How Wall Street And Washington Betrayed America
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How Wall Street and Washington
Betrayed America
March 2009
Essential Information * Consumer Education Foundation
www.wal streetwatch.org
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How Wall Street and Washington
Betrayed America
March 2009
Essential Information * Consumer Education Foundation
www.wal streetwatch.org
4
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Primary authors of this report are Robert Weissman and James Donahue. Harvey Rosenfield,
Jennifer Wedekind, Marcia Carroll, Charlie Cray, Peter Maybarduk, Tom Bollier and Paulo
Barbone assisted with writing and research.
Essential Information
Consumer Education Foundation
PO Box 19405
PO Box 1855
Washington, DC 20036
Studio City, CA 91604
202.387.8030
cefus@mac.com
info@essential.org
www.essential.org
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www.wallstreetwatch.org
Table of Contents
Introduction: A Call to Arms, by Harvey Rosenfield ..…………….
6
Executive Summary ………………………………………………...
14
Part I: 12 Deregulatory Steps to Financial Meltdown .......................
21
1. Repeal of the Glass-Steagall Act and the Rise of the Culture of ………….. 22
Recklessness
2. Hiding Liabilities: Off-Balance Sheet Accounting ………………………… 33
3. The Executive Branch Rejects Financial Derivative Regulation ………….. 39
4. Congress Blocks Financial Derivative Regulation …………………………
47
5. The SEC’s Voluntary Regulation Regime for Investment Banks ………….
50
6. Bank Self-Regulation Goes Global: Preparing to Repeat the Meltdown? …
54
7. Failure to Prevent Predatory Lending ………………………………………
58
8. Federal Preemption of State Consumer Protection Laws …………………..
67
9. Escaping Accountability: Assignee Liability ………………………………
73
10. Fannie and Freddie Enter the Subprime Market ……………………………
80
11. Merger Mania ………………………………………………………………
87
12. Rampant Conflicts of Interest: Credit Ratings Firms’ Failure ……………..
93
Part II: Wall Street’s Washington Investment ..…………………….
98
Conclusion and Recommendations:
Principles for a New Financial Regulatory Architecture ..……...
109
Appendix: Leading Financial Firm Profiles of Campaign
Contributions and Lobbying Expenditures ...……………………
115
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Introduction:
ber of Congress to the President of the
United States. The Money Industry spent
another $3.4 billion on lobbyists whose job
A Cal to Arms
it was to press for deregulation — Wall
Street’s license to steal from every Ameri-
by Harvey Rosenfield∗
can.
In return for the investment of more than
America’s economy is in tatters, and the
$5.1 billion, the Money Industry was able to
situation grows dire by the day. Nearly
get rid of many of the reforms enacted after
600,000 Americans lost their jobs in Janu-
the Great Depression and to operate, for
ary, for a total of 1.8 million over the last
most of the last
three
months.
Industry1
$ to Politicians $ to Lobbyists
ten years, with-
Millions
more
Securities
$512 million
$600 million
out any effective
will lose theirs
rules
or
re-
Commercial Banks
$155 million
$383 million
over the next
straints whatso-
year no matter
Insurance Cos.
$221 million
$1002 million
ever. The report,
what
happens.
Accounting
$81 million
$122 million
prepared
by
Students can no
Essential Information and the Consumer
longer pursue a college education. Families
Education Foundation, details step-by-step
cannot afford to see a doctor. Many Ameri-
many of the events that led to the financial
cans owe more on their homes than they are
debacle. Here are the “highlights” of our
worth. Those lucky enough to have had
economic downfall:
pensions or retirement funds have watched
• Beginning in 1983 with the Reagan
helplessly as 25 percent of their value
Administration, the U.S. govern-
evaporated in 2008.
ment acquiesced in accounting rules
What caused this catastrophe? As this
adopted by the financial industry
report chronicles in gruesome detail, over
that allowed banks and other corpo-
the last decade, Wall Street showered Wash-
rations to take money-losing assets
ington with over $1.7 billion in what are
off their balance sheets in order to
prettily described as “campaign contribu-
hide them from investors and the
tions.” This money went into the political
public.
coffers of everyone from the lowliest mem-
• Between 1998 and 2000, Congress
∗ President, Consumer Education Foundation
and the Clinton Administration re-
1 Source: Center for Responsive Politics,
peatedly blocked efforts to regulate
<www.opensecrets.org>.
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“financial derivatives” — including
legally liable for fraud or other ille-
the mortgage-related credit default
galities that occurred when the
swaps that became the basis of tril-
mortgage was made.
lions of dollars in speculation.
• Egged on by Wall Street, two gov-
• In 1999, Congress repealed the De-
ernment-sponsored
corporations,
pression-era law that barred banks
Fannie Mae and Freddie Mac,
from offering investment and insur-
started buying large numbers of
ance services, and vice versa, ena-
subprime loans from private banks
bling these firms to engage in specu-
as well as packages of mortgages
lation by investing money from
known as “mortgage-backed securi-
checking and savings accounts into
ties.”
financial “derivatives” and other
• In 2004, the top cop on the Wall
schemes understood by only a hand-
Street beat in Washington — the
ful of individuals.
Securities and Exchange Commis-
• Taking advantage of historically low
sion — now operating under the
interest rates in the early part of this
radical deregulatory ideology of the
decade, shady mortgage brokers and
Bush Administration, authorized in-
bankers began offering mortgages
vestment banks to decide for them-
on egregious terms to purchasers
selves how much money they were
who were not qualified. When these
required to set aside as rainy day re-
predatory lending practices were
serves. Some firms then entered into
brought to the attention of federal
$40 worth of speculative trading for
agencies, they refused to take seri-
every $1 they held.
ous action. Worse, when states
• With the compensation of CEOs in-
stepped into the vacuum by passing
creasingly tied to the value of the
laws requiring protections against
firm’s total assets, a tidal wave of
dirty loans, the Bush Administration
mergers and acquisitions in the fi-
went to court to invalidate those re-
nancial world — 11,500 between
forms, on the ground that the inac-
1980 and 2005 — led to the pre-
tion of federal agencies superseded
dominance of just a relative handful
state laws.
banks in the U.S. financial system.
• The financial industry’s friends in
Successive administrations failed to
Congress made sure that those who
enforce antitrust laws to block these
speculate in mortgages would not be
mergers. The result: less competi-
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tion, higher fees and charges for
and defeat. The power of the Money Indus-
consumers, and a financial system
try overcame all opposition, on a bipartisan
vulnerable to collapse if any single
basis.
one of the banks ran into trouble.
It’s not like our elected leaders in Wash-
• Investors and even government au-
ington had no warning: The California
thorities relied on private “credit rat-
energy crisis in 2000, and the subsequent
ing” firms to review corporate bal-
collapse of Enron — at the time unprece-
ance sheets and proposed invest-
dented — was an early warning that the
ments and report to potential inves-
nation’s system of laws and regulations was
tors about their quality and safety.
inadequate to meet the conniving and trick-
But the credit rating companies had
ery of the financial industry. The California
a grave conflict of interest: they are
crisis turned out to be a foreshock of the
paid by the financial firms to issue
financial catastrophe that our country is in
the ratings. Not surprisingly, they
today. It began with the deregulation of
gave the highest ratings to the in-
electricity prices by the state legislature.
vestments issued by the firms that
Greased with millions in campaign contribu-
paid them, even as it became clear
tions from Wall Street and the energy indus-
that the ratings were inflated and the
try, the legislation was approved on a bipar-
companies were in precarious condi-
tisan basis without a dissenting vote.
tion. The financial lobby made sure
Once deregulation took effect, Wall
that regulation of the credit ratings
Street began trading electricity and the
firms would not solve these prob-
private energy companies boosted prices
lems.
through the roof. Within a few weeks, the
None of these milestones on the road to
utility companies — unable because of a
economic ruin were kept secret. The dangers
loophole in the law to pass through the
posed by unregulated, greed-driven financial
higher prices to consumers — simply
speculation were readily apparent to any
stopped paying for the power. Blackouts
astute observer of the financial system. But
ensued. At the time, Californians were
few of those entrusted with the responsibil-
chastised for having caused the shortages
ity to police the marketplace were willing to
through “over-consumption.” But the energy
do so. And as the report explains, those
shortages were orchestrated by Wall Street
officials in government who dared to pro-
rating firms, investment banks and energy
pose stronger protections for investors and
companies, in order to force California’s
consumers consistently met with hostility
taxpayers to bail out the utility companies.
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California’s political leadership and utility
it, were derivatives: pieces of paper that
regulators largely succumbed to the black-
were backed by other pieces of paper that
mail, and $11 billion in public money was
were backed by packages of mortgages,
used to pay for electricity at prices that
student loans and credit card debt, the
proved to be artificially manipulated by …
complexity and value of which only a few
Wall Street traders. The state of California
understood. Meanwhile, the lessons of
was forced to increase utility rates and
Enron were cast aside after a few insignifi-
borrow over $19 billion — through Wall
cant measures — the tougher reforms killed
Street firms — to cover these debts.
by the Money Industry — and Wall Street
Its electricity trading activities under in-
went back to business as usual.
vestigation, Enron’s vast accounting she-
Last fall, the house of cards finally col-
nanigans, including massive losses hidden in
lapsed. For those who might have heard the
off-balance sheet corporate entities, came to
“blame the victim” propaganda emanating
light, and the company collapsed within a
from the free marketers whose philosophy
matter of days. It looked at the time as
lies in a smoldering ruin alongside the
though the California deregulation disaster
economy, the report sets the record straight:
and the Enron scandal would lead to
consumers are not to blame for this debacle.
stronger regulation and corporate account-
Not those of us who used credit in an at-
ability.
tempt to have a decent quality of life (as
But then 9/11 occurred. And for most of
opposed to the tiny fraction of people in our
the last decade, the American people have
country who truly got ahead over the last
been told that our greatest enemy lived in a
decade). Nor can we blame the Americans
cave. The subsequent focus on external
who were offered amazing terms for mort-
threats, real and imagined, distracted atten-
gages but forgot to bring a Ph.D. and a
tion from deepening problems at home. As
lawyer to their “closing,” and later found out
Franklin Roosevelt observed seventy years
that they had been misled and could not
ago, “our enemies of today are the forces of
afford the loan at the real interest rate buried
privilege and greed within our own bor-
in the fine print.
ders.” Today, the enemies of American
Rather, America’s economic system is
consumers, taxpayers and small investors
at or beyond the verge of depression today
live in multimillion-dollar palaces and pull
because gambling became the financial
down seven-, eight- or even nine-figure
sector’s principal preoccupation, and the pile
annual paychecks. Their weapons of mass
of chips grew so big that the Money Industry
destruction, as Warren Buffett famously put
displaced real businesses that provided real
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goods, services and jobs. By that time, the
the plug on credit, Congress rebuffed efforts
amount of financial derivatives in circula-
to include safeguards on how taxpayer
tion around the world — $683 trillion by
money would be spent and accounted for.
one estimate — was more than ten times the
That’s why many of the details of the bailout
actual value of all the goods and services
remain a secret, hiding the fact that no one
produced by the entire planet. When all the
really knows why certain companies were
speculators tried to cash out, starting in
given our money, or how it has been spent.
2007, there really wasn’t enough money to
Bankers used it pay bonuses, to buy back
cover all the bets.
their own bank stock, or to build their em-
If we Americans are to blame for any-
pires by purchasing other banks. But very
thing, it’s for allowing Wall Street to do
little of the money has been used for the
what it calls a “leveraged buy out” of our
purpose it was ostensibly given: to make
political system by spending a relatively
loans. One thing is certain: this last Wash-
small amount of capital in the Capitol in
ington giveaway — the Greatest Wall Street
order to seize control of our economy.
Giveaway of all time — has not fixed the
Of course, the moment the Money In-
economy.
dustry realized that the casino had closed, it
Meanwhile, at this very moment of na-
turned — as it always does — to Washing-
tional threat, the banks, hedge funds and
ton, this time for the mother of all favors: a
other parasite firms that crippled our econ-
$700 billion bailout of the biggest financial
omy are pouring money into Washington to
speculators in the country. That’s correct:
preserve their privileges at the expense of
the people who lost hundreds of billions of
the rest of us. The only thing that has
dollars of investors’ money were given
changed is that many of these firms are
hundreds of billions of dollars more. The
using taxpayer money — our money — to do
bailout was quickly extended to insurance
so.
companies, credit card companies, auto
That’s why you won’t hear anyone in
manufacturers and even car rental firms. In
the Washington establishment suggest that
addition to cash infusions, the government
Americans be given a seat on the Board of
has blown open the federal bank vaults to
Directors of every company that receives
offer the Money Industry a feast of discount
bailout money. Or that America’s economic
loans, loan guarantees and other taxpayer
security is intolerably jeopardized when
subsidies. The total tally so far? At least $8
pushing paper around constitutes a quarter
trillion.
or more of our economy. Or that credit
Panicked by Wall Street’s threat to pull
default swaps and other derivatives should
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be prohibited, or limited just like slot ma-
Here are seven basic principles that
chines, roulette wheels and other forms of
Americans should insist upon.
gambling.
In most of the United States, you can go
Relief. It’s been only five months since
to jail for stealing a loaf of bread. But if you
Congress authorized $700 billion to bail out
have paid off Washington, you can steal the
the speculators. Congress was told that the
life-savings, livelihoods, homes and dreams
bailout would alleviate the “credit crunch”
of an entire nation, and you will be allowed
and encourage banks to lend money to
to live in the fancy homes you own, drive
consumers and small businesses. But the
multiple cars, throw multi-million dollar
banks have hoarded the money, or misspent
birthday parties. Punishment? You might not
it. If the banks aren’t going to keep their end
be able to get your bonus this year or, worst
of the bargain, the government should use its
come to worst, if you are one of the very
power of eminent domain to take control of
unlucky few unable to take advantage of the
the banks, or seize the money and let the
loopholes in the plan announced by the
banks go bankrupt. On top of the $700
Treasury Secretary Geithner, you may end
billion bailout, the Federal Reserve has been
up having to live off your past riches be-
loaning public money to Wall Street firms
cause you can only earn a measly $500,000
money at as little as .25 percent. These
while you are on the dole. (More good news
companies are then turning around and
for corporate thieves: this flea-bitten pro-
charging Americans interest rates of 4
posal is not retroactive — it does not apply
percent to 30 percent for mortgages and
to all the taxpayer money already handed
credit cards. There should be a cap on what
out).
banks and credit card companies can charge
Like their predecessors, President-
us when we borrow our own money back
elected Obama’s key appointments to the
from them. Similarly, transfers of taxpayer
Treasury, the SEC and other agencies are
money should be conditioned on acceptance
veterans of the Money Industry. They are
of other terms that would help the public,
unlikely to challenge the narrow boundaries
such as an agreement to waive late fees, and
of the debate that has characterized Wash-
an agreement not to lobby the government.
ington’s response to the crisis. So long as
And, Americans should be appointed to sit
the Money Industry remains in charge of the
on the boards of directors of these firms in
federal agencies and keeps our elected
order to have a say on what these companies
officials in its deep pockets, nothing will
do with our money — to keep them from
change.
wasting it and to make sure they repay it.
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Restitution. Companies that get taxpayer
full disclosure. Further mergers of financial
money must be required to repay it on terms
industry titans should be barred under the
that are fair to taxpayers. When Warren
antitrust laws, and the current monopolistic
Buffett acquired preferred shares in Gold-
industry should be broken up once the
man Sachs, he demanded that Goldman
country has recovered.
Sachs pay 10 percent interest; taxpayers are
only getting back 5 percent. The Congres-
Reform. It is clear that the original $700
sional Oversight Panel estimates that tax-
billion bailout was a rush job so poorly
payers received preferred shares worth about
constructed that it has largely failed and
two-thirds of what was given to the initial
much of the money wasted. The federal
bailout recipients. Even worse are the tax-
government should revise the last bailout
payer loan guarantees offered to Citigroup.
and establish new terms for oversight and
For a $20 billion cash injection plus tax-
disclosure of which companies are getting
payer guarantees on $306 billion in toxic
federal money and what they are doing with
assets — likely to impose massive liabilities
it.
on the public purse — the government
received $27 billion in preferred shares,
Responsibility. Americans are tired of
paying 8 percent interest. Now the Obama
watching corporate criminals get off with a
administration has suggested that it might
slap on the wrist when they plunder and
offer a dramatically expanded guarantee
loot. Accountability is necessary to maintain
program for toxic assets, putting the tax-
not only the honesty of the marketplace but
payer on the hook for hundreds of billions
the integrity of American democracy. Cor-
more.
porate officials who acted recklessly with
stockholder and public money should be
Regulation. The grand experiment in letting
prosecuted and sentenced to jail time under
Wall Street regulate itself under the assump-
the same rules applicable to street thugs.
tion that free market forces will police the
State and local law enforcement agencies,
marketplace has failed catastrophically.
with the assistance of the federal govern-
Wall Street needs to operate under rules that
ment, should join to build a national network
will contain their excessive greed. Deriva-
for the investigation and prosecution of the
tives should be prohibited unless it can be
corporate crooks.
shown that they serve a useful purpose in
our economy; those that are authorized
Return — to a real economy. In 2007, more
should be traded on exchanges subject to
than a quarter of all corporate profits came
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from the Money Industry, largely based on
private enterprise has plundered and then for
speculation by corporations operating in
so many Americans abandoned.
international markets and whose actions call
into question their loyalty to the best inter-
Revolt. Things will not change so long as
ests of America. To recover, America must
Americans acquiesce to business as usual in
return to the principles that made it great —
Washington. It’s time for Americans to
hard work, creativity, and innovation — and
make their voices heard.
both government and business must serve
that end. The spectacle of so many large
■ ■ ■
corporations lining up for government
assistance puts to rest the argument made by
the corporate-funded think tanks and talking
heads over the last three decades that gov-
ernment is “the problem, not the solution.”
In fact, as this report shows, government has
been the solution for the Money Industry all
along.
Now Washington must serve America,
not Wall Street. Massive government inter-
vention is not only appropriate when it is
necessary to save banks and insurance
companies. For the $20 billion in taxpayer
money that the government gave Citigroup
in November, we could have bought the
company lock, stock and barrel, and then we
would have our own credit card, student
loan and mortgage company, run on careful
business principles but without the need to
turn an enormous profit. Think of the assis-
tance that that would offer to Main Street,
not to mention the competitive effect it
would have on the market. And massive
government intervention is what’s really
needed in the health care system, which
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Executive Summary
aimed to force disclosure of publicly rele-
vant financial information; established limits
on the use of leverage; drew bright lines
Blame Wall Street for the current financial
between different kinds of financial activity
crisis. Investment banks, hedge funds and
and protected regulated commercial banking
commercial banks made reckless bets using
from investment bank-style risk taking;
borrowed money. They created and traf-
enforced meaningful limits on economic
ficked in exotic investment vehicles that
concentration, especially in the banking
even top Wall Street executives — not to
sector; provided meaningful consumer
mention firm directors — did not under-
protections (including restrictions on usuri-
stand. They hid risky investments in off-
ous interest rates); and contained the finan-
balance-sheet vehicles or capitalized on their
cial sector so that it remained subordinate to
legal status to cloak investments altogether.
the real economy. This hodge-podge regula-
They engaged in unconscionable predatory
tory system was, of course, highly imper-
lending that offered huge profits for a time,
fect, including because it too often failed to
but led to dire consequences when the loans
deliver on its promises.
proved unpayable. And they created, main-
But it was not its imperfections that led
tained and justified a housing bubble, the
to the erosion and collapse of that regulatory
bursting of which has thrown the United
system. It was a concerted effort by Wall
States and the world into a deep recession,
Street, steadily gaining momentum until it
resulted in a foreclosure epidemic ripping
reached fever pitch in the late 1990s and
apart communities across the country.
continued right through the first half of
But while Wall Street is culpable for
2008. Even now, Wall Street continues to
the financial crisis and global recession,
defend many of its worst practices. Though
others do share responsibility.2
it bows to the political reality that new
For the last three decades, financial
regulation is coming, it aims to reduce the
regulators, Congress and the executive
scope and importance of that regulation and,
branch have steadily eroded the regulatory
if possible, use the guise of regulation to
system that restrained the financial sector
further remove public controls over its
from acting on its own worst tendencies.
operations.
The post-Depression regulatory system
This report has one overriding message:
financial deregulation led directly to the
2 This report uses the term “Wall Street” in the
financial meltdown.
colloquial sense of standing for the big play-
ers in the financial sector, not just those lo-
It also has two other, top-tier messages.
cated in New York’s financial district.
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First, the details matter. The report docu-
candidates in campaign contributions over
ments a dozen specific deregulatory steps
the past decade, spending more than $1.7
(including failures to regulate and failures to
billion in federal elections from 1998-2008.
enforce existing regulations) that enabled
Primarily reflecting the balance of power
Wall Street to crash the financial system.
over the decade, about 55 percent went to
Second, Wall Street didn’t obtain these
Republicans and 45 percent to Democrats.
regulatory abeyances based on the force of
Democrats took just more than half of the
its arguments. At every step, critics warned
financial sector’s 2008 election cycle contri-
of the dangers of further deregulation. Their
butions.
evidence-based claims could not offset the
The industry spent even more — top-
political and economic muscle of Wall
ping $3.4 billion — on officially registered
Street. The financial sector showered cam-
lobbying of federal officials during the same
paign contributions on politicians from both
period.
parties, invested heavily in a legion of
During the period 1998-2008:
lobbyists, paid academics and think tanks to
• Accounting firms spent $81 million
justify their preferred policy positions, and
on campaign contributions and $122
cultivated a pliant media — especially a
million on lobbying;
cheerleading business media complex.
• Commercial banks spent more than
Part I of this report presents 12 Deregu-
$155 million on campaign contribu-
latory Steps to Financial Meltdown. For
tions, while investing nearly $383
each deregulatory move, we aim to explain
million in officially registered lob-
the deregulatory action taken (or regulatory
bying;
move avoided), its consequence, and the
• Insurance companies donated more
process by which big financial firms and
than $220 million and spent more
their political allies maneuvered to achieve
than $1.1 billion on lobbying;
their deregulatory objective.
• Securities firms invested nearly
In Part II, we present data on financial
$513 million in campaign contribu-
firms’ campaign contributions and disclosed
tions, and an additional $600 million
lobbying investments. The aggregate data
in lobbying.
are startling: The financial sector invested
All this money went to hire legions of
more than $5.1 billion in political influence
lobbyists. The financial sector employed
purchasing over the last decade.
2,996 lobbyists in 2007. Financial firms
The entire financial sector (finance, in-
employed an extraordinary number of
surance, real estate) drowned political
former government officials as lobbyists.
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This report finds 142 of the lobbyists em-
2. Hiding Liabilities:
ployed by the financial sector from 1998-
Off-Balance Sheet Accounting
2008 were previously high-ranking officials
Holding assets off the balance sheet gener-
or employees in the Executive Branch or
ally allows companies to exclude “toxic” or
Congress.
money-losing assets from financial disclo-
sures to investors in order to make the
■ ■ ■
company appear more valuable than it is.
Banks used off-balance sheet operations —
These are the 12 Deregulatory Steps to
special purpose entities (SPEs), or special
Financial Meltdown:
purpose vehicles (SPVs) — to hold securi-
tized mortgages. Because the securitized
1. Repeal of the Glass-Steagall Act and
mortgages were held by an off-balance sheet
the Rise of the Culture of Recklessness
entity, however, the banks did not have to
The Financial Services Modernization Act
hold capital reserves as against the risk of
of 1999 formally repealed the Glass-Steagall
default — thus leaving them so vulnerable.
