Kuttner: Fight taking place not to weaken “small” restraints that are in bill; public option is needed


Story Transcript

PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. We’re at the conference America’s Future Now. We’re now joined by Robert Kuttner. He’s the author of the book A Presidency in Peril. He’s the coeditor of American Prospect magazine. Thanks for joining us.

ROBERT KUTTNER, CO-EDITOR, THE AMERICAN PROSPECT: Happy to be here.

JAY: So the financial reform bill is making its way through the House conferencing now. The Senate and the House will get together, decide what this bill will be. Many people have said the big challenge of this bill was to end the structural blackmail, whereby Wall Street can gamble—when they lose, get the American people to pay for it. As the bill stands, or as it looks like it’s going to be, is structural blackmail going to be ended?

KUTTNER: No. The business model of Wall Street, whereby banks can get as big as they want to get, and if they’re too big to fail, the taxpayers have to bail them out, that’s not going to be ended. There are lots of smaller constraints on banks that are very constructive that are in this bill. There’s a huge fight about whether the stronger version of the provisions of the Senate bill and some of the House provisions are stronger, whether the stronger provisions stay in the final bill or whether Wall Street succeeds in weakening it. So it’s a step in the right direction. The derivatives reform is very good. But on the big question of whether the fundamental Wall Street business model changes, it doesn’t go nearly far enough.

JAY: So before we get into what you like about the bill, tell us why not. I mean, the crisis was so immense, everyone was calling it apocalyptic. Well, you’d think if something’s apocalyptic then it’s time for a change.

KUTTNER: Well, too big to fail—that’s the main thing they have not dealt with. There was an amendment. Sherrod Brown of Ohio in the Senate sponsored it. It went down about 60:40. That would have limited the amount of deposits as a percentage of all of the deposits that any one bank could hold. And the financial industry pulled out all the stops to defeat that. So that’s not going to be in there. And a question still outstanding is: what do they do when a big bank goes belly up? Do they just let the shareholders and the bondholders take the loss? Or is the bank so big that Uncle Sam can’t afford to have it fail? Those two things have not been adequately dealt with.

JAY: And there’s another part of it, ’cause even if they had been stronger on that, this is a pack-investment mentality: it’s not like one bank does something and the rest do something else; they all do the same. So even if they’re a little smaller, if they all gamble on the same bubble and they all lose on the same bubble, the whole sector starts to go down again.

KUTTNER: Well, but the version that passed the Senate—and, ironically, Blanche Lincoln, whose own political career is in jeopardy, she was a kind of a deathbed convert. She got religion on this stuff. So she was the author of a much tougher provision on derivatives that was much tougher than Tim Geithner wanted, much tougher than either Barney Frank or—.

JAY: So be specific. What’s the difference between Lincoln and what’s in the bill now?

KUTTNER: Well, Lincoln is in the bill now. It’s in the Senate bill. So this is the all-out war between the good guys in Congress and Wall Street, ’cause Wall Street wants to get rid of the Lincoln provision. Lincoln provision basically says that if you are a commercial bank you can’t play these games. If you’re insured by the FDIC, which is to say the taxpayer, you’ve got to get out of the derivatives business. It also says that all trades have to be transparent, they have to be settled by exchanges that are regulated—this can’t be done in the dead of night just between two consenting adults. So it’s good, tough legislation. I would say the odds are 50-50 that this stays in the bill.

JAY: And it’s particularly important, because during the bailout and the crisis a lot of these investment banks that weren’t considered banks became banks so they could get to the Fed and get zero percent money, which they—apparently, they’re sitting on, like, over $800 million of it now. So they want it both ways: they want to be able get to get the cheap money from the Fed, but they want the freedom to operate like gamblers.

KUTTNER: Yeah. And, of course, in the old days, before they repealed the Glass-Steagall act in 1999, it was a clear, bright line: you had to either be an investment bank, in which case you were gambling with your own money, or maybe your shareholders’ money, or you were commercial bank, and then you had to follow much narrower rules. If you went belly up, the depositors, the savers were protected, but you couldn’t gamble with FDIC-insured money. When they repealed the Glass-Steagall they blurred that line, and every bank wanted to be a hedge fund, they all took these horribly risky bets, and the financial collapse is a result. So if the Lincoln provision stays in the bill, that gets us partway to where we need to get.

JAY: Okay. What if it doesn’t? Do you still support the bill? What if that—like, Cantwell, Senator Cantwell, when it came out of the Senate, wouldn’t vote for it because, she said, it’s—I think her thing was, like, the Hoover Dam looks great, but if there’s holes at the bottom of it, it doesn’t mean much.

