Blog

Damn right America is better off than it was four years ago.

Four years ago was September 2008. George W. Bush was president and Wall Street giant Lehman Brothers was collapsing. It was a time of fear. It was a time of panic about the future. Recalling that anxiety is unsettling. But it’s important for comparison sake.

Lehman filed for bankruptcy this week four years ago – Sept. 15, 2008. Global financial markets spun into a panic. Credit markets froze worldwide. The stock market plunged. GM and Chrysler fell into crisis. Foreclosures were spiking and housing prices plummeting. Main Street shops and factories couldn’t get ordinary loans essential to sustain routine business. Nearly half a million workers lost their jobs that month. It was the ninth consecutive month of massive job losses. The Bush administration had converted a vibrant economy and budget surplus it had inherited from former President Bill Clinton into the Great Recession and massive deficits. America was still mired in two wars, including one Bush started on false pretenses.

Now, in September 2012, global financial markets have stabilized. Credit is available to Main Street. GM and Chrysler are building cars and creating jobs. Unemployment is declining as the private sector has added jobs to the economy every month for the past 30. The value of housing is rising once again, creating wealth for the middle class. Now there’s a financial reform law to prevent another Wall Street bailout. There’s Obamacare to help families retain and secure health insurance. The war in Iraq is over and Osama bin Laden is dead.  Is America better off than it was four years ago? Hell, yes it is!

September 2012 can’t be described as boom times. But it’s sure not the dread-filled days of September 2008. As former President Clinton so eloquently said last week in his convention speech, describing the Republican attitude toward President Obama:

“We left him a total mess. He hasn’t cleaned it up fast enough. So fire him and put us back in.”

Republicans want Americans to put them back in charge. Their presidential nominee, Mitt Romney, has promised to “restore” America, to return the country to the days before President Obama.

The Romney plan to “restore” America involves repealing, revoking and rejecting every advance President Obama has achieved, including health insurance reform and Wall Street regulation. As Andy Borowitz suggested, if Romney could, he’d revive Osama bin Laden and kill Detroit. Anything to take America back(wards).

Luckily, Romney wouldn’t be able to undo President Obama’s auto bailout – although he opposed it from day one, urging “Let Detroit Go Bankrupt.”  He wrote:

“If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye.”

Well, GM and Chrysler got bailouts, and both are doing fine, thank you, Mr. Romney. In fact, in January GM reclaimed for a few months the title of world’s largest car manufacturer. Both companies are repaying the government loans and 1.45 million people are working as a direct result of the bailout, according to the nonpartisan Center for Automotive Research.

Would America be better off without GM and Chrysler? No, it would not. That according to 1.45 million employed people. (more…)

Remember the fear in 2008?  Think of the collapse of Bear Stearns and Lehman Brothers. Wall Street melting down. Pension savings disappearing. Housing values plunging and foreclosures skyrocketing. Three million workers losing their jobs.

It had all the makings of another Great Depression. As Barack Obama took office on Jan. 20, 2009, he faced a dilemma. In this crisis he could play it safe and hold steady on his predecessor’s path of pampering the rich and pandering to corporations, pretending that possibly, eventually, some benefit would trickle down to workers. Or President Obama could keep candidate Obama’s promises of change.

He went with change. He focused on workers, believing restoration of the nation’s great middle would drive economic recovery for all. He secured an economic stimulus package and rescued the American auto industry. Both measures worked to halt, and eventually reverse, the previous year’s relentless economic decline. Both, as well as other changes President Obama has proposed, emphasize creating and securing jobs for everyday workers. He wagered on American workers. And it paid off.

As unemployment slowly eases, as the Big Three automakers report huge profits and hire workers, as the stock market slowly climbs and foreclosures slowly drop, Republicans, particularly the GOP presidential candidates, refute it all. They simply deny that the stimulus created the 1.2 to 3.3 million jobs that the non-partisan Congressional Budget Office reports it did. They continue to insist that America should have let Detroit go bankrupt. Instead of betting on American workers, they would double down on Bush’s tax breaks for the rich, subsidies for fabulously profitable corporations and deregulation of Wall Street.

GOP front runner Mitt Romney supported the government bailout for Wall Street but opposed rescuing GM and Chrysler. Like so many Republicans, he’s all for preserving the jobs and institutions and million dollar bonuses for executives. But Republicans offer nothing but cutbacks and pain for workers.

They want to cut back food stamps, raise the retirement age, slash funds for education and Pell Grants for college, slice Medicaid and repeal the health care reform law that will lower the deficit while enabling 32 million uninsured American to get coverage.  At the same time, all four GOP presidential contenders would lower or eliminate corporate taxes and further cut levies on the wealthiest so much that their budget plans would increase the national deficit that they’re so keen to criticize.

They’re betting that more tax cuts for the rich will prompt reinvestment and economic resurgence. That’s the gamble former President Bush took when he twice cut taxes on the wealthiest. After seven years, here’s how Bush’s bet on the rich paid off: the economy and jobs were contracting at an alarming rate. Remember the fear in 2008?

Now, three years later, after President Obama placed his faith in workers, the nation’s economic outlook is brighter. As is that of GM and Chrysler.

