“An Incongruous Spectacle”: Dave Brat’s Win Over Eric Cantor Exposed The Unholy Tea Party-Wall Street Alliance
The Tea Party wave that built around the country in 2009 and 2010 was fueled by many things—resentment over foolhardy homeowners getting mortgage relief, backlash against the Affordable Care Act, and anxiety over federal spending. But if its rhetoric was to be believed, the movement was also driven by a healthy dose of old-fashioned anti-Wall Street populism—anger over the TARP bailouts, the AIG bonuses, the Obama administration’s failure to prosecute any of the bankers who’d brought us close to ruin.
Something funny happened, though, as the pitchforks made their way to confront the money changers at the temple: Wall Street and big business co-opted them. It turned out that some elements of the Tea Party movement were much more opposed to Obama than they were to self-dealing CEOs and bankers, and perfectly willing to join with the latter to fight the former. This quickly produced the confounding spectacle of a purportedly populist uprising that was working hand in hand, and in many cases funded by, the business elite. And the nexus for this alliance was the Republican leadership in Congress. When Republicans were trying to block the Dodd-Frank financial reform bill, they took Frank Luntz’s devious advice to label the bill a “bailout” for the banks—deploying Tea Party rhetoric to attack a bill that was in fact bitterly opposed by the bailed-out banks. In recognition of this effort, Wall Street in 2010 swung its campaign spending sharply toward GOP candidates, including many running under the Tea Party banner.
And when the Tea Party wave reached Washington, after the Republican rout in the midterm elections, who put himself forward as the new arrivals’ standard bearer within the House leadership? None other than Eric Cantor—the top recipient of financial industry money in Congress, the longtime protector of one of the most notorious Wall Street favors of all, the tax loophole for the carried-interest income of private-equity and hedge-fund managers. It was an incongruous spectacle, but so muddled had the right’s populism become by that point that the opportunistic Cantor was able to brazen his way through it. It was he who goaded the insurgent congressmen to make the raising of the debt-ceiling limit in June of 2011 their big stand against Obama: “I’m asking you to look at a potential increase in the debt limit as a leverage moment when the White House and President Obama will have to deal with us,” Cantor told the rank-and-file in a closed-door meeting in Baltimore in January 2011. It was he who undermined Speaker John Boehner’s effort to reach a grand bargain with Obama to pull the nation back from the brink, by riling up rank-and-file conservatives against the deal. It was a brilliant display: in one fell swoop, Cantor was able to protect the financiers’ carried-interest loophole (which Obama sought to close as part of the deal) at the same very time as he was serving as the champion of the Tea Party insurgents.
Now, Cantor’s game is up. Many, such as my colleague John Judis and the New Yorker’s Ryan Lizza, have already noted the right-wing populism in the rhetoric of Dave Brat, the economics professor who upset Cantor in Tuesday’s primary. But what is particularly significant about Brat’s victory is that he deployed this populism against the very man who had perfected the art of faking it. “All the investment banks in New York and D.C.—those guys should have gone to jail,” Brat said at one Tea Party rally last month. “Instead of going to jail, they went on Eric’s Rolodex, and they are sending him big checks.” Liberals have for some time now been decrying Cantor’s hypocrisy in posing as the tribune of the common man, but here was a fellow Republican calling it out (without, it should be noted, the assistance of any of the self-appointed Tea Party organizations that have been so willing to make common cause with their anti-Obama allies on Wall Street). Yes, some conservatives have for the past few years been making noise about “crony capitalism,” but somehow their examples of this scourge most often tended to be Democratic-inflected rackets, such as the failed solar energy company Solyndra, rather than Republican-tinted ones such as, say, the private lenders who were making a killing acting as taxpayer-subsidized middle-men in the student loan market.
This is why we should be grateful for Dave Brat, beyond the schadenfreude of seeing a widely disliked congressional leader brought low. Yes, Brat’s win will add new kindling to the Tea Party cause just as some were declaring it burned out, thus further reducing the odds of legislative progress in areas such as immigration reform. But his win has, at least momentarily, also brought some clarity and integrity to the insurgency. Here was anti-Wall Street populism in its pure form: aimed, for once, at the right target.
