Multinational Monitor Editors blog

What can $5 billion buy in Washington?

Quite a lot.

Over the 1998-2008 period, the financial sector spent more than $5 billion on U.S. federal campaign contributions and lobbying expenditures.

This extraordinary investment paid off fabulously. Congress and executive agencies rolled back long-standing regulatory restraints, refused to impose new regulations on rapidly evolving and mushrooming areas of finance, and shunned calls to enforce rules still in place.

“Sold Out: How Wall Street and Washington Betrayed America,” a report released by Essential Information and the Consumer Education Foundation (and which I co-authored), details a dozen crucial deregulatory moves over the last decade — each a direct response to heavy lobbying from Wall Street and the broader financial sector, as the report details. (The report is available here.) Combined, these deregulatory moves helped pave the way for the current financial meltdown.

Here are 12 deregulatory steps to financial meltdown:

1. The repeal of Glass-Steagall

The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 and related rules, which prohibited banks from offering investment, commercial banking, and insurance services. In 1998, Citibank and Travelers Group merged on the expectation that Glass-Steagall would be repealed. Then they set out, successfully, to make it so. The subsequent result was the infusion of the investment bank speculative culture into the world of commercial banking. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that led many of the banks to ruin and rocked the financial markets in 2008.

2. Off-the-books accounting for banks

Holding assets off the balance sheet generally allows companies to avoid disclosing “toxic” or money-losing assets to investors in order to make the company appear more valuable than it is. Accounting rules — lobbied for by big banks — permitted the accounting fictions that continue to obscure banks’ actual condition.

3. CFTC blocked from regulating derivatives

Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffett’s warning that they represent “weapons of mass financial destruction” has proven prescient — they have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. During the Clinton administration, the Commodity Futures Trading Commission (CFTC) sought to exert regulatory control over financial derivatives, but the agency was quashed by opposition from Robert Rubin and Fed Chair Alan Greenspan.

4. Formal financial derivative deregulation: the Commodities Futures Modernization Act

The deregulation — or non-regulation — of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act. Its passage orchestrated by the industry-friendly Senator Phil Gramm, the Act prohibits the CFTC from regulating financial derivatives.

5. SEC removes capital limits on investment banks and the voluntary regulation regime

In 1975, the Securities and Exchange Commission (SEC) promulgated a rule requiring investment banks to maintain a debt to-net capital ratio of less than 15 to 1. In simpler terms, this limited the amount of borrowed money the investment banks could use. In 2004, however, the SEC succumbed to a push from the big investment banks — led by Goldman Sachs, and its then-chair, Henry Paulson — and authorized investment banks to develop net capital requirements based on their own risk assessment models. With this new freedom, investment banks pushed ratios to as high as 40 to 1. This super-leverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments — so that their individual failures, or the potential of failure, became systemic crises.

6. Basel II weakening of capital reserve requirements for banks

Rules adopted by global bank regulators — known as Basel II, and heavily influenced by the banks themselves — would let commercial banks rely on their own internal risk-assessment models (exactly the same approach as the SEC took for investment banks). Luckily, technical challenges and intra-industry disputes about Basel II have delayed implementation — hopefully permanently — of the regulatory scheme.

7. No predatory lending enforcement

Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

8. Federal preemption of state enforcement against predatory lending

When the states sought to fill the vacuum created by federal non-enforcement of consumer protection laws against predatory lenders, the Feds — responding to commercial bank petitions — jumped to attention to stop them. The Office of the Comptroller of the Currency and the Office of Thrift Supervision each prohibited states from enforcing consumer protection rules against nationally chartered banks.

9. Blocking the courthouse doors: Assignee Liability Escape

Under the doctrine of “assignee liability,” anyone profiting from predatory lending practices should be held financially accountable, including Wall Street investors who bought bundles of mortgages (even if the investors had no role in abuses committed by mortgage originators). With some limited exceptions, however, assignee liability does not apply to mortgage loans, however. Representative Bob Ney — a great friend of financial interests, and who subsequently went to prison in connection with the Abramoff scandal — worked hard, and successfully, to ensure this effective immunity was maintained.

10. Fannie and Freddie enter subprime

At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets — at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision. In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying — including especially but not only of Democratic friends of the institutions — enabled them to divert from their traditional exclusive focus on prime loans.

Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

11. Merger mania

The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled them to combine size, explicit and implicit federal guarantees, and reckless high-risk investments.

