U.S. President Barack Obama reaches out to Erskine Bowles, left, and Alan Simpson of the National Commission on Fiscal Responsibility and Reform as they leave the White House Rose Garden April 27, 2010.The Associated Press
Each phase of the post-crash blame game has produced its villain-du-jour, the fleeting symbol-of-what-went-wrong on Wall Street that bears the wrath of politicians until they find their next source of outrage.
After skewering American International Group and Lehman Brothers, it was only a matter of time before Washington got around to Goldman Sachs, the boldest, brashest and canniest firm on the Street.
When the Securities and Exchange Commission brought civil fraud charges this month against Goldman and one of its star traders, the politicians could hardly believe their luck.
The SEC's allegation that the firm deceived clients by selling complex derivatives based on pools of mortgages that Goldman secretly expected to fail has provided Congress with new ammunition to justify sweeping new regulations to rein in Wall Street.
Those allegations, which the investment bank vigorously denies, provided ample opportunity for politicians to pillory Goldman executives' hauled before a Senate subcommittee Tuesday to answer for their actions. Michigan Democratic Senator Carl Levin revelled in turning the executives' embarrassing internal e-mails against them - e-mails in which they described products they sold as "crap pools" and "shitty."
"Instead of doing well when its clients did well, Goldman Sachs did well when its clients lost money," Mr. Levin charged. "Its conduct brings into question the whole function of Wall Street, which traditionally has been seen as an engine of growth, betting on America's successes, and not its failures."
President Barack Obama weighed in too, taking another populist jab at the captains of finance. Touring a wind-turbine factory in Iowa, Mr. Obama made a pitch for "common sense reforms that prevent the irresponsibility of a few on Wall Street from threatening the dreams of millions on Main Street."
The problem is, the more populist the President and senators get, the farther the reforms being hashed out in Congress get from common sense.
In their zeal to punish Wall Street, and make amends to Main Street, the Democrats have concocted a proposed regulatory regime so complex it makes credit default swaps look simple. The 1,400-page (still incomplete) bill before the Senate is so convoluted that virtually no one has a clue how the pieces all fit together or how the new rules will impact the financial industry and the economy.
It's gotten so out of hand the administration now finds itself trying to cage the populist monster it unleashed. A provision inserted into the bill by the Senate Agriculture Committee that would force banks with access to federally insured deposits or central bank loans to spin off their derivatives activities into separate firms has caused as much consternation in the White House as on Wall Street.
The provision is the brainchild of Agriculture Committee chairman Blanche Lincoln, an Arkansas Democrat facing a tough re-election battle this fall. It appears to have been adopted without any study of its impact on the financial sector. One industry estimate suggests it would require firms to raise as much as $250-billion (U.S.) to set up separately capitalized derivatives units.
The Treasury Department has been working behind the scenes to get the provision removed. Austan Goolsbee, one of Mr. Obama's top economic advisers, tied himself in knots when pressed on ABC's This Week about whether the administration backs the Lincoln clause, blathering something evasive.
Senator Bob Corker, a Tennessee Republican, summed it up for viewers: "I think what Austan's saying is he doesn't support it."
It's tough caging populist monsters.
To be sure, there are many good elements to the proposed financial overhaul. Requiring more transparency in the derivatives market is one of the best parts. Another is the abolition of the Office of Thrift Supervision, the conflict-ridden regulator that oversaw the banks that wrote subprime mortgages based on no or fake documentation.
But as Harvard University financial historian Niall Ferguson recently warned: "As the rules become ever more convoluted, so the opportunities for the unscrupulous increase - and the efficiency of the financial system as a whole decreases."
Besides, the investment banks that invented the derivatives that destabilized the financial system in 2008 could not have created such toxic products in the first place had it not been for government policies aimed at putting more Americans in their own homes - whether they could afford it or not. The reform package before Congress does not address those policies.
It's business-as-usual for Fannie Mae and Freddie Mac, the government-sponsored entities that buy up home loans and bundle them into securities to boost liquidity in the mortgage market - even though the Treasury Department estimates taxpayers will face a net loss of $85-billion (U.S.) on bailing out the two agencies. (Other estimates are much higher.) And the net cost to taxpayers of rescuing the Wall Street banks? Zero.
Commonsense reforms would rein in the risk-taking at Fannie Mae and Freddie Mac, which was, by all accounts, as reckless as the casino-mentality on Wall Street. But as long as Wall Street keeps giving the politicians such great material to work with, common sense does not appear to be Washington's first priority.