Act of 1933 (also known as the Banking Act
Off-balance sheet operations are permitted
of 1933) and related laws, which prohibited
by Financial Accounting Standards Board
commercial banks from offering investment
rules installed at the urging of big banks.
banking and insurance services. In a form of
The Securities Industry and Financial Mar-
corporate civil disobedience, Citibank and
kets Association and the American Securiti-
insurance giant Travelers Group merged in
zation Forum are among the lobby interests
1998 — a move that was illegal at the time,
now blocking efforts to get this rule re-
but for which they were given a two-year
formed.
forbearance — on the assumption that they
would be able to force a change in the
3. The Executive Branch Rejects
relevant law at a future date. They did. The
Financial Derivative Regulation
1999 repeal of Glass-Steagall helped create
Financial derivatives are unregulated. By all
the conditions in which banks invested
accounts this has been a disaster, as Warren
monies from checking and savings accounts
Buffet’s warning that they represent “weap-
into creative financial instruments such as
ons of mass financial destruction” has
mortgage-backed securities and credit
proven prescient.3 Financial derivatives have
default swaps, investment gambles that
3 Warren Buffett, Chairman, Berkshire
rocked the financial markets in 2008.
Hathaway, Report to Shareholders, February
21, 2003. Available at:
<http://www.berkshirehathaway.com/letters/
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amplified the financial crisis far beyond the
crisis.
unavoidable troubles connected to the
popping of the housing bubble.
5. The SEC’s Voluntary Regulation
The Commodity Futures Trading Com-
Regime for Investment Banks
mission (CFTC) has jurisdiction over fu-
In 1975, the SEC’s trading and markets
tures, options and other derivatives con-
division promulgated a rule requiring in-
nected to commodities. During the Clinton
vestment banks to maintain a debt-to-net-
administration, the CFTC sought to exert
capital ratio of less than 12 to 1. It forbid
regulatory control over financial derivatives.
trading in securities if the ratio reached or
The agency was quashed by opposition from
exceeded 12 to 1, so most companies main-
Treasury Secretary Robert Rubin and, above
tained a ratio far below it. In 2004, however,
all, Fed Chair Alan Greenspan. They chal-
the SEC succumbed to a push from the big
lenged the agency’s jurisdictional authority;
investment banks — led by Goldman Sachs,
and insisted that CFTC regulation might
and its then-chair, Henry Paulson — and
imperil existing financial activity that was
authorized investment banks to develop their
already at considerable scale (though no-
own net capital requirements in accordance
where near present levels). Then-Deputy
with standards published by the Basel
Treasury Secretary Lawrence Summers told
Committee on Banking Supervision. This
Congress that CFTC proposals “cas[t] a
essentially involved complicated mathe-
shadow of regulatory uncertainty over an
matical formulas that imposed no real limits,
otherwise thriving market.”
and was voluntarily administered. With this
new freedom, investment banks pushed
4. Congress Blocks Financial Derivative
borrowing ratios to as high as 40 to 1, as in
Regulation
the case of Merrill Lynch. This super-
The deregulation — or non-regulation — of
leverage not only made the investment
financial derivatives was sealed in 2000,
banks more vulnerable when the housing
with the Commodities Futures Moderniza-
bubble popped, it enabled the banks to
tion Act (CFMA), passage of which was
create a more tangled mess of derivative
engineered by then-Senator Phil Gramm, R-
investments — so that their individual
Texas. The Commodities Futures Moderni-
failures, or the potential of failure, became
zation Act exempts financial derivatives,
systemic crises. Former SEC Chair Chris
including credit default swaps, from regula-
Cox has acknowledged that the voluntary
tion and helped create the current financial
regulation was a complete failure.
2002pdf.pdf>.
18
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6. Bank Self-Regulation Goes Global:
enforcement actions from 2004 to 2006.
Preparing to Repeat the Meltdown?
In 1988, global bank regulators adopted a set
8. Federal Preemption of State Consumer
of rules known as Basel I, to impose a
Protection Laws
minimum global standard of capital ade-
When the states sought to fill the vacuum
quacy for banks. Complicated financial
created by federal nonenforcement of con-
maneuvering made it hard to determine
sumer protection laws against predatory
compliance, however, which led to negotia-
lenders, the feds jumped to stop them. “In
tions over a new set of regulations. Basel II,
2003,” as Eliot Spitzer recounted, “during
heavily influenced by the banks themselves,
the height of the predatory lending crisis, the
establishes varying capital reserve require-
Office of the Comptroller of the Currency
ments, based on subjective factors of agency
invoked a clause from the 1863 National
ratings and the banks’ own internal risk-
Bank Act to issue formal opinions preempt-
assessment models. The SEC experience
ing all state predatory lending laws, thereby
with Basel II principles illustrates their fatal
rendering them inoperative. The OCC also
flaws. Commercial banks in the United
promulgated new rules that prevented states
States are supposed to be compliant with
from enforcing any of their own consumer
aspects of Basel II as of April 2008, but
protection laws against national banks.”
complications and intra-industry disputes
have slowed implementation.
9. Escaping Accountability:
Assignee Liability
7. Failure to Prevent Predatory Lending
Under existing federal law, with only lim-
Even in a deregulated environment, the
ited exceptions, only the original mortgage
banking regulators retained authority to
lender is liable for any predatory and illegal
crack down on predatory lending abuses.
features of a mortgage — even if the mort-
Such enforcement activity would have
gage is transferred to another party. This
protected homeowners, and lessened though
arrangement effectively immunized acquir-
not prevented the current financial crisis.
ers of the mortgage (“assignees”) for any
But the regulators sat on their hands. The
problems with the initial loan, and relieved
Federal Reserve took three formal actions
them of any duty to investigate the terms of
against subprime lenders from 2002 to 2007.
the loan. Wall Street interests could pur-
The Office of Comptroller of the Currency,
chase, bundle and securitize subprime loans
which has authority over almost 1,800
— including many with pernicious, preda-
banks, took three consumer-protection
tory terms — without fear of liability for
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19
illegal loan terms. The arrangement left
for the financial crisis. They are responsible
victimized borrowers with no cause of
for their own demise, and the resultant
action against any but the original lender,
massive taxpayer liability.
and typically with no defenses against being
foreclosed upon. Representative Bob Ney,
11. Merger Mania
R-Ohio — a close friend of Wall Street who
The effective abandonment of antitrust and
subsequently went to prison in connection
related regulatory principles over the last
with the Abramoff scandal — was the
two decades has enabled a remarkable
leading opponent of a fair assignee liability
concentration in the banking sector, even in
regime.
advance of recent moves to combine firms
as a means to preserve the functioning of the
10. Fannie and Freddie Enter the
financial system. The megabanks achieved
Subprime Market
too-big-to-fail status. While this should have
At the peak of the housing boom, Fannie
meant they be treated as public utilities
Mae and Freddie Mac were dominant pur-
requiring heightened regulation and risk
chasers in the subprime secondary market.
control, other deregulatory maneuvers
The
Government-Sponsored
Enterprises
(including repeal of Glass-Steagall) enabled
were followers, not leaders, but they did end
these gigantic institutions to benefit from
up taking on substantial subprime assets —
explicit and implicit federal guarantees, even
at least $57 billion. The purchase of sub-
as they pursued reckless high-risk invest-
prime assets was a break from prior practice,
ments.
justified by theories of expanded access to
homeownership for low-income families and
12. Rampant Conflicts of Interest:
rationalized by mathematical models alleg-
Credit Ratings Firms’ Failure
edly able to identify and assess risk to newer
Credit ratings are a key link in the financial
levels of precision. In fact, the motivation
crisis story. With Wall Street combining
was the for-profit nature of the institutions
mortgage loans into pools of securitized
and their particular executive incentive
assets and then slicing them up into
schemes. Massive lobbying — including
tranches, the resultant financial instruments
especially but not only of Democratic
were attractive to many buyers because they
friends of the institutions — enabled them to
promised high returns. But pension funds
divert from their traditional exclusive focus
and other investors could only enter the
on prime loans.
game if the securities were highly rated.
Fannie and Freddie are not responsible
The credit rating firms enabled these
20
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investors to enter the game, by attaching
table. With Wall Street having destroyed the
high ratings to securities that actually were
system that enriched its high flyers, and
high risk — as subsequent events have
plunged the global economy into deep
revealed. The credit ratings firms have a bias
recession, it’s time for Congress to tell Wall
to offering favorable ratings to new instru-
Street that its political investments have also
ments because of their complex relation-
gone bad. This time, legislating must be to
ships with issuers, and their desire to main-
control Wall Street, not further Wall Street’s
tain and obtain other business dealings with
control.
issuers.
This report’s conclusion offers guiding
This institutional failure and conflict of
principles for a new financial regulatory
interest might and should have been fore-
architecture.
stalled by the SEC, but the Credit Rating
Agencies Reform Act of 2006 gave the SEC
■ ■ ■
insufficient oversight authority. In fact, the
SEC must give an approval rating to credit
ratings agencies if they are adhering to their
own standards — even if the SEC knows
those standards to be flawed.
■ ■ ■
Wall Street is presently humbled, but not
prostrate. Despite siphoning trillions of
dollars from the public purse, Wall Street
executives continue to warn about the perils
of restricting “financial innovation” — even
though it was these very innovations that led
to the crisis. And they are scheming to use
the coming Congressional focus on financial
regulation to centralize authority with indus-
try-friendly agencies.
If we are to see the meaningful regula-
tion we need, Congress must adopt the view
that Wall Street has no legitimate seat at the
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21
Part I:
12 Deregulatory Steps to
Financial Meltdown
22
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REPEAL OF THE GLASS-
tion on combinations between commercial
banks on the one hand, and investment
STEAGALL ACT AND THE RISE OF
banks and other financial services compa-
1 THE CULTURE OF RECKLESSNESS nies on the other. Glass-Steagall’s strict
rules originated in the U.S. Government’s
IN THIS SECTION:
response to the Depression and reflected the
The Financial Services Modernization Act of
learned experience of the severe dangers to
1999 formally repealed the Glass-Steagall
consumers and the overall financial system
Act of 1933 (also known as the Banking Act
of permitting giant financial institutions to
of 1933) and related laws, which prohibited
combine commercial banking with other
commercial banks from offering investment
financial operations.
banking and insurance services. In a form of
Glass-Steagall and related laws ad-
corporate civil disobedience, Citibank and
vanced the core public objectives of protect-
insurance giant Travelers Group merged in
ing depositors and avoiding excessive risk
1998 — a move that was illegal at the time,
for the banking system by defining industry
but for which they were given a two-year
forbearance — on the assumption that they
structure: banks could not maintain invest-
would be able to force a change in the
ment banking or insurance affiliates (nor
relevant law at a future date. They did. The
affiliates in non-financial commercial activ-
1999 repeal of Glass-Steagall helped create
ity).
the conditions in which banks invested
As banks eyed the higher profits in
monies from checking and savings accounts
higher risk activity, however, they began to
into creative financial instruments such as
breach the regulatory walls between com-
mortgage-backed securities and credit
mercial banking and other financial services.
default swaps, investment gambles that
Starting in the 1980s, responding to a steady
rocked the financial markets in 2008.
drumbeat of requests, regulators began to
weaken the strict prohibition on cross-
Perhaps the signature deregulatory move of
ownership. In 1999, after a long industry
the last quarter century was the repeal of the
campaign, Congress tore down the legal
1933 Glass-Steagall Act4 and related legisla-
walls altogether. The Gramm-Leach-Bliley
tion.5 The repeal removed the legal prohibi-
Act6 removed the remaining legal restric-
tions on combined banking and financial
4 Glass-Steagall repealed at Pub. L. 106–102,
title I, § 101(a), Nov. 12, 1999, 113 Stat.
service firms, and ushered in the current
1341.
5
hyper-deregulated era.
See amendments to the Bank Holding Com-
pany Act of 1956, 12 U.S.C. §§ 1841-1850,
1994 & Supp. II 1997 (amended 1999).
6 Pub. L. No. 106-102.
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23
The overwhelming direct damage in-
holding company that also owns banks —
flicted by Glass-Steagall repeal was the
were not subject to the prohibition. As a
infusion of investment banking culture into
result, commercial bank affiliates regularly
the conservative culture of commercial
traded customer deposits in the stock mar-
banking. After repeal, commercial banks
ket, often investing in highly speculative
sought high returns in risky ventures and
activities and dubious companies and de-
exotic financial instruments, with disastrous
rivatives.
results.
The Pecora Hearings
Origins
The economic collapse that began with the
Banking involves the collection of funds
1929 stock market crash hit Americans hard.
from depositors with the promise that the
By the time the bottom arrived, in 1932, the
funds will be available when the depositor
Dow Jones Industrial Average was down 89
wishes to withdraw them. Banks keep only a
percent from its 1929 peak.8 An estimated
specified fraction of deposits in their vaults.
15 million workers — almost 25 percent9 of
They lend the rest out to borrowers or invest
the workforce — were unemployed, real
the deposits to generate income. Depositors
output in the United States fell nearly 30
depend on the bank’s stability, and commu-
percent and prices fell at a rate of nearly 10
nities and businesses depend on banks to
percent per year.10
provide credit on reasonable terms. The
difficulties faced by depositors in judging
the quality of bank assets has required
obtained under contract made absent legal
authority); National Bank v. Case, 99 U.S.
government regulation to protect the safety
628, 633 (1878) (holding that national bank
may be liable for stock held in another
of depositors’ money and the well being of
bank).
8
the banking system.
Floyd Norris, “Looking Back at the Crash of
’29,” New York Times on the web, 1999,
In the 19th and early 20th centuries, the
available at:
<http://www.nytimes.com/library/financial/i
Supreme Court prohibited commercial banks
ndex-1929-crash.html>.
9
from engaging directly in securities activi-
Remarks by Federal Reserve Board Chairman
Ben S. Bernanke, “Money, Gold, and the
ties,7 but bank affiliates — subsidiaries of a
Great Depression,” March 2, 2004, available
at:
<http://www.federalreserve.gov/boarddocs/s
7 See California Bank v. Kennedy, 167 U.S. 362,
peeches/2004/200403022/default.htm>.
370-71 (1897) (holding that national bank
10 Remarks by Federal Reserve Board Chairman
may neither purchase nor subscribe to stock
Ben S. Bernanke, “Money, Gold, and the
of another corporation); Logan County Nat’l
Great Depression,” March 2, 2004, available
Bank v. Townsend, 139 U.S. 67, 78 (1891)
at:
(holding that national bank may be liable as
<http://www.federalreserve.gov/boarddocs/s
shareholder while in possession of bonds
peeches/2004/200403022/default.htm>.
24
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The 1932-34 Pecora Hearings,11 held
risk.13 Peruvian government bonds were sold
by the Senate Banking and Currency Com-
even though the bank’s staff had internally
mittee and named after its chief counsel
warned that “no further national loan can be
Ferdinand Pecora, investigated the causes of
safely made” to Peru. The Senate committee
the 1929 crash. The committee uncovered
found conflicts when commercial banks
blatant conflicts of interest
were able to garner confi-
and self-dealing by com-
dential insider informa-
The Pecora hearings
mercial banks and their
tion about their corporate
investment affiliates. For
concluded that common
customers’ deposits and
example, commercial banks
use it to benefit the bank’s
ownership of commercial
had misrepresented to their
investment affiliates. In
banks and investment banks
depositors the quality of
addition,
commercial
securities that their invest-
created several distinct
banks would routinely
ment banks were underwrit-
purchase the stock of
problems.
ing and promoting, leading
firms that were customers
the depositors to be overly
of the bank, as opposed to
confident in commercial banks’ stability.
firms that were most financially stable.
First National City Bank (now Citigroup)
The Pecora hearings concluded that
and its securities affiliate, the National City
common ownership of commercial banks
Company, had 2,000 brokers selling securi-
and investment banks created several dis-
ties.12 Those brokers had repackaged the
tinct problems, among them: 1) jeopardizing
bank’s Latin American loans and sold them
depositors by investing their funds in the
to investors as new securities (today, this is
stock market; 2) loss of the public’s confi-
known as “securitization”) without disclos-
dence in the banks, which led to panic
ing to customers the bank’s confidential
withdrawals; 3) the making of unsound
findings that the loans posed an adverse
loans; and 4) an inability to provide honest
investment advice to depositors because
banks were conflicted by their underwriting
11 The Pecora hearings, formally titled “Stock
Exchange Practices: Hearings Before the
relationship with companies.14
Senate Banking Committee,” were
authorized by S. Res. No. 84, 72d Cong., 1st
Session (1931). The hearings were convened
13 Federal Deposit Insurance Corporation
in the 72d and 73d Congresses (1932-1934).
website, “The Roaring 20s,” Undated,
12 Federal Deposit Insurance Corporation
available at:
website, “The Roaring 20s,” Undated,
<http://www.fdic.gov/about/learn/learning/
available at:
when/1920s.html>.
<http://www.fdic.gov/about/learn/learning/
14 Joan M. LeGraw and Stacey L. Davidson,
when/1920s.html>.
“Glass-Steagall and the ‘Subtle Hazards’ of
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25
Congress Acts
• Section 32 prohibited individuals
The Glass-Steagall Act consisted of four
from serving simultaneously with a
provisions to address the conflicts of interest
commercial bank and an investment
that the Congress concluded had helped
bank as a director, officer, em-
trigger the 1929 crash:
ployee, or principal.18
• Section 16 restricted commercial na-
One exception in Section 20 permitted
tional banks from engaging in most
securities activities by banks in limited
investment banking activities;15
circumstances, such as the trading of mu-
• Section 21 prohibited investment
nicipal general obligation bonds, U.S.
banks from engaging in any com-
government bonds, and real estate bonds. It
mercial banking activities;16
also permitted banks to help private compa-
• Section 20 prohibited any Federal
nies issue “commercial paper” for the pur-
Reserve-member bank from affiliat-
pose of obtaining short-term loans. (Com-
ing with an investment bank or other
mercial paper is a debt instrument or bond
company “engaged principally” in
equivalent to a short-term loan; companies
securities trading;17 and
issue “commercial paper” to fund daily (i.e.,
short-term) operations, including payments
Judicial Activism,” 24 New Eng. L. Rev.
225, Fall 1989.
Federal Reserve or simply “the Fed.” The
15 12 U.S.C. § 24, Seventh (1933) (provided that
Fed, created in 1913, is the central bank of
a national bank “shall not underwrite any
the United States comprised of a central,
issue of securities or stock” ).
governmental agency — the Board of
16 12 U.S.C. § 378(a) (1933) (“it shall be
Governors — in Washington, D.C., and
unlawful - (1) For any person, firm,
twelve regional Federal Reserve Banks,
corporation, association, business trust, or
located in major cities throughout the nation.
other similar organization, engaged in the
The Fed supervises thousands of its member
business of issuing, underwriting, selling, or
banks and controls the total supply of money
distributing, at wholesale or retail, or
in the economy by establishing the rate of
through syndicate participation, stocks,
interest it charges banks to borrow. It is
bonds, debentures, notes, or other securities,
considered an independent central bank
to engage at the same time to any extent
because its decisions do not have to be
whatever in the business of [deposit
ratified by the President and Congress.
banking].”
Federal Reserve member banks must
17 12 U.S.C. § 377 (1933) (prohibited affiliations
comply with the Fed's minimum capital
between banks that are members of the
requirements. (See “The Structure of the
Federal Reserve System and organizations
Federal Reserve System,” Federal Reserve,
“engaged principally in the issue, flotation,
available at:
underwriting, public sale, or distribution at
<http://federalreserve.gov/pubs/frseries/frser
wholesale or retail or through syndicate
i.htm>.)
participation of stocks, bonds, debentures,
18 12 U.S.C. § 78 (1933) (provided that no
notes, or other securities.....”). Federal
officer, director, or employee of a bank in
Reserve member banks include all national
the Federal Reserve System may serve at the
banks and some state-chartered banks and
same time as officer, director, or employee
are subject to regulations of the Federal
of an association primarily engaged in the
Reserve System, often referred to as the
activity described in section 20).
26
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to employees and financing inventories.
panies became a popular way for financial
Most commercial paper has a maturity of 30
institutions and other corporations to subvert
days or less. Companies issue commercial
the Glass-Steagall wall separating commer-
paper as an alternative to taking out a loan
cial and investment banking. In response,
from a bank.)
Congress enacted the Bank Holding Com-
Glass-Steagall was a
pany Act of 1956 (BHCA)
key element of the Roo-
to prohibit bank holding
Glass-Steagal was a key
sevelt
administration’s
companies from acquiring
element of the Roosevelt
response to the Depres-
“non-banks” or engaging in
sion
and
considered
administration’s response to
“activities that are not
essential both to restoring
closely related to banking.”
the Depression and consid-
public confidence in a
Depository institutions were
ered essential both to re-
financial system that had
considered “banks” while
failed and to protecting
storing public confidence in
investment banks (e.g. those
the nation against another
that trade stock on Wall
a financial system that had
profound
economic
Street) were deemed “non-
failed and to protecting the
collapse.
banks” under the law. As
While the financial
nation against another
with Glass-Steagall, Con-
industry was cowed by
gress expressed its intent to
profound economic col apse.
the Depression, it did not
separate customer deposits
fully embrace the New
in banks from risky invest-
Deal, and almost immediately sought to
ments in securities. Importantly, the BHCA
maneuver around Glass-Steagall. A legal
also mandated the separation of banking
construct known as a “bank holding com-
from insurance and non-financial commer-
pany” was not subject to the Glass-Steagall
cial activities. The BHCA also required
restrictions. Under the Federal Reserve
bank holding companies to divest all their
System, bank holding companies are “pa-
holdings in non-banking assets and forbade
per” or “shell” companies whose sole pur-
acquisition of banks across state lines.
pose is to own two or more banks. Despite
But the BHCA contained a loophole
the prohibitions in Glass-Steagall, a single
sought by the financial industry. It allowed
company could own both commercial and
bank holding companies to acquire non-
investment banking interests if those inter-
banks if the Fed determined that the non-
ests were held as separate subsidiaries by a
bank activities were “closely related to
bank holding company. Bank holding com-
banking.” The Fed was given wide latitude
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27
under the Bank Holding Company Act to
buy securities firms. For example, Bank-
approve or deny such requests. In the dec-
America purchased stock brokerage firm
ades that followed passage of the BHCA, the
Charles Schwab in 1984.21 The Federal
Federal Reserve frequently invoked its
Reserve had decided that Schwab’s service
broad authority to approve bank holding
of executing buy and sell stock orders for
company acquisitions of investment banking
retail investors was “closely related to
firms, thereby weakening the wall separating
banking” and thus satisfied requirements of
customer deposits from riskier trading
the BHCA.
activities.
In December 1986, the Fed reinter-
preted the phrase “engaged principally,” in
Deference to regulators
Section 20 of the BHCA, which prohibited
In furtherance of the Fed’s authority under
banks from affiliating with companies
BHCA, the Supreme Court in 1971 ruled
engaged principally in securities trading.
that courts should defer to regulatory deci-
The Fed decided that up to 5 percent of a
sions involving bank holding company
bank’s gross revenues could come from
applications to acquire non-bank entities
investment banking without running afoul of
under the BHCA loophole. As long as a
the ban.22
Federal Reserve Board interpretation of the
Just a few months later, in the spring of
BHCA is “reasonable” and “expressly
1987, the Fed entertained proposals from
articulated,” judges should not intervene, the
Citicorp, J.P Morgan and Bankers Trust to
court concluded.19 The ruling was a victory
loosen Glass-Steagall regulations further by
for opponents of Glass Steagall because it
allowing banks to become involved with
increased the power of bank-friendly regula-
commercial paper, municipal revenue bonds
tors. It substantially freed bank regulators to
and mortgage-backed securities. The Federal
authorize bank holding companies to con-
Reserve approved the proposals in a 3-2
duct new non-banking activities without
vote.23 One of the dissenters, then-Chair
judicial interference,20 rendering a signifi-
Paul Volcker, was soon replaced by Alan
cant blow to Glass-Steagall. As a result,
banks whose primary business was manag-
21 Securities Industry Association v. Federal
Reserve System, 468 U.S. 207 (1984).
ing customer deposits and making loans
22 “The Long Demise of Glass-Steagall,” PBS
began using their bank holding companies to
Frontline, May 8, 2003, available at:
<http://www.pbs.org/wgbh/pages/frontline/s
hows/wallstreet/weill/demise.html>.
