The Wall Street Leviathan

Inside Job

a film directed by Charles Ferguson
Representational Pictures/Sony Pictures Classics
Former Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and Treasury Secretary Timothy Geithner; from Charles Ferguson’s documentary film Inside Job

With its revealing accounts of the Wall Street practices that led to the recession of 2008 and 2009, the recent report of the Financial Crisis Inquiry Commission (FCIC) is the most comprehensive indictment of the American financial failure that has yet been made. During two years of investigations, the commission accumulated evidence of many hundreds of irresponsible, self-serving, and unethical practices by Wall Street bankers and systematic tolerance of them by regulators.

Written by the six members appointed by congressional Democrats, the FCIC report concludes, “The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire.” Many readers would think the conclusion obvious. But Wall Street professionals repeatedly claimed that similar crises occurred frequently in the history of modern capitalism, that they are merely the price paid for a dynamic and innovative economic system, and that individuals were not to blame. They thus minimized their own responsibility for the events and cast doubt on the need for significantly more intense regulation of their activities. The FCIC majority dismisses such arguments.

Can we then infer that future crises may be avoided by intelligent and unbiased financial regulators and a chastened Wall Street? A 2,300-page set of regulations—known as the Dodd-Frank Act after its congressional sponsors, Senator Chris Dodd and Representative Barney Frank—was passed last year to accomplish just that. In a television interview with Charlie Rose this March, Frank said he “got better than 90 percent” of what he wanted. The act has some bite. It proposes ways to deal with many of the practices that contributed to the crisis, including inadequate capital requirements, excessive Wall Street compensation, and damaging conflicts of interest in credit ratings agencies that readily assigned their highest ratings to risky debt. It tries to regulate trading of speculative securities like derivatives, which enabled bankers to wage huge bets with little capital on the movement of securities prices.

Under Dodd-Frank, a new oversight board, composed of members of regulatory agencies led by the Federal Reserve, will now be charged with assessing the level of so-called systemic risk of major financial institutions and imposing stricter capital rules or even shutting institutions down if they are deemed to put the financial system at risk—that is, if their failure might bring down many other institutions with them and endanger the American economy. Now there will be regulation not only of traditional commercial banks, which always fell under the purview of the Federal Reserve, but also investment banks, money market funds, and perhaps even hedge funds, which had been hardly regulated at all.

The Consumer Financial Protection Bureau has also been established inside the Federal Reserve to write new requirements for mortgages, consumer loans, and…

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