The Wall Street Takeover, Part 2

By James Kwak

Five years later, and things seem marginally better in some areas (the CFPB exists), significantly worse in others (LIBOR, money laundering, London Whale, etc.). There has been some debate recently about whether we have a safer financial system today than before Lehman collapsed. But the fundamental issue, as Simon and I discussed in 13 Bankers, is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. On that score, there is little to be encouraged about.

In 2002, Art Wilmarth wrote a mammoth (262 pages) article titled “The Transformation of the U.S. Financial Services Industry, 1975–2000.” In that article, he identified many of the key trends in the financial sector—consolidation, deregulation, breakdown of Glass-Steagall, complex products, increased risk-taking—that would not only produce a financial crisis but make it so destabilizing for the economy later in the decade. Now he has written a shorter (164 pages) article, “Turning a Blind Eye: Why Washington Keeps Giving into Wall Street,” on the key question: why our government doesn’t do anything about it, even after the financial crisis.

Much of the material will be familiar to readers of this blog and others who follow the misdeeds of the megabanks closely. But Wilmarth provides a nearly comprehensive catalog of all the things we should be outraged about. Reading it, I remembered so many instances where Wall Street blocked or delayed sensible regulatory policies, or regulators pushed for Wall Street’s interests—the watering down of mark-to-market accounting, the artificial inflation of the mortgage settlement by giving dubious credits to banks for doing things that were in their own interests, and so on—that I had forgotten about or not thought about recently because they had been crowded out of my mind by successive waves of revelations.  

According to Wilmarth, the fundamental problem, and the reason things don’t get significantly better, is the political power of major financial institutions. This power takes on many forms: campaign contributions, lobbying, regulatory capture in various flavors, and simply being “too big to jail.” Wilmarth tries to end his article on an optimistic note: even though Wall Street appears to be just as influential as it was before the financial crisis, perhaps the magnitude of its victory will trigger a popular backlash. I find it hard to be so hopeful: if we couldn’t get the job done in 2009–2010, when the financial crisis was on everyone’s minds, how will we be able to do it now? This is especially true with a Democratic president who is completely uninterested in dealing with the problem—and a Democratic nominee on deck who has never shown any inclination to take on Wall Street. (We can safely assume that the Republican nominee will be against any substantive regulation of the financial sector.) In any case, Wilmarth’s article does a great job of pointing exactly where we should be looking.

34 thoughts on “The Wall Street Takeover, Part 2

  1. ‘… the fundamental issue…is whether our political system will put the interests of society at large ahead of the interests of large financial institutions. ‘

    Tullock and Buchanan answered that question more than a half-century ago; No, well focused special interests will use their better cost-benefit calculus to benefit themselves while the dispersed costs are imposed on society.

    Why is this so hard to understand? It’s not like there are no voices shouting, ‘Try another way.’ Say;

  2. Sadly I agree with James Kwak on the bleak outlook for real reform. It’s mind-boggling that nobody has went to jail on LIBOR, selling junk to “customers” and betting against them, etc. Could this be a bigger problem than the completely FUBAR way the US conducts international trade?

  3. Even though this is a tad optimistic, it would appear we need one more banking-induced crash for all of us to take a stand against Wall Street.

    Am looking forward to DiCaprio’s/Scorcese’s “Wolf of Wall Street.”

  4. @David – too late when 480 USA citizens are worth a collective total of 2.08 TRILLION, isn’t it? No amount of war, torture, murder and mayhem – one on one – will solve the problems. Nihilism is absolute – a lawless outcome, the complete dismantling of Main Street commerce.

    The 480 prefer rank savagery to protect them instead of a moon-walking Middle Class.

