Exposing Corruption on Wall Street: Lawrence Lessig, Matt Taibbi, The Daily Show, and Netroots Nation

Lawrence Lessig exposes the roots of corruption on Wall Street in his recent article in the Daily Beast. Specifically, Lessig shows how when Dodd-Frank was first signed into law in 2010, politicians were boasting that it would put Wall Street in its place. But the bill had gaping holes, including one that punted actually writing and enacting 400 of the bill’s rules. It’s been years since the bill was signed, and only 104 of the rules have been finalized. What’s more, many—especially those that focus on derivatives—are being eroded piece by piece, right in line with the wishes of Wall Street lobbyists. It’s no surprise, then, that Lessig finishes hist article with three simple sentences: “Our government is held hostage by the funders of campaigns. And those funders don’t spend their money to get good public policy. They spend their money to get public policy that pays them.”

Matt Taibbi continues his long task of exposing corruption on Wall Street in his recent article “The Last Mystery of the Financial Crisis.” Here Taibbi reveals specific emails from the rating agencies (the companies that were paid to give stellar ratings to the derivatives Wall Street peddles). The piece contains lines that should humiliate these agencies, lines like: ”Lord help our f*#%ing scam . . . this has to be the stupidest place I have worked at” and “Let’s hope we are all wealthy and retired by the time this house of card[s] falters.” The attitude of these employees helps explain why these agencies would continue to pass off as good the junk they were rating: The employees didn’t care. They knew that they were making money off a totally bogus process. Most of the public probably already understands this, but the specific quotes in Taibbi’s article help solidify what we already know.

The Daily Show has two segments last night that rail on the corruption on Wall Street. The first segment focuses on the article from Taibbi and the clueless responses financial journalists gave to a simple proposal to fix the rating agencies by making them less fraught with bias and kickbacks. The second segment focuses on the difference between Canadian banking and American banking. Perhaps the most telling moments in the segment are when correspondent Jason Jones asks people in Canada and people in New York about their thoughts on bankers. The Canadians say things like “trustworthy” and “considerate” while New Yorkers say things like “cockroaches” and “disrespectful.” And yet Wall Street largely continues to think that we should keep things just as they are, with no serious regulations. It’s incredible. (Watch it here.)

Netroots Nation had a panel this last week called “Stopping the Great Depression: Banks Are Still Too Big to Fail,” featuring Anat Admati, Jeff Merkley, Phil Angelides, Robert Kuttner, and Richard Escrow. Phil Angelides, chair of the Financial Crisis Inquiry Commission, made the point that if a thief could rob a 7-11 and only be charged just $25 and get to keep the robbery money, they’d do it again. It’s the same, Angelides says, with Wall Street. They keep getting relatively minor charges for activities that makes them loads of money. In the same vein, Jeff Merkley told the story of a guy who made $100,000 from bribery but only had to pay a $10,000 fine. It’s a story that parallels the deeds of HSBC, which helped drug lords launder money for over a decade and then only had to pay a fine equal to 5 weeks of pay. If that’s not corruption on Wall Street, we don’t know what is. Merkley summed up the situation with this biting line: ”This is not we the people. It is we the powerful.”

It’s time we unrelentingly demand that Washington stop playing favoritism with Wall Street. It’s time we throw out any politician who does, and it’s time we get money out of politics.

For more, watch this TED talk from Lawrence Lessig where he explains why his issue—getting money out of politics—should be the first issue.

Bank of America Gave Bonuses, Gift Cards To Foreclose On Homeowners

Bloomberg News and ProPublica have the story: Bank of America gave bonuses and gift cards to employees who met quotas for putting homeowners into foreclosure, incentivizing employees to figure out inventive and illegal ways to closed accounts. It’s a story that deserves to be heard widely and will hopefully lead to criminal prosecutions so this kind of behavior can be stopped. It just goes to show how little the big banks actually care about their customers, and it renews one of the most pressing questions in our minds: Why does anyone still bank with Bank of America?

