by James Lavin
In Part 1, I criticized Sen. Dodd for writing the legislation – HAVA – that pushed unauditable, privately operated electronic voting machines into American elections and for fighting – for years – against paper audit trails, thus undermining Americans' trust in the legitimacy and integrity of our elections and our ability to verify election "results."
In Part 2, I show that Sen. Dodd was uniquely positioned to prevent the banking crisis but utterly failed Connecticut and America.
Sen. Dodd – Chairman of the Senate Banking Committee – has taken millions of dollars from financial institutions to not do his job:
- "Dodd has received more campaign contributions from AIG than any other elected official."
- Dodd's the #4 recipient of commercial bank campaign contributions, at $1.3 million, behind three major presidential candidates (McCain, Clinton and Kerry).
- Dodd's the #4 recipient of finance / credit company money, at $411,000, behind three Republicans.
- Dodd's the #3 recipient of contributions from mortgage bankers and brokers, at $325,000, behind major presidential candiates Clinton and Kerry. And #6 overall from real estate interests, at $1.9 million.
- Dodd's the #2 recipient of hedge fund contributions, at $780,000, behind only Hillary Clinton.
- Dodd's the #2 recipient of insurance company money, at over $2.2 million, behind only John McCain!
Why does Dodd – a long-term incumbent in a small state – need all this money? And why are powerful financial firms so eager to give Dodd money?
They wanted a friend running the Senate Banking Committee, a friend who wouldn't push new regulations or tough enforcement of existing regulations. And that's exactly what they got for their money.
What did we citizens get for Dodd's close friendship with the finance industry? Dodd's failure to regulate banks led directly to:
- A financial crisis
- Bank failures
- A deep, protracted recession
- Massive job losses
- Plummeting home values
- Trillions in taxpayer subsidies for failed banks that we and future generations must pay back
- Inflation expectations – due to the debt incurred to bail out banks – that will make government and private borrowing far more expensive for decades to come
During Dodd's watch as Chairman of the Senate Banking Committee, the U.S. banking system collapsed as it had not since the Great Depression. This occurred because Congress tore down laws preventing banks and other financial insitutions from taking massive risks. And then Congress failed to watch – let alone regulate – what those financial institutions were doing.
No one was better positioned to prevent the madness than Dodd.
But Dodd was part of the problem, not the solution. One landmark law – The Financial Services Modernization Act of 1999 (informally called Gramm-Leach-Bliley) – repealed essential legislation – the Glass-Steagall Act of 1933 and the Bank Holding Company Act of 1956 – put in place after the Great Depression to prevent another banking crisis.
Dodd voted "yes" on repealing Glass-Steagall and gutting the Bank Holding Company Act. Shamefully, only eight Senators – including five of the best (Boxer, Dorgan, Feingold, Harkin and Wellstone) – voted "no."
Sen. Dodd absolutely should have known he was pulling the pin on a hand grenade. Many others shouted loudly that deregulation would cause a financial crisis & taxpayer bailouts:
- Ralph Nader knew: "These conglomerates will be the financial equivalent of nuclear bombs. The explosion of even one could have a disastrous impact not only on the U.S. economy but on financial systems around the world."
- Molly Ivins knew: "Watch the banking industry dig its own grave. Watch supposedly smart people set up a financial disaster… Not since Congress passed the Garn-St. Germain bill in 1981 - the one that deregulated the S&Ls and unleashed a half-a-trillion-dollar disaster, which the taxpayers of this country wound up paying for - has there been a move to match this for pure folly… The most obvious risk is that a blunder in the insurance or brokerage end of the business could bring down a bank, putting insured deposits at risk. The taxpayers, of course, then wind up with the tab, as we did with the savings-and-loan mess."
- Senator Byron Dorgan knew: "This bill will also, in my judgment, raise the likelihood of future massive taxpayer bailouts. It will fuel the consolidation and mergers in the banking and financial services industry at the expense of customers, farm businesses, family farmers, and others, and in some instances I think it inappropriately limits the ability of the banking and thrift institution regulators from monitoring activities between such institutions and their insurance or securities affiliates and subsidiaries raising significant safety and soundness consumer protection concerns." Sen. Dorgan even predicted the timeframe: "I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010."
- Senator Paul Wellstone knew: "This is the wrong kind of modernization because it fails to put in place adequate regulatory safeguards for these new financial giants whose failure could jeopardize the entire economy. It is the wrong kind of modernization because taxpayers could be stuck with the bill if these conglomerates become ‘too big to fail.'" He continued: "We are flirting with disaster. We are strolling casually along the upper decks of the Titanic, oblivious to the dangers ahead of us. Remember, the Titanic in its day symbolized the ultimate triumph of technology and progress. Just like these new financial conglomerates, it was considered ‘too big to fail.' Because everybody assumed this flagship of Western technology was unsinkable, they saw no need to take ordinary precautions. They disregarded the usual rules of speed and safety, as Congress is now doing with [this legislation]."
Most damagingly, Senate Banking Committee Chairman Dodd failed to regulate derivatives. Since at least the mid-1990s, experts had been calling for derivatives regulation. In 1994, the government's own Government Accounting Office (GAO) issued a 200-page GAO report calling for regulation of the exploding derivatives market. The report warned that failure to regulate derivatives could result in "a financial bailout paid for by taxpayers."
Passing such legislation was Senate Banking Committee chairman Dodd's job. He failed.
The current financial crisis is the natural and logical result of a failed financial regulatory system that placed an irrational faith in the ability of markets to self-correct. As a result, regulators ignored repeated warnings about the over-the-counter derivatives markets, problems with securitization and lax mortgage underwriting standards, excessive leverage in financial institutions, and the general movement of financial activity into increasingly complex and opaque forms…
This has allowed institutions to structure complex transactions and take on risky exposures without fulfilling the regulatory requirements Congress deemed necessary to prevent a systemic financial crisis after the Great Depression. These unregulated and under-regulated activities and institutions, the "shadow financial system," were permitted to become so intertwined with the real economy that the government has chosen to use taxpayers' money to bail them out when they failed.
No one was better positioned to understand the dangers or empowered to prevent them than Senate Banking Chairman Dodd. And when problems first appeared, instead of addressing them, he moved to Iowa and launched a presidential campaign.
It doesn't matter whether Dodd was simply ignorant of the massive risks banks were taking or seduced by power and money. He failed, and America and Connecticut will pay a dear price for decades to come. It's time for Sen. Dodd to go.
James Lavin is an economist and blogger in Stamford. This article was originally published as "Please retire Chris Dodd from the Senate (Part 2)" on his blog, James Lavin — Blogging the Bust.