In the Public Interest

Behind The Deregulatory Curtain

by Ralph Nader

The current finger pointing by the deregulation crowd in Congress and their ideological soul mates in the media reminds me of the 1939 film classic The Wizard of Oz. It is as though these spin masters want us to pay no attention to the government officials behind the deregulation curtain.

Indeed, the right-wing pundits and the revisionists in Congress are spending an inordinate amount of time falsely claiming that our nation’s current financial disaster stems from the Community Reinvestment Act, a law passed by Congress and signed into law by President Jimmy Carter in 1977. The primary purpose of this modest law is to require banks to report on where and to whom they are making loans. Community organizations have used the data produced as a result of this law to determine if banks were meeting their lending obligations in the minority and lower-income communities in which they do business. Congress passed this law because too many lenders were discriminating against minority borrowers. "Redlining" was the name given to the practice by banks of literally drawing a red line around minority areas and then proceeding to deny people within the red border home loans - even if they were otherwise qualified. The law has been in place for 30 years, but the right-wing fringe claims it somehow is responsible for predatory lending practices that date back just to the beginning of this decade.

Notice what these revisionists are not mentioning.

No "thank you" to former Senator Phil Gramm for pushing the repeal of the Glass-Steagall Act. This law was passed in the wake of the stock market crash of 1929 – and designed to separate banking from securities activities. In 1999, when Congress passed the Gramm-Leach-Bliley Act and in so doing repealed Glass-Steagall the banks strayed into rough waters by looking for fast money from risky investments in securities and derivatives.

As predatory lending mushroomed out of control, the regulators—key among them, the Federal Reserve and the Office of Comptroller of Currency—sat on their hands. The Federal Reserve took exactly three formal actions against subprime lenders from 2002 to 2007. Bloomberg news service found that 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.

No "tip of the hat" to the Bush Administration for preempting state regulators and Attorneys General from using state consumer laws to crack down on predatory and sub-prime lending by national banks.

And, let us not forget the folks at Fannie Mae and Freddie Mac. Imagine allowing these two government sponsored enterprises—that were weakly regulated by HUD—to claim they were meeting the national housing goals by counting the purchase of subprime loans. Back in May of 2000, our associate Jonathan Brown warned that it would be inappropriate and counterproductive to encourage Fannie and Freddie to meet the housing goals by purchasing subprime loans. Too bad our members of Congress and the regulators at HUD were infected with deregulatory zeal. Former Texas Senator and current UBS executive Phil Gramm—would-be President John McCain’s Treasury Secretary-in-waiting—pushed through the Commodities Futures Modernization Act of 2000, which deregulated the derivatives market. With help from his wife, Wendy, the former head of the Commodity Futures Trading Commission who went on to a post on the Enron board of directors, Gramm removed the controls on Wall Street so it could innovate all sorts of exotic financial instruments. Instruments far riskier than advertised, and now at the core of the financial meltdown.

The SEC, through its “consolidated supervised entities” program, decided that voluntary regulation would work for the investment banking sector. Not surprisingly, this was a scheme cooked up by Wall Street itself. The investment banks were permitted to double, triple and go 20 times (and more) down on their bets by using lots of borrowed money. They made minimal disclosures to the SEC about what they were doing, and the SEC didn’t bother to review those disclosures adequately. Too bad for the investment banks—and the rest of us—they made lots of bad bets. The SEC has now closed the voluntary program, though now there aren’t any major investment banks left (the two remaining ones have converted themselves into conventional banks).

It is time to start paying very close attention to government officials behind the deregulation curtain. Let your Members of Congress know you are not willing to bailout the gamblers on Wall Street with a no-strings-attached pile of taxpayer dollars. The time for regulation is upon us.