Here are few quotes from the employees who are speaking out:

“I witnessed employees and managers change and falsify information in the systems of record, and remove documents from homeowners’ files to make the account appear ineligible for a loan modification.”

“On many occasions, homeowners who did not receive the permanent modification that they were entitled to ultimately lost their homes.”

“We were told to lie to customers and claim that Bank of America had not received documents it had requested.”

“We were told that admitting that the Bank received documents ‘would open a can of worms.’”

It’s a little insane isn’t it? Incentivizing employees to hurt customers? However, it does go a little ways in explaining why so many foreclosure papers were “lost” in recent years.

Read the full story at Bloomberg and ProPublica, and also see our post about why Bank of America is the worst.

Index Funds vs Managed Funds: Don’t Give Wall Street Any More Money In Hidden Fees.

This page is an addendum to our article explaining why people should invest in index funds to save themselves from Wall Street fees. It offers additional proof on why index funds are a better choice than actively managed mutual funds.

The Index Funds Win Again, NYTimes

The index fund’s average after-expense return was 8.5 percent a year, versus 8 percent for the actively managed fund and 7.7 percent for the hedge fund.

Expenses were the culprit. For both the actively managed fund and the hedge fund, those expenses more than ate up the large amounts — 3.5 and 9 percentage points a year, respectively — by which they beat the index fund before expenses.

If such outperformance isn’t enough to overcome the drag of expenses, what would do the trick? Mr. Kritzman calculates that just to break even with the index fund, net of all expenses, the actively managed fund would have to outperform it by an average of 4.3 percentage points a year on a pre-expense basis. For the hedge fund, that margin would have to be 10 points a year.

Moving Your Money Off Wall Street, MSN Money

The [index] fund has an average holding period for each of its stocks of 33 years, so very few trading commissions are being generated. By contrast, the average domestic equity fund has a holding period of little more than a year.

Furthermore, the Vanguard fund has beaten 83% of its peers in its category over the past decade.

The S&P 500 Index Fund, Motley Fool

The Vanguard S&P 500 fund has outperformed over 90% of all domestic equity mutual funds over the past three and five years (and a much higher number if you include bond and international equity funds).

What Stock to Buy?, Greg Mankiw, Harvard economist

One prominent theory of the stock market — the efficient markets hypothesis — explains how answering my mother’s question would be a fool’s errand. If I knew anything good about a company, that news would be incorporated into the stock’s price before I had the chance to act on it. Unless you have extraordinary insight or inside information, you should presume that no stock is a better buy than any other.

This theory gained public attention in 1973 with the publication of “A Random Walk Down Wall Street,” by Burton G. Malkiel, the Princeton economist. He suggested that so-called expert money managers weren’t worth their cost and recommended that investors buy low-cost index funds. Most economists I know follow this advice.

The Phony Debate About Active and Index Funds, US News

Roughly two-thirds to more than three-quarters of these proprietary funds did not achieve the returns of their benchmark index …

Ask yourself this question: If this is the best the largest U.S. investment banks can do with the funds that bear their name, why are you giving any credence to anything they may tell you about their “investment expertise”? Investing responsibly means paying less attention to the hype and more to the hard data.

A Mutual Fund Master, Too Tired To Rest, NYTimes

“The only way anyone can really compete with us on costs is to adopt a mutual ownership structure,” [Bogle] says. “I’ve been waiting all these years for someone to do it, but no one has.”

One reason is surely that there’s no profit in it. Despite Vanguard’s size and success, Mr. Bogle is no billionaire. For comparison, Forbes lists the personal wealth of Edward C. Johnson 3rd, the chairman of Fidelity, as $5.8 billion. By contrast, Mr. Bogle says his own wealth is in the “low double-digit millions.” Most of it is in Vanguard and Wellington mutual funds in which he invested via payroll deduction during his long career. … During his peak earning years at Vanguard, he regularly gave half his salary to charities …

Mutual Fund Casinos Still Skimming Billions, Market Watch

“The mutual fund croupiers rake huge sums off the stock market table,” says Bogle. Here’s his current estimate: Management fees average 0.8%. Other expenses are 0.6%. So the average expense ratio for the industry is well over 1%, often five to seven times the ratio for comparable index funds.

