Banks make enormous amounts of money facilitating such trades, creating these swaps (as these insurance policies are called) for their customers, allowing them to continuously trade, while taking a healthy cut as the middle man. They don't want transparency. They want opacity. They don't want people to be able to see what these insurance polices are trading at, because as soon as they would do that, profits would shrink.

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http://www.pbs.org/moyers/journal/03262010/profile.html

In the synopsis of this PBS interview that follows, Morgenson, who first began writing about Wall Street's excessive risk taking well before the last crisis, doesn't believe the major bills currently before Congress do enough to regulate Wall Street. As she tells Bill Moyers, "I think that the bills that we have seen thus far are half-baked and really don't address some of the crucial elements of reform that are needed if we want to prevent this kind of crisis from happening again."

One of the main issues for her is allowing banks to grow "too big to fail" -- a size so big that they present a risk to the entire economy. To reduce the size of banks, Morgenson says, "You have to increase capital requirements. You have to increase the cost of doing business for these entities if they grow too big. Then put the money they pay into an FDIC-type insurance fund."

However, getting meaningful reform is often easier said than done in Washington, where lobbyists far outnumber legislators, and many legislators rely on wealthy industries, especially the financial industry, to fund their campaigns.

Last November, the Center for Responsive Politics (CRP) published a seven-part series on the power of the financial services lobby, "Crossing Wall Street." Since 1989, they report, the finance, insurance and real estate sector has been the largest single contributing sector to Congressional campaigns -- contributing $2.3 billion in that period. As the report notes, "Despite a moribund economy, the financial industries that have enjoyed relatively little regulation over the years continue pouring big money into making sure the government's control over them remains limited." Since the beginning of 2009, the finance, insurance and real estate sector has spent more than $500 million on lobbying and campaign contributions. www.OpenSecrets.org.

Two years ago this month the financial giant Bear Sterns collapsed and Wall Street began to unravel, wiping out millions of jobs, driving millions of people from their homes, and plundering once healthy pension plans. And all this time later there is still no reform from Congress, to prevent the reoccurrence of such a tragedy. A crippled little bill seems to be hobbling out of the wreckage but still faces an array of well-armed forces gunning for it.

And that's no surprise. In the two recent election cycles, members of the Senate Banking Committee received more than $39 million from Wall Street and the banks, while members of the House Financial Services Committee raked in more than $21 million. So just how serious do you think these members of Congress are going to be about true reform?

The companies that come to have so much control over our financial system are so politically powerful that they cannot be allowed to fail. This we saw in the crisis with Citigroup, and with American International Group, the big insurer, as well as with Bear Stearns which was merged into JP Morgan to avoid complete failure.

We saw these companies that had been allowed to grow into monsters take enormous risks all the while, which then the taxpayer had to cover, had to "backstop,' when their risky deals went bad. Problem is, we are now nowhere closer than before to any kind of technique or strategy that could prevent such a reckless and largely unregulated behemoth from rising up again.

What's the explanation for the delay? Why has it taken so long?

The answer is that there are enormous amounts of money being poured into lobbying in Washington on behalf of the financial services companies. $150 million in 2009 went into lobbying from the commercial banks and the investment banks. And that doesn't include money from the real estate industry or from big insurance companies or mutual funds. That's just commercial banks and investment banks. Bottom line: Washington is crawling with lobbyists who are operating on behalf of these companies to make sure that reform does not threaten their profitability -- no matter what the risk to the country as a whole.

The lobbyists are the "mules' in our addicted political culture. They bring the drugs to the users. The users are members of Congress. In the same way that you can't have an illegal drug sale unless there's a user willing to buy, you can't have a bribe unless there's some politician willing to be bribed.

And isn't it amazing that the bankers who buy off our members of Congress have the temerity to come out of their holes right after driving the nation into the brink? It's stunning to watch the brazenness with which they swagger about town, throwing some of our bailout tax dollars at legislators to make sure the legislators won't put up a formidable regulatory framework.

