On March 4, 2009, Wall Street Watch released a damning report about the cause of the current economic meltdown, “Sold Out: How Wall Street and Washington Betrayed America.” This report “has one overriding message: financial deregulation led directly to the financial meltdown.”

Part I of the report documents a dozen specific deregulatory steps (including failures to regulate and failures to enforce existing regulations) that enabled Wall Street to crash the financial system:

1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting — tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives — which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal “risk-assessment models.”
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

Part II presents data on financial firms’ campaign contributions and disclosed lobbying investments, including “more than 5.1 billion in political influence purchasing over the last decade.” Among other findings:

• Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying:
• Accounting firms spent $68 million on campaign contributions and $115 million on lobbying;
• Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying;
• Securities firms invested more than $504 million in campaign contributions, and an additional $576 million in lobbying. Included in this total: private equity firms contributed $56 million to federal candidates and spent $33 million on lobbying; and hedge funds spent $32 million on campaign contributions (about half in the 2008 election cycle).

The conclusion of the report offers principles for a new financial regulatory architecture.

For full copies of the report, an executive summary, or highlights of the campaign contribution and lobbyist data, click here.

The Wall Street Watch project is jointly sponsored by the Consumer Education Foundation and Essential Information.

The Consumer Education Foundation is a California-based non-profit, non-partisan consumer research, education and advocacy organization. Through grants and direct advocacy, CEF promotes public participation in policy matters, insurance loss prevention and shareholder rights, and stronger consumer protection laws.

Essential Information is a nonprofit, tax-exempt organization involved in a variety of projects to promote a more just economy, public health and a sustainable planet. We publish a bi-monthly magazine, Multinational Monitor, as well as books and reports. Our advocacy arm, Essential Action, undertakes strategic initiatives to advance corporate accountability.

posted by K.L., ACPP Project Coordinator