19 Investment Company Inst. v. Camp, 401 U.S.
23 “The Long Demise of Glass-Steagall,” PBS
617 (1971).
Frontline, May 8, 2003, available at:
20 Jonathan Zubrow Cohen, 8 Admin. L.J. Am.
<http://www.pbs.org/wgbh/pages/frontline/s
U. 335, Summer 1994.
hows/wallstreet/weill/demise.html>.
28
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Greenspan, a strong proponent of deregula-
ance companies24 spent lavishly in support
tion. In 1989, the Fed enlarged the BHCA
of the legislation in the late 1990s. During
loophole again, at the request of J.P. Mor-
the 1997-1998 Congress, the three industries
gan, Chase Manhattan, Bankers Trust and
delivered more than $85 million in cam-
Citicorp, permitting banks to generate up to
paign contributions, including soft money
10 percent of their revenue from investment
donations to the Democratic and Republican
banking activity.
parties.25 But the Glass-Steagall rollback
In 1993, the Fed approved an acquisi-
stalled. The Clinton administration was
tion by a bank holding company, in this case
winding down, and the finance industries
Mellon Bank, of TBC Advisors, an adminis-
were becoming increasingly nervous that the
trator and advisor of stock mutual funds. By
legislation would not pass.
acquiring TBC, Mellon Bank was authorized
In the next congressional session, the
to provide investment advisory services to
industry redoubled its efforts, upping cam-
mutual funds.
paign contributions to more than $150
By the early 1990s, the Fed had author-
ized commercial bank holding companies to
24 Bank holding companies were prohibited from
own and operate full service brokerages and
providing insurance not under Glass-
Steagall, but the Bank Holding Company
offer investment advisory services. Glass
Act of 1956. Section 4(c)(8) of the Bank
Steagall was withering at the hands of
Holding Company Act of 1956, as amended,
prohibited bank holding companies and their
industry-friendly regulators whose free
subsidiaries from “providing insurance as a
principal, agent or broker” except under
market ideology conflicted with the Depres-
seven minor exemptions. See 12 U.S.C. §§
sion-era reforms.
1841-1850 (1994 & Supp. II 1997)
(amended 1999). Under the Act, banks were
permitted only to engage in activities that
were deemed “closely related to banking.”
The Financial Services Modernization Act
The statutory definition of “closely related
While the Fed had been progressively
to banking” specifically excludes insurance
activities. See Bank Holding Company Act
undermining Glass-Steagall through deregu-
4(c)(8), 12 U.S.C. 1843(c)(8) (1994). From
the time Glass-Steagall was enacted until the
latory interpretations of existing laws, the
Bank Holding Company Act of 1956 was
financial
industry
was
simultaneously
passed, bank holding companies had become
increasingly involved in insurance (and se-
lobbying Congress to repeal Glass-Steagall
curities) activities. The Bank Holding Com-
pany Act ended this activity. Gramm-Leach-
altogether. Members of Congress introduced
Bliley ended the Bank Holding Company
major deregulation legislation in 1982,
Act’s prohibition in 1999. In this sense, ref-
erences to “Glass-Steagall,” in this report,
1988, 1991, 1995 and 1998.
and in most policy discussions, commonly
refer also to the BHCA of 1956, which is
Big banks, securities firms and insur-
just as important as Glass-Steagall itself.
25 Data from the Center for Responsive Politics.
<www.opensecrets.org>.
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29
million,26 in considerable part to support
commerce (meaning non-financial busi-
Glass-Steagall repeal, now marketed under a
nesses), but was forced to back away from
new and deceptive name, “Financial Mod-
such a radical move after criticism from
ernization.”
former Federal Reserve
The Clinton admini-
Chair Paul Volcker and
The Clinton administration
stration supported the push
key Members of Con-
was winding down, and the
for deregulation. Clinton’s
gress.28 Rubin played a
Treasury Secretary, Robert
finance industries were
key role in obtaining
Rubin, who had run Gold-
approval of legislation to
becoming increasingly
man Sachs, enthusiastically
repeal Glass-Steagall, as
nervous that the legislation
promoted the legislation. In
both Treasury Secretary
1995 testimony before the
to repeal Glass-Steagal
and in his subsequent
House Banking Committee,
private sector role.
would not pass.
for example, Rubin had
A handful of other
argued that “the banking
personalities were instru-
industry is fundamentally different from
mental in the effort. Senator Phil Gramm, R-
what it was two decades ago, let alone in
Texas, the truest of true believers in deregu-
1933. … U.S. banks generally engage in a
lation, was chair of the Senate Banking
broader range of securities activities abroad
Committee, and drove the repeal legislation.
than is permitted domestically. Even domes-
He was assisted by Federal Reserve Chair
tically, the separation of investment banking
Alan Greenspan, an avid proponent of
and commercial banking envisioned by
deregulation who was also eager to support
Glass-Steagall has eroded significantly.”
provisions of the proposed Financial Ser-
Remarkably, he claimed that Glass-Steagall
vices Modernization Act that gave the Fed
could “conceivably impede safety and
enhanced jurisdictional authority at the
soundness by limiting revenue diversifica-
expense of other federal banking regulatory
tion.”27 At times, the Clinton administration
agencies. Notes Jake Lewis, formerly a
even toyed with the idea of allowing a total
professional staff member of the House
blurring of the lines between banking and
Banking Committee, “When the legislation
became snagged on controversial provisions,
26 Data from the Center for Responsive Politics.
<www.opensecrets.org>.
28 Jake Lewis, “Monster Banks: The Political and
27 “Rubin Calls for Modernization Through
Economic Costs of Banking and Financial
Reform of Glass-Steagall Act,” Journal of
Consolidation,” Multinational Monitor,
Accountancy, May 1, 1995, available at:
January/February 2005, available at:
<http://www.allbusiness.com/government/b
<http://www.multinationalmonitor.org/mm2
usiness-regulations/500983-1.html>.
005/012005/lewis.html>.
30
SOLD OUT
Greenspan would invariably draft a letter or
and lobbyists who badgered the administra-
present testimony supporting Gramm’s
tion and pounded the halls of Congress until
position on the volatile points. It was a
the final details of a deal were hammered
classic back-scratching deal
out. Top Citigroup offi-
that satisfied both players
cials vetted drafts of the
The Depression-era conflicts
— Greenspan got the domi-
legislation before they
and consequences that
nant regulatory role and
were
formally
intro-
Gramm used Greenspan’s
Glass-Steagal was intended
duced.31
wise words of support to
As the deal-making
to prevent re-emerged once
mute opposition and to help
on the bill moved into its
the Act was repealed.
assure a friendly press
final phase in Fall 1999
would grease passage.”29
— and with fears running
Also playing a central role were the
high that the entire exercise would collapse
CEOs of Citicorp and Travelers Group. In
— Robert Rubin stepped into the breach.
1998, the two companies announced they
Having recently resigned as Treasury Secre-
were merging. Such a combination of bank-
tary, Rubin was at the time negotiating the
ing and insurance companies was illegal
terms of his next job as an executive at
under the Bank Holding Company Act, but
Citigroup. But this was not public knowl-
was excused due to a loophole in the BHCA
edge at the time. Deploying the credibility
which provided a two-year review period of
built up as part of what the media had la-
proposed mergers. Travelers CEO Sandy
beled “The Committee to Save the World”
Weill met with Greenspan prior to the
(Rubin, Greenspan and then-Deputy Treas-
announcement of the merger, and said
ury Secretary Lawrence Summers, so named
Greenspan had a “positive response” to the
for their interventions in addressing the
audacious proposal.30
Asian financial crisis in 1997), Rubin helped
Citigroup’s co-chairs Sandy Weill and
broker the final deal.
John Reed, along with lead lobbyist Roger
The Financial Services Modernization
Levy, led a swarm of industry executives
Act, also known as the Gramm-Leach-Bliley
Act of 1999, formally repealed Glass-
29 Jake Lewis, “Monster Banks: The Political and
Steagall. The new law authorized banks,
Economic Costs of Banking and Financial
Consolidation,” Multinational Monitor,
January/February 2005, available at:
<http://www.multinationalmonitor.org/mm2
31 Russell Mokhiber, “The 10 Worst Corpora-
005/012005/lewis.html>.
tions of 1999,” Multinational Monitor, De-
30 Peter Pae, “Bank, Insurance Giants Set
cember 1999, available at:
Merger: Citicorp, Travelers in $82 Billion
<http://www.multinationalmonitor.org/mm1
Deal,” Washington Post, April 7, 1988.
999/mm9912.05.html>.
SOLD OUT
31
securities firms and insurance companies to
where aggressive deal-making became the
combine under one corporate umbrella. A
norm.
new clause was inserted into the Bank
The practice of “securitization” had vir-
Holding Company Act allowing one entity
tually disappeared after it contributed to the
to own a separate financial holding company
1929 crash, but had made a comeback in the
that can conduct a variety of financial activi-
1970s as Glass-Steagall was being disman-
ties, regardless of the parent corporation’s
tled. Economic analyst Robert Kuttner
main functions. In the congressional debate
testified in 2007 that trading loans on Wall
over the Financial Services Modernization
Street “was the core technique that made
Act, Senator Gramm declared, “Glass-
possible the dangerous practices of the
Steagall, in the midst of the Great Depres-
1920s. Banks would originate and repackage
sion, thought government was the answer. In
highly speculative loans, market them as
this period of economic growth and prosper-
securities through their retail networks,
ity, we believe freedom is the answer.” The
using the prestigious brand name of the bank
chief economist of the Office of the Comp-
— e.g. Morgan or Chase — as a proxy for
troller of the Currency supported the legisla-
the soundness of the security. It was this
tion because of “the increasingly persuasive
practice, and the ensuing collapse when so
evidence from academic studies of the pre-
much of the paper went bad, that led Con-
Glass-Steagall era.”32
gress to enact the Glass-Steagall Act”33 that
separated banks and securities trading.
Impact of Repeal
Whereas bank deposits had been a cen-
The gradual evisceration of Glass-Steagall
terpiece of the 1929 crash, mortgage loans
over 30 years, culminating in its repeal in
— and the securities connected to them —
1999, opened the door for banks to enter the
are at the center of the present financial
highly lucrative practice of packaging
crisis. There is mounting evidence that the
multiple home mortgage loans into securi-
repeal of Glass-Steagall contributed to a
ties for trade on Wall Street. Repeal of
high-flying culture that led to disaster. The
Glass-Steagall created a climate and culture
banks suspended careful scrutiny of loans
they originated because they knew that the
32
loans would be rapidly packaged into mort-
James R. Barth, R. Dan Brumbaugh Jr. and
James A. Wilcox, “The Repeal of Glass-
Steagall and the Advent of Broad Banking,”
33 Testimony of Robert Kuttner before the
Economic and Policy Analysis Working
Committee on Financial Services, U.S.
Paper 2000-5, Office of the Comptroller of
House of Representatives, October 2, 2007,
the Currency, April 2000, available at:
available at:
<http://www.occ.treas.gov/ftp/workpaper/w
<http://financialservices.house.gov/hearing1
p2000-5.pdf>.
10/testimony_-_kuttner.pdf>.
32
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gage-backed securities and sold off to third
mortgage defaults and themselves traded on
parties. Since the banks weren’t going to
Wall Street.
hold the mortgages in their own portfolios,
In short, the Depression-era conflicts
they had little incentive to review the bor-
and consequences that Glass-Steagall was
rowers’ qualifications carefully.34
intended to prevent re-emerged once the Act
But the banks did not in fact escape ex-
was repealed. The once staid commercial
posure to the mortgage market. It appears
banking sector quickly evolved to emulate
that, as they packaged mortgages into secu-
the risk-taking attitude and practices of
rities and then sold them off into “tranches,”
investment banks, with disastrous results.
the banks often kept portions of the least
Notes economist Joseph Stiglitz, “The
desirable tranches in their own portfolios, or
most important consequence of the repeal of
those of off-balance-sheet affiliates. They
Glass-Steagall was indirect — it lay in the
also seemed to have maintained liability in
way repeal changed an entire culture. Com-
some cases where securitized mortgages
mercial banks are not supposed to be high-
went bad. As banks lost billions on mort-
risk ventures; they are supposed to manage
gage-backed securities in 2008, they stopped
other people’s money very conservatively. It
making new loans in order to conserve their
is with this understanding that the govern-
assets. Instead of issuing new loans with
ment agrees to pick up the tab should they
hundreds of billions of dollars in taxpayer-
fail. Investment banks, on the other hand,
footed bailout money given for the purpose
have traditionally managed rich people’s
of jump-starting frozen credit markets, the
money — people who can take bigger risks
banks used the money to offset losses on
in order to get bigger returns. When repeal
their mortgage securities investments. Banks
of Glass-Steagall brought investment and
and insurance companies were saddled with
commercial banks together, the investment-
billions more in losses from esoteric “credit
bank culture came out on top. There was a
default swaps” created to insure against
demand for the kind of high returns that
could be obtained only through high lever-
34 See Liz Rappaport and Carrick Mollenkamp,
age and big risk taking.”35
“Banks May Keep Skin in the Game,” Wall
Street Journal, February 9, 2009, available
at:
<http://sec.online.wsj.com/article/SB123422
■ ■ ■
980301065999.html>; “Before That, They
Made A Lot of Money: Steps to Financial
Collapse,” An Interview with Nomi Prins,
Multinational Monitor, Novem-
35 Joseph Stiglitz, “Capitalist Fools,” Vanity Fair,
ber/December 2008, available at:
January 2009, available at:
<http://www.multinationalmonitor.org/mm2
<http://www.vanityfair.com/magazine/2009/
008/112008/interview-prins.html>.
01/stiglitz200901>.
SOLD OUT
33
HIDING LIABILITIES:
financial health is illusory.
Thanks to the exploitation of loopholes
OFF-BALANCE SHEET
in accounting rules, commercial banks were
2 ACCOUNTING
able to undertake exactly this sort of
deceptive financial shuffling in recent years.
IN THIS SECTION:
Even in good times, placing securitized
Holding assets off the balance sheet gener-
mortgage loans off balance sheet had
ally allows companies to exclude “toxic” or
important advantages for banks, enabling
money-losing assets from financial disclo-
them to expand lending without setting aside
sures to investors in order to make the
more reserve-loss capital (money set aside to
company appear more valuable than it is.
protect against loans that might not be
Banks used off-balance sheet operations —
repaid).36 As they made and securitized
special purpose entities (SPEs), or special
more loans shunted off into off-balance
purpose vehicles (SPVs) — to hold securi-
sheet
entities,
the
banks’
financial
tized mortgages. Because the securitized
vulnerability kept increasing — they had
mortgages were held by an off-balance sheet
entity, however, the banks did not have to
increased lingering obligations related to
hold capital reserves as against the risk of
securitized loans, without commensurate
default — thus leaving them so vulnerable.
reserve-loss capital. Then, when bad times
Off-balance sheet operations are permitted
hit, off-balance sheet accounting let banks
by Financial Accounting Standards Board
hide their losses from investors and
rules installed at the urging of big banks. The
regulators. This allowed their condition to
Securities Industry and Financial Markets
grow still more acute, ultimately imposing
Association and the American Securitization
massive losses on investors and threatening
Forum are among the lobby interests now
the viability of the financial system.
blocking efforts to get this rule reformed.
36
Wall Street recognized this immediately after
the adoption of the relevant accounting rule,
A business’s balance sheet is supposed to
known as FASB 140 (see text below for
more explanation). “How the sponsors and
report honestly on a firm’s financial state by
their lawyers and accountants address FASB
listing its assets and liabilities. If a company
140 may have an impact on the continuing
viability of this market,” said Gail Sussman,
can move money-losing assets off of its
a managing director at Moody's. “If they
have to keep these bonds on their balance
balance sheet, it will appear to be in greater
sheet, they have to reserve against them. It
financial health. But if it is still incurring
may eat into the profit of these products
[securitized loans].” Michael McDonald,
losses from the asset taken off the balance
“Derivatives Hit the Wall - Sector Found
sheet, then the apparent improvement in
Wary Investors in 2001,” The Bond Buyer,
March 15, 2002.
34
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The scale of banks’ off-balance sheet
authority to the Financial Accounting
assets is enormous — 15.9 times the amount
Standards Board (FASB). The FASB is an
on the balance sheets in 2007. This ratio
independent, private sector organization
represents a massive surge over the last
whose purpose is to establish financial
decade and half: “During the period 1992-
accounting
standards,
including
the
2007, on-balance sheet assets grew by 200
standards that govern the preparation of
percent, while off-balance sheet asset grew
financial reports. FASB’s Statement 140
by a whopping 1,518 [percent].”37
establishes rules relevant to securitization of
One Wall Street executive described
loans (packaging large numbers of loans
off-balance sheet accounting “as a bit of a
resold to other parties) and how securitized
magic trick”38 because losses disappear from
loans may be moved off a company’s
the balance sheet, making lenders appear
balance sheet.
more financially stable than they really are.
Pursuant to Statement 140, a lender
A former SEC official called it “nothing
may sell blocks of its mortgages to separate
more than just a scam.”39
trusts or companies known as Qualified
The
Securities
and
Exchange
Special Purpose Entities (QSPEs), or
Commission (SEC) has statutory authority
“special
investment
vehicles”
(SIVs),
to establish financial accounting and
created by the lender. As long as the
reporting standards, but it delegates this
mortgages are sold to the QSPE, the lender
is authorized not to report the mortgages on
37 Joseph Mason, “Off-balance Sheet Accounting
its balance sheet. The theory is that the
and Monetary Policy Ineffectiveness,” RGE
lender no longer has control or responsibility
Monitor, December 17, 2008, available at:
<http://www.rgemonitor.com/financemarket
for the mortgages. The Statement 140 test of
s-monitor/254797/off-
balance_sheet_accounting_and_monetary_p
whether a lender has severed responsibility
olicy_ineffectiveness>.
for mortgages is to ask whether a “true sale”
38 Alan Katz and Ian Katz, “Greenspan Slept as
Off-Books Debt Escaped Scrutiny,”
has taken place.
Bloomberg.com, October 30, 2008,
available at:
But whether a true sale of the
<http://www.bloomberg.com/apps/news?pid
mortgages has occurred is often unclear
=20601170&refer=home&sid=aYJZOB_gZi
0I> (quoting Pauline Wallace, partner at
because of the complexities of mortgage
PriceWaterhouseCoopers LLP and team
securitization. Lenders often retain some
leader in London for financial instruments).
39 “Plunge: How Banks Aim to Obscure Their
control over the mortgages even after their
Losses,” An Interview with Lynn Turner,
former SEC chief accountant, Multinational
sale to a QSPE. So, while the sale results in
Monitor, November/December 2008,
moving mortgages off the balance sheet, the
available at:
<http://www.multinationalmonitor.org/mm2
lender may still be liable for mortgage
008/112008/interview-turner.html>.
SOLD OUT
35
defaults. This retained liability is concealed
the matter to allow lenders to renegotiate
from the public by virtue of moving the
loans without losing off-balance sheet status.
assets off the balance sheet.
Former SEC Chair Christopher Cox an-
Under
Statement
nounced to Congress in
140, a “sale” of mortgages
2007 that loan restructuring
A former SEC official cal ed
to a QSPE occurs when
or modification activities,
off-balance sheet accounting
the mortgages are put
when default is reasonably
“beyond the reach of the
“nothing more than just a
foreseeable, does not pre-
transferor [i.e. the lender]
clude continued off-balance
scam.”
and its creditors.” This is
sheet
treatment
under
a “true sale” because the lender relinquishes
Statement 140.40
control of the mortgages to the QSPE. But
The problems with off-balance sheet
the current financial crisis has revealed that
accounting are a matter of common sense. If
while lenders claimed to have relinquished
there was any doubt, however, the
control, and thus moved the mortgages off
deleterious impact of off-balance sheet
the balance sheet, they had actually retained
accounting was vividly illustrated by the
control in violation of Statement 140. A
notorious collapse of Enron in December
considerable
portion
of
the
banks’
2001. Enron established off-balance sheet
mortgage-related losses remain off the
partnerships whose purpose was to borrow
books,
however, contributing
to the
from banks to finance the company’s
continuing uncertainty about the scale of the
growth. The partnerships, also known as
banks’ losses.
special purpose entities (SPEs), borrowed
The problems with QSPEs became
heavily by using Enron stock as collateral.
clear in 2007 when homeowners defaulted in
The debt incurred by the SPEs was kept off
record numbers and lenders were forced to
Enron’s balance sheet so that Wall Street
renegotiate or modify mortgages held in the
40 (Chairman Christopher Cox, in a letter to Rep.
QSPEs. The defaults revealed that the
Barney Frank, Chairman, Committee on Fi-
mortgages were not actually put “beyond the
nancial Services, U.S. House of Representa-
tives, July 24, 2007, available at:
reach” of the lender after the QSPE bought
<http://www.house.gov/apps/list/press/finan
cialsvcs_dem/sec_response072507.pdf>.)
them. As such, they should have been in-
The SEC's Office of the Chief Accountant
cluded on the lender’s balance sheet pursu-
agreed with Chairman Cox in a staff letter to
industry in 2008. (SEC Office of the Chief
ant to Statement 140.
Accountant, in a staff letter to Arnold
Hanish, Financial Executives International,
The Securities and Exchange Commis-
January 8, 2008, available at:
sion (SEC) was forced to clarify its rules on
<http://www.sec.gov/info/accountants/staffl
etters/hanish010808.pdf>).
36
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and regulators were unaware of it. Credit
institutions, setting the stage for the current
rating firms consistently gave Enron high
financial crisis.
debt ratings as they were unaware of the
The Enron fiasco got the attention of
enormous off-balance sheet liabilities.
Congress, which soon began considering
Investors pushing Enron’s stock price to
systemic accounting reforms. The Sarbanes-
sky-high
levels
were
Oxley Act, passed in 2002,
oblivious to the enormous
attempted to shine more
amount of debt incurred to
The Sarbanes-Oxley Act,
light
on
the
murky
finance
the
company’s
underworld of off-balance
passed in 2002, attempted
growth. The skyrocketing
sheet assets, but the final
to shine more light on the
stock price allowed Enron
measure was a watered-
to borrow even more funds
murky underworld of off-
down compromise; more
while using its own stock
far-reaching demands were
balance sheet assets, but
as collateral. At the time of
defeated by the financial
the final measure was a
bankruptcy, the company’s
lobby.
on-balance sheet debt was
watered-down compromise.
