When the financial crisis first engulfed the world, opinion leaders rushed to explain it as a freak of nature, like a "perfect storm" or a tsunami that comes every 100 years. Subsequent revelations destroyed that nonsense. Like famines, financial crises are man-made. This one was made in America–invented on Wall Street and enabled by Washington complicity, Democrats and Republicans alike.
This message was delivered again by the SEC’s recent fraud charges against Goldman Sachs. The investment house sold poison to unwitting customers–financial instruments deliberately designed to fail. Sure enough, they failed, but they also helped to poison the entire system.
People are asking if anyone will go to jail. No, not yet. The SEC only charges a "civil" offense–Goldman’s failure to disclose that its hedge fund partner, John Paulson, stacked the deck. But the case has the potential to rock Wall Street and Washington politics. First, the facts scream out for deeper investigation. Securities law usually allows Wall Street con men to avoid prosecution by paying off swindled parties. Still, bankers and traders must be feeling queasy, because the Street is awash in similar manipulations–conflicts of interest that in other business sectors often qualify as criminal fraud.
Furthermore, the Goldman case could stiffen the spine of senators now working on financial reform legislation, which began as the White House’s utterly inadequate response to the economic catastrophe. Thanks to this scandal, there’s a chance that toughening amendments will greatly improve things. Sherrod Brown’s, for example, would shrink the size of bloated mega-banks. Blanche Lincoln is pushing a hard crackdown on dangerous derivatives. The proposed Consumer Financial Protection Bureau could be rescued from bank lobbyist efforts to strangle it. And Bernie Sanders is trying to put a hard cap on credit card interest rates.
Maybe Senate reformers can stiffen President Obama’s spine too. His reform strategy essentially would have turned the mess over to the Federal Reserve. His premise was folly, since the Fed had cheered on the deregulation that enabled the bankers’ reckless greed. And by putting the Fed in charge, Treasury Secretary Timothy Geithner and White House adviser Larry Summers accepted the bankers’ proposed solution: tinker with the regulatory system but do not greatly disturb Wall Street’s business model. That lets politicians evade the need to enact laws that compel real change. House Democrats went along.
The Senate, however, is now a more promising arena than expected. First, Chris Dodd, lame-duck chairman of the Banking Committee, proposed a more ambitious reform: dump the central bank as "super-regulator" and strengthen provisions to curb oversize banks. His draft is marred by weak points and may not survive the floor action, but the fight for serious reform is still alive.