Both companies suffered managed bankruptcies. Tens of thousands of workers lost jobs. Retirees took health care benefit cuts. Remaining workers accepted pay reductions. Plants and dealerships closed. It was pain all around.

Now, GM is back as the world’s number one automaker, making the highest profits in its history. Chrysler is growing faster than any other American car company. Ford is investing $16 billion in its American operations and plans to bring thousands of jobs back from overseas. Altogether, the industry added 200,000 jobs. In addition, rescuing the industry meant preserving hundreds of thousands of jobs in auto parts factories across America, and all the service jobs they support. (more…)

Zach Carter

Zach Carter
Economics Editor, AlterNet; Fellow, Campaign for America’s Future

The Washington Post has published a very silly op-ed by Chrystia Freeland accusing President Barack Obama of unfairly “demonizing” Wall Street. Freeland wants to see Obama tone down his rhetoric and play nice with executives in pursuit of a harmonious economic recovery. The trouble is, Obama hasn’t actually deployed harsh words against Wall Street. What’s more, in order to avoid being characterized as “anti-business,” the Obama administration has refused to mete out serious punishment for outright financial fraud. Complaining about nouns and adjectives is a little ridiculous when handcuffs and prison sentences are in order.

Freeland is a long-time business editor at Reuters and the Financial Times, and the story she spins about the financial crisis comes across as very reasonable. It’s also completely inaccurate. Here’s the key line:

“Stricter regulation of financial services is necessary not because American bankers were bad, but because the rules governing them were.”

Bank regulations were lousy, of course. But Wall Street spent decades lobbying hard for those rules, and screamed bloody murder when Obama had the audacity to tweak them. More importantly, the financial crisis was not only the result of bad rules. It was the result of bad rules and rampant, straightforward fraud, something a seasoned business editor like Freeland ought to know. Seeking economic harmony with criminals seems like a pretty poor foundation for an economic recovery. (more…)

Zach Carter

Zach Carter
Economics Editor, AlterNet

What is the penalty for bankers who tell $40 billion lies? Somewhere between nothing and a rounding-error on your bonus.

The SEC just hit two Citigroup executives with fines for concealing $40 billion in subprime mortgage debt from investors back in 2007. The biggest fine is going to Citi CFO Gary Crittenden, who will pay $100,000 to settle allegations that he screwed over his own investors. The year of the alleged wrongdoing, Crittenden took home $19.4 million. That’s right. Crittenden will lose one-half of one percent of his income from the year he hid a quagmire of bailout-inducing insanity from his own investors. That’s it. No indictment. No prison time. Crittenden doesn’t even have to formally acknowledge any wrongdoing.

In 2007, as financial markets were freaking out about the subprime situation, Citi repeatedly told its investors that it owned just $13 billion in subprime mortgage debt. It was true–if you didn’t count an additional $40 billion in subprime debt that the company was also holding onto.

Citi’s CEO at the time, Chuck Prince, has not been charged with anything. As Yves Smith emphasizes, all of the top financial officers of every major corporation are responsible for the accuracy of their quarterly financial statements. Lying on those statements is a federal crime. This is the sort of thing that securities fraud cases are built around.

The SEC’s own statements about what went on at Citi are damning. If the agency can make this kind of information public, they ought to be pursuing criminal prosecutions. The SEC says that senior Citi management had been collecting information about the company’s subprime situation as early as April 2007, but repeatedly cited the $13 billion figure to investors over the next six months, waiting to acknowledge the additional $40 billion in subprime debt until November 2007. The SEC also says that Crittenden knew the “full extent” of Citi’s subprime situation by September at the latest, but the company continued to cite $13 billion in earnings reports through October. (more…)

Leo W. Gerard

By Leo W. Gerard
USW International President

Recent stories about Wall Street contain a recurring theme: deceit.

For example, this week the CEO of the late Lehman Brothers, Richard S. Fuld Jr., with a completely straight face swore to Congress that he’d been utterly out to lunch on the issue of “Repo 105,” a sleight-of-hand accounting procedure auditors found Lehman used to conceal its debts.

Last week, the Securities and Exchange Commission filed a civil lawsuit charging  Goldman Sachs with securities fraud and describing a scheme in which Goldman defrauded clients by selling them a mortgage investment to bet on after secretly permitting selection of its component securities by a hedge fund manager who Goldman knew planned to bet against it.

Also last week, the Senate conducted hearings on failed Washington Mutual following a report by a Senate subcommittee that found the bank’s lending operations rife with fraud, including fabricated loan documents.

This deceit illustrates that America’s largest financial institutions can’t be trusted to refrain from crashing the world economy again. In fact, when the big banks announced their first quarter earnings recently — Citigroup $4.4 billion; Bank of America, $4.2 billion; Goldman Sachs $3.46 billion, and JPMorgan $3.3 billion; Morgan Stanley $1.8 billion – it turned out that much of that money was made by their trading divisions – the very ones that dragged them – and the U.S. economy – down during the crisis in 2008. These are the same risky trading practices that cost taxpayers a $700 billion bank bailout, their savings, their jobs, their businesses.