Sarbanes-Oxley requires
$13.15 billion, but the
that companies make some
company had a roughly equal amount of off-
disclosures about their QSPEs, even if they
balance sheet liabilities.
are not required to include them on the
In the fallout of the Enron scandal, the
balance sheet. Specifically, it requires
FASB adopted a policy to address off-
disclosure of the existence of off-balance-
balance sheet arrangements. Under its FIN
sheet arrangements, including QSPEs, if
46R guidance, a company must include any
they are reasonably likely to have a
SPE on the balance sheet if the company is
“material” impact on the company’s
entitled to the majority of the SPE’s risks or
financial condition. But lenders have sole
rewards, regardless of whether a true sale
discretion to determine whether a QSPE will
occurred. But the guidance has one caveat:
have a “material” impact. Moreover,
QSPEs holding securitized assets may still
disclosures have often been made in such a
be excluded from the balance sheet. The
general way as to be meaningless. “After
caveat, known as the “scope exception,”
Enron, with Sarbanes-Oxley, we tried
means that many financial institutions are
legislatively to make it clear that there has to
not subject to the heightened requirements
be some transparency with regard to off-
provided under FIN 46R. The lessons of
balance sheet entities,” Senator Jack Reed of
Enron were thus ignored for financial
Rhode Island, the chair of the Securities,
SOLD OUT
37
Insurance and Investment subcommittee of
QSPE from the U.S. accounting literature.”44
the Senate Banking Committee, said in early
It is not, however, a certainty that the
2008 as the financial crisis was unfolding.41
FASB will succeed in its effort. The Board
“We thought that was already corrected and
has repeatedly tried to rein in off-balance
the rules were clear and we would not be
sheet accounting, but failed in the face of
discovering new things every day,” he said.
financial
industry
pressure.45
The
The FASB has recognized for years
commercial banking industry and Wall
that Statement 140 is flawed, concluding in
Street are waging a major effort to water
2006 that the rule was “irretrievably
down the rule and delay adoption and
broken.”42 The merits of the “true sale”
implementation.46 Ironically, the banking
theory of Statement 140 notwithstanding, its
detailed and complicated rules created
44 FASB Chairman Bob Herz, “Lessons Learned,
Relearned, and Relearned Again from the
sufficient loopholes and exceptions to
Credit Crisis — Accounting and Beyond,”
enable financial institutions to circumvent
September 18, 2008, available at:
<http://www.fasb.org/articles&reports/12-
its purported logic as a matter of course.43
08-08_herz_speech.pdf>.
45 “Plunge: How Banks Aim to Obscure Their
FASB Chairman Robert Herz likened
Losses,” An Interview with Lynn Turner,
off-balance sheet accounting to “spiking the
former SEC chief accountant, Multinational
Monitor, November/December 2008,
punch bowl.” “Unfortunately,” he said, “it
available at:
seems that some folks used [QSPEs] like a
<http://www.multinationalmonitor.org/mm2
008/112008/interview-turner.html>.
punch bowl to get off-balance sheet
46 See “FAS Amendments,” American
Securitization Forum, available at:
treatment while spiking the punch. That has
<http://www.americansecuritization.com/sto
led us to conclude that now it’s time to take
ry.aspx?id=76>. (“Throughout this process
[consideration of revisions of Statement
away the punch bowl. And so we are
140], representatives of the ASF have met
on numerous occasions with FASB board
proposing eliminating the concept of a
members and staff, as well as accounting
staff of the SEC and the bank regulatory
41 Floyd Norris, “Off-the-balance-sheet
agencies, to present industry views and
mysteries,” International Herald Tribune,
recommendations concerning these
February. 28, 2008, available at:
proposed accounting standards and their
<http://www.iht.com/articles/2008/02/28/bu
impact on securitization market activities.”);
siness/norris29.php>.
George P. Miller, Executive Director,
42 FASB and International Accounting Standards
American Securitization Forum, and Randy
Board, “Information for Observers,” April
Snook, Senior Managing Director, Securities
21, 2008, available at:
Industry and Financial Markets Association,
<www.iasplus.com/resource/0804j03obs.pdf
letter to Financial Accounting Standards
>.
Board, July 16, 2008, available at:
43 See Thomas Selling, “FAS 140: Let’s Call the
<http://www.americansecuritization.com/sto
Whole Thing Off,” August 11, 2008,
ry.aspx?id=2906>. (Arguing for delay of
available at:
new rules until 2010, and contending that “It
<http://accountingonion.typepad.com/theacc
is also important to remember that too much
ountingonion/2008/08/fas-140-lets-
consolidation of SPEs can be just as
ca.html>.
confusing to users of financial statements as
38
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industry and Wall Street lobbyists argue that
disclosure of too much information will
confuse investors. These lobby efforts are
meeting with success,47 in part because of
the likelihood that forcing banks to
recognize their off-balance sheet losses will
reveal them to be insolvent.
■ ■ ■
too little.”); John A. Courson, Chief
Operating Officer, Mortgage Bankers
Association, letter to Financial Accounting
Standards Board, October 31, 2008,
available at:
<http://www.mbaa.org/files/Advocacy/Testi
monyandCommentLetters/MBACommentLe
tter-10-31-2008-
AmendmentstoFASBInterpretationNo.46R.p
df>. (“MBA believes the proposed
disclosures would result in providing readers
of financial statements with an unnecessary
volume of data that would obfuscate
important and meaningful information in the
financial statements.”)
47 Jody Shenn and Ian Katz, “FASB Postpones
Off-Balance-Sheet Rule for a Year,”
Bloomberg, July 30, 2008, available at:
<http://www.bloomberg.com/apps/news?pid
=20601009&sid=a4O4VjK.fX5Q&>. (“The
Financial Accounting Standards Board
postponed a measure, opposed by Citigroup
Inc. and the securities industry, forcing
banks to bring off-balance-sheet assets such
as mortgages and credit-card receivables
back onto their books. FASB, the Norwalk,
Connecticut-based panel that sets U.S.
accounting standards, voted 5-0 today to
delay the rule change until fiscal years
starting after Nov. 15, 2009.”)
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39
THE EXECUTIVE BRANCH
financial derivatives represent “weapons of
mass financial destruction” because “[l]arge
REJECTS FINANCIAL
amounts of risk, particularly credit risk, have
3 DERIVATIVE REGULATION become concentrated in the hands of rela-
tively few derivatives dealers” so that “[t]he
IN THIS SECTION:
troubles of one could quickly infect the
Financial derivatives are unregulated. By all
others” and “trigger serious systemic prob-
accounts this has been a disaster, as Warren
lems.”48
Buffet’s warning that they represent “weap-
A financial derivative is a financial in-
ons of mass financial destruction” has
strument whose value is determined by the
proven prescient. Financial derivatives have
value of an underlying financial asset, such
amplified the financial crisis far beyond the
as a mortgage contract, stock or bond, or by
unavoidable troubles connected to the
financial conditions, such as interest rates or
popping of the housing bubble.
currency values. The value of the contract is
The Commodity Futures Trading
determined by fluctuations in the price of
Commission (CFTC) has jurisdiction over
futures, options and other derivatives con-
the underlying asset. Most derivatives are
nected to commodities. During the Clinton
characterized by high leverage, meaning
administration, the CFTC sought to exert
they are bought with enormous amounts of
regulatory control over financial derivatives.
borrowed money.
The agency was quashed by opposition from
Derivatives are not a recent invention.
Treasury Secretary Robert Rubin and, above
all, Fed Chair Alan Greenspan. They chal-
48 Warren Buffett, Chairman, Berkshire Hatha-
lenged the agency’s jurisdictional authority;
way, Report to Shareholders, February 21,
2003. Wrote Buffet: “Another problem
and insisted that CFTC regulation might
about derivatives is that they can exacerbate
imperil existing financial activity that was
trouble that a corporation has run into for
completely unrelated reasons. This pile-on
already at considerable scale (though
effect occurs because many derivatives con-
nowhere near present levels). Then-Deputy
tracts require that a company suffering a
credit downgrade immediately supply col-
Treasury Secretary Lawrence Summers told
lateral to counterparties. Imagine, then, that
Congress that CFTC proposals “cas[t] a
a company is downgraded because of gen-
eral adversity and that its derivatives in-
shadow of regulatory uncertainty over an
stantly kick in with their requirement, im-
otherwise thriving market.”
posing an unexpected and enormous demand
for cash collateral on the company. The need
to meet this demand can then throw the
company into a liquidity crisis that may, in
Over-the-counter financial derivatives are
some cases, trigger still more downgrades. It
unregulated. By all accounts, this has been a
all becomes a spiral that can lead to a corpo-
rate meltdown.” Available at:
disaster. As Warren Buffett warned in 2003,
<http://www.berkshirehathaway.com/letters/
2002pdf.pdf>.
40
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Traditional, non-financial derivatives in-
such as an insurance company like AIG,
clude futures contracts traded on exchanges
which agrees to become liable for all the
such as the Chicago Mercantile Exchange,
debt in the event of a default in the mort-
and regulated by the Commodity Futures
gage-backed securities. Wall Street wunder-
Trading Commission. A traditional futures
kinds with backgrounds in complex mathe-
contract might include, for example, futures
matics and statistics developed algorithms
on oranges, where buyers and sellers agree
that they claimed allowed them to correctly
to deliver or accept delivery of a specified
price the risk and the CDSs.49
number of oranges at some point in the
Banks and hedge funds also began to
future, at a price determined now, irrespec-
sell CDSs and even trade them on Wall
tive of the price for oranges at that future
Street. Billions in these “insurance policies”
time. This kind of futures contract can help
were traded every day, with traders essen-
farmers and others gain some price certainty
tially betting on the likelihood of default on
for commodities whose value fluctuates in
mortgage-backed securities. CDS traders
uncertain ways. Over-the-counter (OTC)
with no financial interest in the underlying
financial derivatives, by contrast, are negoti-
mortgages received enormous profits from
ated and traded privately (not on public
buying and selling CDS contracts and thus
exchanges) and are not subjected to public
speculating on the likelihood of default.
disclosure, government supervision or other
The current financial crisis has exposed
requirements applicable to those traded on
how poorly the sellers and the buyers under-
exchanges.
stood the value of the derivatives they were
trading.
Derivatives and the current financial crisis
Once home values stopped rising in
In the 1990s, the financial industry began to
2006 and mortgage default became more
develop increasingly esoteric types of de-
commonplace, the value of the packages of
rivatives. One over-the-counter derivative
mortgages known as mortgage-backed
that has exacerbated the current financial
securities plunged. At that point, the CDS
crisis is the credit default swap (CDS).
agreements called for the sellers of the
CDSs were invented by major banks in the
CDSs to reimburse the purchasers for the
mid-1990s as a way to insure against possi-
losses in the mortgage-backed securities.
ble default by debtors (including mortgage
holders). Investment banks that hold mort-
49 Lewis Braham, “Credit Default Swaps: Is
Your Fund at Risk?” BusinessWeek, Febru-
gage debt, including mortgage-backed
ary 21, 2008, available at:
securities, can purchase a CDS from a seller,
<http://www.businessweek.com/magazine/c
ontent/08_09/b4073074480603.htm>.
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41
Firms that had sold CDS contracts, like
banks might have to pay some money out,
AIG, became responsible for posting billions
but they would also be getting money back
of dollars in collateral or paying the pur-
in. So, while the total value of each CDS
chasers.
buy and sell order equaled
The global market
$60 trillion in 2007, the
The value of the entire global
value of CDS contracts
actual value at risk was a
derivatives market reached
(“notional value”) reached
fraction of that — but still
over $60 trillion in 2007,
$683 tril ion by mid-2008,
large enough to rock the
surpassing
the
gross
financial markets.
more than 20 times the total
domestic product of every
The insurance giant
value of the U.S. stock
country in the world
AIG, however, did not buy
combined. The value of
market.
CDS contracts — it only
the entire global deriva-
sold them. AIG issued $440
tives market reached $683 trillion by mid-
billion53 worth of such contracts, making it
2008, more than 20 times the total value of
liable for loan defaults, including billions in
the U.S. stock market.50
mortgage-backed securities that went bad
The total dollars actively at risk from
after the housing bubble burst. In addition,
CDSs is a staggering $3.1 trillion.51 The
the company’s debt rating was downgraded
amount at risk is far less than $60 trillion
by credit rating firms, a move that triggered
because most investors were simultaneously
a clause in its CDS contracts that required
“on both sides” of the CDS trade. For exam-
AIG to put up more collateral to guarantee
ple, banks and hedge funds would buy CDS
its ability to pay. Eventually, AIG was unable
protection on the one hand and then sell
to provide enough collateral or pay its obliga-
CDS protection on the same security to
tions from the CDS contracts. Its stock price
someone else at the same time.52 When a
tumbled, making it impossible for the firm to
mortgage-backed security defaulted, the
attract investors. Many banks throughout the
world were at risk because they had bought
50 Bureau of International Settlements, Table 19:
CDS contracts from AIG. The financial spiral
Amounts Outstanding of Over-the-counter
Derivatives, available at:
downward ultimately required a taxpayer-
<www.bis.org/statistics/derstats.htm>.
51
financed bailout by the Federal Reserve,
Bureau of International Settlements, Table 19:
Amounts Outstanding of Over-the-counter
which committed $152.5 billion to the com-
Derivatives, available at:
<www.bis.org/statistics/derstats.htm>.
52 Adam Davidson, “How AIG fell apart,”
53 Adam Davidson, “How AIG fell apart,”
Reuters, September 18, 2008, available at:
Reuters, September 18, 2008, available at:
<http://www.reuters.com/article/newsOne/id
<http://www.reuters.com/article/newsOne/id
USMAR85972720080918>.
USMAR85972720080918>.
42
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pany in 2008, in order to minimize “disruption
Arthur Levitt, Treasury Secretary Robert
to the financial markets.”54
Rubin and Federal Reserve Chair Alan
Greenspan, all of whom felt that the finan-
Federal Agencies Reject Regulation of
cial industry was capable of regulating itself.
Financial Derivatives.
An April 1998 meeting of the President’s
Some industry observers warned of the
Working Group on Financial Markets,
dangers of over-the-counter derivatives. But
which consisted of Levitt, Greenspan, Rubin
acceding to political pressure from the
and Born, turned into a standoff between the
powerful financial industry, the federal
three men and Born. The men were deter-
agencies with the responsibility to safeguard
mined to derail her efforts to regulate de-
the integrity of the financial system refused
rivatives, but left the meeting without any
to permit regulation of financial deriva-
assurances.57
tives,55 especially the credit default swaps
Pressing back against her critics, Born
that have exacerbated the current financial
published a CFTC concept paper in 1998
meltdown.
describing how the derivatives sector might
In 1996, President Clinton appointed
be regulated. Born framed the CFTC’s
Brooksley Born chair of the Commodity
interest in mild terms: “The substantial
Futures Trading Commission (CFTC).56 The
changes in the OTC derivatives market over
CFTC is an independent federal agency with
the past few years require the Commission
the mandate to regulate commodity futures
to review its regulations,” said Born. “The
and option markets in the United States.
Commission is not entering into this process
Born was outspoken and adamant about
with preconceived results in mind. We are
the need to regulate the quickly growing but
reaching out to learn the views of the public,
largely opaque area of financial derivatives.
the industry and our fellow regulators on the
She found fierce opposition in SEC Chair
appropriate regulatory approach to today’s
OTC derivatives marketplace.”58
54 Erik Holm, “AIG Sells Mortgage-Backed
Securities to Fed Vehicle,” Bloomberg.com,
57 Anthony Faiola, Ellen Nakashima and Jill
December 15, 2008.
Drew, “The Crash: What Went Wrong,” The
55 Exchange-traded and agricultural derivatives
Washington Post, October 15, 2008, avail-
are generally regulated by the Commodity
able at:
Futures Trading Commission (CFTC). Over-
<http://www.washingtonpost.com/wp-
the-counter financial derivatives — not
dyn/content/story/2008/10/14/ST200810140
traded on an exchange — were and are not
3344.html>.
subject to CFTC jurisdiction. This report
58 CFTC Issues Concept Release Concerning
primarily uses the shorthand term “financial
Over-the-Counter Derivatives Market, May
derivative” to reference over-the-counter fi-
7, 1998, available at:
nancial derivatives.
<http://www.cftc.gov/opa/press98/opa4142-
56 <http://www.cftc.gov/anr/anrcomm98.htm>
98.htm>.
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43
The publication described the growth of
Among the proposals floated in the con-
derivatives trading (“Use of OTC deriva-
cept paper were the following measures:61
tives has grown at very substantial rates over
• Narrow or eliminate exemptions for
the past few years,” to a notional value of
financial derivatives from the regu-
more than $28 trillion) and raised questions
lations that applied to exchange-
about financial derivatives rather than
traded derivatives (such as for agri-
proposed specific regulatory initiatives.
cultural commodities);
But the concept paper was clear that the
• Require financial derivatives to be
CFTC view was that the unrestrained growth
traded over a regulated exchange;
of financial derivatives trading posed serious
• Require registration of person or en-
risks to the financial system, and its probing
tities trading financial derivatives;
questions suggested a range of meaningful
• Impose capital requirements on
regulatory measures — measures which, if
those engaging in financial deriva-
they had been adopted, likely would have
tives trading (so that they would be
reduced the severity of the present crisis.
required to set aside capital against
“While OTC derivatives serve impor-
the risk of loss, and to avoid exces-
tant economic functions, these products, like
sive use of borrowed money); and
any complex financial instrument, can
• Require issuers of derivatives to
present significant risks if misused or mis-
disclose the risks accompanying
understood by market participants,” the
those instruments.
CFTC noted.59 “The explosive growth in the
The uproar from the financial industry
OTC market in recent years has been ac-
was immediate. During the next two months,
companied by an increase in the number and
industry lobbyists met with CFTC commis-
size of losses even among large and sophis-
sioners at least 13 times.62 Meanwhile, Born
ticated users which purport to be trying to
faced off against Greenspan and others in
hedge price risk in the underlying cash
markets.”60
61 Commodity Futures Trading Commission,
Concept Release: Over-the-Counter Deriva-
tives, May 7, 1998, available at:
59 Commodity Futures Trading Commission,
<http://www.cftc.gov/opa/press98/opamntn.
Concept Release: Over-the-Counter Deriva-
htm#issues_for_comment>.
tives, May 7, 1998, available at:
62 Sharona Coutts and Jake Bernstein, “Former
<http://www.cftc.gov/opa/press98/opamntn.
Clinton Official Says Democrats, Obama
htm#issues_for_comment>.
Advisers Share Blame for Market Melt-
60 Commodity Futures Trading Commission,
down,” ProPublica, October 9, 2008, avail-
Concept Release: Over-the-Counter Deriva-
able at:
tives, May 7, 1998, available at:
<http://www.propublica.org/feature/former-
<http://www.cftc.gov/opa/press98/opamntn.
clinton-official-says-democrats-obama-
htm#issues_for_comment>.
advisers-share-blame-for-marke/>.
44
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numerous antagonistic congressional hear-
thriving market “65
ings. Senator Richard Lugar, R-Indiana,
Federal Reserve Chair Alan Greenspan
chair of the Senate Agricultural Committee,
echoed the Treasury Department view, argu-
stepped into the fray.
ing that regulation would be
Lugar,
who
received
both unnecessary and harm-
Lawrence Summers com-
nearly $250,000 in cam-
ful. “Regulation of deriva-
plained that a proposal to
paign contributions from
tives transactions that are
securities and investment
regulate derivatives “cast a
privately
negotiated
by
firms in 1998,63 extended
professionals is unnecessary.
shadow of regulatory un-
an ultimatum to Born:
Regulation that serves no
certainty over an otherwise
cease the campaign or
useful purpose hinders the
Congress would pass a
thriving market.”
efficiency of markets to
Treasury-backed bill that
enlarge standards of liv-
would put a moratorium
ing.”66
on any further CFTC action.64 The stalemate
In September 1998, Long Term Capital
continued.
Management, a hedge fund heavily focused
The Treasury Department weighed in
on derivatives, informed the Fed it was on
with its view that derivatives should remain
the brink of collapse, and couldn’t cover $4
unregulated. President Clinton’s then-Deputy
billion in losses.67 The New York Federal
Treasury Secretary, Lawrence H. Summers
Reserve quickly recruited 14 private banks
(now head of the Obama administration’s
to bail out Long Term Capital by investing
National Economic Council), complained
$3.6 billion.68
that Born’s proposal “cast the shadow of
regulatory uncertainty over an otherwise
65 Lawrence H. Summers, Testimony Before the
Senate Committee on Agriculture, Nutrition,
63 Center for Responsive Politics,
and Forestry, July 30, 1998, available at:
<http://www.opensecrets.org/politicians/ind
<http://www.ustreas.gov/press/releases/rr26
ustries.php?cycle=1998&cid=N00001764>.
16.htm>.
64 Senator Richard Lugar, “Regulation of Over
66 Alan Greenspan, “Regulation of Over the
the Counter (OTC) Derivatives and Deriva-
Counter (OTC) Derivatives and Derivatives
tives Markets,” Hearing of the Senate Agri-
Markets,” Hearing of the Senate Agricul-
culture, Nutrition and Forestry Committee,
ture, Nutrition and Forestry Committee, July
July 30, 1998 (“[I]t is essential that the gov-
30, 1998.
ernment not create legal uncertainty for
67 Anthony Faiola, Ellen Nakashima and Jill
swaps. I hope it will not be necessary, but
Drew, “The Crash: What Went Wrong,” The
there are circumstances that could compel
Washington Post, October 15, 2008, avail-
Congress to act preemptively in the near
able at:
term.”) For a full account of the dispute, see:
<http://www.washingtonpost.com/wp-
<http://www.washingtonpost.com/wp-
dyn/content/story/2008/10/14/ST200810140
dyn/content/story/2008/10/14/ST200810140
3344.html>.
3344.html>.
68 Sharona Coutts and Jake Bernstein, “Former
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45
“This episode should serve as a wake-up
(whom Clinton had appointed Treasury
call about the unknown risks that the over-
Secretary) and Levitt’s campaign to block
the-counter derivatives market may pose to
any CFTC regulation. In November 1999,
the U.S. economy and to financial stability
the inter-agency President’s Working Group
around the world,” Born told the House
on Financial Markets released a new report
Banking Committee two days later. “It has
on derivatives recommending no regulation,
highlighted an immediate and pressing need
saying it would “perpetuate legal uncertainty
to address whether there are unacceptable
or impose unnecessary regulatory burdens
regulatory gaps relating to hedge funds and
and constraints upon the development of
other large OTC derivatives market partici-
these markets in the United States.”71
pants.”69 But what should have been a
Among other rationalizations for this non-
moment of vindication for Born was swept
regulatory posture, the report argued, “the
aside by her adversaries, and Congress
sophisticated counterparties that use OTC
enacted a six-month moratorium on any
derivatives simply do not require the same
CFTC action regarding derivatives or the
protections” as retail investors.72 The report
swaps market.70 (Permanent congressional
briefly touched upon, but did not take seri-
action would soon follow, as the next sec-
ously, the idea that financial derivatives
tion details.) In May 1999, Born resigned in
posed overall financial systemic risk. To the
frustration.
extent that such risk exists, the report con-
Born’s replacement, William Rainer,
cluded, it was well addressed by private
went along with Greenspan, Summers
parties: “private counterparty discipline
currently is the primary mechanism relied
Clinton Official Says Democrats, Obama
upon for achieving the public policy objec-
Advisers Share Blame for Market Melt-
down,” ProPublica, October 9, 2008, avail-
tive of reducing systemic risk. Government
able at:
regulation should serve to supplement,
<http://www.propublica.org/feature/former-
clinton-official-says-democrats-obama-
rather than substitute for, private market
advisers-share-blame-for-marke/>.
69 Brooksley Born, CFTC Chair, Testimony
Before the House Committee on Banking
71 The President’s Working Group on Financial
and Financial Services, October 1, 1998,
Markets, “Over-the-Counter Derivatives
available at:
Markets and the Commodity Exchange
<http://financialservices.house.gov/banking/
Act,” November 1999, available at:
10198bor.pdf>.
<http://www.treas.gov/press/releases/reports
70 Anthony Faiola, Ellen Nakashima and Jill
/otcact.pdf>.