  5. Both the political and financial systems are irreparably broken. Our leaders in government and industry with few exceptions are devoted to advancing and shielding the interests of the predatorclass and predatorclass oligarchs exclusively. Both systems are peopled by a predominance of sociopaths and/or psychopaths with absolutely zero concern for, or interest in those less fortunate, the havenots, the 99%, – or those quaint forgotten notions of justice, theruleoflaw, fairness, that “goddamn piece of paper, we call the Constitution. Whatever social contract once existed in America is now a tattered shredded forgotten relic. The peoples rights, freedoms, protections and privileges have been dismembered, and almost totally destroyed. We no longer inhabit an America our founding fathers and our ancestors, and our parents envisioned, framed, and fought and died to protect. We inhabit fascist Amerika, where the predatorclass owns and controls the socalled government and 50% of the nations wealth and resources and ruthlessly robs, abuses, neglects, and incarcerates, or exterminated the havenots while advancing and shielding predatorclass interests singularly and exclusively. The people have no representation and no voice in the wayward conduct of the socalled government. There is no balm in Gilead. There is no fixing these toxic, systemically corrupt, morally bankrupt systems. America is dead and rotting devoured by the predatorclass.

    Burn it all down! Reset!! It’s the only viable option for the 99%!

  6. it takes 164 pages to reach the conclusion that the banks can pay for what they want from DC ?

    I mean jeez, another 3 or 4,000 pages , he might realize that sometimes poor people get trashed by the police cause they be poor…

  7. A few Patrick Sullivan. My reading of history informs me that whenever a society grows excessively unjust and criminal, and sociopathic tendencies pervade leadership, and thefew rob and pillage themany and commandeer the majority of the societies wealth and resources obdurately peering down from their opulent castles on the unwashed masses ordering suggesting to their ministers to “let them eat cake”, the end is violent revolution and predatorclass heads on spikes. Sadly this history is repeated time and time again.

    Burn it all down! Reset! It’s the only viable option for the 99%!

  8. Tony – at least 50% of the 99% in USA are educated and civilized people who have EARNED the rights to the civilization that they built!

    We’re taking out the psychos without Nihilism of “burn it all down, etc.”

    They don’t CARE that their head ends up on stick. They’re psychos, remember?

    Turning a Blind Eye: Why Washington Keeps Giving In to Wall Street
    Arthur E. Wilmarth Jr.
    George Washington University Law School

    “Four principal factors account for Wall Street’s continuing dominance in the corridors of Washington. First, the financial industry has spent massive sums on lobbying and campaign contributions, and its political influence has expanded along with the growing significance of the financial sector in the U.S. economy. Second, financial regulators have aggressively competed within and across national boundaries to attract the allegiance of large financial institutions. Wall Street has skillfully exploited the resulting opportunities for regulatory arbitrage.

    Third, Wall Street’s political clout discourages regulators from imposing restraints on the financial industry. Politicians and regulators encounter significant “push-back” whenever they oppose Wall Street’s agenda, and they also lose opportunities for lucrative “revolving door” employment from the industry and its service providers. Fourth, the financial industry has achieved “cognitive capture” through the “revolving door” and other close connections between Wall Street and Washington. ”
    These are great reference works to file for arguing the normative course of (non-Marxian) classically ‘critical’ assessments of default (at least) in judgements, over the fanatically overextended network of interests that are creating a mixed economy of failure based upon ‘factionalized’ successes. But if interests are factional, the normative basis for this failed mosaic is inherently ‘fictional’ even if it appears intrinsically coherent. The vast majority of Americans are acting under a distinctive delusion and denial that the system works and is only being tweaked by some (sociopathic?) opportunists that have become path dependent of excessive risk.

    But When “moral hazards” are spending other peoples lives…not merely their financial risk alone, we can no longer think of systemic failure but of systemic fraud. Line this up with BCCI, with the 1978 Savings and Loan debacle, and the greatest robbery in the history of mankind as the LOOTING of the US Treasury…and we will get a closer focus on the real time grounded political-economic coup d’etat and the black market-off-shore systems that are sucking it dry. And now, of course, have taken on the informatively neutralizing title by high standing officials as not TBTF…but too Big to Jail! Just how blatantly stupid and bold does it get?
    When the mafia does this it is termed “busting out” but when Wall Street Executives enter Washington DC through crony capital ties we gingerly call it “revolving doors” and massive Bail Out.


