In 1997, Brooksley Born, now retired, directed a small federal office, the Commodity Futures Trading Commission, the federal agency which oversees the futures and commodity options markets. However, she was blocked from overseeing off-exchange markets for derivatives.(Derivatives are so-named because they derive their value from something else, such as currency or bond rates.)

She wanted to release a “concept paper” — essentially a set of questions — that explored whether there should be regulation of over-the-counter derivatives. President Clinton’s economic advisors were furious with her.

CFTC regulation was strenuously opposed by Federal Reserve chairman Alan Greenspan, Treasury Secretaries Robert Rubin and Lawrence Summers.

Simon Johnson and James Kwak in their new book, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, stated: ” Larry Summers, Deputy Treasury Secretary for President Clinton called her and said: ‘I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.’” Unintimated, Born released a concept paper the following year much to the chargin of Clinton’s economic team.

A year later,following the suggestion of Clinton’s economic team, Congress enacted the Commodity Futures Modernization Act, which effectively gutted the ability of the CFTC to regulate OTC derivatives. With no other agency picking up the slack, the market grew, unchecked.

Years later she was proven right. The failure to regulate derivatives helped bring on the greatest recession since the Great Depression. In 2009, she was awarded the John F. Kennedy Profiles in Courage Award in recognition of the “political courage she demonstrated in sounding early warnings about conditions that contributed to the current global financial crisis”.

Although Democrats try to trace the causes of the financial crisis back to the Bush administration, clearly, President Bush and Clinton both contributed to the current financial crisis as did Congress. The next time you see a Congressional hearing and the Congressmen and women are chastising the bankers, remember the legislation that Congress passed.

“Oh, yes, we have class warfare in America. My class is winning.”

                                                                              Warren Buffet

In our current financial crisis, the activity of significant lending by banks to those who wanted to own a home was followed by those banks selling off the mortgage loans to investors. This had two consequences: the banks no longer were responsible for their loans (the loans were not on their balance sheets); thus, the banks became incredibly irresponsible about whom they would loan money; and two, once the mortgages were sold, the investors bundled those loans, and, thus, no one was able to keep track of who’s got what and to whom. This bundling is called securitization.

Of course we can change this. We can regulate the banks. We used to do that . It was called the the 1933 Glass-Steagall Act and it prevented banks from being so irresponsible that they could sell mortgages. Over time the Glass-Steagall Act’s powers were eroded by both Republicans and Democrats. (Yes, the Democrats were also responsible, not everything can be blamed on Ronald Reagan.)

Not only did Congress eroded the Act so did the Federal Reserve Board which has regulatory jurisdiction over banking, but not the stock market. Therein lies the rub. The banks were increasingly losing profits to nonbanking institutions who were intruding on banking territory. Congress got so nervous that in 1994, when Congress was still under Democratic rule, Congress passed the Home Owners Equity Protection Act. It empowered the Federal Reserve board to make rules for mortgages even for institutions that were not banks.  (I say this in case you think it doesn’t matter which party wins – it does matter).

Wonderful! Except Mr. Greenspan, head of the Federal Reserve, did not enforce the regulation. Remember Mr. Greenspan, he believed in the power of the market to self-regulate. We didn’t need regulation.

Now we are at the point where most sensible people say – we need regulation, let’s figure out what that will be.  However, we have the Republicans saying we have too much regulation and since the minority is running the Senate, we could end up with no new regulation to address this financial crisis.  What a country!

On October 22, 2008 the Congressional Committee on Oversight and Government Reform held a hearing on “Credit Rating Agencies and the Financial Crisis. Chairman Henry Waxman said that the story of the “credit rating agencies was a story of colossal failure” in the subprime mortgage debacle by rating debt obligations with incredibly high ratings at a time when the ability of the issuer to make timely payments was highly doubtful. He accused the credit rating agencies (the leading credit rating agencies are Standard & Poor’s, Moody’s, and Fitch) of breaking their trust with millions of investors.

During the Committee hearing, emails were released that demonstrated credit rating agency analysts were well aware of the fragile nature of many of the loans. Several people testified highlighting how the credit rating agencies are compromised by the issuers since that is who pays them. And that’s the rub. Where do credit rating agencies get their money? from the people who want the agencies to rate their bonds, RMBS, CDOs, and SIVs. Hence if the issuer does not like the rating, the issuer will walk across the street to another credit rating agency.

Now a year later, legislation is being considered to regulate these credit rating agencies. House Financial Services Committee Chairman Barney Frank and Paul Kanjorski, Chairman of the Subcommittee on Credit Markets have draft legislation to create the Enhanced Accountability and Transparency in Credit Rating Agencies Act. Now to get it passed….

The best website to read about the corruption of the credit rating agencies is the McClatchy site: http://www.mcclatchydc.com/227/story/77244.html. I have made it my homepage!

There are three major credit rating agencies: Standard & Poor’s, Moody’s Investors Services, and Fitch.  These three agencies assign risk to corporate investment.  They can deliver a top-tier rating of AAA to a corporate investment that they consider an excellent investment.