Clearly, these bankers can’t control themselves. And the “free market” has failed to moderate their behavior. Strict regulation is essential, including re-instituting the Glass-Steagall Act and other rules that will prevent financial firms from growing too big to fail; forcing the banks themselves to pay for liquidation of big financial institutions; placing on open markets trades of those secretive derivatives that brought down AIG and that the SEC says Goldman used fraudulently; and creating an independent consumer financial protection agency to stop practices like predatory lending, usurious interest rates and hidden fees.

Congress lifted bank regulations over the past three decades, including the Glass-Steagall Act passed after the 1929 stock market crash to reduce speculation and conflicts of interest and to prevent “too-big-to-fail” financial institutions by forbidding the combination of investment and commercial banks. Like gullible investors in subprime mortgage bonds, the politicians who reversed those rules bought the argument that the free market would regulate itself. This is the same argument 1,500 Wall Street lobbyists are using, along with millions of dollars, right now in attempts to persuade lawmakers to stop worrying their little heads about seriously regulating Wall Street.

Main Street, where foreclosures continue at a record pace and unemployment remains painfully near 10 percent, desperately needs its own 1,500 lobbyists and millions in influence dollars. It will have the power of thousands of voices at a “Make Wall Street Pay” rally April 29 in the heart of New York City’s financial district, one of several protests across the country organized by the AFL-CIO.

On Main Street the need to forcefully re-regulate to prevent another Great Recession is clear; it’s not in Washington, D.C. In fact, weakening the already-too-soft financial regulation bill proposed by Sen. Chris Dodd is a crusade for Senate Minority leader Mitch McConnell, whose campaign coffers have received more money from security and investment firms than from any other category — $1.3 million. Like a Wall Street banker, McConnell is using deception. For example, he harped all last week that an “orderly liquidation fund” in the Dodd bill was a “bailout fund.”

It’s not. It would be created with fees on banks – not taxpayers. And it’s not for bailouts that preserve banks. It is for bank liquidation. It would pay for the orderly closing of too-big-to-fail banks. Ezra Klein of the Washington Post ridiculed McConnell’s claims, and Katrina vanden Heuvel, editor of the Nation, described McConnell’s attacks on the bill as fraudulent.

All of the sudden on Monday, McConnell changed his mind about Dodd’s bill. Coincidentally, that was three days after the SEC filed the fraud suit against Goldman Sachs, making railing against financial reform appear not quite so politically wise to Republicans anymore. It’s all about the politics in Washington, D.C.

McConnell said he had new optimism that Wall Street reform would pass because Democrats had resumed bipartisan talks and, he said:

“I’m convinced now there is a new element of seriousness attached to this, rather than just trying to score political points.”

Listening to McConnell is like hearing Lehman’s Fuld, who got a $22 million bonus six months before his financial firm filed for bankruptcy, swear to Congress he knew nothing about the “Repo” accounting procedure Lehman used to conceal $50 billion in debts. Following his testimony, Anton R. Valukas, the examiner in the Lehman bankruptcy, told Congress that his investigators found a person who had discussed Repo with then-CEO Fuld and e-mails to Fuld describing it.

The problem with McConnell and his new-found eagerness to pass “bipartisan” legislation is that the Dodd bill needs to be strengthened, not weakened with compromises thrown to Senate Republicans, all 41 of whom signed a letter last week saying they’d vote against it.

Before compromises remove from this bill the power to effectively regulate, Congress needs to review what Goldman is accused of doing. Ezra Klein of the Post described it best:

“Goldman Sachs let hedge-fund manager John Paulson select the subprime-mortgage bonds that he thought likeliest to explode and put them into a package called Abacus 2007-AC1. Paulson, who guessed early that the market was heading for a crash, wanted to bet against these bonds. But he needed someone on the other side of the bet. So Goldman went out and found him some suckers, or, as Goldman called them, “counterparties.” .  .  .But here’s the rub: Goldman didn’t tell the counterparties that Paulson had picked the bonds. ‘Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,’  said Robert Khuzami, the director of the  SEC’s division of enforcement.”

Khuzami’s description makes Goldman’s behavior sound a lot like lying.

The real economy in this country – the one that manufactures, builds and produces tangible products – can’t afford a Wild West financial economy. The real economy depends on banks to finance business expansion and everyday transactions. All of that froze in the Fall of 2008 because of Wall Street’s reckless, inadequately-regulated gambling.

In a speech in New York City on Thursday, President Obama reinforced that some bankers “forgot that behind every dollar traded or leveraged, there is family looking to buy a house, and pay for an education, open a business, save for retirement.”

Obama also referenced the issue of dishonesty when he said this in New York:

“A free market was never meant to be a free license to take whatever you can get, however you can get it.”

If McConnell-style deceit about the financial reform bill continues in the Senate, serious regulatory reform won’t happen. Half measures won’t work. Only robust financial reform will end Wall Street’s freedom to deceive.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

The SEC’s fraud case against Goldman Sachs could represent a turning point in the public understanding of the great financial collapse, its politics and its remedies. Or not.

Far-seeing critics such as Bill Black, Jamie Galbraith, and Tom Ferguson, have long maintained that at the root of this crisis was not just regulatory failure or mistaken financial strategies but deliberate fraud. The SEC’s suit is a civil one, not a criminal charge, but it’s a start. Before this is over, senior financial executives need to be brought before the bar of justice and the existing system and its biggest players need to be broken up.