Next, deduct “hidden portfolio transaction costs of at least 0.8%” from managed funds says Bogle. Yes, hidden, buried in the reported numbers, which are usually a few months to a year old. Then, you need to deduct the long-term costs of “sales commissions on load funds, another 0.7%.”

As a result, the total costs for you, if you’re an investor in an actively managed fund, is 3%, leaving you with just 4% on a 7% return. Yes, the casino’s operators are skimming off almost a third of your mutual fund to pay themselves some handsome salaries.

The Hidden Costs of Mutual Funds, WSJ Journal

U.S.-stock funds pay an average of 1.31% of assets each year to the portfolio manager and for other operating expenses, according to Morningstar Inc.

But that’s not the real bottom line. There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.

Man Vs. Machine: The Great Stock Showdown, WSJ Journal

What about Warren Buffett, chairman of Berkshire Hathaway, who has beaten the market by a large margin over the past four decades? Isn’t he an exception?

It is certainly possible that he has been more skillful than his competitors. But with a portfolio that is now so huge, Mr. Buffett will have a more difficult time in the future picking stocks that will perform better than an index fund, Mr. Miller says. Mr. Buffett himself has said that he expects Berkshire’s future returns to be only slightly better than the S&P 500′s.

Warren Buffett 1996 Letter To Shareholders

Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.

Index Fund Understanding, Motley Fool

What should you do when your 401(k) plan doesn’t include an equity index fund? That isn’t fair after all, is it?

Well, no, it isn’t fair, but there is a way out. You need to find a Foolish fund, which, as things turn out, is the fund that is most like an S&P 500 index fund. Essentially, you are looking for a fund with the following features: [the link then lists a series of features]

Wall Street Will Eat Your Retirement (Unless You Know How To Avoid Their Hidden Fees Through Index Funds)

“Whether you know it or not, Wall Street wants to steal your future.” - William Bernstein, author of The Four Pillars of Investing

—

PBS Frontline recently aired “The Retirement Gamble,” a biting documentary that exposes the ways in which Wall Street wreaks havoc on retirement accounts.

We’ve been curious about whether the claims in the film are true. After all, the film makes some bold claims about how most Americans have made tremendous mistakes in saving for retirement by allowing Wall Street to eat up investment returns.

One of the key points in the documentary is that actively managed mutual funds—the kind Wall Street manages, typically as part of 401(k) plans—aren’t good for us. These funds contain hidden and excessive fees, fees that 65% of Americans are unaware of, according to a report from Demos. These Wall Street fees seem tiny, but when the costs are compounded over a few decades, they amount to substantive gains (for Wall Street).

The chart below shows what these fees look like.

You can see that compounded interest turned an average initial investment of $10,000 in 1980 into a gain of $179,200 by 2005.

But the investor didn’t get the full $179,200. Instead, the fund incurred Wall Street fees of $81,000, leaving only $98,200 for the investor (before taxes). The wins for Wall Street were enormous.

In other words, what initially may have seemed like an awesome total gain, suddenly wasn’t. Wall Street was charging an average of 2.5% in hidden fees during that time, fees that added up to $81,000 when compounded over 25 years.

Unfortunately for all of us, Wall Street has been raking in the profits from this gig for decades, and it’s only gotten worse. To illustrate: the annual fees for management and trading costs rose from $7 billion in 1980 to nearly $100 billion in 2006, according to a study from Kenneth French, a finance professor at Dartmouth. That money—nearly $100 billion per year—went to the asset management divisions of places like JPMorgan, Citi, Goldman Sachs, etc. (No wonder they’ve grown at the expense of the rest of us.)

What Can We Do?