The shock to Americans who relied upon their credit ratings was that these three agencies assigned “AAA” ratings to investments that were backed by subprime mortgages. Of course, their response is that they were fooled just like you and me, although unlike you and me, they had a stable full of bright well educated MBAs to conduct in-depth analysis of these investments. Of course, if that excuse doesn’t work, they fall back on credit ratings are constitutionally protected free speech and are thus protected from lawsuits.

Fortunately, a federal judge in New York, Shira Scheindlin, stopped such excuses in their tracks and said that indeed companies that provided credit ratings are indeed liable from investors who were burned by their ratings.

How could credit rating agencies be so wrong? They are paid by those who are issuing the investment, and the better the rating, the higher the fee. Talk about incentives. Of course with such incentives the credit rating agencies lack objectivity. Time to go to court!

     For those over 50, when we think about banks, we think about our neighbor who operates the local bank that gave our neighbors mortgages. Not any more. Now we are dealing with huge multinational banking corporations. In 1989 the five largest firms controlled just 7% of the mortgage servicing industry; by 2007, the five largest firms controlled 46%.  The Nation tells us that after Bank of America merged with Countrywide, three banks, Bank of America, Wells Fargo and Chase controlled 48% of the nation’s $11.5 trillion in mortgages. These banks have become so large that any financial problems they meet will become the nation’s problems. And indeed that has happened. 

Banks became too highly leverage particuarly in the mortgage business. Until recently, homeowners were required to put 20% down on any mortgage they sought. However, terms changed as deregulation of the marketplace was encouraged after President Reagan was elected.  Banks began offering mortgages with little or no money down. This became true in other purchases as well.

Banks and other financial institutions in the US have usually kept their leverage ratios at about 10. International standards usually specify a maximum leverage ratio for financial institutions of about 12. During the boom years, large securities firms in the US had much higher leverage ratios. In 2004, the US Securities and Exchange Commission, which supervises these firms, approved a waiver for five large securities firms – Goldman Sachs, Merrill Lynch, Morgan Stanley, Lehman Brothers, and Bear Stearns. They promptly took advantage of the waiver. Leverage ratios of 30 and more were not uncommon. At these levels of leverage, a fall in asset values of about 3 – 4 % makes a firm insolvent. It was a disaster waiting to happen.

In and around 1997, the US Congress – supported by President Clinton – did two things. One was the real estate capital gains tax cut, which eliminated the capital gains tax on primary home real estate held over two years up to $250,000 for a single filer and $500,000 for a married couple. This may be the biggest tax cut ever, and it made real estate the most favored investment class. Small wonder, then, that real estate prices rose in an unprecedented manner for approximately ten years in a row. At some point, however, as in any bubble rising, it went too far. It became easy to see at some point after year 2000 when in many places it had become cheaper to rent than to own, pointing to over-inflated prices.

It wasn’t just the Republicans who were running amock, it was the Democrats. President Clinton did not have the backbone to fight the banking interests. It was easier to go along with his Republican Congress. We need to press Congress to pass banking regulation that reins in the investment community risk takers. The difficulty is how to defeat the powerful financial interests in this country who wish to continue deregulation.

Author Lynne Weikart is available for radio, television and print interviews on how the fiscal elite use access to capital to undermine the voters’ will. She puts a human face on each of New York City’s fiscal crises, analyzes their historical patterns, and compares the tenure of several mayors. This timely book, Follow the Money: Who Controls New York City Mayors, has become an invaluable book for those interested in the future of American cities during the nation’s severe financial crisis.

Through the history of politics, Weikart reveals how financial elites in New York City have exploited recurring fiscal crises and sharply curtailed the range of choices open to mayors in setting priorities and implementing budget choices. In the face of enormous pressure during a fiscal crisis to defer programs and compromise promises to constituents, however, committed mayors from Fiorello LaGuardia to Michael Bloomberg have at times managed to overcome obstacles and achieve their goals.

Weikart writes: “As the world center of financial services, New York City is an informative case study of the power that financial elites exert over the political leadership and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by these powers of the financial interests particularly during times of fiscal crisis.”

This book is available through SUNY Press.
See http://www.sunypress.edu/details.asp?id=61778

For more information contact Lynne Weikart
By Phone: 917-494-3231
By Email: lweikart@gmail.com

To read her current thoughts on the fiscal crises go to:
http://www.followthemoneyus.com/

Why are we in such a financial mess? It started in 1978 when the U.S. Supreme Court ruled that banks could lend at interest rates set by the state where the bank is chartered and not where the loan is made (Marquette National Bank v. First of Omaha Service Corporation). In effect Minnesota could not enforce its usury law against a credit card issued by a Nebraska bank. The effect of that was that banks set out to find states that had no ceilings on interest rates. And you wondered why credit cards were being issued from South Dakota?

