It's Still Relatively Safe To Buy A Toaster Or A Pork Chop-- But A Mortgage Is Something Else Entirely

The big banks are out of control. And when Bush, with congressional acquiescence, fed them $700 billion with absolutely no accountability they went even further into predatory overdrive. And nothing has slowed down the feeding frenzy. It's as though the banksters are basically saying to government, "We bought you, we own you, STFU and do what you're told," and by and large, they do. Just yesterday I was driving home listening to NPR discuss the agency Obama proposed to keep banks from ripping off consumers-- something like the agencies that try to keep poisoned meat off the markets. Of course conservatives opposed that too, so it should come as no surprise that they're just as vehemently against a consumer protection saw in the financial markets-- more so, in fact. But with the financial sector shoveling close to $4 billion into federal-level lobbying since 1998 and with these same characters spending another $1.4 billion in direct payoffs (aka- "campaign contributions")-- $734,153,778 to Republicans and $628,206,085 to Democrats-- members of Congress find it beyond their own limited capacity to seriously take on the banksters. On the NPR show, nearly half the man-on-the-street interviews were with people opposed to consumer protection, utterly brainwashed by right-wing propaganda, spouting nonsense about "bigger government," etc.

This weekend Gretchen Morgenson warned in the NY Times that the shenanigans the banksters have pulled on Greece are headed this way.

Like the credit default swaps that hid Greece’s obligations, the instruments weighing on our municipalities were brought to us by the creative minds of Wall Street. The rocket scientists crafting the products got backup from swap advisers, a group of conflicted promoters who consulted municipalities and other issuers. Both of these camps peddled swaps as a way for tax-exempt debt issuers to reduce their financing costs.
Now, however, the promised benefits of these swaps have mutated into enormous, and sometimes smothering, expenses. Making matters worse, issuers who want out of the arrangements-- swap contracts typically run for 30 years-- must pay up in order to escape.

That’s right. Issuers are essentially paying twice for flawed deals that bestowed great riches on the bankers and advisers who sold them. Taxpayers should be outraged, but to be angry you have to be informed-- and few taxpayers may even know that the complicated arrangements exist.

Here’s how municipal swaps worked (in theory): Say an issuer needed to raise money and prevailing rates for fixed-rate debt were 5 percent. A swap allowed issuers to reduce the interest rate they paid on their debt to, say, 4.5 percent, while still paying what was effectively a fixed rate.

Nothing wrong with that, right?

Sales presentations for these instruments, no surprise, accentuated the positives in them. “Derivative products are unique in the history of financial innovation,” gushed a pitch from Citigroup in November 2007 about a deal entered into by the Florida Keys Aqueduct Authority. Another selling point: “Swaps have become widely accepted by the rating agencies as an appropriate financial tool.” And, the presentation said, they can be easily unwound (for a fee, of course).

But these arrangements were riddled with risks, as issuers are finding out. The swaps were structured to generate a stream of income to the issuer-- like your hometown-- that was tethered to a variable interest rate. Variable rates can rise or fall wildly if economic circumstances change. Banks that executed the swaps received fixed payments from the issuers.

The contracts, however, assumed that economic and financial circumstances would be relatively stable and that interest rates used in the deals would stay in a narrow range. The exact opposite occurred: the financial system went into a tailspin two years ago, and rates plummeted. The auction-rate securities market, used by issuers to set their interest payments to bondholders, froze up. As a result, these rates rose.

For municipalities, that meant they were stuck with contracts that forced them to pay out a much higher interest rate than they were receiving in return. Sure, the rate plunge was unforeseen, but it was not an impossibility. And the impact of such a possible decline was rarely highlighted in sales presentations, municipal experts say.