KUTTNER: Right. And by the way, there is a fix that Cantwell has sponsored that goes even beyond the Lincoln provision, because there are some loopholes even in the Lincoln provision. Well, I don’t have a vote, but here’s my view. I think if you look at Roosevelt, it took six pieces of legislation between 1933 and 1940 before the structure of New Deal financial regulation was complete. So the momentum is moving in the right direction. The public is starting to understand what’s going on. This week for the first time the FCIC, the Financial Crisis Inquiry Commission, headed by Phil Angelides, subpoenaed Goldman Sachs. The Republicans and the Democrats on that commission agreed that Goldman Sachs wasn’t being forthcoming. They’ve subpoenaed documents; they’ve subpoenaed testimony. I think when Goldman was sued by the Justice Department, the public finally saw through all these esoteric labels to what the real game was. The real game was Goldman created junk because its hedge fund clients wanted to bet against it, and then they pawned this stuff off as if it were legitimate investments to ordinary people. So the momentum is moving our way. Even if we lose this battle, I think it’s important that we pass this bill.

JAY: Now, Bill Black, who used to be a financial regulator—and he’s appeared on The Real News and other places—he says, you know, pass the bill, but he says the things that are missing are really the real issues. And he has made the point—I don’t know if you agree with it—you know, some of the leading people in the some of these leading institutions sat in rooms and essentially committed fraud. They knew they were inducing people into investments that were guaranteed to fail, and that nothing in this bill really touches executive compensation, because there’s such a motivation that you don’t even care what happens to your own investment bank if you’ve cashed out with millions of millions of dollars. Is that too big a hole?

KUTTNER: Well, these are huge holes. And Bill’s right that there ought to be criminal prosecutions. In the Savings and Loan fraud, which was a much smaller job of fraud, hundreds of S&L executives went to jail. And before this is over, executives ought to go to jail, because they did commit fraud. There ought to be more criminal prosecutions. Supposedly, the Justice Department is weighing criminal prosecutions, as well as the civil case that they brought against Goldman. So this is half a loaf. But public opinion is moving in the right direction. I would be very disappointed if there were not another financial reform bill next year with more teeth in it that went even further.

JAY: Now, some people have argued that if the public option was good for health care, why doesn’t the same logic apply to the finance sector? Why not some kind of public institution that can lend money and play a banking role that can compete with these private institutions but also protect people from this structural blackmail?

KUTTNER: Well, I’m one of those people who makes that argument. In the Depression, the good citizens of North Dakota created a state bank. We need, right now, something like the Roosevelt Home Owners’ Loan Corporation to refinance these underwater mortgages that people were mostly manipulated into taking out, so that millions of people can keep their homes. And the private banking industry doesn’t have any interest in refinancing these mortgages, except in token numbers, which are not sufficient to prevent this economic downdraft and this human tragedy. So, yeah, we need public institutions to refinance mortgages. We need public institutions to make investments that private institutions are not making.

JAY: And just finally, assess the role of the Obama administration in this whole bill and how it’s unfolding.

KUTTNER: Well, on some issues, like consumer financial protection, they’ve been pretty good. On other issues, like derivatives, they’ve been dragged kicking and screaming. On other issues, like defending the Fed from an audit, they’ve been terrible. So depending on which official you’re talking about, Gary—.

JAY: Let’s talk about the top one, because the buck is supposed to stop there.

KUTTNER: Right. He’s been mostly hands-off. And in the ninth inning with two outs on the health bill he finally started playing a hands-on role. It will be better if he played more of a hands-on role on financial reform, and even more importantly that he play a hands-on role on the right side of financial reform.

JAY: Yeah, ’cause maybe he is playing a hands-on role—it’s not the hands you want to be seeing.

KUTTNER: Well, he’s doing a good hands-on role on consumer protection.

JAY: But aren’t you concerned that that’s in the Fed and the whole lack of accountability for the Fed—. I interviewed Dennis Kucinich. He says he’s not going to vote for the bill, simply on that basis, that there’s no Fed reform.

KUTTNER: In the House bill it’s freestanding. In the Senate bill it’s in the Fed.

JAY: And where’s Obama on this [inaudible]?

KUTTNER: I don’t think Obama has said which one he prefers. And I could be mistaken on that. But if he said it, he hasn’t said it very loudly, and it would be better if he were playing more of a direct role on the right side.

JAY: You’d rather see the consumer protection agency independent and not in the Fed?

KUTTNER: Yeah, but it’s complicated, because the Senate version, which puts it in the Fed, actually gives it more powers and gives it some insulation from the rest of the Fed.

JAY: So you want to see the powers the Senate gave it, but as an independent agency.

KUTTNER: Precisely.

JAY: Alright. Let’s see what happens. Thanks very much for joining us. And thank you for joining us on The Real News Network.

End of Transcript

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