LAW 360: Putting Our Nation’s Economy At Risk Again

For Law 360, by Phil Angelides

It was 10 years ago that our financial system began to unravel after years of recklessness on Wall Street and neglect by regulators and policymakers, plunging our nation into a deep recession. Millions lost their homes and jobs, cities and towns across the nation were devastated, and trillions of dollars in wealth were stripped away from hardworking families and businesses. The aspirations of millions of Americans were crushed in the financial assault on our nation, with all too many still struggling economically from the fallout of the crisis.
Now, just a decade after financial disaster struck, the Trump administration, congressional Republicans and Wall Street are wantonly ignoring the lessons of history and putting our nation at risk again.


In 2009, the president and Congress created the Financial Crisis Inquiry Commission, a 10-member bipartisan commission, to conduct the nation’s official investigation into the causes of the financial and economic crisis that beset our country. In 2011, after conducting 19 public hearings, reviewing millions of pages of documents, and interviewing over 700 witnesses, the FCIC’s final report concluded, based on the evidence, that the financial crisis was avoidable and was caused by widespread failures of regulation, reckless risk-taking on Wall Street, and a systemic breakdown in ethics and accountability.
Among other things, the FCIC detailed pervasive fraud and corruption in the mortgage markets from loan origination to Wall Street’s bundling and sale of mortgage securities to investors. In addition, the FCIC referred evidence of potential violations of law by financial institutions and high-ranking executives to the U.S. Department of Justice for further investigation and, if warranted, prosecution. The facts of the FCIC’s report have gone unchallenged in the six-plus years since its release.
In the wake of the meltdown and a taxpayer bailout of the banks, which ran into the trillions of dollars, Congress passed and President Barack Obama signed a set of financial market reforms to strengthen the bulwarks of public protection that had been eroded over two decades of deregulatory fervor and to put in place new safeguards to curb excesses and systemic risk in a rapidly evolving financial marketplace. Coupled with the appointment of regulators committed to protecting the economy and the public, this reform effort has resulted in a more stable, safer financial system undergirding the American economy.
From the beginning, Wall Street has chafed under the new regime of responsibility. Once they got back on their feet with a hand up from American taxpayers, the big banks have waged a fierce rear guard action against financial reform.


Since 2008, banks and securities and investment firms have spent over $1.5 billion in federal lobbying to get their way and contributed over $1.6 billion to federal campaigns, with the bulk of their largesse going to the Republicans who control Congress.

They have worked to weaken financial reform laws at every turn, hamstring regulators and deprive them of the resources they need to do their jobs, and bottle up new regulations with an endless stream of litigation. And they’ve worked hand in hand with their Republican minions on Capitol Hill as those legislators have harassed and bullied public officials charged with protecting the public interest, including relentless attacks on the Consumer Financial Protection Bureau and a spurious investigation of the staff and Democratic members of the FCIC itself for having the temerity to do the job they were asked to do.

And, since the day the FCIC released its report, Wall Street apologists have labored hard to rewrite the history of the crisis to absolve the financial industry of culpability, banking on fading memories of what actually happened in the run-up to the 2008 crisis and on the old adage that a lie can travel halfway around the world before the truth can tie its shoes. The most notable falsehood peddled by the revisionists is that government housing policy, not Wall Street excesses, was the seminal cause of the crisis. Yet, that false narrative was rejected by nine of the 10 FCIC commissioners, including five Democratic members, three of the four Republicans, and one independent. The evidence gathered by the FCIC clearly demonstrated that it was Wall Street’s toxic mortgage securities – not the actions of Fannie Mae, Freddie Mac and the Federal Housing Administration – that caused the losses that cascaded through the financial system in 2007 and 2008.

That Wall Street never engaged in critical self-examination and changed its ways in the wake of financial disaster should not come as a surprise. Simply stated, the big-bank executives and senior officials who nearly drove our financial system and economy over the cliff have paid no real economic and legal price for their wrongdoing and thus have not felt compelled to change.

On the economic front, the financial sector rebounded rapidly from its brush with death, thanks to the enormous taxpayer bailout. By 2010, just two years after the economy’s near collapse, compensation at publicly traded Wall Street firms hit a new record; the 10 biggest U.S. banks posted annual profits of more than $62 billion; and those 10 banks held over three quarters of the nation’s banking assets. And it’s been upward and onward from there.

