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By Brad Miller, who was a member of the U.S. House of Representatives from 2003 to 2013 and is now Of Counsel to the law firm of Grais & Ellsworth LLP
Matt Taibbi described in “How Wall Street Killed Financial Reform” the many ways “the banks strangled the Dodd-Frank law,” including the effort by House Republicans after the 2010 election to “pass a gazillion loopholes.”
“You might wonder,” Taibbi wrote, “how a bunch of lunkhead Republican Congressmen would even know how to write a coordinated series of ‘technical fixes’ to derivatives legislation, a universe so complicated that it has become hard to find anyone on the Hill who truly understands the subject. (One Congressman who sits on the Financial Services Committee laughingly admitted that when the crash of 2008 happened, he had to look up ‘credit default swaps’ on Wikipedia.)”
Yeah, that was me.
I don’t remember going off the record with Taibbi and he quotes me by name elsewhere in the article, but he probably assumed that no Congressman would publicly admit to being that clueless. I tell that story all the time, and in public.
How was I supposed to know about credit default swaps? Congress put derivatives beyond the reach of federal and state regulation in 2000, two years before I was elected to Congress. In the time I had been in Congress there had not been a single hearing in the Financial Services Committee on derivatives. It turned out that jurisdiction for derivatives legislation was disputed between the Financial Services Committee and the Agriculture Committee, since derivatives were originally a way to hedge commodity prices. The Agriculture Committee wasn’t on the case either. And that was just the way the industry wanted it. In the industry’s view, nothing good would come from Congress asking questions about derivatives.
Certainly no lobbyist said one word to me about derivatives, except to celebrate derivatives as the kind of innovation that can only come from unfettered capitalism. Robert Crouch’s testimony on behalf of the Mortgage Bankers Association on November 5, 2003, was typical. Crouch said that “through innovations in the mortgage finance industry, and through various financing and risk enhancing tools created for the specific purpose of extending credit to our more needy communities, credit-impaired individuals now have ample opportunity to obtain loans through this ‘non-prime,’ or ‘sub-prime’ market.” Credit default swaps were one of those nifty new tools that made subprime mortgages possible.
So by the time I finished reading the Wikipedia entry, I may have known more about credit default swaps than any other Member of Congress.
The megabanks’ influence in Washington is not just about campaign money, although I might have a hard time convincing Sherrod Brown of that right now. There’s the revolving door between Capitol Hill and the industry. It is hard for Congressmen, Senators and key staff not to think about how good life must be on the other side. Regular Naked Capitalism readers already know about the revolving door. See this, this and this.
There is much more to the industry’s power in Washington, however. The industry has a near-monopoly on critical information. Equally important, their approval is highly valued, whether consciously or unconsciously, by policymakers and opinion leaders. The leaders of the financial industry are impressive. They are fabulously rich, schooled in the social graces, well-educated and well-spoken. Who would not want to be held in their good opinion?
Yves discusses “cognitive capture” in Econned, citing Willem Buiter. Buiter explained the response of policymakers to the financial crisis as “cognitive regulatory capture,” in which “those in charge of the relevant state entity internaliz[e], as if by osmosis, the objectives, interests and perceptions of reality of the vested interest they are meant to regulate.” (Buiter was a prominent academic economist at the London School of Economics when he wrote that. He has since become the chief economist for Citigroup.) James Kwak, who blogs at Baseline Scenario, argues that the acceptance of the virtue of financial deregulation was largely the result of “cultural capture,” or “an idea that people adopt in part because of the prestige it confers.” When leaders of the financial industry dismiss “populist” proposals as “well meaning” and perhaps appealing to the uninformed rabble, but simplistic and counterproductive, many in Washington want to agree. Getting past the many cultural cues of seriousness and credibility, the “perceptions of reality” and the need for approval, to the substance requires an ability to distinguish gravitas from pomposity – a rarity in Washington.
After the financial crisis, however, a few in Washington were unwilling to take the industry’s word for it that the crisis was a “perfect storm” of unforeseeable macroeconomic events, and certainly not the result of blameworthy conduct. I was one of them.
So I’m perversely proud to have read Wikipedia for a source of information not completely controlled by the industry. And I was even reduced to reading blogs for information, including Naked Capitalism.
Naked Capitalism does not always come with the cultural cues of seriousness and credibility upon which we are accustomed to relying. Bill Black wrote that Naked Capitalism was an “indispensable source” of “bluntness (in a world plagued with euphemisms and excuses).” Black may himself be guilty of resort to euphemism in that description. But the information here, however incandescent the tone, is generally correct, and comes with links to other authority. Naked Capitalism says what the industry won’t, and is an important alternative to “the captured superstars of the media who long ago transformed their brand of journalism into an access-based celebration of the elites and the status quo,” to use Neil Barofsky’s (not at all euphemistic) phrase.
In Men In Black, the Tommy Lee Jones character turns to “hot sheets” for tips that an alien had landed on earth. The “hot sheets” turn out to be supermarket tabloids. “Best investigative reporting on the planet,” he said to a disbelieving Will Smith. “But go ahead, read The New York Times if you want. They get lucky sometimes.”
I still read The New York Times, but I contributed $100 to Naked Capitalism today so reformers on Capitol Hill and elsewhere will have an important hot sheet on “the dark and seamy corners of finance.”