On Monday the House and Senate began considering the $700 billion gift to Wall Street otherwise known as the bailout package, presented to them in recent days by Treasury Secretary Henry Paulson. How will it fare on the floor of Congress? A clue to what we can expect can be found in the congressional response to the 1999 Gramm-Leach-Bliley Act, which helped pave the way for the current economic crisis.
This now infamous piece of legislation repealed part of the Glass-Steagall Act, passed in 1933 in response to the banking collapse of the Great Depression. Glass-Steagall enforced a firewall between investment banks, commercial banks, and insurance companies, in order separate high-flying Wall Street risk-takers from the banks where Americans keep their money in checking and savings accounts.
Phil Gramm, then a Republican senator from Texas, and recently an economic advisor to the McCain campaign, took the lead in undoing Glass-Steagall, a move the financial services industry had been lobbying for since at least the 1980s. (James Leach, a former Republican congressman from Iowa, introduced the House version of the bill. He is now a leader of Republicans for Obama.) Bill Clinton was also an enthusiastic supporter of banking deregulation. And it was Clinton Treasury Secretary Robert Rubin who brokered the compromise that allowed the legislation to move forward in Congress—shortly before he left the administration to join Citigroup. (In November 1999, Mother Jones published a piece on the dangerous implications of Gramm-Leach-Bliley, under the headline "Robert Rubin Rewrites the Rules.")
How Democrats in Congress dealt with Gramm-Leach-Bliley has now become a subject of debate. The final version of the legislation won nearly universal bipartisan support and passed by a wide margin in both houses of Congress in November 1998. The Senate's 90 yea votes included those of such prominent Democrats as Ted Kennedy, Chris Dodd, Chuck Schumer, and Harry Reid, along with VP nominee Joe Biden.
Some, by way of trying to absolve Democrats of responsibility for passing this measure, have argued that the vote on the earlier Senate version of the bill (before the final conference version) was 54 to 44, divided along partisan lines, with all of the above Dems voting against it. This is truethough at the time most Democrats' objections had nothing to do with preserving the Glass-Steagall firewall. In the end, only nine senators, including Russ Feingold, Tom Harkin, Barbara Mikulski, and Paul Wellstone, along with Independent Bernie Sanders, refused to lend their names to the final bill, regardless of how inevitable its passage was.
But that was then. Now one question is whether Democrats will be as friendly to Wall Street as many were during the 1998 debate. As the current debate gets under way, prominent progressive populists are trying to shape the policy discussion.
On Sunday Clinton-era Labor Secretary Robert Reich, outlined the demands Congress should make of Wall Street in return for the massive bailout that's currently under consideration. He suggests Congress mandate that "Wall Street executives and directors of Wall Street firms relinquish their current stock options and this year's other forms of compensation, and agree to future compensation linked to a rolling five-year average of firm profitability. Why should taxpayers feather their already amply-feathered nests?" And, as part of any bailout legislation, he writes, Congress should require that "the government (i.e. taxpayers) gets an equity stake in every Wall Street financial company proportional to the amount of bad debt that company shoves onto the public. So when and if Wall Street shares rise, taxpayers are rewarded for accepting so much risk."
In a recent op-ed Bernie Sanders (I-Vt.) made a similar point, suggesting that "that taxpayers receive equity stakes in the bailed-out companies so that the assumption of risk is rewarded when companies' stock goes up."
...If the government is going to save companies from bankruptcy, the taxpayers of this country should be rewarded for assuming the risk by sharing in the gains that result from this government bailout.
Detailing a four-point plan to address the financial crisis, Sanders notes that "legislation must be passed which undoes the damage caused by excessive deregulation. That means reinstalling the regulatory firewalls that were ripped down in 1999." Among other things, he advocates levying a "five-year, 10 percent surtax on income over $1 million a year for couples and over $500,000 for single taxpayers." According to Sanders, this would raise $300 billion in revenue.
As Congress hammers out the terms of the Wall Street bailout, one that puts US taxpayers at significant financial risk it's worth looking to the past when considering the future. In the current financial crisis, congressional Democratsnot to mention a prospective Democratic presidentwill need to have steel in their spines to support the interests of Main Street when they clash with the interests of Wall Street. And if they maintain the Clinton triangulation approach of the 1990s, average Americans will once again have no one in their corner.
UPDATE: Rep. Henry Waxman (D-Calif.) just issued a statement expressing "serious reservations about the Administration's bailout proposal."
The structure of the plan appears designed to maximize returns for Wall Street and minimize protections for the taxpayer.
The Administration's plan completely eviscerates the concept of moral hazard. It would enrich the Wall Street executives whose reckless investments caused the financial crisis. The taxpayer is being asked to risk billions to protect the bonuses of investment bankers.
There was public outrage when the CEOs of Countrywide, Merrill Lynch, and Citigroup walked away with hundreds of millions of dollars after causing billions of dollars of losses. But what President Bush and Secretary Paulson are proposing is worse: the taxpayer will be funding million-dollar payouts on Wall Street.
Congress needs to insist on firm limits on executive compensation. No financial institution that gets federal relief should pay its CEO more than $2 million annually. That's over ten times what the Secretary of Treasury makes.
Congress should also insist on greater financial transparency. We should not give bailouts to firms that continue to conceal their balance sheets from investors and the government.
I support intervention to protect the functioning of our capital markets. But we need to consider alternatives to the President's plan. There are other approaches that could provide more relief more quickly at less cost to the taxpayer. While we need to move quickly, we should not be stampeded into enacting a flawed proposal at huge costs to the taxpayer. We need to expeditiously evaluate a range of options and enact the one with the greatest likelihood of success and the least exposure to the taxpayer.
Photo by flickr user epicharmus used under a Creative Commons license.