How Wall Street Created the New Divisive America
Wall Street may not have intended its policies to go this far, but the outrage and approaching Civil War level divisiveness in America today are a direct result of its strategies. Wall Street has ensured that all financial reforms have increased the flow of income and wealth to the upper classes — — and this has been accomplished by stealth methods that the average voter cannot detect.
While many understand that the corporate-banker lobby controls Washington, they’re not certain how it’s done. Wall Street knows the lever of power regarding any financial issue and Wall Street has a man in its pocket, ready with their hand on that lever. I’ll identify their man, the lever and how the Street gets them there.
Here’s a summary of how Wall Street has been the major player in facilitating the wealth gap over the past three decades.
1993
From the 1930s until sometime in the mid-1970s, executive pay had been about 20:1 median worker pay. By the 1990s, the stagnating worker pay and the skyrocketing executive pay fuelled public outrage. Bill Clinton, as part of his “Putting People First” campaign, promised he would stop it by putting a cap on executive pay. Only $1 million could be tax deducted.
And that may have had some effect, except that Wall Street had its man in place so that a freight train sized loophole was slipped in. Corporations could pay more, without limit, if pay was related to performance, which meant not in cash but in unlimited stock or stock options.
Wall Street’s man on the spot was ex-Goldman Sachs CEO, Robert Rubin, who Clinton had appointed as Treasury Secretary.
In his documentary, Saving Capitalism, Robert Reich tells of a dispute between himself and Rubin. Reich strongly opposed the exemption; Rubin strongly favoured it. Clinton chose to follow Wall Street’s man.
The graph below shows the result of Rubin’s loophole. After the 1993 reform, executive pay soared even faster. And this steep upward climb has continued since that date even though it became obvious that the reform had failed — and the Democrats had sufficient control of Congress in many subsequent years to reverse it, but did not.
1996
The investment banking business model had radically changed by this year. The investment bankers no longer made their bonuses by selling stocks and bonds, arranging mergers, IPOs (Initial Public Offerings) and the like. They had created new complex financial instruments called derivatives that yielded their ever increasing bonuses. Curiously, as the name implies, derivatives have no intrinsic value in themselves but derive their value by reference to other assets. The credit default swap is an example. As demonstrated in Michael Lewis’, The Big Short, this was a pure bet. The banks bet with the hedge funds that the mortgage market would continue to rise and lost the bet.
Note how this activity contributes nothing to society, but it does put the financial system at risk of total failure — with the only possible reward being bankers’ bigger bonuses.
By the early 1990s, these new instruments were estimated to have a notional value of $29 trillion and were entirely unregulated; no one outside the banking community knew anything of what was going on in this market, conducted completely in the shadows.
At that time, Brooksley Born, head of the Commodity Futures Trading Commission, circulated a concept paper asking for ideas as to how these new derivatives could best be regulated. She was worried about the fact that there may be no reserves (which there weren’t) if there were defaults, and that there might be a lot of fraud in this dark market (which there was).
Opposing reaction by the Wall Street defence team in government was swift. Writing in the Harvard Business School Case Collection, professors Clayton Rose and David Lane reported that, “Just hours after it [the concept paper] was published, U.S. Treasury Secretary Robert Rubin, Federal Reserve Board Chairman Alan Greenspan, and Securities and Exchange Commission Chairman Arthur Levitt announced their ‘grave concerns’ about it in an unusual joint press release that minced no words.”
The team got Congress to immediately pass a moratorium preventing Born from even dipping her toe into those dark waters for six months. (OK, environmentalist, now you try getting something like that passed so quickly.) Within that six months, Congress made the prohibition permanent by passing what was euphemistically called the Commodity Futures Modernization Act of 2000.
1999
This was the year of the Great Deregulation.
Prior to 1933, investment banks and commercial banks were unified. Keep in mind that banks do not hold deposit money in trust, but are allowed to use it as they wish, including for speculating in the stock and bond markets for better profits — resulting in better banker pay.
Franklin D. Roosevelt said, “No more of this!” and had the two types of banks split into commercial and investment banks by the well-known Glass-Steagall Act. That act absolutely prohibited commercial banks from speculating in the markets. As investment banks didn’t hold the savings of America on deposit, they were free to speculate. If their risky investments failed, their creditors could not get at the assets of the commercial banks, especially depositor money.
But that safe separation of the two types of banks and insurance companies was brought to an end in the middle of Clinton’s second term by the difficult to pronounce Gramm–Leach–Bliley Act.
By this time Rubin had resigned; Clinton had appointed economist Larry Summers as Treasury Secretary. Summers was one of the man-in-Wall Street’s-pocket types. Summers endorsed the Great Deregulation saying, “With this bill, the American financial system takes a major step forward towards the 21st Century.”
Summers got his reward.
Upon being nominated Treasury Secretary in 1999, Summers listed assets of about $900,000 and debts, including a mortgage, of $500,000 for a net worth of about $400,000, a reasonable amount for an academic. By the time he returned in 2009 to serve in the Obama administration, his reported net worth had surged to between $17 million and $39 million.