Drew, “The Crash: What Went Wrong,” The
72 The President’s Working Group on Financial
Washington Post, October 15, 2008, avail-
Markets, “Over-the-Counter Derivatives
able at:
Markets and the Commodity Exchange
<http://www.washingtonpost.com/wp-
Act,” November 1999, available at:
dyn/content/story/2008/10/14/ST200810140
<http://www.treas.gov/press/releases/reports
3344.html>.
/otcact.pdf>.
46
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discipline. In general, private counterparty
credit risk management has been employed
effectively by both regulated and unregu-
lated dealers of OTC derivatives, and the
tools required by federal regulators already
exist.”73
■ ■ ■
73 The President’s Working Group on Financial
Markets, “Over-the-Counter Derivatives
Markets and the Commodity Exchange
Act,” November 1999, available at:
<http://www.treas.gov/press/releases/reports
/otcact.pdf>.
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47
CONGRESS BLOCKS
bipartisan affair and inaction ruled the day.76
In 2000, a year after the outspoken
FINANCIAL DERIVATIVE
Brooksley Born left the Commodity Futures
4 REGULATION
Trading Commission (CFTC), Congress and
President Clinton codified regulatory inac-
IN THIS SECTION:
tion with passage of the Commodity Futures
The deregulation — or non-regulation — of
Modernization Act (CFMA).77 The legisla-
financial derivatives was sealed in 2000,
tion included an “Enron loophole,” which
with the Commodities Futures Modernization
prohibited regulation of energy futures
Act (CFMA), passage of which was engi-
contracts and thereby contributed to the
neered by then-Senator Phil Gramm, R-
collapse of scandal-ridden Enron in 2001.
Texas. The Commodities Futures Moderniza-
CFMA formally exempted financial de-
tion Act exempts financial derivatives,
rivatives, including the now infamous credit
including credit default swaps, from regula-
default swaps, from regulation and federal
tion and helped create the current financial
government oversight. One Wall Street
crisis.
analyst later noted that the CFMA “was
Long before financial derivatives became
slipped into the [budget] bill in the dead of
the darlings of Wall Street, there were some
night by our old friend Senator Phil Gramm
in Congress who believed that the federal
of Texas — now Vice Chairman of [Swiss
government should be given greater power
investment bank] UBS.”78 Gramm led the
to regulate derivatives.
congressional effort to block federal agen-
In 1994, Senator Donald Riegle, D-
cies from regulating derivatives, complain-
Michigan, and Representative Henry Gon-
ing that “[b]anks are already heavily regu-
zalez, D-Texas, introduced separate bills
lated institutions.”79 Gramm predicted
calling for derivatives regulation;74 both
76
went nowhere.75 Opposing regulation was a
The action that Congress did take — the six-
month moratorium on CFTC regulation de-
scribed in the previous section — cut against
the need for regulation.
74 The Derivatives Supervision Act of 1994, in
77 Pub. L. No. 106-554, Appendix E, amending
the Senate; the Derivatives Safety and
the Commodity Exchange Act, 7 U.S.C. § 1
Soundness Supervision Act of 1994, in the
et. seq.
House.
78 Dirk van Dijk, “Credit Default Swaps Ex-
75 Anthony Faiola, Ellen Nakashima and Jill
plained,” Zacks Investment Research, Sep-
Drew, “The Crash: What Went Wrong,” The
tember 24, 2008, available at:
Washington Post, October 15, 2008, avail-
<http://www.zacks.com/stock/news/14884/
able at:
Credit+Default+Swaps+Explained>.
<http://www.washingtonpost.com/wp-
79 Sen. Phil Gramm, 106th Congress, 2nd Ses-
dyn/content/story/2008/10/14/ST200810140
sion, 146 Cong. Rec. S. 11867, December
3344.html>.
15, 2000, available at:
48
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CFMA “will be noted as a major achieve-
else’s to substantiate it. … The markets have
ment” and “as a watershed, where we turned
worked better than you might have
away from the outmoded, Depression-era
thought.”83
approach to financial regulation.”80 He said
Others have a more reality-based view.
the legislation “protects financial institutions
Former SEC Commissioner Harvey J.
from over-regulation, and provides legal
Goldschmid, conceded that “in hindsight,
certainty for the $60 trillion market in
there’s no question that we would have been
swaps”81 — in other words, it offered a
better off if we had been regulating deriva-
guarantee that they would not be regulated.
tives.”84
By 2008, Gramm’s UBS was reeling
While credit default swaps are not the
from the global financial crisis he had
underlying cause of the financial crisis, they
helped create. The firm declared nearly $50
dramatically exacerbated it. As mortgages
billion in credit losses and write-downs,
and mortgage-backed securities plummeted
prompting a $60 billion bailout by the Swiss
in value from declining real estate values,
government.82
big financial firms were unable to meet their
Senator Gramm remains defiant today,
insurance obligations under their credit
telling the New York Times, “There is this
default swaps.
idea afloat that if you had more regulation
Another action by Congress must be
you would have fewer mistakes. I don’t see
mentioned here. In 1995, bowing to the
any evidence in our history or anybody
financial lobby after years of lobbying,
Congress passed the Private Securities
<http://frwebgate.access.gpo.gov/cgi-
Litigation Reform Act.85 The measure
bin/getpage.cgi?position=all&page=S11867
&dbname=2000_record>.
greatly restricted the rights of investors to
80 Sen. Phil Gramm, 106th Congress, 2nd Ses-
sion, 146 Cong. Rec. S. 11868, December
sue Wall Street trading, accounting and
15, 2000, available at:
investment firms for securities fraud. The
<http://frwebgate.access.gpo.gov/cgi-
bin/getpage.cgi?position=all&page=S11868
author of the legislation was Representative
&dbname=2000_record>.
81 106th Congress, 2nd Session, 146 Cong. Rec.
S. 11866, Dec. 15, 2000, available at:
83 Eric Lipton and Stephen Labaton, “Deregula-
<http://frwebgate.access.gpo.gov/cgi-
tor Looks Back, Unswayed,” New York
bin/getpage.cgi?position=all&page=S11866
Times, November 16, 2008, available at:
&dbname=2000_record>.
<http://www.nytimes.com/2008/11/17/busin
82 Eric Lipton and Stephen Labaton, “The
ess/economy/17gramm.html?pagewanted=al
Reckoning: Deregulator Looks Back, Un-
l>
swayed,” New York Times, November 16,
84 “The Crash: What Went Wrong?” Washington
2008, available at:
Post website, Undated, available at:
<http://www.nytimes.com/2008/11/17/busin
<http://www.washingtonpost.com/wp-
ess/econ-
srv/business/risk/index.html?hpid=topnews>
omy/17gramm.html?_r=1&pagewanted=1&
.
em>.
85 15 U.S.C. § 78u-4.
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49
Christopher Cox, R-California, who Presi-
derstands it. The lesson that we are learning
dent Bush later appointed Chair of the
is that the heads of these firms turn a blind
Securities and Exchange Commission.
eye, because the profits are so great from
In the debate over the bill in the House
these products that, in fact, the CEOs of the
of Representatives, Representative Ed
companies do not even want to know how it
Markey, D-Massachusetts, proposed an
happens until the crash.”
amendment that would have exempted
Representative Cox led the opposition
financial derivatives from the Private Secu-
to the Markey amendment. He was able to
rities Litigation Reform Act.86 Markey
cite the opposition of Alan Greenspan, chair
anticipated many of the problems that would
of the Federal Reserve, and President Clin-
explode a decade later: “All of these prod-
ton’s SEC Chair Arthur Levitt. He quoted
ucts have now been sent out into the Ameri-
Greenspan saying that “singling out deriva-
can marketplace, in many instances with the
tive instruments for special regulatory
promise that they are quite safe for a mu-
treatment” would be a “serious mistake.” He
nicipality to purchase. … The objective of
also quoted Levitt, who warned, “It would
the Markey amendment out here is to ensure
be a grave error to demonize derivatives.”87
that investors are protected when they are
The amendment was rejected. The
misled into products of this nature, which by
specter of litigation is a powerful deterrent
their very personality cannot possibly be
to wrongdoing. The Private Securities
understood by ordinary, unsophisticated
Litigation Reform Act weakened that deter-
investors. By that, I mean the town treasur-
rent — including for derivatives — and
ers, the country treasurers, the ordinary
today makes it more difficult for defrauded
individual that thinks that they are sophisti-
investors to seek compensation for their
cated, but they are not so sophisticated that
losses.
they can understand an algorithm that
stretches out for half a mile and was con-
■ ■ ■
structed only inside of the mind of this 26-
or 28-year-old summa cum laude in mathe-
matics from Cal Tech or from MIT who
constructed it. No one else in the firm un-
86 Rep. Edward Markey, 104th Congress 1st
87 Rep. Christopher Cox, 104th Congress 1st
Session, 141 Cong. Rec. H. 2826, March 8,
Session, 141 Cong. Rec. H. 2828, March 8,
1995, available at:
1995, available at:
<http://frwebgate.access.gpo.gov/cgi-
<http://frwebgate.access.gpo.gov/cgi-
bin/getpage.cgi?dbname=1995_record&pag
bin/getpage.cgi?position=all&page=H2828
e=H2826&position=all>.
&dbname=1995_record>.
50
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THE SEC’S VOLUNTARY
Until the current financial crisis, investment
banks regularly borrowed funds to purchase
REGULATION REGIME FOR
securities and debt instruments. A “highly
5 INVESTMENT BANKS leveraged” financial institution is one that
owns financial assets that it acquired with
IN THIS SECTION:
substantial amounts of borrowed money.
In 1975, the SEC’s trading and markets
The Securities and Exchange Commission
division promulgated a rule requiring
(SEC) prohibited broker-dealers (i.e. stock
investment banks to maintain a debt-to-net-
brokers and investment banks) from exceed-
capital ratio of less than 12 to 1. It forbid
ing established limits on the amount of
trading in securities if the ratio reached or
borrowed money used for buying securities.
exceeded 12 to 1, so most companies main-
Investment banks that accrued more than 12
tained a ratio far below it. In 2004, however,
dollars in debt for every dollar in bank
the SEC succumbed to a push from the big
capital (their “net capital ratio”) were pro-
investment banks — led by Goldman Sachs,
hibited from trading in the stock market.88
and its then-chair, Henry Paulson — and
authorized investment banks to develop their
As a result, the five major Wall Street
own net capital requirements in accordance
investment banks maintained net capital
with standards published by the Basel
ratios far below the 12 to 1 limit. The rule
Committee on Banking Supervision. This
also required broker-dealers to maintain a
essentially involved complicated mathemati-
designated amount of set-aside capital based
cal formulas that imposed no real limits, and
on the riskiness of their investments; the
was voluntarily administered. With this new
riskier the investment, the more they would
freedom, investment banks pushed borrowing
need to set aside. This limitation on accruing
ratios to as high as 40 to 1, as in the case of
debt was designed to protect the assets of
Merrill Lynch. This super-leverage not only
customers with funds held or managed by
made the investment banks more vulnerable
when the housing bubble popped, it enabled
the stock broker or investment bank, and to
the banks to create a more tangled mess of
ensure that the broker or investment bank
derivative investments — so that their
could meet its contractual obligations to
individual failures, or the potential of failure,
other firms.89 The rule was adopted by the
became systemic crises. Former SEC Chair
Chris Cox has acknowledged that the volun-
88 17 C.F.R. § 240, 15c3-1.
89
tary regulation was a complete failure.
“Toxic Waste Build Up: How Regulatory
Changes Let Wall Street Make Bigger Risky
Bets,” An Interview with Lee Pickard, Mul-
tinational Monitor, November/December
2008, available at:
<http://www.multinationalmonitor.org/mm2
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51
SEC under the general regulatory authority
The SEC’s new policy, foreseeably, en-
granted by Congress when it established the
abled investment banks to make much
SEC to regulate the financial industry in
greater use of borrowed funds. The top five
1934 as a key reform in
investment banks partici-
the aftermath of the 1929
pated in the SEC’s volun-
The SEC’s Inspector General
crash.
tary program: Bear Steams,
concluded that “it is undis-
In 2004, the SEC
Goldman Sachs, Morgan
abolished its 19-year old
putable” that the SEC “failed
Stanley, Merrill Lynch and
“debt-to-net-capital rule”
Lehman Brothers. By 2008,
to carry out its mission in
in favor of a voluntary
these firms had borrowed
its oversight of Bear
system
that
allowed
20, 30 and 40 dollars for
investment
banks
to
Stearns,” which col apsed in
each dollar in capital, far
formulate
their
own
exceeding the standard 12 to
2008 under massive
“rule.”90 Under this new
1 ratio. Much of the bor-
mortgage-backed securities
scheme, large investment
rowed funds were used to
banks would assess their
losses.
purchase billions of dollars
level of risk based on
in
subprime-related
and
their own risk management computer mod-
other mortgage-backed securities (MBSs)
els. The SEC acted at the urging of the big
and their associated derivatives, including
investment banks led by Goldman Sachs,
credit default swaps. The securities were
which was then headed by Henry M. Paul-
purchased at a time when real estate values
son Jr., who would become Treasury secre-
were skyrocketing and few predicted an end
tary two years later, and was the architect of
to the financial party. As late as the March
the Bush administration’s response to the
2008 collapse of Bear Stearns, SEC Chair
current financial debacle: the unprecedented
Christopher Cox continued to support the
taxpayer bailout of banks, investment firms,
voluntary program: “We have a good deal of
insurers and others. After a 55-minute
comfort about the capital cushions at these
discussion, the SEC voted unanimously to
firms at the moment,” he said.92
abolish the rule.91
Banks Pile Up New Debt,” New York
008/112008/interview-pickard.html>.
Times, October 2, 2008, available at:
90 Final Rule: Alternative Net Capital Require-
<http://www.nytimes.com/2008/10/03/busin
ments for Broker-Dealers that are Part of
ess/03sec.html?_r=1>.
Consolidated Entities, 17 C.F.R. §§ 200 and
92 Stephen Labaton, “Agency’s ’04 Rule Let
240 (2004). Available at:
Banks Pile Up New Debt,” New York
<www.sec.gov/rules/final/34.49830.htm>.
Times, October 2, 2008, available at:
91 Stephen Labaton, “Agency’s ’04 Rule Let
<http://www.nytimes.com/2008/10/03/busin
52
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The SEC had abolished the net capital
had numerous shortcomings, including lack
rule with the caveat that it would continue
of expertise by risk managers in mortgage-
monitoring the banks for financial or opera-
backed securities” and “persistent under-
tional weaknesses. But a 2008 investigation
staffing; a proximity of risk managers to
by the SEC’s Inspector General (IG) found
traders suggesting a lack of independence;
that the agency had neglected its oversight
turnover of key personnel during times of
responsibilities. The IG concluded that “it is
crisis; and the inability or unwillingness to
undisputable” that the SEC “failed to carry
update models to reflect changing circum-
out its mission in its oversight of Bear
stances.” Notwithstanding this knowledge,
Stearns,” which collapsed in 2008 under
the SEC “missed opportunities to push Bear
massive mortgage-backed securities losses,
Steams aggressively to address these identi-
leading the Federal Reserve to intervene
fied concerns.”
with taxpayer dollars “to prevent significant
The much-lauded computer models and
harm to the broader financial system.” The
risk management software that investment
IG said the SEC “became aware of numer-
banks used in recent years to calculate risk
ous potential red flags prior to Bear Stearns’
and net capital ratios under the SEC’s volun-
collapse,” including its concentration of
tary program had been overwhelmed by
mortgage securities and high leverage, “but
human error, overly optimistic assumptions,
did not take actions to limit these risk fac-
including that the housing bubble would not
tors.” Moreover, concluded the IG, the SEC
burst, and a failure to contemplate system-
“was aware ... that Bear Stearns’ concentra-
wide asset deflation. Similar computer
tion of mortgage securities was increasing
models failed to prevent the demise of
for several years and was beyond its internal
Long-Term Capital Management, a heavily
limits.” Nevertheless, it “did not make any
leveraged hedge fund that collapsed in 1998,
efforts to limit Bear Stearns’ mortgage
and the stock market crash of October
securities concentration.” The IG said the
1987.93 The editors at Scientific American
SEC was “aware that Bear Stearns’ leverage
magazine lambasted the SEC and the in-
was high;” but made no effort to require the
vestment banks for their “[o]verreliance on
firm to reduce leverage “despite some
financial software crafted by physics and
authoritative sources describing a linkage
between leverage and liquidity risk.” Fur-
93 Stephen Labaton, “Agency’s ’04 Rule Let
thermore, the SEC “became aware that risk
Banks Pile Up New Debt,” New York
Times, October 2, 2008 (citing Leonard D.
management of mortgages at Bear Stearns
Bole, software consultant), available at:
<http://www.nytimes.com/2008/10/03/busin
ess/03sec.html?_r=1>.
ess/03sec.html?_r=1>.
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53
math Ph.D.s.”94
By the fall of 2008, the number of ma-
jor investment banks on Wall Street dropped
from five to zero. All five securities grants
either disappeared or became bank holding
companies in order to avail themselves of
taxpayer bailout money. JP Morgan bought
Bear Stearns, Lehman Brothers filed for
bankruptcy protection, Bank of America
announced its rescue of Merrill Lynch by
purchasing it, while Goldman Sachs and
Morgan Stanley became bank holding
companies with the Federal Reserve as their
new principal regulator.
On September 26, 2008, as the crisis
became a financial meltdown of epic propor-
tions, SEC Chair Cox, who spent his entire
public career as a deregulator, conceded “the
last six months have made it abundantly
clear that voluntary regulation does not
work.”95
■ ■ ■
94 The Editors, “After the Crash: How Software
Models Doomed the Markets,” Scientific
American, November 2008, available at:
<http://www.sciam.com/article.cfm?id=after
-the-crash>.
95 Anthony Faiola, Ellen Nakashima and Jill
Drew, “The Crash: What Went Wrong,” The
Washington Post, October 15, 2008, avail-
able at:
<http://www.washingtonpost.com/wp-
dyn/content/story/2008/10/14/ST200810140
3344.html>.
54
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BANK SELF-REGULATION
vestments. Generally, banks are required to
keep higher capital amounts in reserve in
GOES GLOBAL: PREPARING TO
order to hold assets with higher risks and,
6 REPEAT THE MELTDOWN? inversely, lower capital for lower risk assets.
In other words, banks with riskier credit
IN THIS SECTION:
exposures are required to retain more capital
In 1988, global bank regulators adopted a
to back the bank’s obligations.
set of rules known as Basel I, to impose a
In 1988, national bank regulators from
minimum global standard of capital ade-
the largest industrial countries adopted a set
quacy for banks. Complicated financial
of international banking guidelines known
maneuvering made it hard to determine
as the Basel Accords. The Basel Accords
compliance, however, which led to negotia-
determine how much capital a bank must
tions over a new set of regulations. Basel II,
hold as a cushion. Ultimately, the purpose of
heavily influenced by the banks themselves,
the Basel Accords is to prevent banks from
establishes varying capital reserve require-
creating a “systemic risk,” or a risk to the
ments, based on subjective factors of agency
ratings and the banks’ own internal risk-
financial health of the entire banking sys-
assessment models. The SEC experience with
tem. The idea of an international agreement
Basel II principles illustrates their fatal
was to level the playing field for capital
flaws. Commercial banks in the United States
regulation as among banks based in different
are supposed to be compliant with aspects of
countries.
Basel II as of April 2008, but complications
The first Basel Accords, known as
and intra-industry disputes have slowed
Basel I, did not well distinguish between
implementation.
loans involving different levels of risk. This
gave rise to two sets of problems. Banks had
Banks are inherently highly leveraged
an incentive to make riskier (and potentially
institutions, meaning they hold large
higher return) loans, because the riskier
amounts of debt compared to their net worth
loans within a given category did not require
(or equity). As a result, their debt-to-equity
more set-aside capital. For example, Basel I
(or debt-to-capital) ratios are generally
categorized all commercial loans into the 8
higher than for other types of corporations.
percent capital category — meaning 8
Regulators have therefore required banks to
percent of a bank’s capital must be set aside
maintain an adequate cushion of capital to
to hold commercial loans — even though
protect against unexpected losses, especially
not all commercial loans are equivalently
losses generated on highly leveraged in-
risky. The Basel I rules also gave banks an
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55
incentive to engage in “regulatory capital
arbitrage by establishing updated and more
arbitrage,” whereby a bank maneuvers the
granular capital standards, Basel II author-
accounting classification of a loan so that it
ized banks to use their own internal models
is classified under Basel I rules as requiring
for assessing “risk.” Critics say that under
less set-aside capital — even though the
this system, banks will be able to employ
bank’s overall risk has not diminished.
their internal risk models to transform high-
Securitization is the main method used by
risk assets into “low risk.”
banks to engage in regulatory capital arbi-
For example, where Basel I categorized
trage. Securitized loans are listed on a
all commercial loans into the 8 percent
bank’s “trading account,” which requires
capital category, internal bank models would
less set-aside capital than the “banking
have allowed for capital allocations on
book,” where loans are maintained.96
commercial loans that vary from 1 percent
To address these problems, the Basel
to 30 percent, depending on the loan’s
Committee on Banking Supervision agreed
estimated risk. The revised framework under
in 2004 to an updated bank capital accord
Basel II gives banks the leeway to lump
(Basel II), formally known as the “Interna-
commercial loans into these differing capital
tional Convergence of Capital Measurement
adequacy requirements, depending on risk as
and Capital Standards: a Revised Frame-
estimated by banks, not the regulators. Basel
work.” The Committee’s members come
II rules appear set to reduce the overall
from Belgium, Canada, France, Germany,
capital requirements for banks.97
Italy, Japan, Luxembourg, the Netherlands,
U.S. federal financial regulatory agen-
Spain, Sweden, Switzerland, the United
cies — the Federal Reserve, Office of the
Kingdom and the United States; the United
Comptroller of the Currency, the Federal
States Federal Reserve serves as a participat-
Deposit Insurance Corporation, and the
ing member.
Office of Thrift Supervision — have strug-
Rather than dealing directly with the is-
gled to find an operationally satisfactory
sue of differentiated levels of risk within
means to implement Basel II. It now appears
categories and the problem of regulatory
U.S. application will be limited to large
commercial banks only, with some Basel II
96 David Jones and John Mingo, “Industry
Practices in Credit Risk Modeling and Inter-
97 Testimony of Daniel K. Tarullo, “Hearing on
nal Capital Allocations: Implications for a
the Development of the New Basel Capital
Models-Based Regulatory Capital Stan-
Accords,” Committee on Banking, Housing
dard,” 4 FRBNY Econ. Pol’y Rev. 3, 53
and Urban Affairs, United States Senate,
(1998), available at:
November, 10 2005, available at:
<http://www.newyorkfed.org/research/epr/9
<http://banking.senate.gov/public/_files/taru
8v04n3/9810jone.pdf>.
llo.pdf>.
56
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requirements coming into effect via regula-
well above what is required to meet supervi-
tion as of April 2008.98 The Securities and
sory standards calculated using the Basel
Exchange Commission (SEC) imposed
framework and the Federal Reserve’s ‘well-
parallel requirements on Wall Street invest-
capitalized’ standard for bank holding
ment banks in 2004. Ac-
companies.”100 In other
cording to the Federal
words, Bear Stearns had
The SEC’s experience with
Reserve, Basel II is sup-
been complying with the
posed to “improve the
the Basel II approach reveals
relaxed Basel II framework
consistency
of
capital
and it still failed.
a fundamental flaw in al ow-
regulations internationally,
Proponents of Basel II
ing banks to make their own
make regulatory capital
argue that internal risk
more risk sensitive, and
risk assessments.
assessments will not be
promote enhanced risk-
cause for abuse because
management practices among large, interna-
regulators will be heavily involved via
tionally active banking organizations.”99
added oversight and disclosure. Five years
But the SEC’s experience with the
before the 2008 financial crisis, John D.