The truth is, we don’t have to let Wall Street take so much from us in fees and trading costs.

In the same study we just cited, Kenneth French also calculated that if every portfolio hadn’t been actively managed, the total annual cost to investors would be only $8.9 billion—more than 10 times less than the $100 billion Wall Street sucks away from us.

Kenneth French is talking index funds—funds that invest in the entire stock market and aren’t actively managed (i.e. no one’s actively trading the stocks in the fund).

Because the investor doesn’t pay someone to manage the fund, it returns more money on average to the investor and less to Wall Street. (In fact, if you don’t buy an index fund from a Wall Street firm, then they’ll get nothing from your account.)

Index funds were first made available to the public by John Bogle, the founder of the nonprofit group Vanguard. Bogle’s been advocating for index funds for decades, and he features prominently in “The Retirement Gamble.” Essentially, Bogle says that it’s a mathematical certainty that the average index fund will beat the average actively managed fund. And the evidence supports him. (See here, here, here, here, here, here, here, here, and here, for starters. Or this page where we’ve collected the important quotes from those links.)

For now, let’s look at a direct comparison to the chart above. In this next chart, we show what would have happened if the investor from the first chart had invested in an index fund rather than an actively managed mutual fund. We used Vanguard’s index fund as an example because we’re getting the data from Bogle. Index funds don’t have to be with Vanguard (though Vanguard is the only nonprofit organization in the industry and therefore perhaps the best choice for investors).

You can see that the investor gets far more money with the index fund.

So, according to the chart, Vanguard takes a tenth of what Wall Street does, leaving nearly twice as much money for the investor. In other words, with the index fund the investor saved $72,600. That money could go a long way for a retiree (and that’s the return on just a $10,000 investment).

What’s more, the same data from John Bogle shows that when you factor in tax rates (which are lower for index funds because they have far less trading turnover), index funds give nearly three times as much in real returns compared to actively managed mutual funds.

To reiterate: America doesn’t have to give Wall Street $100 billion per year in management fees. Instead, we can switch from managed funds to index funds and fight Wall Street excess.

This is especially important for millennials, who as a group are highly skeptical of Wall Street and are starting (or will soon be starting) to save for retirement. Kick Wall Street to the curb.

So Why Don’t More People Switch To Index Funds?

Reason #1: Lack of Awareness From Investors/Employers

Perhaps the biggest reason that people haven’t made the switch is that they’re simply unaware of the fees. Even Martin Smith, the correspondent and co-writer in “The Retirement Gamble,” wasn’t initially aware of what Wall Street was doing to his retirement. In the process of interviewing people for the documentary he discovered what was going on, and at the end of documentary he says he’ll be doing more research.

So we asked him via Twitter whether he ending up investing in index funds after doing the project, and he said, “Yes. I did.”

Like 65% of Americans, Smith simply wasn’t aware of Wall Street’s fees. (That’s why Wall Street keeps them hidden!)

If Wall Streeters said upfront that they’d charge you $81,000 to manage your account for 25 years, you probably wouldn’t do it. So one explanation of why people don’t switch is that they—including employers who decide on 401(k) options—just aren’t aware of what’s going on.

Reason #2: Lack of Awareness From Advisors

But what about all the financial advisors who steer people into actively managed funds? Don’t they know what they’re up to?

Not necessarily. In the Frontline documentary, Smith asks an advisor from Prudential if she’s studied the data on index funds, and she says (earnestly, it appears) that she hasn’t. So it’s possible that the industry is just incredibly insular and doesn’t fully understand why index funds are best for most Americans.

That said, we find it very difficult to believe that most advisors are unaware that they’re raking in huge profits from accounts that underperform index funds. In fact, Jason Zweig, a columnist for the Wall Street Journal, tells Martin Smith that the dirty little secret of the business is that most managers have index funds for their own accounts, but they won’t admit it to clients (unless you get a few beers in them, according to Zweig).