By: Alec MacGinnis, The New Republic, June 12, 2014
“Giving Wall Street More Leeway”: How Paul Ryan’s Budget Paves The Way For Another Financial Crisis
Representative Paul Ryan released his budget blueprint this week, and fans of his work were no doubt pleased: it called for $5 trillion in spending cuts over the next decade, focused heavily on domestic, non-military spending. Safety net programs like Medicaid and food stamps would face savage cuts, and the Affordable Health Care Act would be repealed entirely. Meanwhile, both corporate and individual tax rates would be lowered.
It is easy to make the case that the rich get richer and the poor get poorer under Ryan’s so-called “Path to Prosperity” plan: one needs only to look at the literally trillions cut from Medicaid and food stamps while the rich pay much less in taxes.
But it’s important to refine that point and note that the financial sector in particular gets many special favors in the Ryan plan. After all, it is one of Ryan’s leading benefactors and he can even be spotted sipping $350 bottles of wine with industry leaders from time to time. And his budget is no doubt a path to prosperity for them.
Moreover, in three crucial ways Ryan’s budget not only gives Wall Street more leeway to act recklessly, but makes it more likely that average Americans face the consequences.
Cutting the Securities and Exchange Commission budget: Already, the head of the SEC is complaining that her agency’s budget is not nearly adequate to police the country’s massive financial sector. In a speech earlier this year at SEC headquarters, director Mary Jo White said, “our funding falls significantly short of the level we need to fulfill our mission to investors, companies and the markets.” The SEC has only 4,200 employees, but must regulate eighteen different stock exchanges and over 25,000 different market participants—and the agency’s responsibilities are growing thanks to new mandates from the Dodd-Frank financial reform legislation.
Ryan has a much different take in his budget: he thinks the SEC is just too big. He doesn’t apply a dollar figure, but makes it clear the agency’s already meager budget should be substantially “streamlined.”
“In the run-up to the financial crisis and its aftermath, the SEC repeatedly failed to fulfill any part of its mission,” his blueprint notes, ticking off a familiar list of whiffs, from the unsound nature of Bear Stearns and Lehman Brothers to the Ponzi schemes run by Allen Stanford and Bernie Madoff.
So far, so good. But Ryan goes on: “These failures have taken place despite significant increases in funding at the SEC, which has seen its budget increase almost sixty-six percent since 2004.”
Apparently, the extra money was the problem. “This resolution questions the premise that more funding for the SEC means better, smarter regulation. Adding reams of regulations to the books and scores of regulators to the payrolls will not provide greater transparency, consumer protection and enforcement for increasingly complex markets. Instead, the SEC should streamline and make more efficient its operations and resources.”
In short: since the SEC failed to adequately police Wall Street at a time its budget was increasing, the magic solution would be to cut the agency’s budget, because ipso facto the agency’s performance would get better.
This line of thinking would not be unfamiliar to those who follow Ryan’s recommendations for federal anti-poverty programs, and it’s just as wrong here as it is there. As the agency’s director herself pointed out (on several different occasions), the SEC plainly needs more resources to conduct better regulation of a huge financial sector. Ryan provides no evidence, aside from that odd logical twist, that reducing the number of SEC staffers poring over filings from hedge funds would somehow increase oversight of those outfits.
Transferring the Consumer Financial Protection Bureau budget to Congress: Here Ryan resurrects a longstanding GOP proposal: that Congress, not the Federal Reserve, should fund the CFPB.
As it stands now, the bureau’s budget is essentially guaranteed. It can ask the Federal Reserve for funding up to a certain cap, and that request cannot be denied. The caps are fixed percentages of the Fed’s operating expenses. This guarantees autonomy from a Congress where many members (like, say, Ryan) are elected thanks to campaign contributions from the big financial institutions the CFPB polices.
Ryan claims to have a problem with this arrangement only because the Federal Reserve’s profits are supposed to be returned to the Treasury to reduce the deficit, but instead a portion of them are siphoned off to a new bureaucracy—one in which he suggests via scare quotes is ineffective. “Now, instead of directing these remittances to reduce the deficit, Dodd-Frank requires diverting a portion of them to pay for a new bureaucracy with the authority to write far-reaching rules on financial products and restrict credit to the very customers it seeks to ‘protect,’” says the blueprint.
CFPB funding would thus be transferred to Congress under the Ryan plan, and subject to annual appropriations. He doesn’t say what Congress should do with that budget once its under legislators control, but one needs only to look to his SEC budget proposals to get a sense of what would likely happen.