Reasonable state limits of 5 to 9 percent were cast aside as states repealed their limits and lessened any usury laws in order to meet the competition. Interest rates spiked.
Of course, ceilings on interest rates are still on the books in many states and you will often read that it is against the law to charge too much interest. However, Congress took care of those state laws when it comes to mortgages and credit card issuers.
In 1980, when inflation was raging, the U. S. Congress passed the Depository Institutions Deregulation and Monetary Control Act exempting federally-chartered savings banks, installment plan sellers and chartered loan companies from state usury limits. This effectively overrode all state and local usury laws.

The Alternative Mortgage Transaction Parity Act (AMTPA) was enacted as part of the Garn St. Germain Depository Institutions Act of 1982.  AMPTA preempted any state law that restricted alternative mortgage financing.  This law enabled predatory mortgage lenders to make seemingly affordable loans, like adjustable rate and interest-only loans that lead to foreclosure for so many people. Also state-chartered banks were given the same ability to charge out of state customers the highest interest rate permissible in the state where the bank is headquartered.

Federal law delivered the death blow for a state’s usury limit in 1999 with the Gramm-Leach-Bliley Act, a section of which permitted local banks to charge the greater of the state usury limit or the rate charged by an out-of-state bank with a branch in the state.
The sky is the limit!

Now let’s see who was in charge when all this happened. In 1980, Democratic President Jimmy Carter signed the DIMCA and in 1999 Democratic President Bill Clinton signed the Gramm-Leach-Bliley Act. So much for blaming this financial mess on just the deregulation movement of the conservative Republicans. Democrats are right in there with them.

Author Lynne Weikart puts a human face on each of New York City’s fiscal crises, analyzes their historical patterns, and compares the tenure of several mayors. This timely book, Follow the Money: Who Controls New York City Mayors, has become an invaluable book for those interested in the future of American cities at a time of the nation’s severe financial crisis.

Through the history of politics, Weikart reveals how financial elites in New York City have exploited recurring fiscal crises and sharply curtailed the range of choices open to mayors in setting priorities and implementing fiscal policy.  In the face of enormous pressure during a fiscal crisis to defer programs and compromise promises to constituents, however, committed mayors from Fiorello LaGuardia to Michael Bloomberg have at times managed to overcome obstacles and achieve progressive goals. 

Weikart concludes: “As the world center of financial services, New York City is an informative case study of the power that financial elites exert over the political leadership and how mayors can push back to assert their own political agendas. In the final analysis, although some mayors do achieve their own policy initiatives, their choices are significantly limited by these powers of the financial interests particularly during times of fiscal crisis.”

This book is available through SUNY Press.

For more information:  http://www.followthemoneyus.com

To Purchase this book goto: Amazon Books

I bet you have never heard of the Depository Institutions Deregulatory and Monetary Control Act of 1980 (DIDMCA) or the Garn-St. Germain act of 1982. Those acts, one signed by President Carter and the other signed by President Reagan, helped create the financial mess in which we find ourselves.

The DIDMCA effectively ended all the states usury laws. It meant that if a state decided that interest rates on mortgages and credit cards should be capped at 5%, that state was stopped from doing so.  The Garn-St. Germain Act permitted a “shadow banking system” to develop without any of the regulations required of banks.  In effect the Garn-St.Germain Act cut the savings and loan institutions loose from any regulation.

There are other Congressional acts as the financial elites slowly carved their way out of Glass-Steagall Act of the Great Depression (which required commercial and investment banks to be separate and required insurance and brokerage houses to be separate) until banking regulation disappeared.  What a country!

There are solutions for the credit crunch that too few policymakers are talking about. Here is the list:

Short term: Federally insure subprime mortgages, restructure troubled mortgages, extend unemployment insurance benefits, provide funding to state governments for infrastructure.

Long term: Limit subprime mortgages or outlaw them, require transparency in all mortgage dealings, pass legislation regulating financial markets to prevent highly leveraged deals, stop predatory lending.

So when are we going to see such solutions debated in Congress. Don’t hold your breath. Solutions offered by our federal government so far rescue financial markets but not people. If it weren’t for Gordon Brown of Britain, we would not even be talking about the federal government buying prepared stocks in banks. Buying stocks in banks may be beneficial to the taxpayer, we might even make money on it.

Eliot Spitzer was a dynamite Attorney General. He wrote a column in the Washington Post on February 14, 2008 (see http://www.washingtonpost.com/wp-dyn/content/article/

2008/02/13/AR2008021302783.html in which he said that “In 2003, during the height of the predatory lending crisis, the OCC (office of the Controller of the Currency) [under the direction of President Bush] invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.”

The states attempted to stop predatory lending and the Bush administration stopped them. After all, we don’t want states to over regulate. When this sorry tale of taking advantage of the poorest of our citizens is told, the Bush administration will once again be demonstrated to be a disaster. Meanwhile good government groups try to get this administration to focus on people rather than financial markets. It is an uphill battle.

We made a choice. We voted for Obama and get a rational, thoughtful, educated politician who believes in federal regulation to deal with this crisis instead of McCain, an emotional, impulsive, politician who believes in less government. But Obama has to deliver and so far when dealing with the financial crisis, he is listening to the same people who created it.