Cue the credits: the era of financial thuggery is officially over. Three hellish years of panic, all done and gone – the mass bankruptcies, midnight bailouts, shotgun mergers of dying megabanks, high-stakes SEC investigations, all capped by a legislative orgy in which industry lobbyists hurled more than $600 million at Congress. It all supposedly came to an end one Wednesday morning a few weeks back, when President Obama, flanked by hundreds of party flacks and congressional bigwigs, stepped up to the lectern at an extravagant ceremony to sign into law his sweeping new bill to clean up Wall Street.
Obama’s speech introducing the massive law brimmed with celebratory finality. He threw around lofty phrases like "never again" and "no more." He proclaimed the end of unfair credit-card-rate hikes and issued a fatwa on abusive mortgage practices and the shady loans that helped fuel the debt bubble. The message was clear: The sheriff was padlocking the Wall Street casino, and the government was taking decisive steps to unfuck our hopelessly broken economy.
But is the nightmare really over, or is this just another Inception-style trick ending? It’s hard to figure, given all the absurd rhetoric emanating from the leadership of both parties. Obama and the Democrats boasted that the bill is the "toughest financial reform since the ones we created in the aftermath of the Great Depression" – a claim that would maybe be more impressive if Congress had passed any financial reforms since the Great Depression, or at least any that didn’t specifically involve radically undoing the Depression-era laws.
The Republicans, meanwhile, were predictably hysterical. They described the new law – officially known as the Dodd-Frank Wall Street Reform and Consumer Protection Act – as something not far from a full-blown Marxist seizure of the means of production. House Minority Leader John Boehner shrieked that it was like "killing an ant with a nuclear weapon," apparently forgetting that the ant crisis in question wiped out about 40 percent of the world’s wealth in a little over a year, making its smallness highly debatable.
But Dodd-Frank was neither an FDR-style, paradigm-shifting reform, nor a historic assault on free enterprise. What it was, ultimately, was a cop-out, a Band-Aid on a severed artery. If it marks the end of anything at all, it represents the end of the best opportunity we had to do something real about the criminal hijacking of America’s financial-services industry. During the yearlong legislative battle that forged this bill, Congress took a long, hard look at the shape of the modern American economy – and then decided that it didn’t have the stones to wipe out our country’s one dependably thriving profit center: theft.
It’s not that there’s nothing good in the bill. In fact, there are many good things in it, even some historic things. Sen. Bernie Sanders and others won a fight to allow Congress to audit the Fed’s books for the first time ever. A new Consumer Financial Protection Bureau was created to protect against predatory lending and other abuses. New lending standards will be employed in the mortgage industry; no more meth addicts buying mansions with credit cards. And in perhaps the biggest win of all, there will be new rules forcing some varieties of derivatives – the arcane instruments that Warren Buffett called "financial weapons of mass destruction" – to be traded and cleared on open exchanges, pushing what had been a completely opaque market into the light of day for the first time.
All of this is great, but taken together, these reforms fail to address even a tenth of the real problem. Worse: They fail to even define what the real problem is. Over a long year of feverish lobbying and brutally intense backroom negotiations, a group of D.C. insiders fought over a single question: Just how much of the truth about the financial crisis should we share with the public? Do we admit that control over the economy in the past decade was ceded to a small group of rapacious criminals who to this day are engaged in a mind-numbing campaign of theft on a global scale? Or do we pretend that, minus a few bumps in the road that have mostly been smoothed out, the clean-hands capitalism of Adam Smith still rules the day in America? In other words, do people need to know the real version, in all its majestic whorebotchery, or can we get away with some bullshit cover story?
In passing Dodd-Frank, they went with the cover story.
During an other-wise deathly boring year spent covering this debate, I learned to derive some entertainment from watching politicians scramble to give floor speeches about financial reform without disclosing the fact that they didn’t have the first fucking clue what a credit-default swap is, or how a derivative works. This was certainly true of Democrats, but the Republicans were way, way better at it. Their strategy was brilliant in its simplicity: Don’t even bother trying to figure out the math-y stuff, and instead just blame the entire crisis on government efforts to make homeowners of lazy black people. "Private enterprise mixed with social engineering" was how Sen. Richard Shelby of Alabama put it, with a straight face, not long before the bill passed.
The argument favored by Wall Street lobbyists and Obama’s team of triangulating pro-business Democrats was more subtle. In this strangely metaphysical version of recent history, the economy was ruined by bad luck and a few bad actors, not by any particular law or policy. It was the "guns don’t kill people, people kill people" argument expanded to cover global financial fraud. "There is an assumption that math is evil," insisted Keith Hennessey, a member of the Financial Crisis Inquiry Commission, at a hearing in June. "Credit-default swaps are things, and things can’t be culprits."
