This month, as the Senate resumes work on its draft, numerous showdowns loom—between Wall Street and Congress, Democrats and Republicans—on dozens of aspects of the 1,300-page bill. Some of the controversial provisions you know; but others have so far slipped mostly under the radar. Here are five looming battles sure to pit lobbyists against lawmakers and lawmakers against their colleagues. The outcome of these skirmishes could ultimately determine whether the bill fixes the flaws in our financial system or merely pays lip service to reform.
After a year-and-a-half long financial autopsy, the Senate investigations subcommittee today is exploring the demise of the Washington Mutual, once among the US' largest thrift banks with more than $330 billion in assets and the largest bank failure in American history. The hearing will include testimony from former WaMu executives like CEO Kerry Killinger, president Stephen Rotella, past risk officers, and the former president of the Home Loans division at the heart of WaMu's stunning meltdown.
The beginning of the end, as the Senate's investigation suggests, came in 1999, when WaMu snapped up a subprime lender named Long Beach Mortgage Company. Long Beach was a major player in the booming securitization business—the origination of loans to be bundled into bonds backed by those pools of loans. These mortgage-backed securities were then sold to Wall Street banks and the two government-sponsored housing corporations, Fannie Mae and Freddie Mac. In 2006, Long Beach injected a staggering $30 billion in subprime loans into the securitization machine, a sixfold increase from only three years before. And by churning out subprime loans to less qualified homeowners, Long Beach fit perfectly into WaMu CEO Killinger's goal, echoing that of executives like Citigroup's Sandy Weill, of making WaMu into a supermarket bank, a one-stop shop for customers of all stripes.
Another key date, as the Senate investigation shows, was 2005, when WaMu and Long Beach, as shown in an internal WaMu PowerPoint presentation, settled on a strategy called "gain on sale." That strategy essentially stressed how much more profit could be made on riskier loans as opposed to government-backed, fixed interest-rate loans, and that these riskier, more profitable products—home equity, subprime, and option adjustable-rate mortgages—could be a cash cow for WaMu.
This cutthroat, purely profit-driven philosophy meant WaMu and Long Beach increasingly pushed their employees, in the early 2000s, to focus more on volume than quality—selling more and more loans with little regard for the underwriting or potential success of those loans. "WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage backed securities," Levin said. "To keep the conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb."
As Congress returns to action this week, with writing new financial regulation atop their to-do list, a new poll (pdf) released today by the Consumer Federation of America found that 62 percent of those polled supported a new consumer financial protection agency. That's a 5 percent increase from eight months ago. Opposition to the proposed agency decreased from 39 percent to 34 percent over that eight-month period, the poll found. This uptick in support is a boon for the proposed agency, which would protect consumers from predatory lending practices, unfair fees charged by credit card companies and banks, and toxic financial products like no-income-no-job-no-asset mortgage loans. Consumer advocates, like Elizabeth Warren, say the agency is one of the few parts of the Senate's bill that would directly help American families.
The political support for a tough consumer agency is far from assured, however. While liberal Democrats have favored creating an independent, standalone consumer agency, resembling something like the Environmental Protection Agency, more moderate and conservative lawmakers have sought to chip away at the agency's independence and limit its rule-writing power. Now back from recess, one of the Senate's main hurdles on the way to crafting a financial reform bill is deciding the consumer protection agency's fate. With the bill already passed out of committee, and now set to be debated in the full Senate, there's sure to be a flurry of amendments offered looking to strengthen or weaken the proposed agency, which, as the bill is now, would be independent but housed within the walls of the Federal Reserve.
Like Disneyworld and a Tallahassee flea market, Rep. Alan Grayson (D-FL) has quite the knack for attracting nutty characters. I'm specifically talking about Grayson's campaign for re-election this fall, and the latest challenger to emerge out of the woodwork: a Ocala, Florida, resident named Steve Gerritzen who's running as the lone candidate for (drumroll) the Whig Party. Yes, those Whigs, the ones who haven't had much clout in American politics since the 1850s. Apparently, Gerritzen, fed up with Democrats and Republicans, "wants to remake the American education system in the model of that of Iceland, which emphasizes high rates of literacy, early childhood education, and taxpayer-funded collegiate studies," the Ocala Star-Bannerreports.
By day, Gerritzen, 39, is an electronics assembler, and struck a populist tone in what's presumably his coming-out interview with the Star-Banner. "A lot of people are talking about a revolution, but I'm calling for a revolution through the ballot box," Gerritzen told the newspaper. "Seventy percent of the people make less than $50,000 a year, and that's who I want to represent. I care about the people because I am the people. I am the working class."
In addition to the Whig resurrection, Grayson faces a challenge from the Tea Party's Peg Dunmire, whom Grayson called one of Sarah Palin's "undead minions." So rhetorically gifted is Dunmire, Grayson said, that she deserved a spot in the Guinness Book of World Records for "Most Consecutive Cliches." Dunmire's website says she want to eliminate most payroll taxes, repeal the Sarbanes-Oxley Act of 2002 (a landmark reform of financial accounting principles), and ramp up offshore drilling off Florida's coasts.
Florida's a bizarre enough state as it is, an off-kilter peninsular republic complete with hanging chads, Katherine Harris, Elian Gonzalez, and on and on. Thanks to Grayson and his cadre of challengers, it's only getting stranger.
Citigroup's bygone masters of the universe—Charles Prince, former CEO and chairman, and Robert Rubin, the former chair of Citi's board (and Treasury Secretary under Bill Clinton)—have come to Washington to tell us all something: They were wrong. And they're sorry.
That was among the opening highlights of Prince and Rubin's appearance today before the Financial Crisis Inquiry Commission (FCIC), the Congressionally-mandated panel investigating the root causes of the recent financial meltdown. "I can only say that I am deeply sorry that our management—starting with me—was not more prescient and that we did not foresee that lay before us," said Prince, who led Citigroup from October 2003 to November 2007, resigning on the same day Citi announced $8 to $11 billion in writedowns in the early stages of the crisis. (Prince, you'll remember, is famous for comparing the global financial markets to musical chairs: "When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing.")
Prince and Rubin are before the FCIC today as the commission investigates Citi's role in the subprime mortgage collapse and the broader economic meltdown. The U.S. supermarket bank, for one, was a heavyweight in the market for collateralized debt obligations (CDO), a type of security backed by pools of mortgage loans with varying degrees of risk. Citi, as Prince described in his testimony, held billions in so-called "super-senior" CDOs, which Citi officials felt had little chance of turning sour. (It didn't help that the hapless credit rating agencies imprinted these products with AAA ratings, the gold standard. But that's a whole different issue.) Quite the contrary: Citi ended up losing $30 billion over six quarters on these products. Today's hearings with Prince and Rubin, as well as several hearings held yesterday with Citi officials, are an attempt to understand how such a powerful and sprawling bank could so grossly underestimate the toxicity of these CDOs.
Rubin, who said he only learned of Citi's massive positions with these CDOs in the fall of 2007, accepted his share of blame, too, for underestimating how dangerous these products could be. "Almost all of us involved in the financial system...missed the powerful combination of forces at work and the serious possibility of a massive crisis," Rubin said in his testimony. "We all bear responsibility for not recognizing this, and I deeply regret that."