In the Public Interest
Behind The Deregulatory Curtain
by Ralph Nader
The
current finger pointing by the deregulation crowd in Congress and their
ideological soul mates in the media reminds me of the 1939 film classic
The Wizard of Oz. It is as though these spin masters want us to pay no
attention to the government officials behind the deregulation curtain.
Indeed,
the right-wing pundits and the revisionists in Congress are spending an
inordinate amount of time falsely claiming that our nation’s current
financial disaster stems from the Community Reinvestment Act, a law
passed by Congress and signed into law by President Jimmy Carter in
1977. The primary purpose of this modest law is to require banks to
report on where and to whom they are making loans. Community
organizations have used the data produced as a result of this law to
determine if banks were meeting their lending obligations in the
minority and lower-income communities in which they do business.
Congress passed this law because too many lenders were discriminating
against minority borrowers. "Redlining" was the name given to the
practice by banks of literally drawing a red line around minority areas
and then proceeding to deny people within the red border home loans -
even if they were otherwise qualified. The law has been in place for 30
years, but the right-wing fringe claims it somehow is responsible for
predatory lending practices that date back just to the beginning of
this decade.
Notice what these revisionists are not mentioning.
No "thank you" to former Senator Phil Gramm for pushing the repeal of the
Glass-Steagall Act. This law was passed in the wake of the stock
market crash of 1929 – and designed to separate banking from securities
activities. In 1999, when Congress passed the Gramm-Leach-Bliley Act
and in so doing repealed Glass-Steagall the banks strayed into rough
waters by looking for fast money from risky investments in securities
and derivatives.
As predatory lending mushroomed out of
control, the regulators—key among them, the Federal Reserve and the
Office of Comptroller of Currency—sat on their hands. The Federal
Reserve took exactly three formal actions against subprime lenders from
2002 to 2007. Bloomberg news service found that the Office of
Comptroller of the Currency, which has authority over almost 1,800
banks, took three consumer-protection enforcement actions from 2004 to 2006.
No "tip of the hat" to the Bush Administration for
preempting state regulators and Attorneys General from using state
consumer laws to crack down on predatory and sub-prime lending by
national banks.
And, let us not forget the folks at Fannie Mae
and Freddie Mac. Imagine allowing these two government sponsored
enterprises—that were weakly regulated by HUD—to
claim they were meeting the national housing goals by counting the
purchase of subprime loans. Back in May of 2000, our associate Jonathan
Brown warned that it would be inappropriate and counterproductive to
encourage Fannie and Freddie to meet the housing goals by purchasing
subprime loans. Too bad our members of Congress and the regulators at HUD were infected with deregulatory zeal. Former Texas Senator and current UBS
executive Phil Gramm—would-be President John McCain’s Treasury
Secretary-in-waiting—pushed through the Commodities Futures
Modernization Act of 2000, which deregulated the derivatives market.
With help from his wife, Wendy, the former head of the Commodity
Futures Trading Commission who went on to a post on the Enron board of
directors, Gramm removed the controls on Wall Street so it could
innovate all sorts of exotic financial instruments. Instruments far
riskier than advertised, and now at the core of the financial meltdown.
The SEC,
through its “consolidated supervised entities” program, decided that
voluntary regulation would work for the investment banking sector. Not
surprisingly, this was a scheme cooked up by Wall Street itself. The
investment banks were permitted to double, triple and go 20 times (and
more) down on their bets by using lots of borrowed money. They made
minimal disclosures to the SEC about what they were doing, and the SEC
didn’t bother to review those disclosures adequately. Too bad for the
investment banks—and the rest of us—they made lots of bad bets. The SEC
has now closed the voluntary program, though now there aren’t any major
investment banks left (the two remaining ones have converted themselves
into conventional banks).
It is time to start paying very
close attention to government officials behind the deregulation
curtain. Let your Members of Congress know you are not willing to
bailout the gamblers on Wall Street with a no-strings-attached pile of
taxpayer dollars. The time for regulation is upon us.