Ensuring Taxpayer Bailouts of Big Banks: This is another up-is-down situation where a lot of unpacking of Ryan’s language is needed. His budget says:
Although the proponents of Dodd-Frank went to great lengths to denounce bailouts, this law only sustains them. The Federal Deposit Insurance Corporation now has the authority to access taxpayer dollars in order to bail out the creditors of large, ‘‘systemically significant’’ financial institutions. This resolution calls for ending this regime, now enshrined into law, which paves the way for future bailouts. House Republicans put forth an enhanced bankruptcy alternative that—instead of rewarding corporate failure with taxpayer dollars—would place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.
Sounds good! But that would actually accomplish the exact opposite.
Indeed, Dodd-Frank gave the FDIC the power to wind down too-big-to-fail banks, which is called “resolution authority.” In a crisis, if a failing bank is deemed too big for traditional bankruptcy, a panel of bankruptcy judges can place it in receivership under the FDIC. That FDIC in turn then makes a plan for winding down the institution safely—something Barney Frank called a “death panel” for big banks.
Crucially, under this structure, taxpayers can’t end up paying for this wind down—Dodd-Frank explicitly forbids it. Any taxpayer money used upfront to ease the firm into bankruptcy would be recouped by a structured sale of the bank’s assets. (Note that Ryan sneakily says the FDIC has the authority to “access taxpayer dollars,” eliding the fact that in the end it has to pay them back.)
Ryan’s alternative is to end FDIC’s resolution authority and simply “place the responsibility for large, failing firms in the hands of the shareholders who own them, the managers who run them, and the creditors who finance them.”
That’s akin to just saying “it will all work out.” It is unlikely in the extreme that the shareholders and managers can somehow bail out a failing big bank, especially in a crisis. Inevitably, Congress and thus taxpayers would have to step in, without any of the established authority like asset sales that the FDIC now possesses.
Ryan’s plan would lead to more taxpayer bailouts of failing big banks—and by stripping down the budgets of the agencies meant to oversee those institutions, make failure more likely in the first place. But in the meantime, his friends on Wall Street could enjoy less regulation, less oversight, and more comfort that taxpayers will someday come to the rescue.
By: George Zornick, The Nation, April 2, 2014
“Aligned Agenda’s”: The Tea Party and Wall Street Might Not Be Best Friends Forever, But They Are For Now
“Our problem today was not caused by a lack of business and banking regulations,” argued Ron Paul in his 2009 manifesto End the Fed, which outlined a theory of the financial crisis that only implicated government policy and the Federal Reserve, while mocking the idea that Wall Street’s financial engineering and derivatives played any role. “The only regulations lacking were the ones that should have been placed on the government officials who ran roughshod over the people and the Constitution.”
There seems to be some confusion about the relationship between the Tea Party and Wall Street. New York magazine’s Jonathan Chait says the two “are friends after all,” while the Washington Examiner‘s Tim Carney insists that the Tea Party has loosened the business lobby’s “grip on the GOP.” So let’s make this clear: The Tea Party agenda is currently aligned with the Wall Street agenda.
The Tea Party’s theory of the financial crisis has absolved Wall Street completely. Instead, the crisis is interpreted according to two pillars of reactionary thought: that the government is a fundamentally corrupt enterprise trying to give undeserving people free stuff, and that hard money should rule the day. This will have major consequences for the future of reform, should the GOP take the Senate this fall.
On the Hill, it’s hard to find where the Tea Party and Wall Street disagree. Tea Party senators like Mike Lee, Rand Paul, and Ted Cruz, plus conservative senators like David Vitter, have rallied around a one-line bill repealing the entirety of Dodd-Frank and replacing it with nothing. In the House, Republicans are attacking new derivatives regulations, all the activities of the Consumer Financial Protection Bureau, the existence of the Volcker Rule, and the ability of the FDIC to wind down a major financial institution, while relentlessly attacking strong regulators and cutting regulatory funding. This is Wall Street’s wet dream of a policy agenda.
Note the lack of any Republican counter-proposal or framework. The few that have been suggested, such as David Camp’s bank tax or Vitter’s higher capital requirements have gotten no additional support from the right. House Republicans attacked Camp’s plan publicly, and Vitter’s bill lost one of its only two other Republican supporters immediately after it was announced. So why is there a lack of an agenda? Because the Tea Party thinks that Wall Street has done nothing wrong.
