Finance Bill: a few good measures but mostly show
William Black: Senate Finance Bill has a few good reforms, but maintains structural blackmail
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. Now joining us from Kansas City, Missouri, is William Black. He’s a former financial regulator during the Reagan and Bush and a little bit of the Clinton administration. He’s an associate professor of economics and law at the University of Missouri in Kansas City. Thanks for joining us again, Bill.
WILLIAM BLACK, PROF. ECONOMICS AND LAW, UMKC: Thank you.
JAY: So the Senate finance regulation bill has been passed. The big challenge facing this legislation was whether this financial regulation policy would in fact end the structural blackmail Wall Street held the country to. Do you think it has met that challenge?
BLACK: No, I don’t think that the bill was ever structured to deal with the fundamental reasons why we have recurrent, intensifying crises.
JAY: Why do you say so? First of all, is there anything good in the bill? And if there is, what is it? But in terms of structural problems, what has it not met?
BLACK: There are a number of good things in the bill, and there’s the fact that the bill got stronger instead of weaker in the Senate over time, which is almost unprecedented. And that was in the face of enormous opposition from the industry. So it tells you that the constituents must have been putting a great deal of successful pressure on some key senators to get them to do the right thing, which itself is an encouraging thing about the American people and about the sum ability of the Senate to respond.
JAY: So what are the outstanding examples of what’s good?
BLACK: The good—particularly best thing in it is the creation of a real, independent agency dedicated to protecting consumers in the investment context. And if you put the right leadership in, that could be a very good thing. It won’t prevent future crises, because future crises happen when banks are run in an unsafe and unsound fashion, not simply when they rip off consumers. But that’s the best single thing out of the bill. There are other good things in the bill. There are, for example, restrictions on how you pay some of the professionals involved in the process. And that begins to get at one of the fundamental problems, and that’s compensation. And the compensation falls into two big categories: what do you pay the senior executives, but also what do you pay the smaller employees, and in particular the professionals, ’cause it’s pay that creates the perverse incentives that produces what we call "aggressions dynamic", which is where an unethical conduct drives ethical conduct out of the marketplace. So it’s good. It picks on, you know, some areas of abuse, like how you pay a loan broker. But it doesn’t go anywhere near far enough in applying that same logic to many of the players who caused the crisis. But still, you know, it’s good that they at least cleaned up the few things on loan brokers.
JAY: One of the big issues in terms of structural issues was the amount of bad debt and other—some people have called toxic, other people have called crap, that they’re able to keep off their books and sort of hide what the real situation is. Does this legislation deal with any of that?
BLACK: No, and that’s particularly disappointing and disingenuous. So in all this show about how we’re supposedly going to increase capital requirements for big banks, but net we have dramatically reduced capital requirements for the big banks—and not just the big banks, because we gimmick the accounting rules. So there’s also a big show about, hey, this bill is going to have a prompt corrective action feature, except that we already have a very good statute demanding, mandating prompt corrective action that has been completely ignored and, you know, deliberately circumvented by both administrations. And they did it by gimmicking the accounting rules, and they did so at the direct demand of the industry, which used its political contributions to get Congress to extort the Financial Accounting Standards Board to gimmick the rules. And this was done with a big "Yes, go get ’em, baby" signal from one Ben Bernanke. And, of course, President Obama reappointed Bernanke after he had done—you know, not only failed as a regulator but instituted this massive cover-up designed to evade the prompt corrective action law. And so it’s completely disingenuous to say, oh, now we’ve passed a law mandating prompt corrective action. Yeah, right.
JAY: Now, a couple of senators known as progressive-left of sorts, senators Cantwell and Feingold, they voted against the bill coming out of the Senate. Cantwell described it as being like the Hoover Dam with a couple of holes in the bottom of it because it doesn’t deal properly or thoroughly with derivatives trading. What’s your take on that?
BLACK: Yes, that’s been an area that we’ve been pushing as well. So it’s very good to hear responsible members like her identify that problem in general. This is another of the fundamental areas that hasn’t been fixed. So there are a series of major regulatory black holes that were quite deliberately created. This bill closes slightly the door. I mean, it’s more—on her metaphor, it’s more like sluice gates in a dam, and, you know, you’re running all the water out of the reservoir because you left the sluice gates open, and now this one says, well, let’s close them about 25 percent. Okay, but the water is still going to run out of the reservoir, and you’re still going to have these regulatory black holes. People will simply move. Frauds are dynamic, and they’ll move to the weaker areas that you leave open. And so, in the end of the day, if you slightly close a bit a couple of windows from which people were committing fraud, you don’t actually reduce fraud substantially.
JAY: I mean, that was your point in the last series of interviews we did together was that this, what happened in Wall Street, this subprime mortgage, the playing of the derivatives market, making money on the way up and making money on the way down, was all part of a very conscious and deliberate—what you called "fraud". Is this legislation going to stop that kind of fraud or not?
BLACK: No, it ignores fraud at all. And you’re right, except I would clarify: what we made clear in the prior interviews is they don’t really make money on either the way up or the way down; they commit accounting fraud. Accounting fraud makes it look like you’re making money. You actually lose enormous amounts of money. And, you know, there are more than $1 trillion in damages, well more than $1 trillion in damages caused by these kinds of frauds. And, of course, we’re hiding it by engaging in accounting fraud to hide the accounting fraud.
JAY: And that’s partly in order to keep the shares of the company going. But also, I guess, the point is as individuals these guys made money on the way up and the way down ’cause they’re making their bonuses.
BLACK: Absolutely. And that’s the only reason they’re able to get the bonuses in the modern era, because if they had to recognize their losses, most of these bonuses couldn’t be paid. So this was a terrible action that was done. It’s done in contravention of everything we purport to believe, in this legislation they just passed in the Senate, and people ignore it.
JAY: Okay. In the next segment of our interview let’s talk about what you would recommend to the House and the Senate. They’re going to negotiate this bill, so the final wording’s not done. So if they came to you and say, okay, if you think this is all just show, what should we do? So let’s do that in the next segment of our interview with Bill Black on The Real News Network.
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