Consider the behavior that was at the very center of the collapse. At the retail level, mortgage companies backed by Wall Street’s largest financial behemoths encouraged naïve customers to submit what the trade called “liar loans.” Often the loan officers helped them fill out the application. In other words, the basic business model was built on fraudulent misrepresentations.

The retail mortgage companies could unload this paper because credit rating agencies colluded with them to turn very high risk loans into triple-A securities. This is also fraudulent. But none of the credit rating companies (which are regulated by the SEC) has yet been charged with fraud.

Then, further down the line, outfits like Goldman Sachs both turned these dubious loans into securities, and bet against the securities and helped hedge funds make even more complex bets, collecting both trading profits and fees. This, says the SEC in the complaint, is fraudulent. It took nearly two years for what has been documented in more than a dozen books and innumerable articles about the crash to be turned into a formal government enforcement action.

The SEC’s suit should be just the beginning. Between what we learned in the special examiner’s report on Lehman Brothers, and what will come out in the Goldman suit (if the SEC is not stampeded into a premature settlement) we should be able to document that fraud was at the core of the entire business model.

That’s why the Obama-Dodd-Frank legislation, though a decent beginning, is far too weak to achieve the reforms that the system needs. Meanwhile, the very same banks that exist only thanks to the Administration’s largesse, and which are paying record bonuses while the rest of the economy still suffers, are putting on a full court press to kill even the modest reforms. The Republicans and some Democrats have been working with bank lobbyists to weaken the bill even as GOP leaders like Mitch McConnell attack the measure for inviting future bailouts.

Politically, though Obama is entirely right to slam the Republican hypocrisy, Obama and Dodd have given the Republicans ammunition. The measures to limit abuses in derivatives trading are far too weak; “resolution” of failed banks would not necessarily break them up; too-big-to-fail is a bigger problem than ever; and the Administration is not fighting hard to get investment bankers like Goldman out of the conflicted business of trading for their own accounts.

President Obama has pumped up the rhetoric somewhat, but his willingness to take on the banking industry is still far from Rooseveltian. No wonder the voters are still confused by Mitch McConnell about which is the party of Wall Street.

Paul Volcker was right when he quipped that the last useful innovation produced by the banking system was the ATM machine. For something like three decades, the financial part of our economy has become a world unto itself, consuming over 40 percent of all corporate profits by 2006, the last year before the crash.

During the postwar boom, when the economy grew at nearly four percent a year for almost three decades and America became a more equal society, banks really were close to public utilities. Commercial banks made modest profits by evaluating the creditworthiness of corporate customers and making loans; thrift institutions provided safe places for savings and sources of mortgage borrowing; and investment bankers and true venture capitalists underwrote stock and bond issues, taking risks only with their own money. There were no hedge funds, no private equity–and no spectacular collapses. Securitization was unknown, and derivatives were a small, specialized and well-regulated corner of the financial system used mainly by farmers and others who dealt in primary products and need to hedge against price swings.

We need a drastic, radical simplification of the financial system. That means breaking up large institutions that are too big to fail, and breaking the rice bowl of ones that add nothing to broad economic welfare and efficiency other than an opportunity for the own enrichment at the general expense. To get there politically, we first need to expose the full extent of the fraud, and we need a Democratic Party that reverts to its New Deal role as the party of regular people rather than its Clintonian role as a second party of Wall Street.

Charming as it was to see former President Clinton admit that mistakes were made on his watch when it came to de-regulation of derivatives, that is only the beginning of redemption. Clinton’s people did not take a dive on this and on kindred issues because they made technical errors, but because the whole administration was in bed with Wall Street.

Happily, the politics of this epic struggle are starting to move in a more progressive direction. Senator Blanche Lincoln, chair of the Senate Agricultural Committee (which shares jurisdiction over derivatives regulation) is now taking a tougher line on regulation. It doesn’t hurt that she faces a tough re-election as well as primary opposition from the left.

After the great collapse, the smart politics as well as the right thing to do is to root out the fraud that is the essence of Wall Street’s business model–and dare the Republicans to oppose it. The deeper problem is not the Republicans but the fact that much of the Democratic Party is not sure that it wants to drastically simplify the financial system. President Obama has lately been finding his voice as a progressive. Let’s see if he truly rises to the occasion.

***

Robert Kuttner’s new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos. In addition, he is the author Obama’s Challenge.

Dean Baker

By Dean Baker
Co-Director, Center for Economic and Policy Research

In the middle of the worst downturn since the Great Depression, with unemployment projected to remain at elevated levels for most of the next decade, we have the bizarre spectacle of a presidential commission on the deficit. The commission is supposed to issue a report to Congress by the end of the year on how to get the long-term deficit under control.

This commission contains more than a bit of the theater of the absurd. At the moment, the only force sustaining the economy and keeping unemployment from rising further is the large deficit being run by the government. If we snapped our fingers and eliminated the deficit tomorrow, we would see the unemployment rate rise well into the double digits. The deficit creates demand in the economy. It is really simple; if the government spends more money, then it will employ more people. If we cut back this support for the economy, fewer people would be employed.

But Washington politicians have trouble saying what is obviously true. So, instead of talking about putting 15 million people back to work, we are talking about curbing the deficit. This would be like creating a commission on water conservation as we struggle to get enough water to quench a fire threatening the capital. But that’s where politics in the United States is right now.