How do they get away with it?

A lot of it has to do with the culture in this country that prompts us to idolize people in positions of power, such as chief executive officers, who now make obscene amounts of money. There are all too few people willing to speak truth to this kind of power. Powerful people are almost always surrounded by yes people. They are kowtowed to like rock stars. Naturally it goes to their head and they almost always think only of themselves.

But could the bailouts have been denied them and their companies without their taking everybody down with them?

Quite possibly not. Nevertheless, it's a mistake to allow them to keep privatizing all of their ill-gotten gains. They take the gains when their stock is rising, when their companies are profitable. But when they get into trouble, they get to socialize the losses, which means that the taxpayer has to pay for the losses, which is of course a pretty sweet deal for the banksters. So, should we be surprised when they send their well funded lobbyists to Washington to make sure this arrangement does not change?

So what would good reform look like?

• Ensure that companies cannot become too big and too interconnected to fail.
• Make it very expensive for companies to grow in size and to be in a position to take on very large risks that threaten the entire financial system.
• Increase capital requirements.
• Increase the amount that a bank would pay it if it gets over and above a certain size in terms of assets or by some other measure.
• Somehow increase the cost of doing business for these entities if they grow too big.

Any evidence that the legislation being discussed this week in Washington contains that kind of reform?

There is some language about how we could "unwind' these entities and vague talk about how we could be better prepared, and how we would be vigilant in watching for trouble on the horizon. But no one is saying, "Let's take firm steps to make sure we do not get in this position again. Let's just never again let these banks, these institutions get to the point where they can threaten the entire financial system."

How about what Warren Buffett called financial weapons of mass destruction, i.e. credit default swaps and other complex derivatives. What's been done to disarm those threats?

Very little. As you know, credit default swaps were central to the failure of AIG, central to the now $180 billion taxpayer "backstop' of that huge insurance company. This was a company that, with nowhere near the capital necessary to cover them, sold insurance policies to banks guaranteeing them that if mortgages and mortgage securities failed, they (AIG) would compensate them for such losses. http://en.wikipedia.org/wiki/Credit_default_swap

AIG received regular payments (premiums) from those banks, for the insurance policies they had sold, and were essentially betting a huge amount of money that the insured mortgages would never fail. Well, that was the wrong bet to make, as we now know. And then the taxpayer and the government had to step in and "unwind' all of those very complex transactions. You would think that after such a costly fiasco, Congress would take steps to make sure it could never happen again. But you would be mistaken to think that. And who knows where we're going to end up, with regard to what the final cost will be for the taxpayer.

You would think that lots of people might demand, "Hey, wait a minute, let's make sure that this doesn't happen again. Let's make sure that these credit default swap insurance policies can't just be bought and sold in the dark, which is exactly how they are still sold! -- between two parties, privately. Let's make sure they're at least traded on an open and public exchange, where other people can see them, where their prices can be tracked, where investors can properly assess the risk. If one company is doing too much of that kind of business, the exchange would indicate that to one and all. Investors would see that and would be able to invest more prudently."

The extent to which AIG had gotten into this risky business was a total shock at even the highest level of federal regulators in Washington, who were obviously asleep at the wheel.

So, why is Congress not now talking about putting these things on an open and public exchange?

They're not talking about it because these banks make enormous amounts of money facilitating such trades, creating these swaps (as these insurance policies are called) for their customers, allowing them to continuously trade while taking a healthy cut as the middle man. They don't want transparency. They make more money from opacity. They don't want people to be able to see what these insurance polices are trading at, because at the moment they do that, the spreads would narrow, and their huge profits would be greatly reduced. This kind of trading in the dark provides an enormously profitable (if risky) business for them. And they are still gambling that they will have the taxpayer to bail them out again if things should go awry. After all, they're still "to-big-to-fail."

Could this business, unregulated as it continues to be, without the transparency it cries out for, really bring us down yet again?