12. Credit rating agency failure

With Wall Street packaging mortgage loans into pools of securitized assets and then slicing them into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated.

The credit rating agencies enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk — as subsequent events have revealed. The credit rating agencies have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers.

This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards — even if the SEC knows those standards to be flawed.

From a financial regulatory standpoint, what should be done going forward? The first step is certainly to undo what Wall Street has wrought. More in future columns on an affirmative agenda to restrain the financial sector.

None of this will be easy, however. Wall Street may be disgraced, but it is not prostrate. Financial sector lobbyists continue to roam the halls of Congress, former Wall Street executives have high positions in the Obama administration, and financial sector propagandists continue to warn of the dangers of interfering with “financial innovation.”

Financial deregulatory mania over the last three decades led directly to the current financial meltdown.

Were the deregulators acting out of principle? Perhaps.

But it couldn’t have hurt that the financial sector invested a staggering $5.1 billion in political influence purchasing in the United States over the last decade.

The money flows are laid out in gruesome detail in “Sold Out: How Wall Street and Washington Betrayed America,” a report that my colleague Jim Donahue and I wrote, along with a team of contributors from the Consumer Education Foundation and my organization, Essential Information. The report is available here. **

The entire financial sector (finance, insurance, real estate) drowned political candidates in campaign contributions, spending more than $1.7 billion in federal elections from 1998-2008. Primarily reflecting the balance of power over the decade, about 55 percent went to Republicans and 45 percent to Democrats. Democrats took just more than half of the financial sector’s 2008 election cycle contributions.

The industry spent even more — topping $3.4 billion — on officially registered lobbyists during the same period. This total certainly underestimates by a considerable amount what the industry spent to influence policymaking. U.S. reporting rules require that lobby firms and individual lobbyists disclose how much they have been paid for lobbying activity, but lobbying activity is defined to include direct contacts with key government officials, or work in preparation for meeting with key government officials. Public relations efforts and various kinds of indirect lobbying are not covered by the reporting rules.

During the decade-long period:

– Commercial banks spent more than $154 million on campaign contributions, while investing $383 million in officially registered lobbying;

– Accounting firms spent $81 million on campaign contributions and $122 million on lobbying;

– Insurance companies donated more than $220 million and spent more than $1.1 billion on lobbying; and

– Securities firms invested more than $512 million in campaign contributions, and an additional nearly $600 million in lobbying. Hedge funds, a subcategory of the securities industry, spent $34 million on campaign contributions (about half in the 2008 election cycle); and $20 million on lobbying. Private equity firms, also a subcategory of the securities industry, contributed $58 million to federal candidates and spent $43 million on lobbying.

Individual firms spent tens of millions of dollars each. During the decade-long period:

– Goldman Sachs spent more than $46 million on political influence buying;

– Merrill Lynch threw more than $68 million at politicians;

– Citigroup spent more than $108 million;

– Bank of America devoted more than $39 million;

– JPMorgan Chase invested more than $65 million; and

– Accounting giants Deloitte & Touche, Ernst & Young, KPMG and Pricewaterhouse spent, respectively, $32 million, $37 million, $27 million and $55 million.

The number of people working to advance the financial sector’s political objectives is startling. In 2007, the financial sector employed a staggering 2,996 separate lobbyists to influence federal policy making, more than five for each Member of Congress. This figure only counts officially registered lobbyists. That means it does not count those who offered “strategic advice” or helped mount policy-related PR campaigns for financial sector companies. The figure counts those lobbying at the federal level; it does not take into account lobbyists at state houses across the country. To be clear, the 2,996 figure represents the number of separate individuals employed by the financial sector as lobbyists in 2007. We did not double count individuals who lobby for more than one company the total number of financial sector lobby hires in 2007 was a whopping 6,738.

A great many of those lobbyists entered and exited through the revolving door connecting the lobbying world with government. Surveying only 20 leading firms in the financial sector (none from the insurance industry or real estate), we found that 142 industry lobbyists during the period 19982008 had formerly worked as “covered officials” in the government. “Covered officials” are top officials in the executive branch (most political appointees, from members of the cabinet to directors of bureaus embedded in agencies), Members of Congress, and congressional staff.

Nothing evidences the revolving door — or Wall Street’s direct influence over policymaking — more than the stream of Goldman Sachs expatriates who left the Wall Street goliath, spun through the revolving door, and emerged to hold top regulatory positions. Topping the list, of course, are former Treasury Secretaries Robert Rubin and Henry Paulson, both of whom had served as chair of Goldman Sachs before entering government. Goldman continues to be well represented in government, with among others, Gary Gensler, President Obama’s pick to chair the Commodity Futures Trading Commission, and Mark Patterson, a former Goldman lobbyist now serving as chief of staff to Treasury Secretary Timothy Geithner.