The deficit commission’s co-chairs, former Wyoming Sen. Alan Simpson and Erskine Bowles, a former chief of staff to President Clinton, insist that everything is on the table. In particular, they have both touted their willingness to support cuts in Social Security. It is always impressive to see wealthy and well-connected people who have the courage to take away benefits for which middle-income people have worked and paid.

As the Social Security trustees report shows, Social Security benefits will be fully funded by its designated tax through 2037. The Congressional Budget Office projects that the payroll taxes will be sufficient to pay full benefits through 2044. So, when Simpson and Bowles say that they are anxious to cut workers’ Social Security benefits, they are pledging to take away benefits that these workers have already paid for with their taxes. These guys probably rip off employees on their wages too.

If Simpson and Bowles really gave a damn about the deficit, they would look to where the money is and support a tax on financial speculation. A modest set of financial transactions could easily raise more than $100 billion a year. A modest tax on trades (e.g. 0.5 percent on stock trades and 0.02 percent on trades of futures and credit default swaps) would have almost no impact on ordinary investors. In fact, such taxes would just raise transactions costs back to where they were in the late 80s or early 90s, years when the United States certainly had a vibrant capital market. However, even these modest taxes would impose substantial costs on traders who are actively speculating in these markets, and they could raise lots of money.

The United Kingdom raises the equivalent of $40 billion a year in the United States by just taxing stock trades. Applying the tax to trades of futures, options, credit default swaps, and other derivative instruments traded by banks would substantially increase this amount.

The opponents of this tax insist that it will not raise much revenue and that it is not possible to do without an international agreement. These objections are just excuses to protect Wall Street. The experience of the UK shows that the claims are not true (i.e. lies). The UK shows that it is possible to have the tax in one country and that it can raise plenty of revenue. When people tell us otherwise, we should just tell them to go collect their paycheck from Goldman Sachs and stop bothering us with nonsense.

So, when the deficit commission issues its report, if it comes with a recommendation to cut Social Security and without a recommendation for a FTT, we know what to do with it. Such a report would be worth as much as one of Lehman’s Repo 105′s or a credit default swap from AIG. Congress should send this deficit commission report back to Wall Street and tell them where to put it.

***

Dean Baker is author of the new book, “Plunder and Blunder: The Rise and Fall of the Bubble Economy,” PoliPoint Press, LLC. This piece was first published on Truthout.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

It was a pleasure to see President Obama exercise some leadership and muscle towards health reform, and more recently to pass a true “public option” for student loans. Apparently, the experience of leadership felt good, for the president decided to follow up by deciding to damn the torpedoes and making fifteen recess appointments, including Craig Becker to breathe some life into the National Labor Relations Board.

Now, we need to see a similar display of presidential leadership on financial reform. The bill that passed the House last December is far too weak on all of the key issues. Gigantic banking conglomerates will remain “too big to fail.” There is no separation of commercial banking from investment banking or proprietary trading, nor meaningful reform of corrupted credit rating agencies. Regulation of derivatives such as credit default swaps is far too weak. Private equity companies and hedge funds are largely left alone. There is no serious reform of executive compensation. The next generation of bubbles is already incubating while we are still recovering from the damage of the previous one.

The Dodd bill that will come before the full Senate later this spring is slightly worse in some respects, slightly better in others. The bill does include a version of Obama’s call to restore the Glass-Steagall wall between commercial and investment banking (the “Volcker Rule”); but where the House bill created an independent consumer financial protection agency, the Dodd bill places this new agency, of all places, in the Federal Reserve. It was the Fed’s total failure to enforce consumer protections on the books that invited the abuses that caused the collapse.

The bankruptcy examiner’s revelations in his 2,200 page report about the behavior of Lehman Brothers should cause the White House to rethink its entire approach to financial reform. Basically, Lehman Brothers cooked its books for a few days four times a year, so that its quarterly reports would make the firm look far more solvent than it actually was. It used repurchase agreements (“repos”), which are short term loans, to disguise $30 to 50 billion worth of liabilities. This balance-sheet manipulation began in 2001, according to the examiner, Anton Valukas.

This kind of behavior demonstrates the failure of three separate systems that are supposed to protect investors, creditors and the larger economy from willful corporate fraud. First, the Securities and Exchange Commission, which actually had personnel investigating Lehman at the time, and utterly missed what was going on right under the commission’s nose, in a lapse comparable to the Madoff scandal.

Second, Lehman’s outside auditors, Ernst and Young, failed to blow the whistle. These abuses mostly occurred after Congress enacted the 2002 Sarbanes-Oxley Act, explicitly to improve corporate auditing in the wake of the Enron fraud. Obviously, though corporate lobbies have been complaining that Sarbanes-Oxley inflicted too much red tape, the Lehman affair demonstrates that it is too weak to do the job. Auditors and executives, in principle anyway, are criminally liable for accounting fraud. But that did not deter Lehman from faking its books and Ernst and Young from going along.

According to the examiner’s report, despite the auditor’s acquiescence, Lehman was not able to find a law firm in the US to sign off on its bogus accounting. So Lehman went to the U.K., found a law firm, Linklater’s, to provide an opinion letter under British law okaying the dubious bookkeeping, and then ran the transactions through a London subsidiary.