Where did an academic and civil servant get this kind of money? We have some of the sources. Glenn Greenwald reports that after leaving Treasury, Summers earned $2.7 million in speaking fees from major financial institutions, including Goldman Sachs, JPMorgan Chase, Citigroup, Merrill Lynch and Lehman Brothers, all of which had received or benefitted from bailout money.
Charles Ferguson discovered that Summers earned $5 million a year for one day a week of work at a hedge fund called D.E. Shaw.
2008
In September, 2008, when all the government regulators and economists were surprised by the failure of investment bank Lehman Brothers, there was no real question about the need for a bailout, the hugeness of the amount, and the urgent timing. It would take hundreds of billions, and it must happen in a few days. Fed Chair Ben Bernanke told a committee of legislators: “If we don’t do this, we may not have an economy on Monday.”
The only question was: Who would the money go to — homeowners or banks?
While George W. Bush was in the White House, the Democrats had control of both houses of Congress and wanted a solution based on FDR’s response so the money would go to the homeowners. They proposed a bill doing just that, $700 billion for homeowner relief. Unconvinced? The New York Times published a draft of the bill.
Now we all know that didn’t happen. How did the money tagged for homeowners get to the banks in spite of the will of Congress?
Hint: The Treasury Secretary was again an ex-CEO of Goldman Sachs, Hank Paulson. So now you know the answer and the cause, but stay with me. There will still be a few surprises.
The first advance of $350 billion was given to the Treasury to buy the mortgages in default from the banks and work out terms with the homeowners. Once Paulson had the money, he changed his mind saying it was necessary to give it to the banks — — and necessary to let the bank executives take their bonuses from it. He just did it because he could.
Nancy Pelosi went to complain, but it was a fait accompli. So she said that she would get Congress to give Paulson a directive that the rest of the money must go to homeowners. Paulson said he wouldn’t draw down any further money and would leave the remaining $350 billion to the coming Obama administration to use for homeowner relief.
2009
Obama is in office. The Democrats have control of both houses of Congress. Hope and change ring throughout America.
Now there’s $350 billion left to go to the homeowners. What happened? Obama’s Treasury Secretary, Timothy Geithner, sent it back. Not a penny to the homeowners.
Obama pledged hope for 4 million homeowners through a new program called HAMP (Home Affordable Modification Program). 74 billion was allocated for homeowner relief. Less than a billion got to them. 72% of the applicants were refused.
Proud of this result, Geithner bragged to Neil Barofsky, the special counsel appointed to oversee the use of the funds, that Geithner had used the HAMP funds to “foam the runway for the banks”.
Foaming the runway is a bankruptcy term using the analogy from preventive measures for the crash landing of a plane. It means that the trustee in bankruptcy spends whatever money is necessary to preserve the mortgaged assets for the banks in order to give them time to organize their seizure. That involves paying insurance, utilities and the like.
At another time, Geithner made a public comment that he didn’t believe the money should go to the homeowners as it would create a moral hazard; it would teach them that it was okay not to pay their debts.
In response, the media failed to point out that giving the money to the homeowners and not the banks is precisely what FDR had done in response to the Great Depression, and that, among some other radical socialist measures, created a stable financial system that lasted until 2008.
Geithner, like Summers, collected his reward on leaving government. The private German bank Warburg Pincus, appointed him president, turning his six-figure salary into seven.
A Midget Stands on the Shoulder of Giants
The rank and file Democrats who affiliate with that party believe that the Democrats, in contrast to the Republicans, will fight for policies helping the least of their brethren. Indeed, in some areas such as healthcare that is true, but as the above shows, for any policy that affects the upward transfer of wealth, the Democrats are a more effective tool of giant Wall Street than even the Reagan Republicans.
And the ironic political consequence of this covert control strategy: the more Wall Street makes the working class financially desperate by methods working people cannot understand, the more those people lay blame on what they can understand — — immigration, China, and those bleeding heart progressives.
After Obama’s failure to help the homeowners in the first two years of his presidency, the white working class, that had voted for Obama, began to lose faith in the Democrats. A Washington Post analysis of a sample of the January 6 Capital rioters showed that 80% of them had public records of financial difficulties such as debt collection lawsuits and bankruptcies.
But where could they go? The Republicans, at least, were honest; they were the party of the business-class. The stage was set for an outlier. Trump could convincingly say, “The system is rigged.” And then the cunning impresario could even more convincingly add, “And I am the only one who can fix it.”
Author: Jan D. Weir is a trial lawyer who has advised international corporations, banks, accounting firms and Lloyds of London that insured auditors. He has taught business law at the University of Toronto, and is the co-author of The Essential Concepts of Canadian Business Law (available on KOBO). He discuss how the superrich use unrecognized methods for the upward transfer of wealth in the tax, corporate and banking areas on Medium.com, and on Twitter@JanWeirLaw.
