My Demands

Before I start this latest post, I wanted to quickly follow-up on my last post about Herman Cain and his insane 9-9-9 plan.  I must admit that I really didn't know a whole lot about Herman Cain's past other than what is reported repeatedly in the media that he was the CEO of Godfather's Pizza.  However, I have since learned that he was also the chairman of the Kansas City Federal Reserve Bank.  After the economic collapse of 2008 and the subsequent malaise in which our economy has remained, putting a Central Banker in charge of the government is about the same as putting a serial arsonist as Fire Chief.  Again, this newly discovered fact further begs the question, why are so many middle class, lower class and Tea Party types supporting this person who is obviously going to do everything he can to screw you ten ways to Sunday?

As the #OccupyWallStreet protests gain more and more momentum and attention, there has been a lot of attention focused on their lack of any demands and their lack of an organized platform.  Although I think this criticism is somewhat misguided (for most of us who have followed the train wreck in which the economy finds itself resulting directly from the actions of major Wall Street banks and the government which they run) I decided to set forth what my demands for the big banks and the government to address the actions of the financial system and prevent another economic collapse.  So, here goes.

1.  Break Up TBTF.  One of the reasons that was given in 2008 for bailing out the largest of the banking titans was that these entities had become Too Big To Fail.  That is, that if they were allowed to collapse as a result of their own reckless investments and their own fraudulent actions (as would be the result in a free market capitalist system) that the resulting damage to the economy would be so severe that the economy itself would collapse.  Of course, the result of the bailout was to further enlarge these banks as they swallowed up even more of their competitors.

In a normal world, the next step would have been to ensure that these newly created behemoth banks which have swallowed up all of the still festering carcasses of their competitors and been thrown trillions of dollars to shore up their bad assets (read debts) would be subject to some kind of reform to prevent this from happening again.  Of course, this isn't a normal world, this is the Bizzaro economy where nothing acts according to reason.  Therefore no demands were made of the banks and with the exception of a few quite frankly half-hearted reforms, no real regulations were put into place which would address the problems which led to the disaster of 2008.

One of the surest ways to prevent this from happening again would be to take these behemoth banking entities and break them up into their parts and separate them into smaller entities.  This would have the dual benefits of encouraging competition between the newly separate companies benefiting the consumer and also preventing the type of system wide meltdown that happened in 2008.  Without this breakup of the TBTF banks, the bailout was nothing more than a hand-out to the banks to line their pockets and promote profits on the backs of the taxpayer.

How would this be done?  That brings me to my next demand.

2.  Bring back Glass-Steagall  During the debate in 1999 over the Gramm-Leach-Bliley Bill which repealed the Glass-Steagall Act, Senator Byron Dorgan said on the Senate floor, "I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010."   There are very few instances where an elected official in our modern times gets an argument quite so right.  The only thing that Senator Dorgan was incorrect about was the time frame.  It only took 9 years instead of 10.

The Glass-Steagall Act was a gem of legislative simplicity passed in 1933 during the height of the New Deal reforms sweeping through Congress and saving the nation from its biggest economic disaster in history.  Glass-Steagall prevented the combination of different financial entities into one giant company.  Specifically it stated that commercial banks, investment banks and insurance companies had to be separate entities.

The reason for this was simple.  Commercial banks which deal with consumer deposits have a different responsibility to their customers than the more free-wheeling risk-taking investment banks.  Same with insurance companies.  Investment banks take on more risk for the hopes of higher returns, but they do so with money from large, wealthy investors who are more able to weather the huge losses that these investments can bring.  Commercial banks and insurance companies necessarily have more of a responsibility to invest more conservatively to protect their customers' assets and in the same way have more of a duty to their small investors to make sure that the investments they are making are sound.