One backstop, that has been weakened in recent years both by Congressional action and by Supreme Court rulings, is the right of investors or creditors injured by fraudulent behavior to sue. The original securities laws of the Roosevelt era envisioned that this kind of litigation–”private right of action”–would keep both corporations, their auditors and the SEC honest. But bipartisan legislation in the 1990s and two major Supreme Court decisions on 1994 and 2008 have effectively eliminated liability for aiding and abetting securities fraud. You can be sure if this right were still available, Ernst and Young would have though twice about giving Lehman a clean bill of health.

The politics of financial reform are drastically different from the politics of health care reform. For starters, Wall Street is massively unpopular in the country. By contrast, in the case of health care, some of the bill’s own weaknesses – the mandate, the diversion of Medicare funds, the tax on premiums of high-quality insurance – raised legitimate questions among many voters; Republicans succeed in creating lies about the bill (pulling the plug on Grandma, etc.) that only multiplied concerns. In the end, passing the bill was a genuinely difficult vote for many Democrats.

Financial reform is a whole other story. It’s not a difficult vote to tighten restrictions on predator banks (except when it comes to campaign finance). Judging by the recent comments of Senator Bob Corker, one of the senior Republicans on the Senate Banking Committee, Republicans are genuinely worried about finding themselves on the wrong side of a populist issue if they try to block financial reform the same way they tried to block health reform.

On financial reform, the real problem is not the Republicans–but whether Democrats will be tough enough. They have far more political room to force the Republicans to take a difficult vote than they are exercising. A cynic might think that Democrats such as Chris Dodd and Chuck Schumer are more worried about keeping Wall Street and the Fed happy than about maximizing the moment for reform and demonstrating to regular Americans which side they are on.

And if President Obama wants to appeal to bipartisanship, here is an area where bipartisanship can actually go hand in hand with good government. One example is the amendment to require an independent audit of the Federal Reserve, which was cosponsored by one of the most progressive Democrats in the House, Alan Grayson of Florida, and the libertarian Republican Ron Paul of Texas. With the support of over 300 House Democrats, that bipartisan provision made it into the final House bill.

Another good bipartisan bill was the Fraud Enforcement and Recovery Act, cosponsored by Democratic senators Ted Kaufman of Delaware, Pat Leahy of Vermont, and Republican Chuck Grassley of Iowa, the same Grassley who was part of the obstructions and myth-mongers when it came to health reform. But Grassley and other heartland Republicans are fed up with the double standard that places Wall Street ahead of Main Street. The Act, approved last May, helps–but does not fully restore the right of an injured investor or creditor to sue for damages in cases of securities, including those who aided or abetted a fraud, such as auditors who signed off on cooked books.

As Sen. Kaufman said in a recent floor statement,

“I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg. We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel. Enron engaged in similar deceit with some of its assets. And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar ‘accounting gimmicks’ to hide dangerous risk from investors and the public.”

A good place to start would be to require real audits, similar to the autopsy performed on Lehman Brothers, of all the banks that took taxpayer money under the TARP program. Anyone who thinks that this sort of cooking of books was confined to Lehman Brothers is a good candidate to buy the Brooklyn Bridge–or worse, a bond backed by a sub-prime loan. President Obama could accomplish audit this simply by directing his Treasury Secretary to do it.

Obama has at last discovered that the public expects him to lead; and that Republican whining about the perils of majority rule cuts no ice. His administration has now squandered more than a year, being far too soft on the Wall Street system that crashed the rest of the economy. Now, with his own stock risking, he can show his mettle by demanding much tougher financial reform and daring the Republicans to block it.

***

Robert Kuttner’s forthcoming book is A Presidency in Peril (March, Chelsea Green). He is co-editor of The American Prospect and a senior fellow at Demos. In addition, he is the author Obama’s Challenge.

Robert Kuttner

Robert Kuttner
Co-Founder and Co-Editor of The American Prospect

We have just witnessed what could be a turning point in the Obama presidency. In many respects we can thank Scott Brown. For it took the humiliating loss of Ted Kennedy’s senate seat, and the even deeper incipient humiliation of lost health reform, for Obama to be reborn as a fighter. It remains to be seen whether he will match the resolve that he finally summoned on health reform with comparable leadership on all of the other challenges he yet faces.

But even those of us who were lukewarm on this bill should savor the moment and honor Obama’s odyssey. His Saturday speech was simply the greatest of his presidency. It reminded us of the inspirational figure in whom so many of us invested such hopes last summer and fall. If you have been on Jupiter and somehow missed the speech, you owe it to yourself to watch it.

Visit msnbc.com for breaking news, world news, and news about the economy

At long last, we saw this president leading, as only a president can. And we saw him leading as a progressive Democrat, finally admitting that no common ground with today’s Republicans is possible, narrating stories we all can recognize about the human tragedy that is our current health care system.

We saw him reminding Democratic congressmen and women why progress on health reform is good politics. We saw him using gentle ridicule on the Republicans, who have suddenly become oddly solicitous of the Democrats’ congressional majority.