All of this awesome influence buying has enabled Wall Street to establish the framework for debates in Washington, and to obtain very specific deregulatory actions, with devastating consequences. More on this in tomorrow’s column.

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** We are greatly indebted to the Center for Responsive Politics, which maintains an array of extraordinary and easy-to-use databases regarding money and politics. Most of our data comes from the Center — which transforms and organizes filings with the Federal Election Commission and the Senate Office of Public Records, among other sources, into formats that can be easily accessed and used. Most of our aggregate expenditure totals are taken or derived from Center for Responsive Politics databases.

What a year for corporate criminality and malfeasance!

As we compiled the Multinational Monitor list of the 10 Worst Corporations of 2008, it would have been easy to restrict the awardees to Wall Street firms.

But the rest of the corporate sector was not on good behavior during 2008 either, and we didn’t want them to escape justified scrutiny.

So, in keeping with our tradition of highlighting diverse forms of corporate wrongdoing, we included only one financial company on the 10 Worst list.

Here, presented in alphabetical order, are the 10 Worst Corporations of 2008.

AIG: Money for Nothing

There’s surely no one party responsible for the ongoing global financial crisis. But if you had to pick a single responsible corporation, there’s a very strong case to make for American International Group (AIG), which has already sucked up more than $150 billion in taxpayer supports. Through “credit default swaps,” AIG basically collected insurance premiums while making the ridiculous assumption that it would never pay out on a failure — let alone a collapse of the entire market it was insuring. When reality set in, the roof caved in.

Cargill: Food Profiteers

When food prices spiked in late 2007 and through the beginning of 2008, countries and poor consumers found themselves at the mercy of the global market and the giant trading companies that dominate it. As hunger rose and food riots broke out around the world, Cargill saw profits soar, tallying more than $1 billion in the second quarter of 2008 alone.

In a competitive market, would a grain-trading middleman make super-profits? Or would rising prices crimp the middleman’s profit margin? Well, the global grain trade is not competitive, and the legal rules of the global economy– devised at the behest of Cargill and friends — ensure that poor countries will be dependent on, and at the mercy of, the global grain traders.

Chevron: “We can’t let little countries screw around with big companies”

In 2001, Chevron swallowed up Texaco. It was happy to absorb the revenue streams. It has been less willing to take responsibility for Texaco’s ecological and human rights abuses.

In 1993, 30,000 indigenous Ecuadorians filed a class action suit in U.S. courts, alleging that Texaco over a 20-year period had poisoned the land where they live and the waterways on which they rely, allowing billions of gallons of oil to spill and leaving hundreds of waste pits unlined and uncovered. Chevron had the case thrown out of U.S. courts, on the grounds that it should be litigated in Ecuador, closer to where the alleged harms occurred. But now the case is going badly for Chevron in Ecuador — Chevron may be liable for more than $7 billion. So, the company is lobbying the Office of the U.S. Trade Representative to impose trade sanctions on Ecuador if the Ecuadorian government does not make the case go away.

“We can’t let little countries screw around with big companies like this — companies that have made big investments around the world,” a Chevron lobbyist said to Newsweek in August. (Chevron subsequently stated that the comments were not approved.)

Constellation Energy: Nuclear Operators

Although it is too dangerous, too expensive and too centralized to make sense as an energy source, nuclear power won’t go away, thanks to equipment makers and utilities that find ways to make the public pay and pay.

Constellation Energy Group, the operator of the Calvert Cliffs nuclear plant in Maryland — a company recently involved in a startling, partially derailed scheme to price gouge Maryland consumers — plans to build a new reactor at Calvert Cliffs, potentially the first new reactor built in the United States since the near-meltdown at Three Mile Island in 1979.

It has lined up to take advantage of U.S. government-guaranteed loans for new nuclear construction, available under the terms of the 2005 Energy Act. The company acknowledges it could not proceed with construction without the government guarantee.

CNPC: Fueling Violence in Darfur

Sudan has been able to laugh off existing and threatened sanctions for the slaughter it has perpetrated in Darfur because of the huge support it receives from China, channeled above all through the Sudanese relationship with the Chinese National Petroleum Corporation (CNPC).