We quickly saw the damage wrought by the repeal of this reasonable and sensible law during the housing bubble.  The combining of commercial and investment banks resulted in the huge growth in collateralized debt obligations, which are complex financial securities made up mostly of mortgages, although they can consist of any debt that has collateral such as car loans, for example.  The huge profits that were generated by these derivative products sold by investment banks meant that the investment arms of the new combined entities pushed the consumer banks to make more and more mortgages and in doing so, overlook the usual underwriting standards used to make sure that the debtor was a good risk.  The mortgages were made simply so they could be broken up into securities and sold as investments.  If these combinations of investment and commercial banks didn't happen, it is less likely that this type of abuse would have occurred.

Similar consequences occurred as a result of the combination of investment banks and insurance companies.  AIG is a perfect example wherein the world's largest insurer recklessly sold trillions of dollars of risky investments known as credit default swaps without any possibility of being able to cover the losses if they went bad.  The profits that were generated by AIG-FP which was an investment bank within the overall AIG insurance company were so great that the insurer ignored the liabilities that it was facing and just celebrated the profits.  As a result the company collapsed and became subject to the largest government bailout of all.

The re-institution of Glass-Steagall would require the break up of these entities into their separate parts.  For instance, Bank of America, long known as a commercial bank, is also Merrill Lynch an investment bank, Countrywide, a thrift and an amalgam of several other financial entities.  All of these if broken up into distinct parts would prevent the type of system-wide failure we saw in 2008, while also increasing the amount of competition within the entire banking system, which in and of itself will make the entire economy stronger and encourage growth, consumer lending and consumer demand.

3.  Consequences.  None of the bad players in the economic collapse have really suffered consequences as a result of their activity.  There have been fines paid by the likes of Goldman-Sachs and JP Morgan Chase for their fraudulent activities in marketing CDOs and other bad investments, but these fines when compared to the profits that the companies extracted due to their bad activities are minuscule.

There needs to be a system wide criminal investigation into what actions led to the economic collapse caused by the banks.  It is only through a criminal investigation and prosecutions that we will be able to prevent similar behavior in the future.

There are many in the banking industry who say that criminal prosecution would have no effect other than satisfying public outrage.  Of course history would be against them on this.  Following the stock market crash of 1929 leading to the Great Depression, the Pecora Commission, an independent Congressional investigation led by Ferdinand Pecora, an Assistant District Attorney for New York County, uncovered tremendous abuses within the financial world which directly led to the Great Depression such as price fixing, fraudulent lending, conflicts of interest and insider trading.  This led to the adoption of stringent financial regulations which kept the United States economy on a strong and even keel throughout the remainder of the 20th Century.

It was only through Pecora's tenacity and the willingness to put the titans of Wall Street under oath and in front of an independent investigator who had an eye toward criminal prosecution for their wrongdoing which accomplished this.  It is only through similar action now, by a prosecutor who is independent and removed from Wall Street's excessive campaign spending and wicked lobbying that such a result can occur today.

4.  Regulation of Derivatives.  Thanks to another late 20th Century law, the Commodity Futures Modernization Act, the types of investments known as derivatives which led to the 2008 collapse remain unfettered by regulation.  Many in the financial world would say that this is a good thing, since it supports an unfettered free market free from restriction.  However, in practice the opposite is actually true.

Because credit default swaps, collateralized debt obligations, rate swaps and other complex derivative instruments are not traded publicly, the price and market for such investments is controlled by the parties entering into the deals.  This can lead to abuse and outright fraud on the part of the sellers of such instruments.  For example, Goldman Sachs in a well publicized case for which they paid a multi-billion dollar fine was requested by a customer to put together a CDO made up of the worst of the worst of the mortgages available, for the sole purpose that he could bet against it.  Goldman Sachs subsequently sold this CDO which was designed to fail to its other investors (usually life insurance companies and pensions) as a sound investment even telling them that their own money was invested in the CDO (true, they had a 4 million dollar investment in it, and a 2 billion dollar short against it).  Trading such securities on an open, transparent market would effectively put an end to this type of abuse.