I noticed that there’s been a lot of friendly advice offered all across town. (Laughter.) Mitch McConnell, John Boehner, Karl Rove — they’re all warning you of the horrendous impact if you support this legislation. Now, it could be that they are suddenly having a change of heart and they are deeply concerned about their Democratic friends. (Laughter.) They are giving you the best possible advice in order to assure that Nancy Pelosi remains Speaker and Harry Reid remains Leader and that all of you keep your seats. That’s a possibility. (Laughter.)
But it may also be possible that they realize after health reform passes and I sign that legislation into law, that it’s going to be a little harder to mischaracterize what this effort has been all about.

We watched Obama master the mechanics of legislative politics, cobbling together a majority one vote at a time. And we observed the Republican right reduced to sputtering frustration.

What a splendid shift from the Obama who less than a month ago went imploringly to reason with the House Republican Caucus.

Until very recently, the press treated this battle as a symmetrical stand-off. Now, with the president at last regaining control of the narrative, the Republicans are revealed as pure obstructionists. As the bill takes effect and citizens actually experience benefits (and as Obama said, “Lo and behold, nobody is pulling the plug on Grandma,”) the Republicans will lose both as the party of No, and as a party that tried and failed to block a beneficial reform that citizens will come to value.

It has taken more than fourteen months for Obama to vindicate as president the leadership potential that we saw on the campaign trail; fourteen months to give up on the fantasy of bipartisanship; fourteen months to start truly inspiring ordinary people as he did as a candidate.

House Speaker Nancy Pelosi deserves to share this moment. She never gave up on this legislation, and she kept after Obama and his aides to be tougher, smarter, and unapologetically partisan. She as much as Obama did the hard work of pulling together a majority, and kept Obama from caving in to Rahm Emanuel’s advice to seek a puny bill that the Republicans might support.

The media is notorious for exaggerating the ups and downs of a president. A few weeks ago, Obama and health reform were doomed and Obama was not up to the job. In the coming days, we will see a jubilant Obama on the cover of newsmagazines. He will be lionized as a giant-killer. His approval ratings will rise, both because more Americans are paying attention to the beneficial features of the bill as opposed to the Republican caricatures and because Americans love a winner.

Whether he continues to earn these accolades depends on what he does next, now that the long distraction of health reform is finally behind us. For this come-from behind victory is only the first step in a long road back to the presidency we thought we were getting when we voted for Barack Obama.

The financial system is setting itself up for a second collapse, as new speculative maneuvers make insiders rich and add risks to the rest of the system. The bill working its way through the Senate is far too weak to fix what is broken. We are inviting new scandals, even before we get to the bottom of what really happened at Lehman Brothers and at AIG.

Mortgage foreclosures continue to increase far faster than the Administration’s feeble program of subsidizing the banks can provide relief to homeowners. Credit is still very tight because of the administration’s strategy of putting Wall Street bank balance sheets ahead of recovery on Main Street.

Last week’s signing ceremony in the Rose Garden for a pitifully small jobs bill was enough to wilt the roses. It was a relic of what we get when we strive for bipartisanship. With the economy short at least eleven million jobs, Obama himself has appointed a bipartisan deficit-reduction commission stacked with members who are almost certain to call for massive cuts in social investment that America needs.

And the health bill itself only begins the long task of wresting control of the health care system from callous insurance and drug companies. We still have to fight for a real public option that is the first step towards national health insurance.

But in the springtime of March 2010, we have seen a president who evidently has learned how to lead, who relishes winning, and who is primed to become a more effective progressive. For that we should be grateful. It should whet his appetite as a fighter — and ours.

***

Robert Kuttner’s new book is A Presidency in Peril. He is co-editor of The American Prospect and a senior fellow at Demos. In addition, he is the author Obama’s Challenge.

Leo W. Gerard

By Leo W. Gerard
USW International President 

Tricky auto loans didn’t cause the financial meltdown on Wall Street. Unscrupulous payday lenders didn’t cost taxpayers a $700 billion “troubled asset” bailout. 

So fussing about whether U.S. Sen. Chris Dodd’s financial reform legislation contains an independent Consumer Financial Protection Agency is like worrying about whether you’ll lose your tool shed as a conflagration consumes your home. 

Sure, shielding consumer borrowers would be nice. But safeguarding the entire economy from another collapse is essential. 

Preserving the economy requires limiting, regulating and exposing derivative trading.  That’s because derivatives – those credit default swaps – took down Wall Street. 

Neither the House of Representatives’ version of financial reform nor Dodd’s proposal adequately deals with derivatives. In fact, the language for derivative regulation isn’t even complete in Dodd’s bill. That is to say, it’s unfinished two years after Bear Stearns toppled onto Wall Street, triggering domino disasters at Lehman Brothers, Merrill Lynch and AIG, and warnings from regulators and politicians of a financial doomsday if taxpayers didn’t hand over their hard-earned cash to save financial institutions accustomed to bonus payments in the billions.   

In the Alice-in-Wonderland world of Wall Street, derivatives were designed to make investing safer. Instead, in the hands of speculators, they became a form of betting that nearly destroyed the financial world. 

