By Jeff Balke
By Aaron Reiss
By Angelica Leicht
By Dianna Wray
By Aaron Reiss
By Camilo Smith
By Craig Malisow
By Jeff Balke
The idea of a Super Fed as top financial cop as well as the nation's central bank is colossal and colossally bad, and not just because the Fed is notoriously secretive — the opposite of Obama's pledged "transparency." The Fed chair is, by law, independent and doesn't answer to the president or Congress. A lax chief could not be simply removed. As for Bernanke, he's an academic economist with no enforcement or justice chops who, in tandem with Henry Paulson, force-fed the nearly worthless Merrill Lynch to the foundering Bank of America.
And that story just keeps getting worse.
The House Committee on Oversight and Reform recently investigated the federal outlays that helped Bank of America buy Merrill Lynch. During the hearings, Ohio Representative Dennis Kucinich showed through internal Fed documents that Paulson and Bernanke ignored "evidence that the Bank of America withheld information from its shareholders about mounting losses at Merrill Lynch before the crucial shareholder vote on December 5 — a potentially illegal act." In short, the Fed and Treasury have been accused of condoning a titanic securities fraud. But government approval of an offense often makes it more difficult to prosecute the culprit criminally, which may be why Lewis hasn't been indicted.
The problem of the financial elite not being indicted due to the sensitive involvement of the government may be cooling the securities fraud investigation of Lehman Brothers and its CEO, Richard Fuld, who puffed the stock to investors while on the brink of diving into bankruptcy a year ago. It's well known that the Fed and SEC had camped at Lehman with full access to books and financial records after Bear Stearns had burned down six months before. So Fuld may draw a pass too.
The Fed's obsession with secrecy is another major problem. Take Congressman Ron Paul's popular bill to subject the central bank to audits like every other federal financial agency. The Fed pushed back vindictively, warning that the bill could cause the Fed to raise interest rates.
In August, a federal judge granted a Freedom of Information Act request by Bloomberg News to reveal the identities of banks that borrowed from ten Federal Reserve programs during the peak of the financial crisis last fall, the dollar amounts and the collateral pledged. The Fed claimed that the material was confidential and would hurt the banks' competitive position. U.S. Representative Alan Grayson, a Democrat from Orlando, says: "One way or another, the Fed is going to have to come clean."
Derivatives are the costliest, riskiest form of gambling on earth. They work like this: As soon as hedge funds, investment banks and big-time short sellers sense that a bond is flailing, they pile on derivatives to make millions in what are, in effect, side bets in a craps game. As we learned the hard way in 2008, just about everyone, including the system itself, loses when these side bets win.
Geithner told Congress that the government was "blindsided" last year by the explosive risk of the derivatives market but can regulate it now. That's wrong on both counts. Everyone in Washington knew or should have known the risks in 2000, when the government stopped regarding these complicated bets as felonies and started calling them "investments."
But all hope is not lost. The administration and congressional Democrats do support a promising reform called the Consumer Financial Regulatory Agency (CFRA). Obama's 80-plus-page proposal contains yawning gaps that Congress may fill and the financial industry will fight: Insurance isn't covered, nor are 401(k) retirement plans, and the majority of financial consultants and planners (including all the mini-Madoffs out there) evade scrutiny and standards. But the CFRA would actually wrest consumer-protection powers away from the Fed, which has them now and has failed consumers utterly.
Critically, CFRA could allow scammed consumers to go to court against the securities industry. Any claimant who has been through the securities industry's kangaroo court might prefer the courts of Iran.
Of course, the financial industry's lobby, the most powerful in recent American history, has won every major legislative battle in the past 20 years. Wall Street's lobbyists and their congressional allies can be expected to fight even harder than they fought on mortgage cram-downs. They'll call in all their markers to ensure that securities fraud and other financial crimes won't be heard in front of hometown juries.
But the money lobby will have more trouble beating down this reform because of the Supreme Court's Cuomo v. Clearing House Association decision. The 5-4 opinion this past summer appears to give the go-ahead to states to pursue big-time financial criminals even if the federal government won't do it.
Washington's soft-core approach to the epic financial fraud that caused the crash remains hard to understand. As Bill Black says: "When you don't prosecute, things don't get better."
They're not getting better or safer. Credit is tight as a tick — especially for consumers. And people want justice. They've lost savings, homes, jobs and retirements. Foreclosures continue to rise. But it almost seems as if Bernie Madoff's 150-year sentence for a scheme that had nothing to do with causing Wall Street's meltdown is supposed to cover all the crooks, and that we're supposed to be satisfied.