Reason #3: Some Brokers and Managers Think They’re Smarter Than Other Market Players

Another factor here is that some brokers and managers are convinced that they can beat the market. They know that the zero-sum stock market game requires half of the trades to win and half to lose, but they’re convinced that they can pick the right fund and make the right trade. It’s the other guy who’s stupid, right?

There could be truth to this. Savvy investors might be able to outguess the market. But can they outguess the market consistently? Over decades? Again, the data says otherwise. One study from US News aggregated all the proprietary funds from JPMorgan Chase, Goldman Sachs, and Morgan Stanley and found that 77% of the funds underperformed the benchmark index over ten years.

That’s kind of insane, isn’t it? The “smartest” investment bankers couldn’t consistently beat the benchmark. And so these guys are charging high fees to get less for their clients.

What’s more, JPMorgan Chase, Goldman Sachs, and Morgan Stanley all have access to huge databases and algorithms to analyze the market. So what chance do other players have in consistently outguessing the market for 20, 30, 40, or 50 years?

Reason #4: Brokers Get Kickbacks From the Funds They Sell

One of the most disturbing sections in “The Retirement Gamble” is when Martin Smith discovers that brokerage firms (places like Fidelity, eTrade, Scottrade, Charles Schwab, etc) get kickbacks from Wall Street when they promote certain funds. The brokers argue that since they’re doing all the work of selling the fund, they should get a cut of the big fees. After learning what’s going on, Martin Smith looks through his own retirement plan and finds these kickbacks were passed along to him and were listed under “revenue sharing.”

This means that brokers don’t necessarily have a vested interest in finding the best returns for you. Instead, they have an interest in finding the fund that get them the biggest cut of a given fund’s management fee.

Conclusion

We don’t have to put up with this. We can be aware that Wall Street is siphoning $100 billion in management fees and trading costs per year for doing something that is largely unnecessary and even harmful. We can get out of the Wall Street casino and have lots more money available to us for retirement.

Don’t just take our word for it, since we’re just an advocacy group against Wall Street excess. Research further. Watch “The Retirement Gamble” and see our collection of excerpts showing why index funds are superior to managed funds. It’s a collection that answers questions like, “What about people like Warren Buffett who did well in the market?” and “What do I do if my 401(k) options don’t include index funds?”

Financialization (or: This Party Is For Wall Street, Not You)

Have you heard of the word financialization? It’s an ugly word that basically means an economy has become over-reliant and over-run by a bloated financial sector.

To see an example of financialization, look at the United States right now. The financial sector in the US has grown from less than 4% of total GDP in the 1960s to over 8% of total GDP today. This means, for one thing, that a large portion of otherwise intelligent college graduates are going into jobs on Wall Street. It also means that Wall Street increasingly has a lot more power in Washington.

That’s not all, though. When a nation experiences financialization, a section of the economy starts making big money by siphoning small fees from the rest of the citizens. The smaller and more recurrent the fees, the better (for Wall Street). It’s death by a thousand paper cuts, and it’s not a pretty picture. (If you’re interested, Demos has two particularly poignant studies on this topic—one about how Wall Street took a sledgehammer to the intermediation pipeline, and one about how Wall Street hits retirement accounts.)

In his biting book, Predator Nation, Charles Ferguson (director of Inside Job) has a passage about financialization that perfectly articulates exactly why we shouldn’t stand for it:

The uncontrolled hyperfinancialization of an economy is a serious problem. Over the last thirty years, the U.S. financial sector has grown like a malignancy. Many of its recent “innovations” are no more than tricks to evade regulation, taxes, or law enforcement, and some of them have proven profoundly destructive. …

Nor has the hypergrowth of American finance been accompanied by improved real economic performance—quite the contrary. … Most of the real growth in U.S. productivity and GNP over the last two decades has been due to information technology, particularly the Internet revolution. If one removes IT, U.S. growth has been poor indeed during this period. Moreover, the financial sector’s contribution to economy-wide wage and income growth has been modest, even if we ignore the damage it has caused.

