The subprime crisis, originating in the U.S. mortgage market, quickly spread to the entire global financial and economic system. In response, the Federal Reserve and Treasury Department endorsed a number of unprecedented regulatory reforms. The first rung towards revamping the financial architecture was Congress enactment of the Troubled Asset Relief Program (TARP). Maria Bartiromo, the anchor of CNBC’s Closing Bell, provides a narrative of event in her book The Weekend that Change Wall Street: An Eyewitness Account:
In the Roosevelt Room, a windowless workroom in the West Wing of the White House, dominated by a long, sleek table and high-back chairs, President George W. Bush sat with his top economic team and listened to the bad news. Paulson, Bernanke, and the president’s economic advisers sat around the table, taking turns explaining what was happening and offering recommendations. A sense of looming catastrophe was in the air, and it took a great deal of discipline to stay focused…[According to a person in the room] ‘Of course we were nervous. We literally thought we were on the verge of the Great Depression…
We were all in favor of trying to save Lehman, but even if we’d succeeded, other kernels would keep popping—AIG, Washington Mutual, Wachovia, and so on, I’m not sure it would have prevented stock market damage because it wasn’t just Lehman; it was panic in the entire financial system. There was a fundamental problem in the system, and what you had to do was turn the heat off. Or alternatively, you could strengthen the pan—essentially capitalize the financial sector—to withstand all the popping going on inside.’ That according to [Ed Lazear, the president’s chief economic adviser] was the reasoning behind the Troubled Asset Relief Program (TARP), an unprecedented effort to turn down the heat on a system crisis.’
Based on the account in his memoirs, Treasury Secretary Paulson expressed his unambiguous aggravation” “We couldn’t keep using duct tape and bailing wire to try to hold the system together.” It was “only after Lehman Brother failed did we get the authorities from Congress to inject capital into financial institutions.” On October 8, 2008, Congress enacted the $700 billion TARP plan, as part of the Emergency Economic Stabilization Act (EESA), to rescue the U.S. financial system. According to the New York Times, TARP was just one of nearly two dozen emergency programs totaling trillions of taxpayer dollars. As of July 2011, the federal government has made additional commitment of about $12.2 trillion and spent an estimated $2.5 trillion. The multi-trillion dollar financial crisis and recover effort uncovered serious inadequacies in the financial services regulatory framework.
In his “post mortem” on the passage of TARP and subprime crisis, PBS host Bill Moyer disparaged that the “bailout offers almost no help for homeowners, or equity for taxpayer in banks that are being thrown a lifeline.’ His guest Georgetown Law Professor Emma Coleman Jordan called attempts to blame the financial crisis on the poor or blacks a “cynical manipulation” and in the “worst tradition of Lee Atwater and the Willie Horton ad.”
Popular resentment marked a transformational change in how the political establishment viewed Wall Street. During debates on TARP, Paul Kanjorski, Democratic House of Representative Subcommittee, proclaimed that the era of deregulation is over” and “only regulation can save capitalism from its own excesses.” In 2008, both presidential candidates Barack Obama and John McCain called for tougher regulations and more over sight of Wall Street. In January of 2009, President Obama, the newly elected forty-fourth President of the United States and the Democrats in the 111th Congress began an aggressive push for financial regulatory reform.
Following a year of an extensive public discourse, on June 17, 2009, the newly elected President Obama economic team developed and released a comprehensive regulatory reform plan in response to the financial crisis. The Executive Summary of the report, Financial Regulatory Reform, A New Foundation: Rebuilding Financial Supervision and Regulation reads:
“Over the past two years we have faced the most severe financial crisis since the Great Depression. Americans across the nation are struggling with unemployment, failing businesses, falling home prices, and declining savings. These challenges have forced the government to take extraordinary measures to revive our financial system so that people can access loans to buy a car or home, pay for a child’s education, or finance a business.
We must act now to restore confidence in the integrity of our financial system. The lasting economic damage to ordinary families and businesses is a constant reminder of the urgent need to act to reform our financial regulatory system and put our economy on track to a sustainable recovery. We must build a new foundation for financial regulation and supervision that is simpler and more effectively enforced, that protects consumers and investors, that rewards innovation and that is able to adapt and evolve with changes in the financial market.”
In the fall of 2009, after holding over 50 hearings on various aspects of financial reforms and debate over the impact of regulatory reforms, the House of Representatives introduced and passed H.R. 4173, the Wall Street Reform and Consumer Protection Act. On November 11, 2009, Senate Banking Committee Chairman Chris Dodd released a discussion draft of a “Bold Proposal to Create a Sound Economic Foundation to Grow Jobs, Protect Consumers, Rein in Wall Street, End Too Big to Fail, Prevent Another Financial Crisis.” On May 20, 2010, the Senate passed a similar financial reform bill (Restoring American Financial Stability Act). President Obama appointed Mary L. Schapiro as the 29th Chairman of the U.S. Securities and Exchange Commission. The SEC newly appointed leader sued Wall Street investment bank Goldman Sachs for civil fraud.
Democrats brought their financial reform bill to the Senate floor, hoping to build the case that the securities fraud charges brought against investment giant Goldman Sachs validate their argument for sweeping new regulations for Wall Street. Barney Frank, chairman of the House Financial Services Committee, said today the case against Goldman Sachs will hasten the passage of the financial reform bill in the Senate, and that some of the GOP senators are likely to side with Democrats in the end. “It reinforces the need for much of what we were doing,” Frank said in a CNBC interview. Building on this momentum, President Obama delivered a major address attended by several Wall Street executives. Blaming the financial meltdown and recession that followed on a “failure of responsibility” both Washington and Wall Street, President Obama admonished Wall Street for resisting reform.
In July, the SEC and Goldman “without admitting or denying the allegations of the complaint” reached a $500 million settlement. “This settlement is a stark lesson to Wall Street firms that no product is too complex, and no investor too sophisticated, to avoid a heavy price if a firm violates the fundamental principles of honest treatment and fair dealing,” said Robert S. Khuzami, the commission’s director of enforcement, according to the New York Times. On that same day, after garnering the necessary 60 votes to close debate, the Senate passed H.R. 4173 by a final vote of 59 to 39.
After heated debates and extensive lobbying, the House-Senate Conference Committee reported out a Conference Report on H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Wall Street Reform and Consumer Protection Act United States H.R. 4173, is title for Senator Christopher Dodd, chair of the Senate Committee on Banking, Housing and Urban Affairs, and Representative Barney Frank, chair of the House Committee on Financial Services, who both served as principle Conference Committee negotiators. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank), stating that the legislation would “prevent future taxpayer-funded bailouts of financial firms and would protect consumers from abusive business practices.”
Next Page: The Financial Stability Act of 2010