The story of the crisis, according to the right, goes like this: The Community Reinvestment Act and other government regulations forced banks into making subprime loans, and the “affordability goals” of government-sponsored enterprises made the rest of the subprime that crashed the economy. The Federal Reserve pumped a credit bubble, as it always does when it tries to push against recessions. In other words, the financial crisis in 2008 was entirely a government creation, and could have been solved by just putting all the financial firms into bankruptcy. There’s no such problem as “shadow banking,” and to whatever extent Wall Street misbehaved, it was only the result of the moral hazard created by the assumption that there would be bailouts. Or as Senator Marco Rubio said in his 2013 State of the Union response, we suffered “a housing crisis created by reckless government policies.”
This narrative is an easy one to believe for people who distrust government, but it’s far from the facts. The CRA didn’t even cover the fly-by-night institutions making the vast majority of subprime loans. The GSEs lost market share during the housing bubble and subprime loans account for less than 5 percent of their losses. Low interest rates likely account for only a quarter of housing price shifts, and even then, low interest rates likely offset capital coming into the country from abroad.
The mainstream account of the crisis, as Dean Starkman pointed out in The New Republic, is that we’re all to blame—or, as Georgetown law professor Adam Levitin wrote in his recent survey of the crisis, that it was a “perfect storm.” Starkman argues that the Everyone-Is-To-Blame narrative is partially responsible for the lack of serious homeowner help in the Home Affordable Modification Program. As he demonstrates in his piece, “there’s a big and growing body of documentation about what happened as the financial system became incentivized to sell as many loans as possible on the most burdensome possible terms.”
The lack of any Republican policy on financial reform is the result of several factors. Mitt Romney thought it would be a liability to put forward his own agenda in 2012. By voting nearly unanimously against Dodd-Frank, Republicans were able to make this moderate, lukewarm response to the crisis look like a partisan takeover of finance (financial reform is hard and may not work, so all the better to have Democrats own the issue so they can be clubbed with it later). Rather than wage total war against Dodd-Frank through partisan outfits, the smartest minds on the right are weakening the law through law firms and K Street. And the conservative infrastructure has been solely focused on privatizing the GSEs completely.
This lack of policy has allowed the far right and Austrian School acolytes to occupy the intellectual space in the party. It’s the minority party for now, but all it takes is a few Senate seats changing hands before the Tea Party narrative becomes the prevailing one on the Hill—and nothing would delight Wall Street more.
By: Mike Konczal, The New Republic, March 21, 2014
“Low Wage Jobs Endanger Nothing”: Wall Street’s 2013 Bonuses Were More Than All Workers Earned Making The Federal Minimum
Purveyors of Ferraris and high-end Swiss watches keep their fingers crossed toward the end of each calendar year, hoping that the big Wall Street banks will be generous with their annual cash bonuses.
New figures show that the bonus bonanza of 2013 didn’t disappoint. According to the New York State Comptroller’s office, Wall Street firms handed out $26.7 billion in bonuses to their 165,200 employees last year, up 15 percent over the previous year. That’s their third-largest haul on record.
That money will no doubt boost sales of luxury goods. Just imagine how much greater the economic benefit would be if that same amount of money had gone into the pockets of minimum-wage workers.
The $26.7 billion Wall Streeters pocketed in bonuses would cover the cost of more than doubling the paychecks for all of the 1,085,000 Americans who work full-time at the current federal minimum wage of $7.25 per hour.
And boosting their pay in that way would give our economy much more bang for the buck. That’s because low-wage workers tend to spend nearly every dollar they make to meet their basic needs. The wealthy can afford to squirrel away a much greater share of their earnings.
When low-wage workers spend their money at the grocery store or on utility bills, this cash ripples through the economy. According to my new report, every extra dollar going into the pockets of low-wage workers adds about $1.21 to the national economy. Every extra dollar a high-income American makes, by contrast, only adds about 39 cents to the gross domestic product (GDP).
And these pennies add up.
If the $26.7 billion Wall Streeters pulled in on their bonuses last year had instead gone to minimum wage workers, our economy would be expected to grow by about $32.3 billion — more than triple the $10.4 billion boost expected from the Wall Street bonuses.