Our goal at TooBigHasFailed.org is to be a force that helps reverse the trend of financialization. We assert that the United States has done the wrong thing by allowing the financial sector to grow as large as it has, and we assert that our economy would be far better if our big banks were no longer “too big to fail” (for starters). There’s plenty of proof that a bigger Wall Street doesn’t lead to a better economy.

Here’s another view of the chart above—one that reiterates the message.

Addendum: It’s also worth pointing out that the vast majority of gains in financial institutions have gone to 10 megabanks:

The Calls To Fire Eric Holder Should Worry Wall Street

Isn’t it about time we saw a replacement for Eric Holder? Photo credit: ryanjelly

There’s recently been a sharp increase in the bipartisan calls to fire Eric Holder, an opinion we endorse. We want the Obama administration to fire Eric Holder and replace him with someone who will prosecute Wall Street. Here we’ll show a few excerpts from the recent calls to fire Eric Holder and explain our position. First, the excerpts:

From Jonathan Turley, Professor of Public Interest Law at George Washington University:

I am neither a Republican nor conservative, and I believe Holder should be fired.

From Michael Gerson, Washington Post opinion writer:

His tenure will not be remembered for its ideological bent. At times he has displayed the legal sensibilities of a flower child. At other points, he has provided the legal justification for President Obama’s expanded drone war or pursued the broadest attack on press freedom in decades.

From Matthew Filipowicz, host of the Matthew Filipowicz Show:

I’m sorry, but I do not buy that the Justice Department is powerless. They are not powerless here. Or if they are, it is 100% by choice. Eric Holder could prosecute Wall Street for their crimes, and the fact is he has chosen not to.

That last quote mirrors our opinion. If you’ve read the details of the specific crimes on Wall Street, or if you’ve seen Frontline’s documentary “The Untouchables,” you know that some Wall Streeters deserve jail time for the actions leading up to, during, and after the 2008 crash.

Frontline’s documentary was so powerful in proving the guilt on Wall Street and Washington’s lack of action that the day after it aired Lanny Breuer, the assistant attorney general, resigned. So there is clear proof that with enough public knowledge and enough public outcry over injustice, reform can happen.

What is perhaps most important, though, is that the public unites to demand that Holder’s replacement be someone who will hold Wall Street accountable.

As the links above show, we know that there are guilty players on Wall Street. We now just need someone with the political will to act on that knowledge. If Eric Holder is fired, it will at least give us that chance.

This isn’t a matter of satisfying some base desire for revenge. We don’t hold the view that all bankers are evil. We just know that if guilty Wall Streeters aren’t punished for their illicit activities in the financial crash, those activities are likely to continue over and over. It’s a matter of moral hazard, and it needs to be addressed quickly—before we find ourselves in another crisis.

It’s time to fire Eric Holder and replace him with someone who will hold Wall Street accountable (someone who didn’t work for Wall Street’s law firm, Covington & Burling).

***

If you haven’t followed the story on Holder and Wall Street, this clip below from Jon Stewart gives a quick overview.

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Wall Street and Main Street Grew At the Same Pace From 1940-1980. Since Then, Not So Much. Why Is That?

The Growth of Compensation For Most Americans Has Slowed

This chart, a simplified version of a figure from the Financial Crisis Commission Inquiry Report, shows that from 1940-1980 the financial and nonfinancial sectors both grew at the same pace.

Since that time, however, average financial sector compensation has skyrocketed while nonfinancial has increased at a much slower pace.

To illustrate:

The chart shows that from 1950-1980 average compensation in the nonfinancial sector grew by nearly $20,000.

By contrast, over the next thirty years it grew by only about $10,000.

In other words, if average nonfinancial sector compensation had kept up with the 1950-1980 pace, it’d be around $70,000 or more today.

What Created the Recent Disparity?