The banksters are calling in all their favors-- and it's very bipartisan (just the way it was when they demanded the bailout in 2008). They want the Consumer Financial Protection Agency either just killed outright or so weakened-- like put under the jurisdiction of the bankster-friendly Fed, for example-- that it would be better off dead. And we'd be better off with it dead. About a week ago Paul Krugman explained why we'd be better off with no bill than the kind of bill crooked bankster shills like Joe Lieberman (I-CT- $10,154,592), Arlen Specter (R/D-PA- $6,440,935), Mitch McConnell (R-KY- $5,235,603), Dick Shelby (R-AL- $5,213,780), Lamar Alexander (R-TN- $4,931,275), Johnny Isakson (R-GA- $3,808,074), John Thune (R-SD- $3,778,911), Richard Burr (R-NC- $2,874,269), Chuck Grassley (R-IA- $2,558,229) and Blanche Lincoln (D-AR- $2,378,292) are pushing.

Krugman is certain that "all momentum for serious banking reform has been lost" even though the economy is still in a very precarious position.

The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans. The House has already passed a fairly strong reform bill, more or less along the lines proposed by the Obama administration, and the Senate could probably do the same if it operated on the principle of majority rule. But it doesn’t-- and when you combine near-universal Republican opposition to serious reform with the wavering of some Democrats, prospects look bleak.

How did we get to this point? And should reform advocates accept the compromises that might yet produce some kind of bill?

Many opponents of the House version of banking reform present their position as one of principle. House Republicans, offering their alternative proposal, claimed that they would end banking excesses by introducing “market discipline”-- basically, by promising not to rescue banks in the future.

But that’s a fantasy. For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today.

I suspect that even Republicans, in their hearts, understand the need for real reform. But their strategy of opposing anything the Obama administration proposes, coupled with the lure of financial-industry dollars-- back in December top Republican leaders huddled with bank lobbyists to coordinate their campaigns against reform-- has trumped all other considerations.

That said, some Republicans might, just possibly, be persuaded to sign on to a much-weakened version of reform-- in particular, one that eliminates a key plank of the Obama administration’s proposals, the creation of a strong, independent agency protecting consumers. Should Democrats accept such a watered-down reform?

I say no.

There are times when even a highly imperfect reform is much better than nothing; this is very much the case for health care. But financial reform is different. An imperfect health care bill can be revised in the light of experience, and if Democrats pass the current plan there will be steady pressure to make it better. A weak financial reform, by contrast, wouldn’t be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action-- then fail in the clinch.

Better, then, to take a stand, and put the enemies of reform on the spot. And by all means let’s highlight the dispute over a proposed Consumer Financial Protection Agency.

There’s no question that consumers need much better protection. The late Edward Gramlich-- a Federal Reserve official who tried in vain to get Alan Greenspan to act against predatory lending-- summarized the case perfectly back in 2007: “Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself-- the least sophisticated borrowers are probably duped into taking these products.”

Is it important that this protection be provided by an independent agency? It must be, or lobbyists wouldn’t be campaigning so hard to prevent that agency’s creation.

And it’s not hard to see why. Some have argued that the job of protecting consumers can and should be done either by the Fed or-- as in one compromise that at this point seems unlikely-- by a unit within the Treasury Department. But remember, not that long ago Mr. Greenspan was Fed chairman and John Snow was Treasury secretary. Case closed. The only way consumers will be protected under future antiregulation administrations-- and believe me, given the power of the financial lobby, there will be such administrations-- is if there’s an agency whose whole reason for being is to police bank abuses.

In summary, then, it’s time to draw a line in the sand. No reform, coupled with a campaign to name and shame the people responsible, is better than a cosmetic reform that just covers up failure to act.

I'm not certain where Krugman thinks he's going to find Republicans to vote for a serious bill by the way. When the House passed their version on December 11, not only did 100% of the Republicans vote "no," but they were joined by 27 mostly corrupt Blue Dogs bank patsies like Dan Boren (Blue Dog-OK), Bobby Bright (Blue Dog-AL), Baron Hill (Blue Dog-IN), Mike Ross (Blue Dog-AR), Kurt Schrader (Blue Dog-OR), Zach Space (Blue Dog-OH), and Gene Taylor (Blue Dog-MS). The Senate? I wouldn't hold my breath. Instead watch Elizabeth Warren tell you what Wall Street and Republicans and Blue Dogs don't ever want you to hear or think about: