The fall of Citigroup is a resonant political event--akin to the Republican Party's failure to win reform of Social Security--only this time the bell tolls for the Democratic Party. The creation of Citigroup as an all-purpose financial supermarket and too-big-to-fail banking marvel was very much the accomplishment of Clinton Democrats. They enacted the law in the late 1990s that authorized this megabank monstrosity, with coaching from Treasury Secretary Robert Rubin, Fed chairman Alan Greenspan and of course Sanford Weill, the creative genius who built Citi.

Now that this institution has slid into deep trouble and Rubin has been appointed emergency chairman to rescue it, Democrats inherit the stink. They made this mess possible. Will they now accept the meaning of Citigroup gone sour and begin to undo the damage? That is, undertake reform of the financial system in fundamental ways? I doubt it, though the message is obvious.

Just as the GOP dreamed for decades of dismantling Social Security, investment bankers campaigned for thirty years to repeal the Glass-Steagall Act, which separated commercial banking from its investment-house cousins. This was the New Deal achievement enacted in response to the double-dealing banking practices that contributed to the crash of 1929. Bankers pushed their depositors into buying the corporate stocks the bankers were hustling, among other malpractices. Wall Street hated the law but failed year after year to win repeal. The problem was always Democrats (since Republicans were sure supporters).

Bill Clinton delivered his "New Democrat" party, accompanied by lots of happy talk about magic words like "synergy" and how "modernization" would create a more stable (and profitable) financial system. It did the latter, for sure, but not the former.

Actually, the combination of insurance, investment banking and old-line commercial banks multiplied the conflicts of interest within banks, despite so-called "firewalls" supposed to keep these activities separate. Much like Enron, placing some deals in off-balance sheet entities did not insulate Citigroup from the losses in its swollen subprime housing lending. The bank has so far written off something like $15 billion and more to come.

Think of Citigroup's rise and fall as another high-water mark for the conservative order. Like Social Security reform, it looked like a sure thing in politics. It was accompanied by the usual encouragement of lavish campaign contributions. On the downside, no one will remember having voted for it.

Reforming the deregulated financial system is another test for the new "New Democrats." I expect it will take them a while--maybe years--to face up to the implications. This is a far more daunting challenge--substantively and politically--than reforming healthcare or restoring labor organizing rights. Other megabanks like JP Morgan Chase also exist and will argue they have none of Citigroup's flaws. As investors (including pension funds) continue to lose billions in the deformed financial system, government will continue to worry more about the survival of these banking institutions that generate the losses. The megabanks are indeed "too big to fail" and, if that seems likely, Washington will come to their rescue in the name of protecting the soundness of the system. What a scam that is.

At least the unambiguous truth about "financial modernization" is now on the table for all to see. That should keep the Wall Street guys from whining for a while about the oppressive nature of bank regulation. The next reform era, when it does finally arrive, will head in the opposite direction--restoring public protections for the little guys against the greedy excesses of big hogs.

Comments (16)

1. I believe Mr. GREIDER is reading too much into Citi's troubles.....I say this as someone who holds its stocks (losing hand so far)!

   With deregulations come uncharted risk-takings....Citi may well have been more daring (or reckless?) but it and its banking peers are paying the price for going too fast and too deep! Anyone remember when: Cali deregulated part of its electricity market? When airlines were deregulated? Phone Cos. (land/fixed line)?

   Part and parcel of a dynamic economy! Course, "No Pain, No Gain!" has no meaning for some hare brains!

   Posted by Happy at 11/05/2007 @ 11:42am

2. Sorry, Mr Greider, but the politics of it...aren't good for your view.

   If "New Democrats" screwed the pooch, then who's going to fix it? Democrats?...No. Getting a politician much less a whole political party to admit they made a mistake and were wrong...is like...well, getting a neo-con 29%er to admit something similar about Iraq. Trim around the edges maybe....maybe less with Hillary as Prez. But that's it.

   Republicans?...uh, no.

   Posted by Mask at 11/05/2007 @ 1:04pm

3. The bank will be just fine...not all of their money(and yours) went into to borderline mortgages....

   always botherd me,tho,...if a bank or lender feels that a client is not credit worthy at, say $ 600 a month paymnents,...what makes them surprised when he collapses at $800 a month? Hasn't the lender in fact contributed to the pressure applied to the poor fellow collapsing..? The extra $ 200, if he had the orgininal n ote for $600 instead...may have kept him from collapsing in the first place...

   Happy

   A question for you.....

   I understand risk, and the first risk is to be sure of the return OF the investment, not return ON the investment.... our lending system prevents many who would repay by lending to many who can't...

   I am aware of many people who have had poor credit numbers,struggled through hard times, never filed banko, paid all past debts,pay back everything they have ever borrowed at a struggle and sacrifice..only to end up with a poor credit score and are fucked out of the system..to me these guys are the ones who should be loan worthy, not some group that a credit agency assigns a number that determines their worthiness...the system by passes millions who would buy new cars and houses, and instead loans to those I could tell you will not make it.... I personally know guys who earn $ 500,000 a year, and can't get a decent mortgage or car loan rate, but can raise $100k in cash in one day...these guys are constanly turned down by people who make less in a year than the borrowers earn in a month...instead, they put some guy in a loan that can never repay if something goes wrong, and something always goes wrong in life...

   Posted by JOMAMMA at 11/05/2007 @ 1:57pm

4. Any talk of Republicans versus Democrats in reference to US economic policy has been rendered very nearly void of significant meaning by the piercing pitch of the locusts that swarm out from K street.

   In the long struggle by the fair-minded --e.g. FDR (the famous "traitor to his own class")-- against allowing the plutocrats to game the system in their favor, thus opening public coffers to a carnival of caniballism, it is starkly clear that the self-devouring urge is running at full speed.

   When the momentum for this all-too-typical behavior hits fever pitch the slowdown can only come from a collapse. It seems pretty obvious that we're on the clock as we speak.

   Posted by b_kool_66 at 11/05/2007 @ 2:06pm

5. When the momentum for this all-too-typical behavior hits fever pitch the slowdown can only come from a collapse. It seems pretty obvious that we're on the clock as we speak.----Posted by B_KOOL_66 11/05/2007 @ 2:06pm

   Why is it when I hear that kind of thing, I hear....hope...not resignation?

   Posted by Mask at 11/05/2007 @ 2:40pm

6. Now that The Nation has finally seen fit to cover the biggest economic story of the year, one can only hope that the story behind the story will begin to emerge:

   How Republican fiscal policy has created a bubble in stocks and real estate driven by trillions in government borrowing;

   How Republican central bankers (yes, I know they're supposed to be non-partisan) influenced the 2004 election by handing out negative real interest rates to homeowners, thereby inflating a real-estate bubble that was already out of hand;

   How the mortgage crisis was caused not by predatory lending but by excessive housing prices caused by Republican fiscal and monetary policies.

   Posted by samcrossett at 11/05/2007 @ 5:03pm

7. Again, this seems like a collectivist's dream program. What is it you guys are complaining about?

   Posted by MARYBRETBRAD

   A very insightful post. Probably wasted on most of this crowd, though.....

   Posted by davebarlett at 11/05/2007 @ 10:55pm

8. MARYBRETBRAD:

   I still fail to see how putting hundreds of thousands of the nations middle and lower class out of housing is something to not complain about. Big business gets bailed out, and will profit again in the future. Meanwhile your own fellow Americans that havent done as well as you have are now looking for a place to raise their families. Seems pretty inhumane to me. Maybe if you werent in the tax bracket that your in you would consider the qualities of life of other citizens. But thats the joy of YOUR United States isnt it, the fact that you dont have to care. Must be nice to be rich, you dont have to worry about any collectivist policies hindering your lifestyle, your above it all. Your money makes that possible for you. Not every American is in that position and you'd do well to learn compassion for those that dont have the resources that you claim to have.

   Posted by yungpatriot at 11/06/2007 @ 04:01am

9. In the late 1990s the Clinton Democrats enacted the law? Funny, but weren't the Republicans the majority in Congress?

   Posted by proveit at 11/06/2007 @ 2:00pm

10. Posted by proveit at 11/06/2007 @ 2:01pm

11. In the late 1990s the Clinton Democrats enacted the law? Funny, but weren't the Republicans the majority in Congress?

    Posted by proveit at 11/06/2007 @ 2:02pm

12. Yes, I am sure Clinton should have used his magical psychic powers to predict this happening, and vetoed the Republican Congress' decision in the matter.

    Yeah. Right.

    Look, who is in power now, and what is oil doing? Oil costs more, people have less money, people have less money, they default on loans, people default on loans, and places which went lemming on the subprime market go down. They go down, your big lenders start going down.

    Hence, Citigroup going down. It isn't because of Clinton. It has a lot more to do with Bush, and his stupid frigging disasterous policy and lack of internal controls.

    Posted by Taliesan at 11/06/2007 @ 3:36pm

13. Oh and PROVEIT, well put.

    The blame Clinton brigade simply makes my teeth itch, because frankly if there is one bloody useless thing the west has learned from the soviets, its how to blame the previous administration.

    Posted by Taliesan at 11/06/2007 @ 3:38pm

14. I doubt any of the major financial institutions will collapse. This is not the same as what may happen to those firms that specialized in risky loans like Nationwide.

    This doesn't mean they will emerge unchanged. I would expect to see some restructuring which could include spinning off sections of firms or selling them to competitors. The fact that Merrill Lynch could even think of opening discussions with Wachovia shows that such ideas are already in the works.

    If the US banks could survive the collapses of their foreign loans they will certainly be able to get the government support to get through this. And this time we won't even have to send in the marines.

    Posted by rdf at 11/07/2007 @ 10:54am

15. Same as it ever was, the more things change the more they stay the same. From Upton Sinclair: The Jungle (1904),,,,

    And yet all these things were as nothing to what came a little later. They had begun to question the old lady as to why one family had been unable to pay, trying to show her by figures that it ought to have been possible; and Grandmother Majauszkiene had disputed their figures – "You say twelve dollars a month; but that does not include the interest."

    Then they stared at her. "Interest!" they cried.

    "Interest on the money you still owe," she answered.

    "But we don't have to pay any interest!" they exclaimed, three or four at once. "We only have to pay twelve dollars each month." And for this she laughed at them. "You are like all the rest," she said; "they trick you and eat you alive. They never sell the houses without interest. Get your deed, and see."

    Then, with a horrible sinking of the heart, Teta Elzbieta unlocked her bureau and brought out the paper that had already caused them so many agonies. Now they sat round, scarcely breathing, while the old lady, who could read English, ran over it. "Yes," she said, finally, "here it is, of course: 'With interest thereon monthly, at the rate of seven per cent per annum.'"

    And there followed a dead silence. "What does that mean?" asked Jurgis finally, almost in a whisper.

    "That means," replied the other, "that you have to pay them seven dollars next month, as well as the twelve dollars."

    Then again there was not a sound. It was sickening, like a nightmare, in which suddenly something gives way beneath you, and you feel yourself sinking, sinking, down into bottomless abysses. As if in a flash of lightning they saw themselves – victims of a relentless fate, cornered, trapped, in the grip of destruction. All the fair structure of their hopes came crashing about their ears. – And all the time the old woman was going on talking. They wished that she would be still; her voice sounded like the croaking of some dismal raven. Jurgis sat with his hands clenched and beads of perspiration on his forehead, and there was a great lump in Ona's throat, choking her. Then suddenly Teta Elzbieta broke the silence with a wail, and Marija began to wring her hands and sob, "Ai! Ai! Beda man!"

    All their outcry did them no good, of course. There sat Grandmother Majauszkiene, unrelenting, typifying fate. No, of course it was not fair, but then fairness had nothing to do with it. And of course they had not known it. They had not been intended to know it. But it was in the deed, and that was all that was necessary, as they would find when the time came. .................. During the early part of the winter the family had had money enough to live and a little over to pay their debts with; but when the earnings of Jurgis fell from nine or ten dollars a week to five or six, there was no longer anything to spare. The winter went, and the spring came, and found them still living thus from hand to mouth, hanging on day by day, with literally not a month's wages between them and starvation. Marija was in despair, for there was still no word about the reopening of the canning factory, and her savings were almost entirely gone. She had had to give up all idea of marrying then; the family could not get along without her – though for that matter she was likely soon to become a burden even upon them, for when her money was all gone, they would have to pay back what they owed her in board. So Jurgis and Ona and Teta Elzbieta would hold anxious conferences until late at night, trying to figure how they could manage this too without starving.