Both of these takes were engineered to avoid an uncomfortable political truth: The huge profits that Wall Street earned in the past decade were driven in large part by a single, far-reaching scheme, one in which bankers, home lenders and other players exploited loopholes in the system to magically transform subprime home borrowers into AAA investments, sell them off to unsuspecting pension funds and foreign trade unions and other suckers, then multiply their score by leveraging their phony-baloney deals over and over. It was pure financial alchemy – turning manure into gold, then spinning it Rumpelstiltskin-style into vast profits using complex, mostly unregulated new instruments that almost no one outside of a few experts in the field really understood. With the government borrowing mountains of Chinese and Saudi cash to fight two crazy wars, and the domestic manufacturing base mostly vanished overseas, this massive fraud for all intents and purposes was the American economy in the 2000s; we were a nation subsisting on an elaborate check-bouncing scheme.
And it was all made possible by two major deregulatory moves from the Clinton era: the Gramm-Leach-Bliley Act of 1999, which allowed investment banks, insurance companies and commercial banks to merge, and the Commodity Futures Modernization Act of 2000, which exempted the entire derivatives market from federal regulation. Together, these two laws transformed Wall Street into a giant casino, allowing commercial banks to act like high-risk hedge funds, with a whole new galaxy of derivative bets to lay action on. In fact, the laws made Wall Street even crazier than a casino, because in a casino you have to put up actual money to make bets. But thanks to deregulation, financial companies like AIG could bet billions, if not trillions, without having any money at all to back up their gambles.
Dodd-Frank was never going to be a meaningful reform unless these two fateful Clinton-era laws – commercial banks gambling with taxpayer money, and unregulated derivatives being traded in the dark – were reversed. The story of how the last real shot at reining in Wall Street got routed tells you everything you need to know about how, and on whose behalf, our government works. It was Congress at its most cowardly, deceptive best, with both parties teaming up to subject reform to death by a thousand paper cuts – with the worst cuts coming, literally, in the final moments before the bill’s passage.
The first of the two final battles coalesced around an effort by Sens. Carl Levin of Michigan and Jeff Merkley of Oregon to implement the so-called "Volcker rule," a proposal designed to restore the firewall between investment houses and commercial banks. At the heart of Merkley-Levin was one key section: a ban on proprietary trading.
"Prop trading" is just a fancy term for banks gambling in the market for their own profit. Thanks to the Clinton-era deregulation, giant commercial banks like JP Morgan Chase were not only allowed to serve as investment banks, accumulating mountains of privileged insider information, they were allowed to play the markets themselves. That meant that the prop-trading desk at Goldman Sachs could bet heavily against Greek debt not long after the bank had saddled Greece with toxic interest-rate swaps. It also meant that if any of these "too big to fail" banks went bust, American taxpayers would be expected to bail them out. The Volcker rule – pushed by Paul Volcker, the former Fed chief and current Obama adviser – aimed to lay down a simple law for big banks: If you want to gamble like a drunken sailor, fine. Just don’t expect us to mop up the mess after you puke your guts out.
If Obama’s team had had their way, last month’s debate over the Volcker rule would never have happened. When the original version of the finance-reform bill passed the House last fall – heavily influenced by treasury secretary and noted pencil-necked Wall Street stooge Timothy Geithner – it contained no attempt to ban banks with federally insured deposits from engaging in prop trading. But that changed when Scott Brown, the Tea Party darling from Massachusetts, blindsided the Democrats by wresting away the seat of deceased liberal icon Ted Kennedy. With voters seething over Wall Street’s rampant thievery and fraud, the Democrats suddenly got religion about reckless gambling by the financial industry.
Brown won his election on January 19th; just two days later, on January 21st, President Obama pulled a 180 and announced his support for the Volcker rule. Throughout the reform process, Volcker – a legendary figure whose demands for greater responsibility and transparency have alarmed Wall Street – had been forced to take a back seat to Geithner, at one point even sharply criticizing the House bill in open testimony. For the White House to suddenly throw its weight behind Volcker took the Hill by surprise. It was a "complete change of policy – a fundamental shift," observed Simon Johnson, an MIT economist and noted financial analyst.
This was clearly the administration’s attempt to get back on the right side of populist anger at Wall Street. So when Merkley and Levin took up the job of transforming Volcker’s proposal into legislative reality, they assumed the Democratic leadership would be on their side.
It didn’t work out that way. The counterattack began in May, when the Republicans objected to Merkley-Levin and invoked the Senate’s unanimous-consent rule, by which no amendment comes to the floor unless all 100 members agree to let it be voted on. That left the Volcker rule in legislative purgatory right up to the initial Senate vote on the bill. In interviews, the soft-spoken, gregarious Merkley steadfastly refuses to point the finger at the Democratic leadership for failing to break the legislative logjam. But reading between the lines, it’s obvious that he and Levin were on their own – no one with any juice in the key committees lifted a finger to help them. The two senators were like underage geeks who’d been told by Majority Leader Harry Reid that they had to come up with their own keg if they wanted to come to the party.