There were likely many causes for this recent disparity (including the invention of the computer, which let Wall Street handle complex transactions), but we’ll just address two:

Reason #1: Changes In the Tax Code

The top marginal tax rate and the capital gains tax rate started dropping in the 1980s, encouraging more and more people to give their surplus money to Wall Street to invest. The theory was that this would jump-start the entire economy—a theory called into question by the chart above, since growth in the nonfinancial sector slowed after 1980.

At any rate, one thing these changes in the tax code definitely led to was more surplus money on Wall Street, and when there’s more money on Wall Street there’s more money for Wall Street. After all, Wall Street likes low top marginal taxes and low capital gains taxes because it means more fees for them.

Of course, these lower rates have critics. One of the more poignant critics is Sheila Bair, a Republican and former chairman of the FDIC (appointed by George Bush). Speaking of the low capital gains tax rates, she says:

The rationale for this $90-billion-a-year tax benefit is that it spurs job-producing investments, though there is little credible economic evidence that this is the case. Equally likely is that it contributes to a glut of investment dollars searching for return, with too few opportunities in the “real” economy. So we create incentives for banks to come up with an endless array of complex “structured” financial products to meet investors’ insatiable demand for return. Just how many jobs did all of those CDOs-squared give us anyway?

And what does this tell young people? Get a job and find the cure for cancer, and we will tax you at 35%. But hey, go manage a hedge fund and only pay 15%.

Bair is right to focus the attention on hedge fund managers. More than any group, hedge fund managers have led the drive in the disparity between the financial and nonfinancial sector:

source

We have a tax code that encourages this insane disparity.

Reason #2: Deregulation on Wall Street

In the 1990s and early 2000s, three laws (all with fabulously boring names!) caused an intense concentration in the banking industry.

The first, called the “Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,” allowed interstate bank mergers, creating bigger banks.

The second, called the “Gramm-Leach-Bliley Act of 1999,” repealed Glass-Steagall, a depression-era law that split investment and commercial banks. The repeal of Glass-Steagall meant that the creation of enormous bank conglomeration was now legal (though Glass-Steagall had been eroding for years leading up to 1999).

The third, called “The Commodity Futures Modernization Act of 2000,” deregulated complex financial transactions called derivatives. This law effectively allowed Wall Street to corner the market on a deregulated industry, slanting the playing field in their favor and allowing them to eat up other smaller market players.

Here’s what it all looked like:

By 2009 the three biggest banks, which had held about 10% of total commercial bank assets for over 60 years, suddenly held over 40%. This concentration of power led to the rise of “too big to fail.” It also led to a unified and concentrated financial sector that continued to game the system in their favor. In fact, their political contributions more than tripled from 1996 to 2012.

So What?

We want to conclude by making two points forcefully.

The first is that Wall Street hasn’t always been this way. There are people who seem to justify the status quo by saying there have always been bad apples and inequality in America. That statement is technically true, of course. But it’s important that people understand that the Wall Street of today isn’t the same as the Wall Street of yesterday. Things have fundamentally shifted in recent decades.

The second point is that we can change this. If you look again at the graph at the top of the page, you’ll see that after the Great Depression the disparity between the financial and nonfinancial sectors closed. If it happened once, it can happen again. We can—with enough political will—reform Wall Street and get back to an economy where all industries can grow better together. To do this, we need to revamp the tax code and revamp regulations among many other things. But history proves that it is possible to do these things.

So let’s do them.

Join us here.

Political Contributions From The Financial Sector Have More Than Tripled Since 1996. We Should Oppose This Loudly.

OpenSecrets.org has released data showing that political contributions from the financial sector have more than tripled since 1996. This might not come as a surprise since everyone has a sense that something about the political system is increasingly unfair, but it doesn’t mean that we shouldn’t continue to be loud about the matter.

In fact, according to Neil Barofsky, who spoke at a recent event about his experience as attorney general for TARP, when it comes to reforming Wall Street we should ”keep being loud about it. And let’s just hope that we can get this resolved before the next crisis.”