On the legal front, law enforcement against financial wrongdoing has been woefully broken. While shareholders (401ks, pension funds, mutual funds) of major financial institutions have paid out over $40 billion for the wrongdoing related to the sales of mortgage securities to investors alone, no senior executive who drove or condoned this pervasive misconduct was held accountable, and most of the mortgage securities settlements included no admission of wrongdoing. Apparently, the financial crisis was an immaculate corruption – banks committed misdeeds, but no bankers were involved.

Emboldened by their miraculous escape from consequence and responsibility, Wall Street’s leaders now see the ascendancy of Donald Trump and the Republican’s control of Congress as their golden opportunity to undo the reforms put in place since 2008 and to return to the deregulatory policies and weak oversight that put us on the path to peril.

Working hand in hand, the triumvirate of Trump, congressional Republicans and Wall Street are attacking on all fronts, with much of the assault hidden by the smoke and explosions emanating daily from an unhinged White House.

They are moving forward to unravel the framework of sensible financial oversight crafted in the wake of the crisis. The Treasury Department has released three reports to date to serve as the blueprint for deregulation. The reports, which have aptly been described as the financial industry’s wish list on Treasury’s letterhead, recommend changes in everything from capital requirements to the independence of the CFPB. The latest report even goes so far as to suggest eliminating the use of the phrase “shadow banking,” mimicking the farcical motion by the FCIC’s Republican commissioners to strike that phrase as well as words such as “deregulation” and “Wall Street” from the FCIC’s report.

And while the systematic dismantlement of financial market reforms is readied, they are already knocking out individual pillars of protection as the opportunities arise – eliminating heightened oversight of AIG, the recipient of a $182 billion taxpayer bailout; defanging the Financial Stability Oversight Council, the entity charged with identifying systemic risks; repealing the CFPB’s arbitration rule to deprive consumers of the right to go to court when wronged by financial institutions; and blocking the fiduciary rule, which ensures that financial advisers act in the interests of their clients.

They have installed regulators – from Steve Mnuchin at Treasury to Jay Clayton at the U.S. Securities and Exchange Commission to Keith Noreika at the Office of the Comptroller of the Currency to Christopher Giancarlo at the U.S. Commodity Futures Trading Commission -whose defining characteristics are their lifelong service in and fealty to the financial industry. These appointments raise significant questions of conflict of interest. They are a clear signal of where oversight of Wall Street is headed, since strong financial rules are only as good as the people enforcing them. These appointments are particularly troubling in light of the FCIC’s findings that regulators had ample authority to rein in excesses in the marketplace in the run-up to the 2008 meltdown, but failed to do so.

And, last but not least, they have begun to weaken the already anemic enforcement of financial laws and rules. Last month, the SEC’s co-director of enforcement signaled that the agency may back away from its recent push to obtain more admissions of wrongdoing as part of settlements – something that has happened in only 2 percent of enforcement cases filed from 2014-2017. This change in direction comes amid a new report in Politico that penalties levied by the SEC against publicly traded companies have dropped precipitously since Trump took office – from $702 million in 43 cases from February to September 2016 to $127 million in 15 cases from February to September of this year.

All of these actions are ominous, not just for the stability of our nation’s financial system but also for that of the global financial framework of which we are a part. As in so many areas, the world has looked to us for leadership and, in the wake of the financial crisis, the United States has pushed and prodded other nations to fix the evident flaws in financial regulation and supervision. The recent decision of the EU to pull back from a proposed rule that gave regulators the power to force banks to split off risky trading activities may be a harbinger of things to come.

The White House and congressional Republicans have clearly chosen money and power over the interests of our nation and our economy. Time and again – from the crash of 1929 and the Great Depression to the deregulation of the savings and loan industry and the debacle that followed to the financial crisis of 2008 and the Great Recession – history has proved that unfettered deregulation and deference to Wall Street comes to no good end.

The unknown is not if, but when financial disaster will strike again. And the question for the American people is: will we see it coming this time and stop it?
Phil Angelides, former state treasurer of California, was the chairman of the Financial Crisis Inquiry Commission, which conducted the nation’s official inquiry into the financial crisis of 2008.