Obama's bank regulation: Doomed to fail?

Administration lax on cleaning up AIG, Bear Stearns, and Lehman Brothers

WHERE DID OUR WEALTH GO? How do we claw it back? And when are we going to punish the culprits?

When Barack Obama donned the crusader's mantle during the 2008 presidential campaign, his web-savvy campaign team created KeatingEconomics.com and pushed it on millions of voters. The main video showed Charles Keating—the wealthy, politically connected poster child of the '80s savings-and-loan scandal—in handcuffs.

The Obama video portrayed John McCain as Keating's stooge and likened the S&L crash to the 2008 Wall Street meltdown, which was even bigger and badder. Today's corporate villains were flashed on the screen, among them AIG, Bear Stearns, Lehman Brothers, and Fannie Mae. The opening narrator was Bill Black, a Ph.D. criminologist and lead lawyer at the Office of Thrift Supervision, who helped steer the brilliant federal effort that cleaned up the S&L industry and won more than 1,000 felony convictions of senior insiders while recovering millions of their ill-gotten dollars.

Chris Whetzel

Those watching the compelling attack ad had every reason to believe that Obama's approach would be just as hard-edged, and that felon-busting G-men would rout the crooks and recover our money.

That was not to be.

As it stands now, only one federal prosecution is related to the credit crash and massive federal bailout, and it was begun by the Bush administration's Justice Department in June 2008.

Not that there aren't culprits. Wall Street's institutional buccaneers carted off up to $12.7 trillion—almost the size of the entire gross domestic product. Today's pirates are sailing away from the light regulatory scrutiny that apparently will continue in our benighted, weakened, and bubble-addicted economy.

Black says that Obama's current efforts are doomed to fail—and, in a twist, it's for lack of trying. "There is not a single successful regulator giving him advice," says Black. He pointedly views Treasury Secretary Tim Geithner and SEC Chair Mary Schapiro as flops in the prelude to the crisis, who flacked for the financial industry's "self-regulation." Some of Obama's appointees have a history as ardent advocates for financial crooks and active foes of regulation. Because neither the Obama team nor its proposed reforms pack the requisite punch, Black predicts, "There will be far more catastrophic losses."

Still, all hope for justice is not lost. Scammed consumers could get their day in court, thanks to a Supreme Court decision this past June in Cuomo v. Clearing House Association, which ruled that the federal government cannot stop states from conducting their own crackdowns on financial crooks—with more stringent laws than Washington's—against such evils as the predatory mortgage lending that sparked last fall's meltdown.

In that case, the Obama administration shed its crusader's mantle and defended the dark side—but in vain.

CONCEIVABLY, SOME OF THE MONEY RIPPED off by financial institutions in their orgy of trading and selling bad investments could be "clawed back," in the parlance of regulators. The best way to retrieve at least a portion of that wealth is through prosecution, followed by forfeiture. This is what we do when we catch money launderers and drug lords, or Ponzi schemers like Bernie Madoff. It's retributive justice. It fills a social need as well as an economic one.

So, where is the justice in the current crisis? Why have there been so few prosecutions and only feeble attempts to claw the money back? One reason may be that, in such infamous cases as the Lehman Brothers collapse and Bank of America's absorption of Merrill Lynch, the Fed and the Treasury were intimately involved with the financial elite's deal-making at the time. It's difficult to prosecute others for securities fraud if you condoned the deals to begin with.

And there's another, more pertinent reason: The top federal law enforcement establishment is simply not in the mood. People who expect President Obama's Department of Justice to take the lead will be severely disappointed, because the Obama administration is showing that it lacks the will. Instead, the new administration is putting its energy into creating what it believes will be a meltdown-proof new system of elite, "too big to fail" banks, regulated by a beefed-up Federal Reserve.

Bill Black calls that elite group of megabanks, like Citigroup and Bank of America, "zombies." And they're not done feeding. All of the devilish tools remain in place, says Black, including "the subprime loans, with securitization and the credit default swaps. And the Obama administration astonishingly wants to re-create a secondary market in subprime loans—even though it cost us more than a trillion dollars."

AN ADMINISTRATION WHOSE CLAWS ARE far from sharpened shouldn't really surprise us: Obama was Wall Street's preferred candidate in terms of campaign contributions. His SEC chair, Mary Schapiro, ran FINRA, the street's self-regulatory private agency. Gary Gensler, chair of the Commodity Futures Trading Commission, worked a decade ago to exempt credit default swaps and other derivatives from regulation.

More important, the nation's new top prosecutor, Attorney General Eric Holder, has a history of preferring that deviant corporations be held to no more than a "voluntary cooperation" system in which they investigate themselves privately.

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