But come up with a keg they did. On the week of the first Senate vote, Merkley’s staffers pored over Senate procedural rules and discovered an arcane clause that allowed them to attach their proposal to an amendment by Republican Sam Brownback of Kansas designed to exempt auto dealers from regulation by the new Consumer Financial Protection Bureau. The Brownback amendment had already been approved for a vote, so once Merkley’s people used the remora-fish tactic of sticking to Brownback, there was seemingly no way to prevent Merkley-Levin from going to a vote.
Or so they thought. "We were plumbing the inner rules of the Senate," Merkley says. One of those rules is that when you attach your amendment to another, your measure has to be "germane" to the amendment you’re attaching it to. Since Merkley-Levin’s ban on prop trading and Brownback’s auto-dealer exemption were completely different, this was not a simple thing to accomplish. So Merkley and Levin personally trekked down to one of the more obscure offices in the congressional complex.
"Carl Levin and I went on a trip down to the parliamentarian’s office, where I’d never been," Merkley says. "They briefed us on what it took, and the team set about to make it work."
From there, Merkley and Levin hit the phones to lobby other members, including Republicans. Right up to the final vote on May 20th, they thought they had a real shot. "I got the sense that we might pick up quite a few Republican votes," says Merkley. "It was starting to look pretty good."
But that very fact that the Merkley-Levin amendment had such momentum is ultimately what did it in. "What killed us," says Merkley, "was that it was looking pretty good."
What happened next was a prime example of the basic con of congressional politics. Throughout the debate over finance reform, Democrats had sold the public on the idea that it was the Republicans who were killing progressive initiatives. In reality, Republican and Democratic leaders were working together with industry insiders and deep-pocketed lobbyists to prevent rogue members like Merkley and Levin from effecting real change. In public, the parties stage a show of bitter bipartisan stalemate. But when the cameras are off, they fuck like crazed weasels in heat.
With Merkley-Levin looking like a good bet to pass, the Republicans pulled a dual-suicide maneuver. Brownback withdrew his auto-dealer exemption, which instantly killed the ban on prop trading. What Merkley and Levin didn’t know was that Brownback had worked out an agreement with the Democratic leadership to surreptitiously restore his auto-dealer exemption later on, when the final bill was reconciled with the House version. In other words, Democratic leaders had teamed up with Republicans behind closed doors to double-cross Merkley and Levin.
When the agreement was announced one day before the Senate vote, Merkley couldn’t even make sense of what he was hearing. "You’re sitting there trying to understand what kind of deal has been struck," he says. "You know there’s something there, but you’re not really sure." Merkley almost objected to the deal, but unable to grasp that he had been sold out by his own party’s leadership, he hesitated – a fatal mistake. The deal to reinstate Brownback went through, and Merkley’s amendment to rein in Wall Street died.
That might have been the end of the Volcker rule – but soon after, Merkley and Levin made the most of their one last chance. According to Merkley, he and Levin convinced Rep. Barney Frank, who was overseeing the House bill, to reintroduce the amendment in conference talks. The Volcker rule was alive again – but it now began a journey into a new sort of hell, in which insiders from both parties chipped away at it until there was almost nothing left.
It started with Senate rookie Scott Brown, who demanded major changes to Merkley-Levin on behalf of big Massachusetts banks in exchange for his vote. But Senate sources I talked to insist that Chris Dodd, the powerful chair of the Senate Banking Committee, was just using Brown as a cover to gut the Volcker rule. "It became far more than accommodating the Massachusetts banks," says one high-ranking Senate aide. "It became a ruse for Treasury trying to get as far as they could, with Dodd’s help."
From the start, Dodd had been opposed to the ban on proprietary trading. "Hey, I would gladly dump the Volcker rule," he told industry lobbyists. "But I can’t, because of the pressure I’m getting from the left." Now, with Brown pressing for concessions, Dodd agreed to let Merkley-Levin be spattered with a wave of loopholes. If you can imagine a 4,000-pound lizard pretending to cower before a Cub Scout clutching a lollipop, then you’ve grasped the basic dynamic of a grizzled legislative titan like Dodd caving into Brown, the cheery GOP newbie with the Pez-dispenser face.
First, in what amounted to an open handout to the financial interests represented by Brown, insurers, mutual funds and trusts were exempted from the Merkley-Levin ban. Then, with the floodgates officially open, every financial company in America was granted a massive loophole – one that allowed them to skirt the ban on risky gambling by investing a designated percentage of their holdings in hedge funds and private-equity companies.