Basel II approach reveals a fundamental
Hawke, Jr., then U.S. Comptroller of the
flaw in allowing banks to make their own
Currency, lauded the Basel II standards,
risk assessments. Investment bank Bear
arguing that “some have viewed the new
Stearns collapsed in 2008 even though its
Basel II approach as leaving it up to the
own risk analysis showed it to be a sound
banks to determine their own minimum
institution. SEC Chairman Christopher Cox
capital — putting the fox in charge of the
said “the rapid collapse of Bear Stearns ...
chicken coop. This is categorically not the
challenged the fundamental assumptions
case. While a bank’s internal models and
behind the Basel standards and the other
risk assessment systems will be the starting
program metrics. At the time of its near-
point for the calculation of capital, bank
failure, Bear Stearns had a capital cushion
supervisors will be heavily involved at every
stage of the process.”101
98 Office of the Comptroller of the Currency,
“Basel II Advanced Approaches and Basel II
Standardized Approach,” undated, available
at:
100 Chairman Christopher Cox, Before the
<http://www.occ.treas.gov/law/basel.htm>.
Committee on Oversight and Government
99 Basel II Capital Accord, Basel I Initiatives,
Reform, U.S. House of Representatives, Oc-
and Other Basel-Related Matters, Federal
tober 23, 2008, available at:
Reserve Board, August 28, 2008, available
<http://oversight.house.gov/documents/2008
at:
1023100525.pdf>.
<http://www.federalreserve.gov/GeneralInfo
101 John D. Hawke, Jr., Comptroller of the
/basel2/>.
Currency, Before the Committee on Bank-
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57
But the Comptroller’s claim is not sup-
ported by the SEC’s experience. The SEC’s
Inspector General (IG) found that regulators
were anything but “heavily involved” in
oversight of Bear Stearns in the years before
its collapse. As noted above (Part I.5), the
IG concluded that “it is undisputable” that
the SEC “failed to carry out its mission in its
oversight of Bear Stearns.”
The banks’ internal risk models per-
formed horribly in the housing bubble and
subsequent meltdown. It’s hard to see the
logic of a system that would embed those
models into regulatory requirements for set-
aside capital.102
■ ■ ■
ing, Housing, and Urban Affairs, United
States Senate, June 18, 2003, available at:
<http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=108_senate_hearing
s&docid=f:94514.pdf>.
102 Steven Sloan, “Another Reason to Disagree
Over Basel,” American Banker, January 6,
2009, available at:
<http://www.aba.com/aba/documents/ICAA
P_WG/Sloan_AB_090106.pdf>. (“‘I am
most concerned that any institution that
tends to underestimate its risk exposure —
as many recently have — will be just as
likely to underestimate its capital needs if al-
lowed to operate a risk-based capital stan-
dard, such as Basel II,’ Mr. Hoenig [the
president and chief executive of the Federal
Reserve Bank of Kansas City] said. ‘Risk-
based capital standards may also encourage
institutions to lower their capital, instead of
build it up, in the prosperous times that typi-
cally precede a crisis.’”)
58
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FAILURE TO PREVENT
include high fees and charges associated
with the loan; low teaser interest rates,
PREDATORY LENDING
which skyrocket after an initial grace period;
7
and negative amortization loans, which
require, for a time, monthly payments less
than the interest due. These are, typically,
IN THIS SECTION:
unaffordable loans.
Even in a deregulated environment, the
The real-world examples of predatory
banking regulators retained authority to
lending are shocking. In one lawsuit, Albert
crack down on predatory lending abuses.
Zacholl, a 74-year-old man living in South-
Such enforcement activity would have
ern California, alleges that Countrywide and
protected homeowners, and lessened though
not prevented the current financial crisis. But
a pair of mortgage brokers “cold-called and
the regulators sat on their hands. The Fed-
aggressively baited” him. They promised
eral Reserve took three formal actions
him $30,000 cash, a mortgage that would
against subprime lenders from 2002 to 2007.
replace his previous mortgage (which was
The Office of Comptroller of the Currency,
leaving him owing more each month) and a
which has authority over almost 1,800 banks,
monthly payment that would not exceed
took three consumer-protection enforcement
$1,700. Zacholl told the brokers that his
actions from 2004 to 2006.
income consisted of a pension of $350 a
month and Social Security payments of
Subprime loans are those made to persons
$958, and that with help from his son, he
who ostensibly have a poor credit history.
could afford a mortgage up to $1,700.
Predatory loans are, to a significant extent, a
According to the lawsuit, the broker falsified
subset of subprime loans.103 A bank is
his loan application by putting down an
engaged in predatory lending when it
income of $7,000 a month, and then ar-
“tak[es] advantage of a borrower’s lack of
ranged for a high-interest mortgage that
sophistication to give them a loan whose
required him to pay more than $3,000 a
rates and terms may not be beneficial to the
month (and failed to deliver the $30,000
borrower.”104 Common predatory terms
cash payment). The motivation for the scam,
according to the lawsuit, was to collect
103 Non-prime mortgages known as Alt-A —
with riskier borrower profiles than prime
mortgages but less so than subprime — also
with Allen Fishbein, Consumer Federation
often contain predatory terms.
of America, Multinational Monitor,
104 “The Foreclosure Epidemic: The Costs to
May/June 2007, available at:
Families and Communities of the Predict-
<http://www.multinationalmonitor.org/mm2
able Mortgage Meltdown,” An interview
007/052007/interview-fishbein.html>.
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59
$13,000 in fees. In court papers, the Center
alarm bells sounded by public interest
for Responsible Lending reports, Country-
advocates.)
wide responded that Zacholl “consented to
Reviewing the record of the past seven
the terms of the transaction” and that any
years shows that:
problems were the result of his own “negli-
1. Federal regulators — and Members
gence and carelessness.”105
of Congress — were warned at the
Preventing predatory lending practices
outset of the housing bubble about
would not have prevented the housing
the growth in predatory lending, and
bubble and the subsequent financial melt-
public interest advocates pleaded
down, but it would have taken some air out
with them to take action.
of the bubble and softened the economic
2. Federal regulators — and Congress
crisis — and it would have saved millions of
— refused to issue appropriate regu-
families and communities across the country
latory rules to stem predatory lend-
from economic ruin.
ing.
Unlike the housing bubble itself, preda-
3. Action at the state level showed that
tory lending was easily avoidable through
predatory lending rules could limit
sound regulation.
abusive loans.
But federal regulators were asleep at
4. Federal regulators failed to take en-
the switch, lulled into somnolence by cozy
forcement actions against predatory
relationships with banks and Wall Street and
lenders.
a haze-inducing deregulatory ideology.
5. After the housing bubble had
Regulators were warned at the outset of
popped, and the subprime lending
the housing bubble about the growth in
industry collapsed, federal regula-
predatory lending, and public interest advo-
tors in 2008 issued new rules to
cates pleaded with them to take action. They
limit predatory practices. While
declined, refusing either to issue appropriate
highly imperfect, the new rules evi-
regulatory rules or to take enforcement
dence what might have been done in
actions against predatory lenders. (Congress
2001 to prevent abuses.
similarly failed to act in response to the
Early Warnings on Predatory Lending
105 Center for Responsible Lending, “Unfair and
Yield No Regulatory Action
Unsafe: How Countrywide’s irresponsible
practices have harmed borrowers and share-
There are only limited federal substantive
holders,” February 2008, available at:
statutory requirements regarding predatory
<http://www.responsiblelending.org/issues/
mortgage/countrywide-watch/unfair-and-
lending. These are established in the Home
unsafe.html>.
60
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Ownership and Equity Protection Act
taken.
(HOEPA), which was adopted in 1994.
“Clearly, the FDIC recognizes that
HOEPA effectively put an end to certain
there is a grave problem throughout the
predatory practices, but
U.S., particularly affecting
only for loans containing
low income and minority
Unlike the housing bubble
upfront fees or charges of
households and neighbor-
itself, predatory lending
more than 8 percent of the
hoods,” wrote the National
loan amount, or interest
was easily avoidable
Consumer Law Center and
rates above a varying, but
the Consumer Federation
through sound regulation.
very high threshold. Preda-
of America in January
But federal regulators were
tory lenders easily devised
2001 comments submitted
ways to work around these
asleep at the switch.
to the FDIC. “While many
limitations.
regulators recognize the
In 2000 and 2001, the Federal Deposit
gravity of the predatory lending problem,
Insurance Corporation (FDIC), the Federal
the appropriate — and politically feasible —
Reserve and the Office of Thrift Supervi-
method of addressing the problem still
sion, among other federal agencies, adopted
appears elusive.”107
or considered rules to further restrict preda-
What was needed, the consumer groups
tory lending. The adopted binding rules,
argued, was binding regulation. “All agen-
issued by the Federal Reserve pursuant to
cies should adopt a bold, comprehensive and
HOEPA, however, focused very narrowly
specific series of regulations to change the
on certain egregious practices.106 More
mortgage marketplace,” the groups wrote, so
expansive statements on predatory lending
that “predatory mortgage practices are either
were issued only as non-binding guidelines.
specifically prohibited, or are so costly to
The reliance on non-binding guidelines
the mortgage lender that they are not eco-
continued through the decade.
nomically feasible” while ensuring that
As regulators were issuing non-binding
“necessary credit is made available with
guidelines, public interest advocates were
appropriate rates and terms to all Ameri-
praising their recognition of the problem —
but urging that more forceful action be
107 National Consumer Law Center and the
Consumer Federation of America, “How to
106 12 C.F.R. 226 (Regulation Z; Docket No. R-
Avoid Purchasing or Investing in Predatory
1090), 66 Fed. Reg. 245, 65604-65622
Mortgage Loans,” January 31, 2001, avail-
(2001) (adjusting the price trigger for cover-
able at:
age under HOEPA and prohibiting certain
<http://www.nclc.org/issues/predatory_mort
acts).
gage/fdic.shtml>.
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61
cans.”108
predatory lending.110 The Office of the
Public interest groups would repeat this
Comptroller of the Currency (OCC), which
advice again and again over the subsequent
has regulatory authority over roughly 1,800
years, pointing to growing abuses and
nationally chartered banks, similarly took
proposing specific remedies.
three public enforcement actions from 2004
But federal agencies, operating under
to 2006.111 These numbers reflect a startling
the prevailing laissez-faire ideology of the
regulatory failure during the peak period of
Bush Administration, declined to issue any
abusive subprime lending. Subprime loans
binding regulations in response to mush-
made up between one-in-six and one-in-five
rooming predatory lending. They did issue
home mortgage loans in 2004, 2005 and
additional guidance statements, but these
2006.112
were non-binding and consistently behind
Although Federal Reserve officials now
the curve of evolving lender abuses. Not
acknowledge that they should have done
surprisingly, they failed to curtail predatory
more, the OCC says it took appropriate
lending practices.
action. Both agencies insist that they also
addressed abuses on an informal, bank-by-
A Failure to Enforce
bank basis, ordering improved practices in
Federal regulators also failed to enforce the
connection with the agency’s routine exami-
rules that were on the books.
nations of individual banks. The informal
From 2003 through the start of 2007,
and non-public nature of this approach
the Federal Reserve, which has jurisdiction
over the entire banking industry, took a mere
<http://www.federalreserve.gov/boarddocs/e
nforcement>.
three formal enforcement actions109 to stop
110 James Tyson, Craig Torres and Alison Vek-
shin, “Fed Says It Could Have Acted Sooner
on Subprime Rout,” Bloomberg, March 22,
108 National Consumer Law Center and the
2007, available at:
Consumer Federation of America, “How to
<http://www.bloomberg.com/apps/news?pid
Avoid Purchasing or Investing in Predatory
=20601087&sid=a1.KbcMbvIiA&refer=ho
Mortgage Loans,” January 31, 2001, avail-
me>.
able at:
111 Craig Torres and Alison Vekshin, “Fed, OCC
<http://www.nclc.org/issues/predatory_mort
Publicly Chastised Few Lenders During
gage/fdic.shtml>.
Boom,” Bloomberg, March 14, 2007, avail-
109 “Generally, the Federal Reserve takes formal
able at:
enforcement actions against [banks] for vio-
<http://www.bloomberg.com/apps/news?pid
lations of laws, rules, or regulations, unsafe
=20601103&sid=a6WTZifUUH7g&refer=u
or unsound practices, breaches of fiduciary
s>.
duty, and violations of final orders. Formal
112 Chris Mayer and Karen Pence, “Subprime
enforcement actions include cease and desist
Mortgages: What, Where and to Whom,”
orders, written agreements, removal and
Figure 1B, Federal Reserve, 2008, available
prohibition orders, and orders assessing civil
at:
money penalties.” The Federal Reserve
<http://www.federalreserve.gov/pubs/feds/2
Board, “Enforcement Actions,” available at:
008/200829/200829pap.pdf>.
62
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means that Fed and OCC’s claims cannot be
borrowers access to subprime credit. “States
easily verified.
with anti-predatory lending laws reduced the
Even if there were extensive private en-
proportion of loans with targeted [predatory]
forcement
actions
or
terms by 30 percentage
conversations,
such
points,” the study deter-
Federal agencies, operating
moves fail to perform
mined. Even this number
under the prevailing laissez-
important public func-
masked the superior per-
tions. They do not signal
faire ideology of the Bush
formance of those with the
appropriate behavior and
toughest laws. “States with
Administration, declined to
clear rules to other lend-
the strongest laws — Mas-
issue any binding regulations
ers; and they do not
sachusetts,
New
Jersey,
provide information to
in response to mushrooming
New Mexico, New York,
victimized
borrowers,
North Carolina, and West
predatory lending.
thereby depriving them of
Virginia — are generally
an opportunity to initiate follow-on litigation
associated with the largest declines in tar-
to recover for harms perpetrated against
geted terms relative to states without signifi-
them.
cant protections,” the study found.113
The Center for Responsible Lending
State Action Shows What Could Have Been
study also concluded that lending continued
Done
at a constant rate in states with anti-
While federal regulators sat on their hands,
predatory lending laws, and that “state laws
some states adopted meaningful anti-
have not increased interest rates and, in
predatory lending laws and brought en-
some cases, borrowers actually paid lower
forcement actions against abusive lenders.
rates for subprime mortgages after their state
This report does not explore state regulatory
laws became effective compared to borrow-
successes and failures, but the ability of
ers in states without significant protections.”
states to regulate and address abusive lender
In other words, eliminating abusive fees did
behavior demonstrates what federal regula-
not translate into higher interest rates.114
tors might have done.
A comprehensive review of subprime
113 Wei Li and Keith S. Ernst, “The Best Value
loans conducted by the Center for Responsi-
in the Subprime Market: State Predatory
Lending Reforms,” Center for Responsible
ble Lending found that aggressive state
Lending, February, 23, 2006, available at:
<http://www.responsiblelending.org/pdfs/rr0
regulatory action greatly reduced the num-
10-State_Effects-0206.pdf>.
114
ber of predatory loans, without affecting
Wei Li and Keith S. Ernst, “The Best Value
in the Subprime Market: State Predatory
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63
Partially Closing the Barn Door (after the
defined “higher-priced mortgages.”117 They
horses left and a foreclosure sign is posted)
also apply some measures — such as speci-
After years of inaction, and confronted with
fied deceptive advertising practices — for
signs of the economic meltdown to come,
all loans, regardless of whether they are
the Federal Reserve in January 2008 finally
subprime.118
proposed binding regulations that would
apply to all lenders, not just nationally
117 Key elements of these regulations:
• Prohibit a lender from engaging in a
chartered banks.
pattern or practice of making loans
The Federal Reserve proposal noted the
without considering the borrowers’ abil-
ity to repay the loans from sources other
growth of subprime mortgages, claimed the
than the home’s value.
expansion of subprime credit meaningfully
• Prohibit a lender from making a loan by
relying on income or assets that it does
contributed to increases in home ownership
not verify.
• Restrict prepayment penalties only to
rates (a gain quickly unraveling due to the
loans that meet certain conditions, in-
cluding the condition that the penalty
subprime-related foreclosure epidemic) and
expire at least sixty days before any
modestly suggested that “[r]ecently, how-
possible increase in the loan payment.
• Require that the lender establish an es-
ever, some of this benefit has eroded. In the
crow account for the payment of prop-
last two years, delinquencies and foreclosure
erty taxes and homeowners’ insurance.
The lender may only offer the borrower
starts have increased dramatically and
the opportunity to opt out of the escrow
account after one year.
reached exceptionally high levels as house
118 These regulatory provisions, applying to all
price growth has slowed or prices have
mortgages, regardless of whether they are
subprime:
declined in some areas.”115
• Prohibit certain servicing practices,
such as failing to credit a payment to a
With slight modification, the Fed
consumer’s account when the servicer
adopted these rules in July.116 The new
receives it, failing to provide a payoff
statement within a reasonable period of
regulations establish a new category of
time, and “pyramiding” late fees.
“higher-priced mortgages” intended to
• Prohibit a creditor or broker from coerc-
ing or encouraging an appraiser to mis-
include virtually all subprime loans. The
represent the value of a home.
• Prohibit seven misleading or deceptive
regulations prohibit a number of abusive
advertising practices for closed-end
practices in connection with these newly
loans; for example, using the term
“fixed” to describe a rate that is not
truly fixed. It would also require that all
Lending Reforms,” Center for Responsible
applicable rates or payments be dis-
Lending, February, 23, 2006, available at:
closed in advertisements with equal
<http://www.responsiblelending.org/pdfs/rr0
prominence as advertised introductory
10-State_Effects-0206.pdf>.
or “teaser” rates.
115 Federal Reserve System, Truth In Lending, 73
• Require truth-in-lending disclosures to
Fed. Reg. 6, 1673-74 (2008).
borrowers early enough to use while
116 Federal Reserve System, 12 C.F.R. § 226,
shopping for a mortgage. Lenders could
[Regulation Z; Docket No. R-1305], 73 Fed.
not charge fees until after the consumer
Reg. 147, 44521-614 (2008).
receives the disclosures, except a fee to
64
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These measures are not inconsequen-
tected,” argue the consumer and housing
tial. They show the kind of action the Fed-
groups. They provide an extensive list of
eral Reserve could have taken at the start of
needed revisions to the proposed regula-
this decade — moves that could have dra-
tions, including that the regulations:
matically altered the subsequent course of
• Cover all loans, including prime
events.
loans;
But the 2008 regulations remain inade-
• Require an “ability to repay” analy-
quate, as a coalition of consumer and hous-
sis for each loan;
ing groups has specified in great detail,119
• Ban prepayment penalties;
because they fail to break with longstanding
• Address lender and originator incen-
deregulatory nostrums. The Fed continues to
tives for appraisal fraud; and
emphasize the importance of enabling
• Provide effective private litigation
lenders to make credit available to minority
remedies for victimized borrow-
and lower-income communities — histori-
ers.120
cally, a deep-rooted concern — while failing
to acknowledge that the overriding problem
■ ■ ■
has become lenders willing to make credit
available, but on abusive terms.
“The proposed regulations continue to
be most protective of the flawed concept
that access to credit should be the guiding
principle for credit regulation. These regula-
tions need to be significantly strengthened in
order for consumers to be adequately pro-
obtain a credit report.
119 National Consumer Law Center, Consumer
Action, Consumer Federation of America,
Consumers Union, Leadership Conference
on Civil Rights, National Association of
Consumer Advocates, National Fair Hous-
ing Alliance, and the Empire Justice Center
(“National Consumer Law Center et. al.”),
120 National Consumer Law Center, et. al.,
“Comments to the Board of Governors of
“Comments to the Board of Governors of
the Federal Reserve System Regarding Pro-
the Federal Reserve System Regarding Pro-
posed Regulations Relating to Unfair Trade
posed Regulations Relating to Unfair Trade
Practices In Connection with Mortgage
Practices In Connection with Mortgage
Lending,” April 2008, available at:
Lending,” April 2008, available at:
<http://www.consumerfed.org/pdfs/HOEPA
<http://www.consumerfed.org/pdfs/HOEPA
_comments_NCLC_final.pdf>.
_comments_NCLC_final.pdf>.
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65
ORIGINS OF THE HOUSING BUBBLE
The housing bubble can be traced to
Cheap credit did not automatically
a series of inter-related developments in
mean there would be a housing bubble.
the macro-economy, themselves due in
Crucially, government officials failed to
significant part to political choices.
intervene to pop the housing bubble. As
First, the Federal Reserve lowered
economists Dean Baker and Mark Weis-
interest rates to historically low levels in
brot of the Center for Economic and
response to the economic downturn that
Policy Research insisted at the time,
followed the collapse of the stock market
simply by identifying the bubble — and
bubble of the 1990s and the additional
adjusting public perception of the future
economic slowdown after 9/11. Low
of the housing market — Federal Re-
interest rates had beneficial effects in
serve Chair Alan Greenspan could have
spurring economic activity, but they also
prevented or at least contained the bub-
created the conditions for the housing
ble. He declined, and even denied the
bubble, as cheap credit made mortgage
existence of a bubble.
financing an attractive proposition for
There were reasons why Greenspan
home buyers.
and other top officials did not act to pop
Cheap credit was not a result only of
the bubble. They advanced expanded
Fed interest rate decisions. A second
home ownership as an ideological goal.
contributing factor to the housing bubble
While this objective is broadly shared
was the massive influx of capital into the
across the political spectrum, the Bush
United States from China. China’s capi-
administration and Greenspan’s ideo-
tal surplus was the mirror image of the
logical commitment to the goal biased
U.S. trade deficit — U.S. corporations
them to embrace growing home buying
were sending dollars to China in ex-
uncritically — without regard to whether
change for goods sold to U.S. consum-
new buyers could afford the homes they
ers. China then reinvested much of that
were buying, or the loans they were
surplus in the U.S. bond market, with the
getting. Perhaps more importantly, the
effect of keeping U.S. interest rates low.
housing bubble was the engine of an
66
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economy that otherwise was stalled.
vulnerable borrowers through predatory
Rising home prices contributed to the
lending terms. The terms of your loan
huge growth of the construction indus-
don’t matter, they effectively purred to
try; Wall Street grew rich on mortgage-
borrowers, so long as the value of your
related securities and exotic financial
house is going up. They duped borrow-
instruments; and people borrowed en
ers into conditions they could not possi-
masse against the rising value of their
bly satisfy, making the current rash of
homes to spend more and keep the econ-
defaults and foreclosures on subprime
omy functioning.
loans inevitable. Effective regulation of
The toxic stew of financial deregu-
lending practices could have prevented
lation and the housing bubble created the
the abusive loans.
circumstances in which aggressive
lenders were nearly certain to abuse
■ ■ ■
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67
FEDERAL PREEMPTION OF
Georgia Fair Lending Act to its operations
in Georgia.
STATE CONSUMER
The Comptroller agreed with National
8 PROTECTION LAWS City’s contention that the federal banking
laws, the history of federal regulation of
IN THIS SECTION:
national banks and relevant legislative
When the states sought to fill the vacuum
history all supported the conclusion that
created by federal nonenforcement of con-
federal regulatory authority should super-
sumer protection laws against predatory
sede and override any state regulation
lenders, the feds jumped to stop them. “In
regarding predatory lending.121
2003,” as Eliot Spitzer recounted, “during
In its petition, National City argued that
the height of the predatory lending crisis, the
the effect of the Georgia law “is to limit
Office of the Comptroller of the Currency
National City’s ability to originate and to
invoked a clause from the 1863 National
establish the terms of credit on residential
Bank Act to issue formal opinions preempt-
real estate loans and lines of credit, includ-
ing all state predatory lending laws, thereby
rendering them inoperative. The OCC also
ing loans or lines of credit submitted by a
promulgated new rules that prevented states
third party mortgage broker. GFLA [the
from enforcing any of their own consumer
Georgia Fair Lending Act] has significantly
protection laws against national banks.”
impaired National City’s ability to originate
residential real estate loans in Georgia.”