    Such were the cruel terms upon which their life was possible, that they might never have nor expect a single instant's respite from worry, a single instant in which they were not haunted by the thought of money. They would no sooner escape, as by a miracle, from one difficulty, than a new one would come into view. In addition to all their physical hardships, there was thus a constant strain upon their minds; they were harried all day and nearly all night by worry and fear. This was in truth not living; it was scarcely even existing, and they felt that it was too little for the price they paid. They were willing to work all the time; and when people did their best, ought they not to be able to keep alive?

    There seemed never to be an end to the things they had to buy and to the unforeseen contingencies. Once their water pipes froze and burst; and when, in their ignorance, they thawed them out, they had a terrifying flood in their house. It happened while the men were away, and poor Elzbieta rushed out into the street screaming for help, for she did not even know whether the flood could be stopped, or whether they were ruined for life. It was nearly as bad as the latter, they found in the end, for the plumber charged them seventy-five cents an hour, and seventy-five cents for another man who had stood and watched him, and included all the time the two had been going and coming, and also a charge for all sorts of material and extras. And then again, when they went to pay their January's installment on the house, the agent terrified them by asking them if they had had the insurance attended to yet. In answer to their inquiry he showed them a clause in the deed which provided that they were to keep the house insured for one thousand dollars, as soon as the present policy ran out, which would happen in a few days. Poor Elzbieta, upon whom again fell the blow, demanded how much it would cost them. Seven dollars, the man said; and that night came Jurgis, grim and determined, requesting that the agent would be good enough to inform him, once for all, as to all the expenses they were liable for. The deed was signed now, he said, with sarcasm proper to the new way of life he had learned – the deed was signed, and so the agent had no longer anything to gain by keeping quiet. And Jurgis looked the fellow squarely in the eye, and so the fellow wasted no time in conventional protests, but read him the deed. They would have to renew the insurance every year; they would have to pay the taxes, about ten dollars a year; they would have to pay the water tax, about six dollars a year – (Jurgis silently resolved to shut off the hydrant). This, besides the interest and the monthly installments, would be all – unless by chance the city should happen to decide to put in a sewer or to lay a sidewalk. Yes, said the agent, they would have to have these, whether they wanted them or not, if the city said so. The sewer would cost them about twenty-two dollars, and the sidewalk fifteen if it were wood, twenty-five if it were cement.

    So Jurgis went home again; it was a relief to know the worst, at any rate, so that he could no more be surprised by fresh demands. He saw now how they had been plundered; but they were in for it, there was no turning back. They could only go on and make the fight and win – for defeat was a thing that could not even be thought of.

    ---------------------------------------------------------- Welcome to the NeoCon Social-economic Darwinist plutocracy wet dream! I urge the readers to read or refresh their memory of Sinclair's book (The Jungle). We are traveling back in time!

    Posted by Argon at 11/07/2007 @ 7:42pm

16. Again, this seems like a collectivist's dream program. What is it you guys are complaining about? Posted by MARYBRETBRAD 11/05/2007 @ 5:51pm | ignore this person

    The true Collectivist here is the unholy union of Wall Street, the banking industry, and government. And your "dream program" is an environment that allowed it to abandon risk-averse business practices because sympathetic public officials will use public policy to keep it in business.

    You say, "Business was lax on underwriting…." I ask where the regulators were. More to Greider's point, perhaps they went the way of Glass - Steagle. You suggest the current government acted high-minded when it pumped dollars into the banking system, "so fewer jobs went overseas (helping the poor)." The reality is the Fed expanded the money supply at the insistence of Wall Street. This Fed intervention on behalf of the Collectivist affects all of us because it creates inflation. This hidden tax hits the poor disproportionately. (No wonder Mr. Bush's government wanted to stop publishing M3 data last year.)

    Perhaps, at this late stage of the game, there is an argument for "Helicopter Ben" Bernanke lowering rates to appease the Collectivist. No good alternatives exist.

    Slowly and steadily, the neocon virus is destroying all that is great about America.

    Posted by seattlescribe at 11/08/2007 @ 03:35am