    “One of the biggest hidden stories is that news organizations, at the highest levels, are intimidated not by government and advertisers, but more importantly by ownership interests that can overlaps with donors to politicians and the biggest advertisers. Hence the concept of “puppet masters,” or “Wall Street” or similar shorthand names.”

    “I am in the process of organizing two high-profile panel discussions, one in Washington and one in New York City, whereby top reporters who dare to report on such matters can present their latest findings and thereby make possible wider coverage from peers operating under self-censorship by top management reluctant to antagonize news sources in government and financial backers of their news outlets.”
    Andrew Kreig
    Seymour Hersh Attacks Obama, Fellow DC Journalists

  11. I applaud your efforts there Bruce, yet at the same time have seen the push back by their own (more influential) journalistic cohorts, who would rather play on the emotions of the public, over informing or attempting to educate them with their lofty and powerful platform.
    Our problem today, is the momentum of the dry powder A student, mostly flat liners I call them. Which both profiles and stereotypes, anyone not of like mind principals, and then defends themselves with arrogance and history as to why “we” need to continue on this hypocritical path. It’s called blaming the victim and they have every intention of “ruining you financially” as soon as they believe you are no longer on board with their cause. And will also use any trick in the book to verify their position. And some how, I just can’t believe that this same, literally, “keeping up with the Jones”, is not occurring all the time in the halls of congress.
    If you really want to scare a politician into doing the right thing for the public, make um take a drug test before running for public office and watch them head for the hills, and not Capital hills either. We drug test minimum wage workers since they have such a poor profile and need close observation, so we should insist on the same to those who would make our laws, and try to run our country.

  12. ‘Burn it all down! Reset! It’s the only viable option for the 99%!’

    Let’s see what happens when a country is run ‘for the 99%’;

    ‘To alleviate the situation, Hebert García Plaza, chief of the Higher Authority for the Economy, has announced he will place members of the Bolivarian militia — groups of civilians enrolled by the government and usually armed — at the checkouts. But before their presence can be finalized the government first needs to liaise with supermarkets to ensure the militia men have adequate training to understand the product codes and necessary working methods.’

    Wha’ happened? Well, they meant well;

    ‘In reality, the long lines that sometimes snake out of stores are a consequence of the new Labor Law, the last great transformation passed down by [Hugo] Chávez before his death, which obliges employers to guarantee staff two continuous rest days and a maximum of 40 working hours a week.

    ‘The idea behind the law was to get private companies to hire more workers, but now it has rebounded and is hampering the government’s efforts to bring down unemployment. Instead of hiring more staff, supermarket owners have decided to adjust their cost structures to the new reality — some have opted to close at weekends, while others have introduced new opening hours to comply with the ruling — and consumers are paying the price.’

  13. Don’t worry, before too long, everyone will be paying the consequences, for that is all there is left to pay of importance, now isn’t it?

  14. “The Dallas County Sheriff’s Office traveled to Fort Hood this month to acquire its own bona fide military vehicle – the International MaxxPro MRAP tactical vehicle — courtesy of a Department of Defense surplus program.

    According to The Dallas Observer, the sheriff’s office obtained the 19-ton, diesel-operated behemoth with bullet-proof doors and tires, designed by Navistar Defense.

    “The MaxxPro MRAP is built to withstand ballistic arms fire, mine blasts, IEDs, and other emerging threats,” according to the Navistar website. “Its V-shaped hull helps deflect blasts out and away from the crew and its armoring can be customized to meet any mission requirement.”

    “The Observer writes the sheriff’s office will now use it to serve warrants on wanted men.”

  15. @Paddy – Who are you talking about? McCain was “disappointed” that the crisis in Syria did not involve 200 Tomahawks going off!

    Every delusional megalomaniac “leadership” in the entire history of mankind that launched a pre-emptive war lived to regret it because the people ended the war with THEIR head on a stick.

    Iraq was a pre-emptive shot.

    I guess economic genocide using DERIVATIVE against a productive and progressive moon-walking Middle Class is more your style….?!

    Taxes skinned alive from the moon walking Middle Class were USED to wipe out the Middle Class. How is THAT not going to end in a blood bath?