In 2003, the Comptroller of the Currency,
It is instructive to identify the provi-
John D. Hawke, Jr., announced that he was
sions of the Georgia law, a path breaking
preempting state predatory lending laws.
anti-predatory lending initiative, to which
This ruling meant that nationally chartered
National City objected. The Georgia law
banks — which include the largest U.S.
included a wide range of consumer protec-
banks — would be subject to federal bank-
tions that consumer groups applauded but
ing standards, but not the more stringent
which National City complained would
consumer protection rules adopted by many
interfere with its freedom to operate:
states.
GFLA establishes specific and burden-
some limitations on mortgage–secured
The Comptroller’s decision was a direct
loans and lines of credit that significantly
response to a request from the nation’s
interfere with National City’s ability to
biggest banks. It was prompted by a petition
121 Office of the Comptroller of the Currency
from Cleveland-based National City Bank,
[Docket No. 03-17] Preemption Determina-
which challenged the application of the
tion and Order, august 5, 2003, Federal Reg-
ister, Vol. 688. No. 150, 46264.)
68
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make these loans. All Home Loans are
process. Criminal penalties are also avail-
subject to restrictions on the terms of
able.122
credit and certain loan related fees, includ-
ing the prohibition of financing of credit
insurance, debt cancellation and suspen-
The Office of the Comptroller of the
sion coverage, and limiting late charges
Currency (OCC) 2003 preemption decision
and prohibiting payoff and release fees. If
the loan or line of credit is a Covered
was the latest in a long series of actions by
Home Loan which refinances a Home
Loan which was closed within the previ-
the agency to preempt state laws. Following
ous five years, National City is restricted
passage of the Garn-St. Germain Depository
from originating it unless the refinanced
transaction meets standards established by
Institutions Act of 1982, the OCC had by
GFLA. If the loan or line of credit is a
High Cost Home Loan, GFLA does not
regulation specifically preempted a number
permit National City to originate it unless
of state law consumer protections, including
the borrower has received advance coun-
seling with respect to the advisability of
the minimum requirements for down
the transaction from a third party non-
payments, loan repayment schedules and
profit organization. GFLA regulates Na-
tional City’s ability to determine the bor-
minimum periods of time for loans. These
rower’s ability to repay the High Cost
Home Loan. GFLA restricts, and in some
state rules afforded consumers greater
cases prohibits, the imposition by Na-
protection than federal statutes. The 2003
tional City of certain credit terms or ser-
vicing fees on High Cost Home Loans, in-
decision concluded that Georgia’s rules
cluding: prepayment penalties, balloon
payments, advance loan payments, accel-
transgressed some of these longstanding
eration in the lender’s discretion, negative
regulatory preemptions, but then went
amortization, post-default interest and fees
to modify, renew, amend or extend the
further and preempted the Georgia rules
loan or defer a payment. Any High Cost
Home Loan must contain a specific dis-
entirely, as they applied to national banks.
closure that it is subject to special rules,
In conjunction with the OCC’s an-
including purchaser and assignee liability,
under GFLA. Finally, GFLA imposes pre-
nouncement on the Georgia case, it launched
foreclosure requirements. GFLA currently
creates strict assignee liability for all sub-
a rulemaking on the general issue of federal
sequent holders of a home loan. GFLA
preemption of all state regulation of national
provides a private right of action for bor-
rowers against lenders, mortgage brokers,
banks. In January 2004, it issued rules
assignees and servicers for injunctive and
declaratory relief as well as actual dam-
preempting all state regulation of national
ages, including incidental and consequen-
banks.123 The OCC also announced rules
tial damages, statutory damages equal to
forfeiture of all interest or twice the inter-
est paid, punitive damages, attorneys’ fees
122 Letter from Thomas Plant to Julie Williams
and costs. In addition, the Georgia Attor-
(National City’s Request for OCC preemp-
ney General, district attorneys, the Com-
tion of the Georgia Fair Lending Act), Feb-
missioner of Banking and Finance and,
ruary 11, 2003, appendix to Office of the
with respect to the insurance provisions,
Comptroller of the Currency, Docket No.
the Commissioner of Insurance has the ju-
03-04, Notice of Request for preemption
risdiction to enforce GFLA through their
Determination and Order.
general state regulatory powers and civil
123 Office of the Comptroller of the Currency, 12
CFR Parts 7 and 34, [Docket No. 04-xx],
RIN 1557-AC73.
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69
prohibiting state regulators from exercising
argued that national banks were not engaged
“visitorial powers” — meaning inspection,
in predatory lending on any scale of conse-
supervision and oversight — of national
quence; that federal regulation was suffi-
banks.124
cient; and that federal guidance on predatory
The stated rationale
lending — issued in con-
for
these
preemptive
junction with the preemp-
Referring to the OCC’s pre-
moves was that differing
tive moves — provided
emptive measures, Spitzer
state standards subjected
additional and satisfactory
national banks to extra
wrote, “Not only did the
guarantees for consumers.
costs and reduced the
Former
New
York
Bush administration do
availability
of
credit.
State Attorney General (and
nothing to protect consum-
“Today,” said Hawke in
former
Governor)
Eliot
announcing the new rules,
ers, it embarked on an
Spitzer put these actions in
“as a result of technology
perspective in a February
aggressive and unprece-
and our mobile society,
2008 opinion column in the
dented campaign to prevent
many aspects of the
Washington Post.126
financial services business
states from protecting their
“Predatory lending was
are unrelated to geogra-
widely understood [earlier
residents from the very
phy
or
jurisdictional
in the decade] to present a
problems to which the fed-
boundaries, and efforts to
looming national crisis,”
apply
restrictions
and
eral government was turn-
Spitzer wrote. “This threat
directives that differ based
was so clear that as New
ing a blind eye.”
on a geographic source
York attorney general, I
increase the costs of
joined with colleagues in
offering products or result in a reduction in
the other 49 states in attempting to fill the
their availability, or both. In this environ-
void left by the federal government. Indi-
ment, the ability of national banks to operate
under consistent, uniform national standards
Regulations Concerning Preemption and
Visitorial Powers, January 7, 2004, available
administered by the OCC will be a crucial
at: <http://occ.gov/newrules.htm>.
126 Eliot Spitzer, “Predatory Lenders’ Partner in
factor in their business future.”125 Hawke
Crime How the Bush Administration
Stopped the States From Stepping In to Help
Consumers,” Washington Post, February 14,
124 Office of the Comptroller of the Currency, 12
2008, available at:
CFR Part 7, [Docket No. 04-xx], RIN 1557-
<http://www.washingtonpost.com/wp-
AC78.
dyn/content/article/2008/02/13/AR20080213
125 Statement of Comptroller of the Currency
02783.html>.
John Hawke, Jr., Regarding the Issuance of
70
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vidually, and together, state attorneys gen-
“The OCC established strong protections
eral of both parties brought litigation or
against predatory lending practices years
entered into settlements with many subprime
ago, and has applied those standards through
lenders that were engaged in predatory
examinations of every national bank,” he
lending practices. Several state legislatures,
said. “As a result, predatory mortgage
including New York’s, enacted laws aimed
lenders have avoided national banks like the
at curbing such practices.”
plague. The abuses consumers have com-
Referring to the OCC’s preemptive
plained about most — such as loan flipping
measures, Spitzer wrote, “Not only did the
and equity stripping — are not tolerated in
Bush administration do nothing to protect
the national banking system. And the looser
consumers, it embarked on an aggressive
lending practices of the subprime market
and unprecedented campaign to prevent
simply have not gravitated to national banks:
states from protecting their residents from
They originated just 10 percent of subprime
the very problems to which the federal
loans in 2006, when underwriting standards
government was turning a blind eye. … The
were weakest, and delinquency rates on
federal government’s actions were so egre-
those loans are well below the national
gious and so unprecedented that all 50 state
average.”127
attorneys general, and all 50 state banking
Even if it is true that federal banks
superintendents, actively fought the new
originated fewer abusive loans, they clearly
rules.”
financed predatory subprime loans through
“But the unanimous opposition of the
bank intermediaries, securitized predatory
50 states did not deter, or even slow, the
subprime loans and held them in great
Bush administration in its goal of protecting
quantities. In any case, the scale of federal
the banks,” Spitzer noted.
bank financing of predatory loans was still
When state law enforcement agencies
substantial. Alys Cohen of the National
tried to crack down on predatory lending in
Consumer Law Center notes that Wachovia
their midst, the OCC intervened to stop
was a national bank that collapsed in signifi-
them. Wrote Spitzer, “In fact, when my
cant part because of the unaffordable mort-
office opened an investigation of possible
gage loans it originated.
discrimination in mortgage lending by a
number of banks, the OCC filed a federal
lawsuit to stop the investigation.”
127 John Dugan, “Comptroller Dugan Responds
to Governor Spitzer,” news release, Febru-
John Hawke’s successor as Comptroller
ary 14, 2008, available at:
John Dugan, denies Spitzer’s assertions.
<http://www.occ.gov/ftp/release/2008-
16.htm>.
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71
Cohen of the National Consumer Law
predatory lending laws did not apply to
Center notes as well that the OCC’s preemp-
federal thrifts. Like OCC, OTS took an
tive actions protected federal banks from
aggressive posture, arguing that it “occupied
three distinct set of con-
the field” for regulation of
sumer protections. First,
federally chartered institu-
Even if it is true that federal
they
were
immunized
tions.
banks originated fewer
from state banking laws
OTS was explicit that
that offered consumers
abusive loans, they clearly
it
wanted
to
preserve
greater protection than the
“maximum flexibility” for
financed predatory sub-
OCC’s standards. Second,
thrifts to design loans. The
prime loans through bank
the national banks were
agency said its objective
protected from private
intermediaries, securitized
was to “enable federal
lawsuits brought under
savings
associations
to
predatory subprime loans
state law
to
enforce
conduct their operations in
and held them in great
consumer rights. As noted
accordance with best prac-
above, federal voluntary
quantities.
tices by efficiently deliver-
standards made it difficult
ing low-cost credit to the
for victimized borrowers to file suit. Third,
public free from undue regulatory duplica-
the OCC preempted the application of
tion and burden.”128
general state consumer protection law (as
“Federal law authorizes OTS to provide
distinct from banking-specific rules) to
federal savings associations with a uniform
national banks. This includes even basic
national regulatory environment for their
contract and tort law.
lending operations,” said OTS Director
Finally, Cohen emphasizes that the
James E. Gilleran in announcing the pre-
OCC preemptive measures applied not just
emptive decision. “This enables and encour-
to the national banks themselves, but to their
ages federal thrifts to provide low-cost credit
non-supervised affiliates and agents.
safely and soundly on a nationwide basis.
Meanwhile, the federal agency respon-
By requiring federal thrifts to treat custom-
sible for regulating federally chartered
128 Letter from Carolyn J. Buck, Chief Counsel,
savings and loans, the Office of Thrift
Office of Thrift Supervision, January 30,
Supervision (OTS), adopted parallel pre-
2003, available at:
<http://www.ots.gov/index.cfm?p=PressRel
emptive actions.
eases&ContentRecord_id=f8613720-2c1d-
42f4-8608-
In 2003, OTS announced its determina-
f6362c04b6e2&ContentType_id=4c12f337-
tion that New York and Georgia’s anti-
b5b6-4c87-b45c-
838958422bf3&YearDisplay=2003>.
72
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ers in New York differently, the New York
law would impose increased costs and an
undue regulatory burden.”129
The federal government’s regulatory
approach ultimately boomeranged on the
regulated institutions. With the popping of
the housing bubble, predatory loans proved
a disaster not just for borrowers but for
lenders or those banks that purchased sub-
prime mortgage contracts. IndyMac and
Washington Mutual are two federal thrifts
that collapsed as a result of the bad subprime
mortgage loans that they administered.
■ ■ ■
129 “OTS Says New York Law Doesn’t Apply To
Federal Thrifts,” news release, January 30,
2003, available at:
<http://www.ots.gov/index.cfm?p=PressRel
eases&ContentRecord_id=f8613720-2c1d-
42f4-8608-
f6362c04b6e2&ContentType_id=4c12f337-
b5b6-4c87-b45c-
838958422bf3&YearDisplay=2003>.
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73
ESCAPING ACCOUNTABILITY:
legal claims that the borrower might be able
to bring against the original lender.
ASSIGNEE LIABILITY
Competing in the law with assignee li-
9
ability is the “holder-in-due-course” doc-
trine, which establishes that a third party
purchasing a debt instrument is not liable for
IN THIS SECTION:
problems with the debt instrument, so long
Under existing federal law, only the original
as those problems are not apparent on the
mortgage lender is liable for any predatory
face of the instrument. Under the holder-in-
and illegal features of a mortgage — even if
due-course-doctrine, a second bank acquir-
the mortgage is transferred to another party.
ing a predatory loan is not liable for claims
This arrangement effectively immunized
acquirers of the mortgage (“assignees”) for
that may be brought by the borrower against
any problems with the initial loan, and
the original lender, so long as those potential
relieved them of any duty to investigate the
claims are not obvious.
terms of the loan. Wall Street interests could
The Home Ownership and Equity Pro-
purchase, bundle and securitize subprime
tection Act (HOEPA),130 the key federal
loans — including many with pernicious,
protection against predatory loans, at-
predatory terms — without fear of liability
tempted to reconcile these conflicting prin-
for illegal loan terms. The arrangement left
ciples. Passed in 1994, HOEPA does estab-
victimized borrowers with no cause of action
lish assignee liability, but it only applies to a
against any but the original lender, and
limited category of very high-cost loans
typically with no defenses against being
foreclosed upon. Representative Bob Ney, R-
(i.e., loans with very high interest rates
Ohio — a close friend of Wall Street who
and/or fees). For those loans, a borrower
subsequently went to prison in connection
may sue an assignee of a mortgage that
with the Abramoff scandal — was the leading
violates HOEPA’s anti-predatory lending
opponent of a fair assignee liability regime.
terms, seeking either damages or rescission
(meaning all fees and interest payments will
“Assignee liability” is the principle that
be applied to pay down the principle of the
legal responsibility for wrongdoing in
loan, after which the borrower could refi-
issuing a loan extends to a third party that
nance with a non-predatory loan). For all
acquires a loan. Thus, if a mortgage bank
130 The Home Ownership and Equity Protection
issues a predatory loan and then sells the
Act of 1994 amended the Truth-in-Lending
Act by adding Section 129 of the Act, 15
loan to another bank, assignee liability
U.S.C. § 1639. It is implemented by Sec-
would hold the second bank liable for any
tions 226.31 and 226.32 of Regulation Z, 12
C.F.R. §§ 226.31 and 226.32.
74
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other mortgage loans, federal law applies the
ers with no cause of action against any but
holder in due course doctrine.131
the original lender. In many cases, this
The rapid and extensive transfer of
lender no longer exists as a legal entity.
subprime loans, including abusive predatory
And, even where the initial lender still
loans, among varying parties was central to
exists, while it can pay damages, it no longer
the rapid proliferation of subprime lending.
has the ability to cure problems with the
Commonly, mortgage brokers worked out
mortgage itself; only the current holder of
deals with borrowers, who then obtained a
the mortgage can modify it. Thus, a bor-
mortgage from an initial mortgage lender
rower could not exercise a potential rescis-
(often a non-bank lender, such as Country-
sion remedy, or take other action during the
wide, with which the broker worked). The
course of litigation to prevent the holder of
mortgage lender would then sell the loan to
his or her mortgage from foreclosing upon
a larger bank with which it maintained
him or her or demanding unfair payments. A
relations. Ultimately, such mortgages were
hypothetical recovery of damages from the
pooled with others into a mortgage-backed
original lender long after the home is fore-
security, sold by a large commercial bank or
closed upon is of little solace to the home-
investment bank.
owner.
Under existing federal law, none but
The severe consequences of not apply-
the original mortgage lender is liable for any
ing assignee liability in the mortgage context
predatory and illegal features of the mort-
have long been recognized. Consumer
gage (so long as it is not a high-cost loan
advocates highlighted the problem early in
covered by HOEPA). This arrangement
the 2000’s boom in predatory lending.
relieved acquirers of the mortgage of any
Margot Saunders of the National Con-
duty to investigate the terms of the loan and
sumer Law Center explained the problem in
effectively immunized them from liability
testimony to the House of Representatives’
for the initial loan.132 It also left the borrow-
Financial Services Committee in 2003.
131 Lisa Keyfetz, “The Home Ownership and
lowed borrowers to sue anyone holding pa-
Equity Protection Act of 1994: Extending
per on their loan, from the originators who
Liability for Predatory Subprime Loans to
sold it to them to the Wall Street investment
Secondary Mortgage Market Participants,”
bankers who ultimately funded it. Without
18 Loy. Consumer L. Rev. 2, 151 (2005).
the measure in place, Wall Street increased
132 See Eric Nalder, “Politicians, lobbyists
by eightfold its financing of subprime and
shielded financiers: Lack of liability laws
nontraditional loans between 2001 and 2006,
fueled firms' avarice,” Seattle Post-
including mortgages in which borrowers
Intelligencer, October 10, 2008, available at:
with no proof of income, jobs or assets were
<http://seattlepi.nwsource.com/business/382
encouraged by brokers to take out loans, ac-
707_mortgagecrisis09.html>. (“A principle
cording to statistics provided by mortgage
known as assignee liability would have al-
trackers.”)
SOLD OUT
75
“Take, for example, the situation where
would have faced liability themselves.
homeowners sign a loan and mortgage for
For community development and con-
home improvements secured by their home.
sumer advocates, the case for expanded
The documents do not
assignee liability has long
include the required FTC
been clear. Argued Saun-
Had a regime of assignee
Notice of Preservation of
ders in her 2003 testimony,
liability been in place, secu-
Claims and Defenses, and
“Most importantly consider
the contact information
ritizers and others up the
the question of who should
provided by the home
bear the risk in a faulty
lending chain would have
improvement contractor is
transaction. Assume 1) an
been impel ed to impose
useless. The home im-
innocent consumer (victim
provement work turns out
better systems of control
of an illegal loan), 2) an
to be shoddy and useless,
originator guilty of violating
on brokers and initial mort-
but the assignee of the
the law and profiting from
gage lenders, because oth-
loan claims to have no
the making of an illegal
knowledge of the status of
erwise they would have
loan, and 3) an innocent
the work, instead claiming
holder of the illegal note.
faced liability themselves.
it is an innocent third
As between the two inno-
party assignee that merely wants its monthly
cent parties — the consumer and the holder
payments. When the homeowners refuse to
— who is best able to protect against the
pay, the assignee claims the rights of a
risk of loss associated with the making of an
holder in due course and begins foreclosure
illegal loan? It is clear that the innocent
proceedings.”
party who is best able to protect itself from
The absence of assignee liability en-
loss resulting from the illegality of another
abled Wall Street interests to bundle sub-
is not the consumer, but the corporate as-
prime loans — including many with perni-
signee.”133
cious, predatory terms — and securitize
133
them, without fear of facing liability for
Margot Saunders, Testimony Before the
Subcommittee on Housing and Community
unconscionable terms in the loans. Had a
Opportunity & Subcommittee on Financial
Institutions and Consumer Credit of the Fi-
regime of assignee liability been in place,
nancial Services Committee, U.S. House of
securitizers and others up the lending chain
Representatives, “Protecting Homeowners:
Preventing Abusive Lending While Preserv-
would have been impelled to impose better
ing Access to Credit,” November 5, 2003,
available at:
systems of control on brokers and initial
<http://financialservices.house.gov/media/p
mortgage lenders, because otherwise they
df/110503ms.pdf>.
76
SOLD OUT
Making the case even more clear, play-
posals to require subsequent purchasers of
ers in the secondary market — the acquirers
mortgage debt to bear legal responsibility.
of mortgages — were not innocent parties.
“Legislators must be extremely cautious in
They were often directly involved in ena-
making changes that upset secondary market
bling predatory lending by mortgage bro-
dynamics,” warned Steve Nadon, chair of
kers, and were well aware of the widespread
the industry group the Coalition for Fair and
abuses in the subprime market. Explain
Affordable Lending (CFAL) and Chief
reporters Paul Muolo and Mathew Padilla,
Operating Officer of Option One Mortgage,
authors of Chain of Blame: How Wall Street
an H&R Block subsidiary, in 2003 congres-
Caused the Mortgage and Credit Crisis,
sional testimony, “because unfettered access
“Brokers wouldn’t even exist without
to the capital markets is largely responsible
wholesalers, and wholesalers wouldn’t be
for having dramatically increased nonprime
able to fund loans unless Wall Street was
credit availability and for lowering costs for
buying. It wasn’t the loan brokers’ job to
millions of Americans. Lenders and secon-
approve the customer’s application and
dary market purchasers believe that it is very
check all the financial information; that was
unfair to impose liability when there is no
the wholesaler’s job, or at least it was sup-
reasonable way that the loan or securities
posed to be. Brokers didn’t design the loans,
holder could have known of the violation. In
either. The wholesalers and Wall Street did
any case, we feel that liability generally
that. If Wall Street wouldn’t buy, then there
should apply only if the assignee by reason-
would be no loan to fund.”134
able due diligence knew or should have
The securitizers had a counter-
known of a violation of the law based on
argument against calls for assignee liability.
what is evident on the face of the loan
They claimed that assignee liability would
documents.”135
impose unrealistic monitoring duties on
“Predatory lending is harmful and
purchasers of mortgage loans, and would
therefore freeze up markets for securitized
135 Testimony of Steve Nadon, chair of the
loans. The result, they said, would be less
Coalition for Fair and Affordable Lending
(CFAL) and chief operating officer of Op-
credit for homebuyers, especially those with
tion One Mortgage on “Protecting Home-
owners: Preventing Abusive Lending While
imperfect credit histories.
Preserving Access to Credit” before the
Lenders and securitizers opposed pro-
Subcommittees on Housing and Community
Opportunity & Financial Institutions and
Consumer Credit of the Financial Services
134 Paul Muolo and Mathew Padilla, Chain of
Committee, U.S. House of Representatives,
Blame: How Wall Street Caused the Mort-
November 5, 2003, available at:
gage and Credit Crisis, New York: Wiley,
<http://financialservices.house.gov/media/p
2008. 295.
df/110503sn.pdf>.
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77
needs to be stopped. Imposing open-ended
thing but a single set of objective and readily
liability on secondary market participants
detectable standards to determine whether
for the actions of lenders, however, will
an assignee has liability is a regulatory
ultimately have the effect of limiting credit
approach that threatens to undermine many
for those who need it most,”
of the benefits of the
echoed Micah Green, presi-
secondary market,” Green
Securitizers continue to
dent of The Bond Market
testified before the House
defend their position on
Association,
two
years
Financial Services Com-
later.136
(Proponents
of
assignee liability, even
mittee in 2005. “Faced
assignee liability emphasize
with this type of envi-
though it encourages the
they have sought not open-
ronment,
secondary
practices that helped fuel
ended liability, but the kind
market participants may
of measurable liability that
the subprime mess.
find it less attractive to
applies under HOEPA.)
purchase and repackage
Securitizers not only defended the de-
subprime loans.”139
fault federal application of the holder in due
In a 2004 statement submitted to the
course doctrine for non-HOEPA loans, they
House Financial Services Committee, the
supported legislation introduced by Repre-
Housing Policy Council, made up of 17 of
sentative Bob Ney, R-Ohio — who subse-
the largest U.S. mortgage finance compa-
quently went to prison in connection with
nies, argued that diverse state standards
the Jack Abramoff corruption scandal137 —
relating to assignee liability were unfairly
that would have preempted state rules
impinging on lenders and undermining
applying assignee liability.138 “Using any-
access to credit among poor communities.
