Sen. Dodd after destroying bank regulations: "I welcome this day as a day of success and triumph"
In 2008, Sen. John McCain accused Sen. Chris Dodd of having helped cause the financial crisis: “The same people that are now claiming credit for this [financial] rescue are the same ones that were willing co-conspirators in causing the problem. Congressman Barney Frank and Senator Chris Dodd are two of them.”
Sen. McCain’s attack on Sen. Dodd is absolutely justified.
Dodd, whose state is home to the nation’s largest insurance companies, and Schumer, with strong ties to Wall Street, have long sought legislation to repeal the Glass-Steagall Act. Both men said in interviews Friday that they moved to strike a compromise after it became apparent that the legislation might be killed, as it was last year by [Republican Phil] Gramm, over the debate about the Community Reinvestment Act…
After receiving calls from executives of some of the nation’s leading financial companies, Dodd and Schumer began trying to work out a compromise. An agreement was quickly reached on the issue of banks and expanded powers — no institution would be allowed to move into any new lines of business without a satisfactory lending record…
For more than 20 years, Congress has tried unsuccessfully to rewrite the nation’s financial services laws and repeal Glass-Steagall.
This abominable legislation had died a year earlier and would have died again, had Sen. Dodd not saved it.
Dodd was immensely proud of his role in gutting Depression-era banking protections, bragging before the entire Senate, “I welcome this day as a day of success and triumph.”
You can watch him say this about 4 minutes and 40 seconds into this video clip of Sen. Dodd praising the bill.
Sen. Dodd was especially proud of having gutted critical banking regulations because — he explained — Congress had tried and failed for decades to pass such legislation. He even suggested history would try to diminish the centrality of his role:
I have been a member of the Senate Banking Committee since the first day I was sworn into the Senate, almost 19 years ago. I think this effort dates to about 1967 or 1968, more than 30 years ago. This has been an ongoing debate and issue on the part of the Banking Committees of the Senate and the House, the Commerce Committee, and numerous efforts at the executive branch level. But certainly over the last 20 years, on numerous occasions, this body has enacted reforms to financial services only to watch the legislation die…
I suppose history books will expand the size of the number of people who were in that room that night as oftentimes happens. It wasn’t that big a room. There were not that many people in the room.
I have often said over the years of trying to achieve financial modernization I am reminded of the mythical figure Sisyphus who rolled the rock up the hill only to have it roll back down the hill when he got near the top. I have a painting of Sisyphus that I cherish. Today, I can report that the rock is at the top of the hill and I think it will stay there.
Sadly, the rock Sen. Dodd rolled to the top of the mountain crashed down, crushing the U.S. and global economies and costing taxpayers trillions.
The current financial crisis would have been impossible without Sen. Dodd’s intervention to save this bill that gutted Great Depression-era protections. Explains The Courier Times:
Most financial experts lay blame for the current meltdown of Wall Street on the Financial Services Modernization Act that a Republican Congress passed on Nov. 4, 1999 and was signed into law by Democratic President Bill Clinton.
The effect of the legislation was to repeal the Glass-Steagall Act of 1933 (also known as the 1933 Emergency Banking Act) that divided Wall Street between investment banks and commercial banks.
That act prevented banks and insurance companies from expanding into one another’s businesses, one of the root causes of the Great Depression.
But Dodd didn’t stop there.
The next year, in 2000, Dodd supported another abominable piece of financial deregulation, also authored by the abominable Sen. Phil Gramm! The “Commodity Futures Modernization Act” tore down laws preventing Wall Street firms from gamble trillions of dollars on “credit default swaps,” which the brilliant Warren Buffet famously called “financial weapons of mass destruction” years before they exploded.
The dangers of such gambling were not hypothetical. Such gambling had been illegal for nearly 100 years precisely because it had caused the 1907 stock market crash! 60 Minutes explained:
[E]ssentially [credit default swaps] are side bets on the performance of the U.S. mortgage markets and the solvency on some of the biggest financial institutions in the world. It’s a form of legalized gambling that allows you to wager on financial outcomes without ever having to actually buy the stocks and bonds and mortgages.
It would have been illegal during most of the 20th century, but eight years ago Congress gave Wall Street an exemption and it has turned out to be a very bad idea…
Dinallo says credit default swaps were totally unregulated [after 2000] and that the big banks and investment houses that sold them didn’t have to set aside any money to cover their potential losses and pay off their bets…
“It was illegal gambling. And we made it legal gambling…with absolutely no regulatory controls. Zero, as far as I can tell,” Dinallo says.
“I mean it sounds a little like a bookie operation,” Kroft comments.
“Yes, and it used to be illegal. It [became] very illegal 100 years ago,” Dinallo says.
In the early part of the 20th century, the streets of New York and other large cities were lined with gaming establishments called “bucket shops,” where people could place wagers on whether the price of stocks would go up or down without actually buying them. This unfettered speculation contributed to the panic and stock market crash of 1907, and state laws all over the country were enacted to ban them…
Dinallo says “…[It became] a felony when a law came into effect because it had brought down the market in 1907. And they said, ‘We’re not gonna let this happen again.’ And then 100 years later in 2000, we rolled them all back.”
The vehicle for doing this was an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.
It not only removed derivatives and credit default swaps from the purview of federal oversight, on page 262 of the legislation, Congress pre-empted the states from enforcing existing gambling and bucket shop laws against Wall Street.
“It makes it sound like they knew it was illegal,” Kroft remarks.
“I would agree,” Dinallo says. “They did know it was illegal. Or at least prosecutable.”
So, who made it legal? Here’s a hint.
Here’s Sen. Chris Dodd’s only recorded remark during a June 21, 2000 hearing on the proposed “Commodity Futures Modernization Act”, legislation co-authored by Senate Agriculture Committee Chairman Richard Lugar and Senate Banking Committee Chairman Phil Gramm:
Senator DODD. Mr. Chairman, before you do that, I presume that opening statements in which we lavish praise on you and Senator Gramm are appropriate? The CHAIRMAN [Sen. Lugar]. Oh, they would be welcome, published in full. Thank you.
Strangely, Dodd asked no recorded questions of any of the witnesses (Federal Reserve Chairman Alan Greenspan, Treasury Secretary Larry Summers, Securities & Exchange (SEC) Commission Chairman Levitt, and Commodity Futures Trading Commission Chairman William Rainer).
Six months later, the Senate introduced the bill the day after the Supreme Court effectively declared George W. Bush the next president. It never faced a recorded vote:
On December 15, with little warning or fanfare—aside from the overshadowed discussions on the floors of Congress—the new, compromise version was included as a rider to the Consolidated Appropriations Act for FY 2001, an 11,000 page omnibus appropriations conference report.
But Dodd had praised its co-authors during the Senate hearing on the bill and said nothing as it slipped into law.
Nine years later, exhibit A is AIG. The massive, profitable AIG insurance business was utterly destroyed by a tiny subsidiary operating, basically, as a hedge fund attached to a giant insurance company. That tiny unregulated hedge fund within AIG single-handedly destroyed more value than the rest of the massive company was worth. Because government judged AIG “too big to fail,” taxpayers have given AIG hundreds of billions of dollars to pay off its losing bets. AIG would not have been able to make those bets without Sen. Chris Dodd’s timely intervention in 1999 to save the dying legislation and his support of another Phil Gramm monster in 2000.
Posted by James on Tuesday, June 30, 2009