the Dodd bill to the floor. Three times in the last week of April, 41 votes (the republicans plus Ben Nelson) blocked debate: but even the Republicans could see the adverse effect that might have in November if they were generally seen as Wall Street advocates. Debate on the senate floor is now underway as this note is drafted. In dispute are (a) proposals to create a $50 billion fund (paid entirely by private financial institutions) to finance the rundown of any failing institution; (b) the location and powers of a Consumer Protection Agency; (c) the scale and potency of the regulation of new financial products, including derivatives. The Republicans fear too heavy a set of regulations. Liberals fear back-room loophole deals and legislation that lacks genuine teeth
For details on the steady watering down of proposals: from the initial administration proposals through the debate in Congress to the detail of the Dodd bill, see The Financial Times, March 16, 2010 and April 23, 2010. For critiques of the Dodd proposal as too weak, see postings by Nomi Prins, Simon Johnson and Robert Kuttner, all on http://www.alternet.org/story/ respectively 146428, 146470 and 146482.
- Pressure from the White House and from the streets has kept the issue of financial regulation high on the political agenda. The President went to Wall Street in late April to urge his audience of financial CEOs to support regulation and to call off their lobby dogs. The AFL-CIO marched supporters down Wall Street in a similar campaign ahead of Labor Day. The President’s speech to Wall Street can be read at http://www.whitehouse.gov/the-press-office/remarks-president-wall-street-reform
David Coates holds the Worrell Chair in Anglo-American Studies at Wake Forest University. He is the author of Answering Back: Liberal Responses to Conservative Arguments, New York: Continuum Books, 2010.
He writes here in a personal capacity.