“The relationship between CNPC and Sudan is symbiotic,” notes the Washington, D.C.-based Human Rights First, in a March 2008 report, “Investing in Tragedy.” “Not only is CNPC the largest investor in the Sudanese oil sector, but Sudan is CNPC’s largest market for overseas investment.”

Oil money has fueled violence in Darfur. “The profitability of Sudan’s oil sector has developed in close chronological step with the violence in Darfur,” notes Human Rights First.

Dole: The Sour Taste of Pineapple

A 1988 Filipino land reform effort has proven a fraud. Plantation owners helped draft the law and invented ways to circumvent its purported purpose. Dole pineapple workers are among those paying the price.

Under the land reform, Dole’s land was divided among its workers and others who had claims on the land prior to the pineapple giant. However, wealthy landlords maneuvered to gain control of the labor cooperatives the workers were required to form, Washington, D.C.-based International Labor Rights Forum (ILRF) explains in an October report. Dole has slashed it regular workforce and replaced them with contract workers.

Contract workers are paid under a quota system, and earn about $1.85 a day, according to ILRF.

GE: Creative Accounting

In June, former New York Times reporter David Cay Johnston reported on internal General Electric documents that appeared to show the company had engaged in a long-running effort to evade taxes in Brazil. In a lengthy report in Tax Notes International, Johnston reported on a GE subsidiary’s scheme to invoice suspiciously high sales volume for lighting equipment in lightly populated Amazon regions of the country. These sales would avoid higher value added taxes (VAT) in urban states, where sales would be expected to be greater.

Johnston wrote that the state-level VAT at issue, based on the internal documents he reviewed, appeared to be less than $100 million. But, he speculated, the overall scheme could have involved much more.

Johnston did not identify the source that gave him the internal GE documents, but GE has alleged it was a former company attorney, Adriana Koeck. GE fired Koeck in January 2007 for what it says were “performance reasons.”

Imperial Sugar: 14 Dead

On February 7, an explosion rocked the Imperial Sugar refinery in Port Wentworth, Georgia, near Savannah. Days later, when the fire was finally extinguished and search-and-rescue operations completed, the horrible human toll was finally known: 14 dead, dozens badly burned and injured.

As with almost every industrial disaster, it turns out the tragedy was preventable. The cause was accumulated sugar dust, which like other forms of dust, is highly combustible.

A month after the Port Wentworth explosion, Occupational Safety and Health Administration (OSHA) inspectors investigated another Imperial Sugar plant, in Gramercy, Louisiana. They found 1/4- to 2-inch accumulations of dust on electrical wiring and machinery. They found as much as 48-inch accumulations on workroom floors.

Imperial Sugar obviously knew of the conditions in its plants. It had in fact taken some measures to clean up operations prior to the explosion. The company brought in a new vice president to clean up operations in November 2007, and he took some important measures to improve conditions. But it wasn’t enough. The vice president told a Congressional committee that top-level management had told him to tone down his demands for immediate action.

Philip Morris International: Unshackled

The old Philip Morris no longer exists. In March, the company formally divided itself into two separate entities: Philip Morris USA, which remains a part of the parent company Altria, and Philip Morris International. Philip Morris USA sells Marlboro and other cigarettes in the United States. Philip Morris International tramples the rest of the world.

Philip Morris International has already signaled its initial plans to subvert the most important policies to reduce smoking and the toll from tobacco-related disease (now at 5 million lives a year). The company has announced plans to inflict on the world an array of new products, packages and marketing efforts. These are designed to undermine smoke-free workplace rules, defeat tobacco taxes, segment markets with specially flavored products, offer flavored cigarettes sure to appeal to youth and overcome marketing restrictions.

Roche: “Saving lives is not our business”

The Swiss company Roche makes a range of HIV-related drugs. One of them is enfuvirtid, sold under the brand-name Fuzeon. Fuzeon brought in $266 million to Roche in 2007, though sales are declining.

Roche charges $25,000 a year for Fuzeon. It does not offer a discount price for developing countries.

Like most industrialized countries, Korea maintains a form of price controls — the national health insurance program sets prices for medicines. The Ministry of Health, Welfare and Family Affairs listed Fuzeon at $18,000 a year. Korea’s per capita income is roughly half that of the United States. Instead of providing Fuzeon, for a profit, at Korea’s listed level, Roche refuses to make the drug available in Korea.

Korean activists report that the head of Roche Korea told them, “We are not in business to save lives, but to make money. Saving lives is not our business.”