Gut-Check Time on Shackling Wall Street

The administration has rolled out its financial reform plan, which the president accurately calls [1] the "the boldest set of reforms in financial regulation in 75 years."

Rep. Barney Frank, the chair of the House Banking Committee, promises to act rapidly, hoping to pass reforms by the end of the year. Best to move now while the banks are weak, goes the argument, than try to take them on when they are back on their feet.

The banking lobby has reacted like wasps whose hive has been hit by a stick, swarming out to fend off the threat. First target of their sting is the proposed Consumer Financial Protection Agency, designed to defend consumers from the serial abuses of credit card companies, payday lenders, mortgage brokers and the like. Ed Yingling, president of the American Bankers Association, decries even the idea of the agency, saying [2] banks are "dumbfounded" by its scope, suggesting that it would "blow up the system"

This assault on the consumer agency reveals how much the banking lobby has already won. Most notable about the administration's plan is what was left out.

• Nothing real is done about compensation schemes.
• Exotic derivatives and credit default swaps are not banned.
• Rating agencies are still paid by the financial houses they are supposed to rate.
• Banks too big to fail are to be monitored, not broken up.
• Oversight of the system is entrusted to the Federal Reserve, which was designed to insulate money center banks from the democracy.
• No mention is made of a tax on securities transactions that would both put a damper on excessive speculation and raise a ton of money to help repay some of the staggering costs of the crisis the speculators caused.

Sadly, the whole notion of urgency is based on the false assumption that the banks are weak since they are on the public dole. But, as we've seen over the past months, the banks, even on life support, have big-time clout in Washington. They blocked the effort to give bankruptcy judges the right to renegotiate mortgages of distressed families. They torpedoed legislation to put a lid on credit card interest rates. "It's hard to believe," Illinois Sen. Richard Durbin said [3]in frustration, but the banks are "still the most powerful lobby on Capitol Hill. And they frankly own the place."

So what can alter the balance of forces in Washington?

We have one lesson from history: the Pecora Commission in the New Deal. Ferdinand Pecora, the fearless chief counsel of the Senate Banking Committee, led hearings that dragged the barons of Wall Street before a riveted public, exposing their insider dealings, their Ponzi schemes and their excesses. By the time he was done, Time Magazine was calling them banksters, the public was demanding reform, and Congress located its backbone and enacted the Securities Exchange Act, the Glass-Steagall Act and much more. (For a good summary see "Financial Inquiries and the Pecora Legacy" [4] by the New York Times' Kate Phillips.)

These real reforms helped the U.S. escape the cycle of financial crises that previously had convulsed the economy about every ten years. It was only when these protections were dismantled from Reagan on that the bankers once more became "masters of the universe," and replayed the sorry saga of casino and crash.

Modern-day Pecora hearings are waiting to happen. Led by Speaker Nancy Pelosi, the Congress passed legislation setting up a Financial Crisis Commission with subpoena power and the mandate to probe and expose the roots of the current crisis. Senate leader Harry Reid and Pelosi each have the power to name three commissioners, with the Republican leaders of the House and Senate naming two each. Pelosi and Reid name the chair.

With strong and independent leadership—say if it were chaired by Elizabeth Warren, the brilliant Harvard Law professor who has chaired the Congressional Accountability Panel that helped expose the follies of the bank bailout—the commission could transform the debate in Washington.

It could hold hearings in the epicenters of the housing crisis, exposing the systematic fraud practiced by lenders like Countrywide and fostered by the banks that bought up the mortgages. It could expose how the banks and rating agencies colluded to transform garbage NINJA (no income, no job, no assets) mortgages into triple A securities. It could subpoena the barons to show how they profited personally and turned their eyes as the banks took ever greater risks, gambling with ever higher levels of borrowed money. It could make the case for adult supervision.

Americans are eager for this. Pollster Celinda Lake found [5] that 71 percent of voters want Congress to hold investigations into the "events leading up to the Wall Street financial crisis." We want to know who caused this mess, who made out like bandits, who brought down the house. Public hearings would gain national attention. Leads winnowed out by the Commission would be pursued by muckrakers and bloggers. Congressional committees would be stirred from their lethargy. Time magazine would start talking about banksters again. Then real reform might be possible.

It is now up to Pelosi and Reid. The law was passed weeks ago. They have the power. They can choose to name aggressive and independent commissioners or to turn the commission into a pro forma review that creates a report for the shelves a year from now.

The banking lobby is no doubt pushing hard to neuter the commission. And here we see another cost of the decision by Treasury Secretary Timothy Geithner to subsidize the banks rather than reorganize them. If his plan fails, we'll be like Japan with the recovery burdened by zombie plans. If the plan works, we'll end up with the banks "too big to fail." And while we're deciding whether it works or not—as we are now—there's immense pressure not to "undermine confidence." The banks are given stress tests and allowed to pass by cooking their books (not marking their toxic assets to market). The Treasury Secretary announces that they are "healing." They trumpet independence by repaying billions to the Treasury, even while they are still mainlining a range of subsidies from Federal Reserve. That same pressure makes Geithner and Obama economic adviser Lawrence Summers unlikely allies of a strong, independent and public investigation (to say nothing of Summers' involvement in the deregulatory follies of the 1990s).

But Reid and Pelosi have a significant stake in creating a hard-hitting commission. Politically, Democrats need to hold the Wall Street barons accountable, not just bail them out. Americans are furious at the hundreds of billions that are going to save the richest people in America while workers lose their jobs. As the party of "no," Republicans are being taught by Newt Gingrich on how to disingenuously disavow any responsibility and posture as fake populists. Democrats need to show that they are not in the pocket of Wall Street.

Moreover, this isn't just about politics. Fundamental financial reform is essential to the future of the economy and the country. President Obama is correct when he says we can't go back to an economy where finance captures 40 percent of the profits of the country. He's right when he condemns [6] a culture of "arrogance and greed" that can't be tolerated.

If we don't get comprehensive reforms now, we'll have created an even greater peril—banks and hedge funds officially recognized as too big to fail, assuming that they can pocket their winnings and the public will cover their losses. That is a recipe for another crackup a few years from now, as avarice once more clouds memory.

Will we get a modern-day Pecora? Reid and Pelosi have the power. They could appoint truly independent commissioners, give them the budget to gear up, and the mandate to tell the people. It's time for them to step up.