Conservatives have repeatedly tried to blame the financial collapse on homeowners defaulting on mortgages. That’s ridiculous. That’s blaming the victim of a crime. Wall Street committed the crime. It went like this: Financial wizards on Wall Street created “securities” out of mortgages. They bought a bunch of mortgages, then sold what were supposed to be high yield bonds based on the future income from the mortgage payments. These were called Mortgage Backed Securities. That worked fine as long as the mortgages were solid – in the sense that the homeowner had income and assets sufficient to make the monthly mortgage payments. In the good old days, when banks didn’t sell off mortgages to Wall Street, they had a vested interest in accurately determining whether the applicant really could pay. So they required proof of income and assets. 

But as these Mortgage Backed Securities became overwhelmingly popular investments, and pressure increased to produce more and more mortgages to create these securities, the standards for investigating mortgage applicants slipped. That’s how no-income, no-asset verification loans – known as a liar’s loans – came to be. It wasn’t necessarily the applicant who was lying. Frequently it was the mortgage broker, who exaggerated income numbers to give loans to unqualified applicants so that the broker could reap a big commission for producing a new mortgage. Brokers and banks didn’t care if the loans were so dicey that applicants weren’t able to make even the first month’s payment because the brokers and banks didn’t keep them. They quickly sold them to those Wall Street wizards who were making “securities” out of them. 

Investors could buy what Wall Street calls derivatives — credit default swaps — to “insure” the “securities.” So, for example, if an investor began to feel a little queasy about his “security” paying off because it might be filled with liar loans, then the investor could “insure” it. For an annual premium of a small percent of the face value of the security, the investor got a credit default swap — assurance of payment in full in case of default.   

Unlike insurance, however, derivatives like credit default swaps aren’t regulated. So the “insurance company,” like AIG or a bank or a hedge fund needn’t bother keeping collateral on hand to pay its contractual obligations should a tornado of defaults or a hurricane named Bear Stearns occur. Credit default swap issuers are like lotteries collecting bets but not reserving money to pay winners. 

The derivative market differs from the legitimate insurance market in another important way. The derivative market allows speculators to purchase insurance on securities they don’t own. These are called naked credit default swaps. NPR’s Planet Money reporters explained it like this: it’s like buying insurance on your neighbor’s house. The buyer of that policy has a vested interest in your home burning down. And the more “derivative insurance” speculators buy, the greater the interest in your home’s demise. 

Many financial analysts believe derivative buyers have used naked credit default swaps in deliberate campaigns of destruction — like, for example, to take down Lehman Brothers or the country of Greece. 

If you tried to buy real insurance on your neighbor’s car or house, the broker would turn you away when you couldn’t prove ownership. That’s because states regulate real insurance. And those insurance watchdogs see the inherent problem with speculators placing bets that will pay off if catastrophe befalls the real asset owner. That would, of course, encourage arson. 

If derivatives like credit default swaps were traded on public exchanges, investors could at least see orchestrated efforts to take down a firm. But derivatives are traded behind closed doors, in secret deals between speculators and unregulated “insurers” that Wall Street calls “over the counter” but which should really be called “under the table.” AIG provided $440 billion worth of this “insurance” without any regulator knowing, without sufficient collateral to back up those deals, and without anyone questioning why the buyer needed insurance on something he didn’t own. 

The secrecy also enabled Goldman Sachs to sell subprime mortgage backed securities to investors with a straight face, and then turn around and buy credit default swaps that bet those securities would fail – and thus pay Goldman big bucks. Greg Gordon of McClatchy Newspapers detailed this duplicitous scheme by Goldman in a story last fall entitled, “How Goldman Sachs secretly bet on the housing crash.”

Goldman made out, as its name says, like gold, in this dealing. Goldman announced record earnings during 2009 and distributed  $16 billion in year end bonuses, enough to pay each of its 32,500 workers $498,000. That accomplishment, of course, was aided and abetted by $23 billion in direct and indirect federal aid given to Goldman. It also helped that AIG paid off Goldman bets dollar for dollar – for a total of $12.9 billion from the $180 billion taxpayers gave to rescue AIG. 

In the mean time, the individuals and agencies that Goldman sold those crappy mortgage backed securities to, well, they’re not so golden. For example, California’s public employees’ retirement system, called CALPERS, bought $64.4 million in mortgage-backed securities from Goldman on March 1, 2007, Gordon noted in his story for McClatchy. A little more than two years later, Gordon wrote, they were worth $16.6 million – only 25 percent of their original value. Goldman, by contrast, banked on such losses and won big. It earned $13.4 billion last year. 

Goldman distributed those big bonuses while Main Street continued to reel from the effects of the Wall Street melt down. The financial collapse reverberated through the economy, causing high unemployment – which meant, of course, that many mortgage holders who had legitimately qualified under old stringent bank rules could no longer make their payments. Now they’re unemployed and homeless – while those wizards at Goldman are sipping champagne on those bonuses. Meanwhile, Gordon showed in his story, Goldman is aggressively seizing the homes of delinquent mortgage holders. 

Yet, Congress has failed to act. This is at the same time that European Union officials are considering restricting the trade of derivatives linked to government debt – like those believed to have worsened the economic crisis in Greece. 

Wall Streeters who get millions in bonuses to know better are still trading in derivatives. Nothing is preventing another financial collapse, another day when Wall Street comes crying to Washington for a new $700 billion troubled asset bailout.