    Indeed, same schtick as 20th century – NIHILISM and TRIBALISM.

  16. The Cyclops’ Blind Eye?
    Press Release
    Report Identifies 466 ALEC Bills in 2013 That Reflect Corporate Agenda by PRW Staff — August 8, 2013
    The report identifies and analyzes 466 American Legislative Exchange Council (ALEC) bills introduced in 2013.
    In 2013, ALEC is going to new lengths to hide its lobbying of legislators from the public eye. It has taken to stamping all its documents as exempt from state public records laws, dodging open records with a “drop-box” website, and other tricks.

    Key Findings:

    CMD identified 466 ALEC bills from the 2013 session. 84 of these passed and became law. ALEC bills were introduced in all 50 states and the District of Columbia in 2013. The top ALEC states were West Virginia (25 bills) and Missouri (21 bills).
    Despite ALEC’s effort to distance itself from Voter ID and Stand Your Ground by disbanding its controversial Public Safety and Elections Task Force, 62 of these laws were introduced: 10 Stand Your Ground bills and 52 bills to enact or tighten Voter ID restrictions. Five states enacted additional Voter ID restrictions, and two states passed Stand Your Ground.
    CMD identified 117 ALEC bills that affect wages and worker rights. 14 of these became law. These bills included so-called “Right to Work” legislation, part of the ALEC agenda since at least 1979, introduced in 15 states this year. Other bills would preempt local living or minimum wage ordinances, facilitate the privatization of public services, scrap defined benefit pension plans, or undermine the ability of unions to organize to protect workers.
    CMD identified 139 ALEC bills that affect public education. 31 of these became law. Just seven states did not have an ALEC education bill introduced this year. Among other things, these bills would siphon taxpayer money from the public education system to benefit for-profit private schools, including the “Great Schools Tax Credit Act,” introduced in 10 states.
    CMD identified 77 ALEC bills that advance a polluter agenda. 17 of these became law. Numerous ALEC “model” bills were introduced that promote a fossil fuel and fracking agenda and undermine environmental regulations. The “Electricity Freedom Act,” which would repeal state renewable portfolio standards, was introduced in six states this year.
    CMD identified 71 ALEC bills narrowing citizen access to the courts. 14 of these became law. These bills cap damages, limit corporate liability, or otherwise make it more difficult for citizens to hold corporations to account when their products or services result in injury or death.
    CMD identified nine states that have been inspired by ALEC’s “Animal and Ecological Terrorism Act” to crack down on videographers documenting abuses on factory farms. These so-called “ag-gag” bills erode First Amendment rights, and threaten the ability of journalists and investigators to pursue food safety and animal welfare investigations.
    CMD identified 11 states that introduced bills to override or prevent local paid sick leave ordinances, such as the one recently enacted in New York City. At least eight of these bills were sponsored by known ALEC members. Although ALEC has not adopted a preemption bill as an official “model,” ALEC member the National Restaurant Association brought a bill to override local paid sick leave ordinances to an ALEC meeting in 2011, along with a target map and other materials.

  17. A website that never ceases to amaze me is As we approach the $17 trillion debt level, I want to emphasize how dangerous this is for our nation. An old proverb tells us that the borrower is slave to the lender, and as we continue to spend and build debt, think about who we are getting our money from. The answer is the printing press and China.

  18. “on the key question: why our government doesn’t do anything about it, even after the financial crisis.”
    That’s an easy one: it’s no longer “our” government!

  19. “Five years later, and things seem marginally better in some areas …., significantly worse in others” James Kwak
    Everyone might keep in mind that the “ARCHIVES” and archival materials that can be back-paged & tracked on Baseline Scenario’s blog is an ethnological study as field notes of the last five years. Opinions, sentiments, realities and even troll manipulations are all present in an open stream that laid down an unplotted and impromptu record of articles and their reactions, responses and general popular exposition of social-cultural dispositions as they appeared in real time. Anyone willing to spend time studying these records could write a fascinating book on the American and even global experience (phenomenologically or analytically) using the data that exists under the Baseline Scenario’s “fieldnotes” from the streams. It is an interesting prospect and the question of objectivity is clearly an interpretation of this data as it relates to cultural, social, political and economic real time experience untainted by anyone being influenced by its eventual translations as a whole.