The other thing that providing transparency for derivatives would do is that it would eliminate the accounting hocus-pocus in which these financial companies take part that allows them to use derivatives to hide losses and obligations from investors.  Because derivatives are "over the counter", meaning that they are privately traded, all profits are booked immediately and any obligations or losses that happen subsequently are considered "off book" which means that they don't have to be reported.  This type of profit manipulation resulted in the misstating of profits which led to the downfall of such entities as Freddie Mac, Fannie Mae, Lehman Brothers and Behr Stearns.  Regulation of derivatives would make it harder to hide these types of potentially disastrous obligations from investors, again making for a more transparent and healthy economy.

5.  Regime Change.  During the Arab Spring, the protesters in Tahrir Square, Yemen, Libya and across the region were demanding regime change -- the ouster of the corrupt abusive regimes which had held their citizens under their iron grip, enriching themselves at the expense of their nation and holding onto their power at any cost.  In the United States, we face a similar oligarchy of wealthy interests which control the money supply and for all intents and purposes control the government as well.

We should accept nothing less than a total regime change in the financial power centers of this country.  This means the resignation and potential prosecution and imprisonment for a lot of people who have built and perpetuated this system which allows banks to take part in the most serious abuses of power both political and economic.  We cannot continue with a system that not only condones but rewards this type of bad behavior.

This means the immediate resignations of a lot of powerful people from their current positions.  Included in this are Ben Bernanke the head of the Federal Reserve, Timothy Geithner the Treasury Secretary and former head of the New York Federal Reserve Bank, Jamie Dimon the Chairman and CEO of JP Morgan Chase, Lloyd Blankfein the Chairman and CEO of Goldman Sachs among many others.

Additionally, and more importantly, we need to hold our elected officials accountable.  This means throwing away the labels of Democrat and Republican, Liberal and Conservative.  We must not support any elected official or candidate who has ties to or has supported legislation which favors the continued abuses that are taking place on Wall Street.  We must not allow either Democrat or Republican to co-opt this movement for themselves.  It is not until Barack Obama is as afraid of the outrage of those in Zuccotti Park as Mitt Romeny is that we will see real change occur.  There are plenty of legislators on both sides of our two party system who have proven that they care more about the interests of Wall Street banks than they do the interests of the common person.  Among these on the Democratic side are Senators Chuck Shumer and Kirsten Gillibrand of New York, Senator Kay Hagan from North Carolina and Congressman Barney Frank from Massachusetts.  Shumer and Frank are considered among the most liberal of politicians in Congress, and although I am sure that we agree on many issues, their continued unabashed support for the monied interests of Wall Street and their refusal to implement any real reforms means that they will never receive my support and shouldn't receive yours.  Furthermore, Barack Obama has proved that he is willing to put the interests of his donors on Wall Street above the interests of those who elected him.

The Democratic party for years has presented a populist tone in its campaigns and then embarked on a conservative agenda once elected.  They count on keeping the support of their constituents by alarming warnings of the dire circumstances that will occur if their opponents are elected.  There is no doubt that I don't want to see Mitt Romney, Heman Cain or Rick Perry as President in 2012.  But quite frankly I can't say that having them in office will really be different than having Barack Obama for another four years.  Perhaps it will take a Democratic drubbing in 2012 to make the party realize that they can't continually turn their backs on their supporters year after year after year and promote serious change within the ranks of the party.  And if they don't, then perhaps they need to be replaced by another party.

Last, make sure to support those candidates that actually do stand for substantial change in our economic system and actually fight for the middle class against the Wall Street interests.  If you contributed to Barack Obama's campaign in 2008, take that money and give it instead to Elizabeth Warren's Senate campaign in Massachusetts.  You may even want to let the Obama campaign know that you've done this and that they won't get another dime from you because they turned their backs on you as soon as they took office.

Regime change can happen, but only if you are willing to make it happen and it is only through regime change and the implementation of the reforms of which I have written here that we can prevent the economic injustice which has permeated every aspect of our society and it destroying our nation.