It seemed like every Democrat who mattered was against 716: Dodd, Frank, the New Democrats, the Treasury department, the influential FDIC chief Sheila Bair, even Paul Volcker. Schumer and other New Yorkers lobbied mightily against it, arguing that it would be a drain on the income of Wall Street banks; New York mayor Michael Bloomberg traveled to Washington specifically to lobby against the Lincoln rule. But the crowd had turned against Wall Street, and the populist scrubs seemed like they were about to win big.
But then Blanche Lincoln, the captain of the scrubs, coughed up the ball. Lincoln, who was never considered a particularly strong advocate of finance reform, had originally proposed her ban on derivatives – the most radical reform in the entire bill – during a re-election campaign in which she faced a stiff populist challenge from Bill Halter, the lieutenant governor of Arkansas. Rumors circulated in Washington that Democratic leaders were cynically holding off on gutting Lincoln's proposal until she got past Halter in the primary.
If that was the plan, it worked. In early June, only a week after she defeated Halter in the runoff, Lincoln set about gutting her own rule. First she offered a broad exemption for community banks. Then a group of conservative House Democrats led by Rep. Collin Peterson of Minnesota proposed an even bigger compromise – one that would exempt virtually every type of derivative from federal oversight. "I was told that Peterson offered this compromise and Lincoln quickly accepted it," says Greenberger.
That was the beginning of the end. The new deal allowed banks to keep their derivatives desks by moving them into subsidiary units and exempted whole classes of derivatives from regulation: interest-rate swaps (the culprits in disasters like Greece and Orange County), foreign-exchange swaps (which helped trigger a global crash after Long Term Capital Management imploded in 1998), cleared credit-default swaps (a big contributor to the AIG collapse) and currency swaps (also involved in the Greece mess). "About 90 percent of the derivatives market was exempted," says Greenberger.
In the end, this would be the entire list of derivatives that are subject to the new law: credit-default swaps that have not been cleared by regulators and swaps involving commodities other than silver and gold.
Hilariously, even the few new regulations on derivatives that remained in the bill don't seem to worry Wall Street. Just a few weeks after Lincoln agreed to gut the measure, famed JP Morgan executive Blythe Masters, often credited as one of the inventors of the credit-default swap – one insider calls her "the Darth Vader of the swaps market" – actually sounded psyched about the bill. The new law, she declared publicly, won't even hurt energy commodities, one of the few classes of derivatives that Lincoln didn't exempt.
"It's not a big change for commodities," Masters said. "It's fine-tuning more than a material impact." The so-called reforms, she concluded, "are actually going to be very beneficial for the industry."
And that, ladies and gentlemen, is what the Obama administration is touting as the toughest financial reform since the Great Depression.
The systematic gutting of both the Lincoln rule and the Volcker rule in the final days before the passage of Dodd-Frank was especially painful, in part, because so many other crucial reforms that would have spoken directly to the Big Fraud had already been whitewashed out of the bill. An amendment mandating the breakup of too-big-to-fail companies got walloped back in May, and Congress even rejected a ban on "naked" credit-default swaps – the financial equivalent of selling somebody a car with crappy brakes and then taking out a life-insurance policy on the driver.
The few reforms that Congress didn't reject outright it simply kicked into a series of "study groups" created by the bill. Along with promised studies on no-brainers like executive compensation and credit-rating agencies, the bill even punts on the fundamental question of how much capital banks should be required to keep on hand as a hedge against meltdowns, leaving the question to the Basel banking conferences in Switzerland later this year, where financial interests from all over the world will gather to hammer things out in inscrutable backroom negotiations.
"The next phase of all this – the regulatory phase – is going to be supertechnical and complex," says one Senate aide. "It raises questions about how journalists are going to keep the public the slightest bit interested. You might as well just hit the snooze button."
Worst of all, some analysts warn that the failure to rein in Wall Street makes another meltdown a near-certainty. "Oh, sure, within a decade," said Johnson, the MIT economist. "The question: Is it three years or seven years?"
Johnson was part of a panel sponsored by the nonpartisan Roosevelt Institute – including Nobel Prize-winning economist Joseph Stiglitz and bailout watchdog Elizabeth Warren – that concluded back in March that the reform bill wouldn't do anything to stop a "doomsday cycle." Too-big-to-fail banks, they said, would continue to borrow money to take massive risks, pay shareholders and management bonuses with the proceeds, then stick taxpayers with the bill when it all goes wrong. "Risk-taking at banks will soon be larger than ever," the panel warned.
Without the Volcker rule and the Lincoln rule, the final version of finance reform is like treating the opportunistic symptoms of AIDS without taking on the virus itself. In a sense, the failure of Congress to treat the disease is a tacit admission that it has no strategy for our economy going forward that doesn't involve continually inflating and reinflating speculative bubbles. Which sucks, because what happened to our economy over the past three years, and is still happening to it now, was not an accident or an oversight, but a sweeping crime wave unleashed by a financial industry gone completely over to the dark side. The bill Congress just passed doesn't go after the criminals where they live, or even make what they're doing a crime; all it does is put a baseball bat under the bed and add an extra lock or two on the doors. It's a hack job, a C-minus effort. See you at the next financial crisis.
This article originally appeared in RS 1111, on newsstands August 6, 2010. This issue and the rest of the Rolling Stone archives are available via Rolling Stone Plus, Rolling Stone's premium subscription plan. If you are already a subscriber, you can click here for the archives. Not a member? Click here to learn more about Rolling Stone Plus.
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