    It would be interesting to see that chronological progression under the oligarchy of transgressions that we all have experienced in real time…instead of retrofitted models of interpretations that recast the mold of normative practice variations in business cycles and their direct and indirect benefactors.

    Just a thought but maybe a challenge of sorts to someone out their looking for data to mine…with interests in ‘Minding the Store’ in a novel way.

  20. I think we should pay attention to David Brooks. David Brooks deep insight has uncovered that only “childish” people want to discuss mortgages, global warming, and financialization:

  21. @Paddy – seriously, who cares about Venezuela and what does it have to do with someone not doing the math to figure out that the COST of the IRAQ war would exceed the booty from the war by about 17 TRILLION?

    Yea, I see Jesus’s face in a taco shell…

  22. In Venezuela they don’t have taco shells on the grocery stores’ shelves, because they fell for the loony economics of Hugo Chavez (the ideas Annie finds simpatico).. Maybe there’s a lesson in that, in the USA we can fight wars and still buy taco shells and toilet paper?

  23. “What does it say about American politics when a famous 1970s cult leader publishes a Washington newspaper, dresses up in the U.S. Senate offices like King George III, and no one in D.C. seems to care? One night in 2004, at one of Washington’s most outrageous dinner parties, members of Congress bought a shining crown and robes to a billionaire mystery man who calls himself the True Father: the Reverend Moon, sushi mogul, conservative philanthropist, and publisher of the right-wing Washington Times. After journalist John Gorenfeld broke the story of Moon’s coronation, the New York Times compared the scandal to an act of the Roman emperor Caligula.”
    (editorial excerpt from Amazon page):
    Bad Moon Rising: How Reverend Moon Created the Washington Times, Seduced the Religious Right, and Built an American Kingdom
    by John Gorenfeld

  24. [excerpt] MEDIA MATTERS: For America
    “Murdoch’s manipulation of Australian politics was so brazen, the head of the Australian Press Council publicly commented on the blurring lines between news and opinion. Council chair Julian Disney issued a statement saying, “[T]he Council believes that it is essential that a clear distinction be drawn between reporting the facts and stating opinion. A paper’s editorial viewpoints and its advocacy of them must be kept separate from its news columns.”

    On the other side of the Pacific, Murdoch’s Wall Street Journal settled for ignoring context and information to push the canard that carbon controls are a political bogeyman. The tactic is unsurprising given the record of inaccurate climate reporting rampant among Murdoch’s American media empire (the WSJ and Fox News, to name a few).”
    A Warning To Politicians From The Global Murdoch Media Empire
    Blog ››› September 9, 2013 5:00 PM EDT ››› BRIAN POWELL

    More Derivatives Trading Now In The ‘Shadows’
    John M. Mason, September 13, 2013

    Gillian Tett of the Financial Times, in her review of where we are where we are five years after the financial meltdown writes:
    “The shadow banking world is taking over more activity, not less. When Lehman failed, regulators suddenly realized they had been ignoring the non-bank sphere, enabling egregious behavior to flourish. Given that, you might have expected those shadows to shrink. But think again: it has expanded since 2008 from $59 trillion in size to $67 trillion, according to the Financial Stability Board.”

    [Mr. Mason goes on to say]:
    ” Furthermore, as is seen in the numbers presented earlier, the “shadow” banking system is growing by leaps and bounds! Right now, there is little or nothing that can be done to stop the movement. There is little regulation in these “shadows” and, as should be obvious by now, the “shadows” move as the environment changes.

    And, as many others are now arguing, the things that the governments have done over the past five years or so have just helped the wealthy get wealthier … as most of the date being released on income/wealth distribution now confirm.”

  26. The article talks about how the money feeds the political leaders, who in turn never make any changes to the current structure. That’s the end of the story. Until (which could easily mean never or no time soon) that relationship is ended through some kind of major legal realignment nothing will change.

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