Absolutely. As already stated, what has been proposed is to make these risky insurance policies be traded through some kind of clearinghouse. But perhaps not all of the policies, only the most simple of them, would have to contend with that clearinghouse. The more exotic of these "swaps' (where I make an agreement with you to buy or sell something, some stream of income), those might not have to be done via a clearinghouse. So, you're still going to have an enormous amount of this stuff trading behind the curtain, without the knowledge of any regulatory agency.

What about the proposed legislation for a Consumer Financial Protection Agency that would monitor the banks and the lenders to see that the ordinary person or consumer is protected?

More regulations weren't what we needed. What we needed were regulators with an appetite to regulate. We had plenty of regulations on the books regarding mortgages and the associated products and practices, but no one was enforcing them.

What you need to have in the DNA of this new regulatory agency is a certain attitude. The people running it, from the very top on down, have to be a pro-consumer to the core, with a complete unwillingness to be captured by the industry they're overseeing, in the way that actually happened so completely at the Fed, at the Office of Thrift Supervision and with the Comptroller of the Currency. Both of these entities, which were supposed to be monitoring the banking system to spot these kinds of problems, had essentially been captured by the banking system. So, if we are going to institute a new Consumer Financial Protection Agency, it would have to be staffed with pro-consumer people who actually want to carefully monitor and scrutinize the all-powerful banking system they are supposed to regulate. But we have such a dismal, woeful regulatory record in this regard that it's hard to imagine that this will be allowed to actually happen.

What about the proposal that some people are making to install the new regulatory agency within the Federal Reserve? Isn't that a contradiction? The Fed is concerned with the interests of banks, not with the interests of consumers, right?

Exactly. The Fed hasn't had any pro-consumer DNA in its system since the early 1990s. It's really not in that realm at all. And so, to house such an agency inside the Fed, which was pushing for relaxing capital requirements at the banks, would be absurd. The Fed did nothing to prevent many billions of dollars worth of these toxic mortgages from being made and dispensed -- too much money was being made from them by the banks to whom the Fed was loyal. So in light of that, it would be quite foolish to expect the Fed to suddenly develop some overarching concern for consumer financial protection or to be very sympathetic to, or tolerant of, any agency within its ranks that did have such a concern.

Here's what a handmaiden to the Fed, the U.S. Chamber of Commerce, had to say about the idea of a Consumer Financial Protection Agency (CFPA):

"Americans are losing sleep over this economy. Especially small business owners, worrying about payroll and mounting bills. Now Washington wants to make it worse, with the CFPA, a massive new federal agency that will create more layers of regulation and bureaucracy. The CFPA will make it harder for small businesses to access credit. Small businesses work too hard to suffer further. Urge congress to stop the CFPA. Go to www.StopTheCFPA.com."

There is a major problem for small businesses right now: They can't get money from the banks, who will not lend to them. And small businesses provide most of America's new employment. But they could not possibly be beleaguered because of a consumer protection finance agency! They are beleaguered because the banks took too many risks and are now withdrawing from the market and will not lend to them. So, what the Chamber of Commerce is saying is pure sophistry, cynical in the extreme. To tell the poor beleaguered small business owner that a consumer finance protection agency is going to add to their burden, is simply ridiculous. But at least it acknowledges a very real problem in this country, which is that small businesses far too often cannot get loans from the banks.

And why can't they?

Whenever you have a credit crisis, the banker who was, in the go-go good times so willing to lend to a person who didn't even have a pulse, so that they could buy a home (that "will surely appreciate in value"), will not now lend even to someone who has a very good business and simply needs money to make payments for inventory, for example.

In sunny economic weather the banker readily lends you an umbrella -- but then asks for it back when it rains. So now it's raining, and they're asking for the umbrella back. Yes, there are small business people who are in a terrible condition. And our heart should out to them and to all the people who depend on them for employment. America is very dependent on these small business owners to create jobs, and our government is dependent on them to provide tax receipts. But the business owners can't get the loans they need from JP Morgan, from Citibank, from all of these banks that made all these mistakes. What it boils down to is that the taxpayers can't get any of their money back -- after putting up so many billions to bail out the very banks that now give them the cold shoulder.