This immense GDP differential only speaks to one price we pay for Wall Street’s bonus reward culture. Huge bonuses, the 2008 financial industry meltdown made clear, create an incentive for high-risk behaviors that endanger the entire economy.
And yet, nearly four years after passage of the Dodd-Frank financial reform, regulators still haven’t implemented the modest provisions in that law to prohibit financial industry pay that encourages “inappropriate risk.” Time will tell whether last year’s Wall Street bonuses were based on high-risk gambles that will eventually blow up in our faces.
Low-wage jobs, on the other hand, endanger nothing. The people who harvest, prepare and serve our food, the folks who keep our hotels clean, and the workers who care for our elderly all provide crucial services. They deserve much higher rewards.
By: Sarah Anderson, Moyers and Company, Bill Moyers Blog, March 12, 2014; This post originally appeared at Other Words
“Bad Incentives Haven’t Gone Away”: You Still Need To Care About Sky-High Wall Street CEO Pay
According to a new regulatory filing, Bank of America CEO Brian Moynihan received a compensation package for 2013 worth $14 million, a $2 million increase over 2012. This places Moynihan third on the list of big bank CEOs, behind Goldman Sachs chief Lloyd Blankfein, who made $23 million last year and JPMorgan Chase’s Jamie Dimon, who made $20 million. Moynihan’s top underlings also received multi-million dollar compensation packages of their own.
With these numbers, it seems that Wall Street’s biggest banks are trying to put the financial crisis of 2008 firmly in the rear view mirror. (Never mind that many of them, most prominently JPMorgan, are still paying out hefty fines, penalties and settlements due to their actions in the lead up to that crisis.) Nothing more to see here! Back to business as usual! All’s well that ends profitably!
Over at the New York Times’ Dealbook this week, Ohio State University professor Steven Davidoff even lamented the outsized attention still garnered by CEO pay at Wall Street firms, when, for instance, tech CEOs sometimes make much more. “This double standard for finance and technology doesn’t make sense,” he wrote, adding that “perhaps it is time to call a truce on the Wall Street bias in looking at executive compensation.”
But there’s a good reason for the focus on Wall Street pay. For tech firms, misaligned incentives aren’t likely to crash the economy. For Wall Street, however, short-term risk-taking in pursuit of bigger bonuses can cause systemic problems, as several studies have shown. That’s why the Dodd-Frank financial reform law included new regulations meant to tie executive compensation at banks to longer-term performance (and it didn’t hurt that reining in Wall Street pay makes for good politics).
Sure, Davidoff is right that sky-high CEO pay deserves a broader look across the board. After all, it’s a big driver of income inequality. As the Economic Policy Institute has found, “Executives, and workers in finance, accounted for 58 percent of the expansion of income for the top 1 percent and 67 percent of the increase in income for the top 0.1 percent from 1979 to 2005.” Not only that, but taxpayers are subsidizing these big pay packages thanks to a loophole allowing corporations to write off CEO pay that is “performance based.” (Rep. Lloyd Doggett, D-Texas, has introduced legislation to fix that particular problem, but given what the Republican-held House is interested in these days, I wouldn’t expect it to come up for a vote anytime soon.)
But the fact remains that Wall Street pay is unique due to its ability to cause harm to the wider economy. The simple solutions for reining in pay that would work in other industries – such as higher taxes, more transparency and stronger unions – don’t reduce that risk. And the fixes in Dodd-Frank, while helpful, haven’t done enough, as professor J. Robert Brown Jr., an expert in corporate law, wrote recently:
Executive compensation is not adequately bounded by legal standards under state law. Efforts to address these concerns by Congress have been useful but remain incomplete. The system as it currently exists does not ensure that compensation will be based upon actual performance or that the approach will not encourage excessive risk taking.
Now, Wall Street will tell you up, down and all around that its new pay packages are not like those of yesteryear. And maybe that’s even the case for now. But as 2008 fades further and further into memory, it’s worth remembering just how the economy was brought to the brink and what still hasn’t been done to fix those problems. Without firm rules, there’s nothing stopping Wall Street from slipping right back to the same old bad habits when it thinks everyone has lost interest.
By: Pat Garofalo, U. S. News and World Report, February 20, 2014
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