This is why we must continue to demand Wall Street reform until it happens. Until reform happens, we’re at serious risk of a repeated crisis. We all know someone who either lost a job, was foreclosed on, or who is struggling to find a job as a result of the last crash. And we can’t be too sure that another crisis won’t hit again until we reform Wall Street and refuse to allow them to so fully capture Washington.

After all, the big banks are bigger than they were in 2008, and they still have trillions of dollars in credit default swaps and other exotic derivatives. Plus, they’ve now seen proof that in a crunch Washington will help them out. Why should we think the status quo is safe? We shouldn’t.

Groups like Move Your Money and Bank Transfer Day have done tremendous good for calling attention to Wall Street excess. We need to keep movements like these alive, and be loud about Wall Street reform. “Write to your congressman and senator,” Barofsky said. “Sounds like an ‘I’m just a Bill,’ School House Rock thing, but it works.” With enough concerted force and focused attention on this, we will see reform, and we’ll create a safer economic environment.

The last crash was not an accident. Wall Street will repeat it however they can unless we figure out a way to put them in their place.

Quote discovered here.

Charlie Munger Quotes

Charlie Munger quotes are among the best zingers to Wall Street in existence. Known as Warren Buffett’s folksy business partner, Munger to has a way with words that makes him fun to listen to. Here are a few that stand out to us.

“The major non-investment banks have by and large misbehaved in consumer lending. They have had a marketing model which is the equivalent of a liquor company that seeks out the people very susceptible to alcoholism, and tries to suck them into alcoholism.” source

“To say that derivative accounting is a sewer is an insult to sewage.” source

“The derivatives traders have tended to rook their own customers. It’s not a pretty sight. It’s a dirty business.” source

***

While it’s unfortunate that Munger and Buffett invest in some of the very products and banks they denigrate, we strongly endorse the sentiments in the quotes above.

For more on derivatives, see our derivatives timeline and our post “What Are Derivatives, and Why Are They Dangerous?”

Who Took Down Stockton? A Mini-Documentary That Shows Wall Street Was a Main Culprit

Who Took Down Stockton?

Here’s a mini-documentary that asks why Stockton California went bankrupt and finds some major culprits on Wall Street. It’s a good look at how what happens on Wall Street affects all of us.

Stockton’s central problem was that it overreached. It promised too much in pensions for city employees, and it took on too much debt at the bidding of the Wall Street banks (which make lots of money from fees and interest whenever they underwrite city debt).

Here are some reasons Wall Street is culpable in Stockton’s problems:

They were part of a bid-rigging scandal where various banks colluded together in a bid for a city bond. They would decide the winner of the bid together, so that each winner could get a far better deal than they would have gotten if they were bidding against each other.
They preyed upon unsuspecting city council members who didn’t have the know-how to understand the intricacies of complex financial products (like derivatives) and who therefore unwittingly signed up for what eventually became horrible deals for the city.
When the problems started occurring, Wall Street offered what were essentially pay-day loans for the city. This allowed culpable city council members to finish their terms and move away before the full debt actually came due. These loans were good for Wall Street and horrible for Stockton.

This is a story of many municipalities across the United States. It’s a story of how Wall Street helps themselves and hurts the rest of us.

For more on the bid-rigging scandal, check out Matt Taibbi’s long-form piece on it. Here’s an excerpt:

In the end, though, the conviction of a few bit players seems like far too puny a punishment, given that the bid rigging exposed in Carollo involved an entrenched system that affected major bond issues in every state in the nation. You find yourself thinking, America’s biggest banks ripped off the entire country, virtually every day, for more than a decade! …

Instead of anything resembling real censure, a few young executives got spanked, while the offending banks got off with slap-on-the-wrist fines and were allowed to retain their pre-eminent positions in the municipal bond market.

We shouldn’t stand for the status quo here. The more people who understand how Wall Street plays into bankrupted cities like Stockton, the less likely Wall Street will be to get away with it. Change can’t come too soon on this front.