The frustration that a lot of people feel about this lack of real reform, and about the banks being in control to the point of lording it over Washington, comes from the realization that there's no effective outlet for their rage and anger. They don't have a lobbying organization to go to Congress for them and say, "What about these millions of people who have lost so much because of these bankster shenanigans? Look at these millions who have lost their jobs. Look at the millions who've lost their homes. Look at the millions who have credit card bills on which they're paying at a 28% interest rate." So people are voiceless and they feel powerless. And they're getting angrier by the day.

Senator Chris Dodd who chairs the key Senate Committee on Banking has taken so long to move any legislation toward reform that Jon Stewart's been having some fun with it:

SEN. DODD, speaking on a video clip: First the legislation will end too big to fail bailouts.

JON STEWART, commenting: Wait, we hadn't done that already?

SEN. DODD: This legislation will create an early warning system.

JON STEWART: We don't have an early warning system? It's taken you idiots two years during the worst financial collapse since the Great Depression to compile a list of regulations we should have put into place the next day? Well, better late than never, I guess. At least now we can have the legislation that would stop the next crisis from occurring.

SEN. DODD: This legislation will not stop the next crisis from coming.

Senator Dodd for years was a big recipient of Wall Street money. He was very close to the banksters. What about that banking committee of his? Can we rely on them to do the right thing?

One thing that tells us what we need to know about Senator Dodd is that in 1991, when the government was creating new legislation to make it easier for the Federal Deposit Insurance Corporation to "unwind' failed banks (i.e. take them over, reorganize them, and then sell them), there was an amendment that Senator Dodd introduced that was attached to this legislation that expanded the cast of institutions that could call on the Federal Reserve's emergency backstop powers if they were ever to get into trouble.

What this meant, practically speaking, is that no longer would this federal backstopping just be limited to regular commercial banks if they got into trouble. Now it could be extended to noncommercial banks, i.e. investment banks that were prone to taking wild risks with other people's money. The "backstopping" was also extended to insurance companies. So, Dodd is a guy who was instrumental, in a very quiet way, in the expansion of the too-big-to-fail crowd. It was his amendment.

And now he's in charge of the reform! -- and he balked at the idea of placing the Consumer Financial Protection Agency anywhere other than within the domain of the Federal Reserve. But now we have lived with the terrible consequences of that expansion of the corporate safety net so that it encompasses all of the too-big-to-fail institutions.

The problem here is that not only do members of Congress get big contributions from the banking industry, but that the administration is now populated by people who had high-level jobs on Wall Street at the time the financial crisis originated. And now they've been put in charge of policing their former companies! This goes one better than fox guarding henhouse. This is almost like putting the arsonist in charge of the fire department -- making him your fire chief.

All of the people who did not want to regulate the risky derivatives (that helped do us in) are now in positions of regulatory power: Larry Summers, Director of the White House's National Economic Council. Gary Gensler, head of Commodities Futures Trading. Timothy Geithner, Treasury Secretary all of them were on the scene, participating, allowing, and/or profiting from the extreme growth and risk-taking that brought us the crisis in the first place. Geithner, for instance, was running the New York Fed, countenancing all kinds of risks that were taken at Citigroup, which was under his purview. So now these guys who were on the scene of this disaster when it originated, and purposely allowed it to go forward, are in charge of making sure this financial disaster doesn't reoccur?! Foxes guarding the hen house. You just don't get a sense that they are really and truly reformers in the true sense of the word.

Authors Bio:

Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've always been more interested in political economics and what's going on behind the scenes in politics, than in mechanical engineering, and because of that I've rarely worked more than 8 months a year, devoting much of the rest of the year to reading and writing about that which interests me most.