“In the absence of a national law, lenders
136 “The Bond Market Association and the
face growing problems: (1) a number of
American Securitization Forum Applaud
Responsible Lending Act,” news release,
states, and even cities and counties, pass
March 15, 2005, available at:
<http://www.americansecuritization.com/sto
ry.aspx?id=264>.
C8B63&sec=&spon=&pagewanted=all>.
137 Philip Shenon, “Ney Is Sentenced to 2 1⁄2
139 Testimony of Micah Green, president, The
Years in Abramoff Case,” New York Times,
Bond Market Association, on “Legislative
January 20, 2007, available at:
Solution to Abusive Market Lending Prac-
<http://www.nytimes.com/2007/01/20/washi
tices,” before the Financial Services Com-
ngton/20ney.html?_r=>.
mittee, Subcommittee on Housing and
138 Diana B. Henriques with Jonathan Fuer-
Community Opportunity and Subcommittee
bringer, “Bankers Opposing New State
on Financial Institutions and Consumer
Curbs on Unfair Loans,” New York Times,
Credit, U.S. House of Representatives, May
February 14, 2003, available at:
24, 2005, available at:
<http://query.nytimes.com/gst/fullpage.html
<http://financialservices.house.gov/media/p
?res=9405E2D7153AF937A25751C0A9659
df/052405msg.pdf>.
78
SOLD OUT
widely different legislation that causes a
Ney’s preemptive legislation regarding
variety of administrative and legal problems.
assignee liability never became law, but it
What is permitted in some locales is not in
helped frame the debate so that the mortgage
others, sometimes even within the same
lenders, banks and Wall Street were on the
state; (2) states and subdivisions begin
offensive — demanding even reduced
competing to devise new restrictions; (3)
standards of assignee liability, rather than a
because of the lack of uniformity and great
legal standard that would place responsibil-
variety of differences between jurisdictions
ity on securitizers (the banks and investment
the chances of honest mistakes are com-
banks that bundled loans into mortgage-
pounded and the possibility of litigation is
backed securities) for predatory loans and
magnified; (4) litigation adversely impacts
give predatory loan victims a timely oppor-
the reputations of lenders, and (5) lenders
tunity in court to prevent foreclosure.
decide that making loans in states and
Securitizers continue to defend their
municipalities with broad and vague statutes
position on assignee liability, even though it
is no longer worth the risk to their reputa-
encourages the practices that helped fuel the
tions, and assignees decide that buying or
subprime mess.
lending against these loans is also not worth
In a June 2007 paper, the American Se-
the risk for them. The end result is actually
curitization Forum (ASF) argued that, “In
less credit for borrowers.”140
addition to being largely unnecessary, any
Further, the Housing Policy Council as-
federal legislation that would expose secon-
serted, under a national standard, assignee
dary market participants to assignee liability
liability should only apply where an as-
that is very high or unquantifiable would
signee had actual knowledge that a loan was
have severe repercussions.” The ASF re-
flawed, or intentionally failed to use due
peats the arguments of yesterday: that
diligence (itself a weak standard). 141
securitization has increased capital available
and Consumer Credit and the Subcommittee
140 Statement of the Housing Policy Council of
on Housing and Community Opportunity,
the Financial Services Roundtable, before
“Promoting Homeownership by Ensuring
the Subcommittee on Financial Institutions
Liquidity in the Subprime Mortgage Mar-
and Consumer Credit and the Subcommittee
ket,” June 23, 2004, available at:
on Housing and Community Opportunity,
<http://financialservices.house.gov/media/p
“Promoting Homeownership by Ensuring
df/062304hpc.pdf>. “Actions and defenses,”
Liquidity in the Subprime Mortgage Mar-
asserted the Housing Policy Council, “must
ket,” June 23, 2004, available at:
be limited to those that are based on actual
<http://financialservices.house.gov/media/p
knowledge of the assignee of the existence
df/062304hpc.pdf>.
of the violations in the loans assigned to
141 Statement of the Housing Policy Council of
them, or intentional failure to use appropri-
the Financial Services Roundtable, Before
ate due diligence in reviewing the loans as-
the Subcommittee on Financial Institutions
signed.”
SOLD OUT
79
to subprime markets and helped expand
That these arguments are overblown
homeownership; that assignees have an
and misplaced was clear at the start of the
economic incentive to ensure acquired loans
subprime boom. They are now utterly im-
that are unlikely to default; that it is unrea-
plausible. As a fairness matter, assignees
sonable to ask assignees to investigate all
will often be the only party able to offer
securitized loans; and that assignee liability
relief to victims of predatory loans, and
would dry up the secondary loan market
victims often need to be able to bring claims
with dire consequences.142
against assignees in order to prevent unjust
Asserted the ASF, “The imposition of
foreclosures; the hypothetical incentives for
overly burdensome and potentially unquanti-
assignees to avoid loans that could not be
fiable liability on the secondary market —
paid off proved illusory; assignees have
for abusive origination practices of which
ample capacity to police the loans they
assignees have no knowledge and which
acquire, including by hiring third-party
were committed by parties over whom they
investigators or by contractual arrangement
have no control — would therefore severely
with mortgage originators; and the overarch-
affect the willingness of investors and other
ing problem for lower-income families and
entities to extend the capital necessary to
communities since 2001 has not been too
fund subprime mortgage lending. As a
little credit, but too much poor quality
result, at precisely the time when increased
credit.
liquidity is essential to ensuring the financial
health of the housing market, schemes
■ ■ ■
imposing overly burdensome assignee
liability threaten to cause a contraction and
deleterious repricing of mortgage credit.”143
142 American Securitization Forum, “Assignee
Liability in the Secondary Mortgage Market:
Position Paper of the American Securitiza-
tion Forum,” June 2007, available at:
<http://www.americansecuritization.com/upl
oaded-
Files/Assignee%20Liability%20Final%20V
ersion_060507.pdf>.
143 American Securitization Forum, “Assignee
Liability in the Secondary Mortgage Market:
Position Paper of the American Securitiza-
tion Forum,” June 2007, available at:
<http://www.americansecuritization.com/upl
oaded-
Files/Assignee%20Liability%20Final%20V
ersion_060507.pdf>.
80
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FANNIE AND FREDDIE
consistent supply of mortgage funds. Fannie
Mae, as it is popularly known, became a
ENTER THE SUBPRIME
private, shareholder-owned corporation in
10 MARKET
1968.144 As a “government sponsored enter-
prise” (GSE) chartered by Congress, Fannie
Mae’s purpose is to purchase mortgages
IN THIS SECTION:
from private bankers and other lenders so
At the peak of the housing boom, Fannie Mae
that they have additional funds to continue
and Freddie Mac were dominant purchasers
originating new mortgages. Fannie Mae
in the subprime secondary market. The
does not issue or originate new loans, but
Government-Sponsored Enterprises were
private lenders seek to sell their loans to
followers, not leaders, but they did end up
taking on substantial subprime assets — at
Fannie, which maintains specific dollar
least $57 billion. The purchase of subprime
value ceilings for the repurchasing of single
assets was a break from prior practice,
and multi-family loans and does not pur-
justified by theories of expanded access to
chase high-end loans (i.e., loans for expen-
homeownership for low-income families and
sive homes). Because many private lenders
rationalized by mathematical models alleg-
hope to sell their mortgages to Fannie, its
edly able to identify and assess risk to newer
loan purchasing criteria have a substantial
levels of precision. In fact, the motivation
influence on the prudence of the mortgages
was the for-profit nature of the institutions
that lenders issue.
and their particular executive incentive
The Federal Home Loan Mortgage
schemes. Massive lobbying — including
especially but not only of Democratic friends
Corporation, or Freddie Mac,145 was estab-
of the institutions — enabled them to divert
lished by Congress in 1970 as a private
from their traditional exclusive focus on
shareholder-owned corporation to take on
prime loans.
the same role as Fannie Mae and prevent
Fannie and Freddie are not responsible
Fannie from exercising a monopoly. As with
for the financial crisis. They are responsible
Fannie Mae, Freddie Mac does not issue or
for their own demise, and the resultant
originate new loans. Instead, Freddie buys
massive taxpayer liability.
loans from private lenders in order to pro-
vide added liquidity to fund America’s
The Federal National Mortgage Association
housing needs.146
was created in 1938, during Franklin D.
144
Roosevelt’s administration, as a federal
12 U.S.C. § 1716b et seq. (1968).
145 Emergency Home Finance Act, 12 U.S.C. §
government agency to address the lack of a
1401 (1970).
146 Federal Home Loan Mortgage Corporation
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81
Fannie Mae began converting mort-
Freddie Mac provide no explicit guarantee
gages it acquired into mortgage-backed
of their debt obligations. Nonetheless,
securities (MBSs) in 1970.147 An MBS is
investors throughout the world assumed that
created by pooling thousands of purchased
because the entities are so intertwined with
mortgages into a single security for trade on
the U.S. government and so central to U.S.
Wall Street. By selling MBSs to investors,
housing policy, the federal government
Fannie obtains additional funds to buy
would never to allow Fannie or Freddie to
increasing numbers of mortgages from
default on its debt. Because they were
private lenders who, in turn, use the added
considered quasi-governmental, Fannie and
liquidity (cash) to originate new home loans.
Freddie enjoyed the highest-graded rating
By purchasing mortgages from private
(Triple-A) from independent ratings firms,
lenders, however, Fannie Mae incurs all the
despite holding little capital in reserve as
risk of default by borrowers, providing an
against the scale of their outstanding
incentive for lenders to make risky loans,148
loans.149
and making it vital that Fannie exercise care
In 1992, Congress passed and President
in determining which loans it acquires.
George H.W. Bush signed into law the
Traditionally, Fannie only purchased high
Federal Housing Enterprises Financial
quality loans that conform to relatively
Safety and Soundness Act. This law estab-
stringent standards, including that the bor-
lished “risk-based and minimum capital
rower provided a 20 percent down payment.
standards”150 for the two GSEs and also
Even after it sells MBSs, Fannie guarantees
established the Office of Federal Housing
payment to buyers of the MBSs — effec-
Enterprise Oversight (OFHEO) to oversee
tively providing insurance on the securities.
and regulate the activities of Fannie and
The laws establishing Fannie Mae and
Freddie. OFHEO, however, had limited
authority. The legislation also required
website, “Frequently Asked Questions
Fannie and Freddie to devote a minimum
About Freddie Mac,” undated, available at:
<http://www.freddiemac.com/corporate/com
percentage of their lending to support af-
pany_profile/faqs/index.html>.
fordable housing.
147 Federal National Mortgage Association
website, “About Fannie Mae,” October 7,
2008, available at:
149 Ivo Welch, “Corporate Finance: An
<http://www.fanniemae.com/aboutfm/index.
Introduction,” Prentice-Hall, 2008, available
jhtml;jsessionid=XUMTTVZMCQYSHJ2F
at:
QSISFGA?p=About+Fannie+Mae>.
<http://welch.econ.brown.edu/oped/finsyste
148 Ivo Welch, “Corporate Finance: An
m.html>.
Introduction,” Prentice-Hall, 2008, available
150 “About Fannie Mae: Our Charter,” Fannie
at:
Mae website, October 29, 2008, available at:
<http://welch.econ.brown.edu/oped/finsyste
<http://www.fanniemae.com/aboutfm/charte
m.html>.
r.jhtml>.
82
SOLD OUT
In 1999, Fannie Mae softened the stan-
But Fannie and Freddie were not buy-
dards it required of loans that it purchased.
ing subprime mortgages directly in signifi-
The move came in response to pressure from
cant quantities, in part because the most
the banking and thrift
predatory subprime loans
industries, which wanted to
did not meet their lending
Fannie and Freddie’s large-
extend subprime lending
standards. The two firms
scale purchases of subprime
(and wanted Fannie Mae to
purchased just 3 percent
agree to purchase subprime
mortgage-back securities on
of all subprime loans
loans), and from federal
issued from 2004 through
the secondary market may
officials who wanted Fannie
2007, most of that in 2007
and Freddie to buy more
have facilitated greater
alone.153 Subprime loans
private industry mortgages
represented 2 percent of
subprime lending than
made to low and moderate-
Fannie
Mae’s
single-
otherwise would have
income families.151
family mortgage credit
As the housing bubble
occurred.
book of business at the
inflated starting in 2001,
end of 2006, and 3 per-
banks and especially non-bank lenders made
cent at the end of 2005.154
an increasing number of subprime loans,
Fannie and Freddie’s large-scale pur-
peaking in the years 2004-2006. Fannie and
chases of subprime mortgage-back securities
Freddie were major players in the “secon-
on the secondary market may have facili-
dary market,” buying up bundles of sub-
tated greater subprime lending than other-
prime loans that were traded on Wall Street.
wise would have occurred, but to a consid-
They purchased 44 percent of subprime
erable extent the companies were victims
securities on the secondary market in 2004,
rather than perpetrators of the subprime
33 percent in 2005 and 20 percent in
crisis. That is, they were not driving the
2006.152
market, so much as getting stuck with bad
products already placed on the market.
151 Steven A. Holmes, “Fannie Mae Eases Credit
to Aid Mortgage Lending,” New York
Times, September 30, 1999, available at:
<http://query.nytimes.com/gst/fullpage.html
?res=9c0de7db153ef933a0575ac0a96f95826
153 Ronald Campbell, “Most Subprime Lenders
0&sec=&spon=&pagewanted=all>.
Weren’t Subject to Federal Lending Law,”
152 Carol D. Leonnig, “How HUD Mortgage
Orange County Register, November 16,
Policy Fed the Crisis,” Washington Post,
2008, available at:
June 10, 2008, available at:
<http://www.ocregister.com/articles/loans-
<http://www.washingtonpost.com/wp-
subprime-banks-2228728-law-lenders>.
dyn/content/article/2008/06/09/AR20080609
154 Fannie Mae form 10-K, for the fiscal year
02626_pf.html>.
ending December 31, 2006, pF-78.
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83
The two companies also trailed the
Fannie increased its direct investment in
market, entering into the subprime arena
riskier loans despite these cautionary warn-
because they felt at a competitive disadvan-
ings — and even as the housing bubble was
tage as against other
coming to an end.
housing market players.
Today, Freddie and
Perceived as quasi-
Internal Fannie memos
Fannie own or guarantee
governmental agencies,
obtained by the House
more than $5 trillion in
Oversight
Committee
Fannie and Freddie were in
mortgages158 and regularly
show the company was
issue MBSs. Fannie itself is
fact subjected to govern-
very concerned that it was
the largest issuer and guar-
ment regulation — but the
rapidly
losing
market
antor of MBSs. Both agen-
share to Wall Street
regulators’ hands were tied
cies were purchasing risky
securitizers. “Our pricing
subprime loans on the
by a Congress heavily
is uncompetitive. Accord-
secondary
market
from
lobbied by Fannie and
ing to our models, market
2004 to 2007, but they were
participants today are not
Freddie.
not required to report mort-
pricing legitimately for
gage losses on the balance
risks,” noted a top-level memo.155 The same
sheet. As a result, both investors and regula-
memo noted the risks of pursuing more
tors were unaware of the extent of their
aggressive strategies — noting that Fannie
growing mortgage problems. The compa-
had a “lack of knowledge of the credit
nies’ significant investments in the riskiest
risks”156 — and urged that the company
elements of the market would bring their
“stay the course.” Numerous other internal
demise in Fall 2008, when the federal gov-
sources echoed this recommendation.157 Yet
ernment placed them in conservatorship to
prevent them from collapsing altogether.159
155 “Single Family Guaranty Business: Facing
The federal government has infused
Strategic Crossroads,” June 27, 2005, p. 18,
available at:
<http://oversight.house.gov/documents/2008
<http://oversight.house.gov/story.asp?ID=22
1209103003.pdf>.
52>.
156 “Single Family Guaranty Business: Facing
158 “Freddie Mac lobbied against regulation bill,”
Strategic Crossroads,” June 27, 2205, p. 9,
Associated Press, October 19, 2008, avail-
available at:
able at:
<http://oversight.house.gov/documents/2008
<http://www.msnbc.msn.com/id/27266607/
1209103003.pdf>.
>.
157 See Opening Statement of Rep. Henry A.
159 See statement by Treasury Secretary Henry
Waxman, Committee on Oversight and
Paulson, September 7, 2008, and related ma-
Government Reform, “The Role of Fannie
terials, available at:
Mae and Freddie Mac in the Financial Cri-
<http://www.ustreas.gov/press/releases/hp11
sis,” December 9, 2008, available at:
29.htm>.
84
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$200 billion into Fannie and Freddie, and
with all Republican committee members
more will follow. Even if Fannie and
supporting it and all Democratic members
Freddie did not create the financial crisis,
opposed. Hagel and 25 other Republican
their reckless decisions are now forcing a
senators pleaded unsuccessfully with Senate
mammoth drain of taxpayer resources.
Majority Leader Bill Frist, R-Tennessee, to
Perceived as quasi-governmental agen-
allow a vote on the bill.
cies, Fannie and Freddie were in fact sub-
“If effective regulatory reform legisla-
jected to government regulation — but the
tion ... is not enacted this year, American
regulators’ hands were tied by a Congress
taxpayers will continue to be exposed to the
lobbied by Fannie and Freddie. The compa-
enormous risk that Fannie Mae and Freddie
nies lobbied heavily to avoid requirements
Mac pose to the housing market, the overall
for larger capital reserves, stronger govern-
financial system and the economy as a
ment oversight, or to limit their acquisition
whole,” the senators wrote in a letter.161
of packages of risky loans. In general,
The Associated Press reported, “In the
Democrats were far more protective of
end, there was not enough Republican
Fannie and Freddie than Republicans, many
support for Hagel’s bill to warrant bringing
of whom were hostile to the GSEs’ govern-
it up for a vote because Democrats also
ment ties. Many Democrats sought to pro-
opposed it and the votes of some would be
tect Fannie and Freddie from stringent
needed for passage.”162 The former chair of
regulatory oversight and capital reserve
the House Financial Services Committee,
requirements, but Republicans were heavily
Michael Oxley, R-Ohio, complained that
lobbied as well.
efforts to regulate Fannie and Freddie were
In 2005, for example, Freddie Mac paid
blocked by the Bush administration, the
$2 million to Republican lobbying firm DCI
Treasury Department and the Federal Re-
Inc. to defeat legislation sponsored by
serve.
Senator Chuck Hagel, R-Nebraska, that
“What did we get from the White
would have imposed tougher regulations on
House? We got a one-finger salute,” Oxley
Freddie’s loan repurchase activities.160 The
legislation languished in the Senate Bank-
161 “Freddie Mac Lobbied Against Regulation
Bill,” Associated Press, October 19, 2008,
ing, Housing and Urban Affairs Committee
available at:
<http://www.msnbc.msn.com/id/27266607/
>.
160 “Freddie Mac Lobbied Against Regulation
162 “Freddie Mac Lobbied Against Regulation
Bill,” Associated Press, October 19, 2008,
Bill,” Associated Press, October 19, 2008,
available at:
available at:
<http://www.msnbc.msn.com/id/27266607/
<http://www.msnbc.msn.com/id/27266607/
>.
>.
SOLD OUT
85
would recall in 2008.163
Democrats believed in Fannie and
Freddie as ways to expand credit to low- and
middle-income communities, but they were
also responsive to massive lobbying efforts.
From 1998 to 2008, Fannie Mae spent
$80.53 million on federally registered
lobbyists. During the same period, Freddie
Mac spent $96.16 million on lobbyists.164
■ ■ ■
163 Greg Farrell, “Oxley Hits Back at Ideo-
logues,” Financial Times, September 9,
2008.
<http://thinkprogress.org/2008/09/15/barney
-frank-mccain-reform/>.
164 Totals compiled from annual data available
from the Center for Responsive Politics,
<www.opensecrets.org>.
86
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Community Reinvestment Act: Not Guilty
Congress passed and President Jimmy
alone the broader financial crisis.
Carter signed the Community Reinvestment
John Dugan, Comptroller of the Currency
Act (CRA) into law in 1977. The purpose of
said, “CRA is not the culprit behind the sub-
this law was to encourage banks to increase
prime mortgage lending abuses, or the broader
their very limited lending in low- and mod-
credit quality issues in the marketplace.”167
erate-income and minority neighborhoods
Federal Reserve Board Governor Randall
and more generally to low- and moderate-
S. Kroszner said he has not seen any evidence
income and minority borrowers.165
that “CRA has contributed to the erosion of
Congress passed this law in large part be-
safe and sound lending practices.”168
cause too many lenders were discriminating
FDIC Chairman Sheila Bair said, “I
against minority and low- and moderate-
think we can agree that a complex interplay
income neighborhoods. “Redlining” was the
of risky behaviors by lenders, borrowers,
name given to the practice by banks of literally
and investors led to the current financial
drawing a red line around minority areas and
storm. To be sure, there’s plenty of blame to
then proceeding to deny loans to people within
go around. However, I want to give you my
the red border even if they were otherwise
verdict on CRA: NOT guilty.”169
qualified. The CRA has been in place for 30
Most predatory loans were issued by
years, but some corporate-backed and libertar-
non-bank lenders that were not subject to
ian think tanks and policy groups, as well as
CRA requirements.
some Republican members of Congress, now
167
claim CRA is responsible for the current
Reuters, “U.S. financial system in better
shape-OCC’s Dugan,” November 19, 2008,
financial disaster. Nothing in the CRA re-
available at:
<http://www.reuters.com/article/regulatoryN
quires banks to make risky loans.166
ewsFinancialServicesAndRealEs-
Leading regulators agree that CRA was
tate/idUSN1946588420081119>.
168 Remarks of Randall S. Kroszner, Governor of
not responsible for predatory lending, let
the Board of Governors of the Federal Re-
serve System, “Confronting Concentrated
Poverty Policy Forum,” December 3, 2008,
165 Federal Financial Institutions Examination
available at:
Council website, “Community Reinvestment
<http://www.federalreserve.gov/newsevents/s
Act: Background & Purpose,” Undated,
peech/kroszner20081203a.htm>.
available at:
169 Remarks by Sheila Bair, Chairperson of the
<http://www.ffiec.gov/cra/history.htm>.
FDIC, Before the New America Foundation,
166 Federal Reserve Board website, “Community
December 17, 2008, available at:
Reinvestment Act,” Undated, available at:
<http://www.fdic.gov/news/news/speeches/ar
<http://www.federalreserve.gov/dcca/cra/>.
chives/2008/chairman/spdec1708.html>.
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87
MERGER MANIA
an average of about 440 mergers per year.171
The size of the mergers has increased to
phenomenal levels in recent years: In 2003,
11
Bank of America became a $1.4 trillion
financial behemoth after it bought FleetBos-
ton, making it the second-largest U.S. bank
IN THIS SECTION:
holding company in terms of assets.172 In
The effective abandonment of antitrust and
2004, JPMorgan Chase agreed to buy Bank
related regulatory principles over the last
One, creating a $1.1 trillion bank holding
two decades has enabled a remarkable
company.173
concentration in the banking sector, even in
From 1975 to 1985, the number of
advance of recent moves to combine firms as
a means to preserve the functioning of the
commercial banks was relatively stable at
financial system. The megabanks achieved
about 14,000. By 2005 that number stood at
too-big-to-fail status. While this should have
7,500, a nearly 50 percent decline.174
meant they be treated as public utilities
171
requiring heightened regulation and risk
Loretta J. Mester, Senior Vice President and
Director of Research at the Federal Reserve
control, other deregulatory maneuvers
Bank of Philadelphia, “Some Thoughts on
(including repeal of Glass-Steagall) enabled
the Evolution of the Banking System and the
Process of Financial Intermediation,” Eco-
these gigantic institutions to benefit from
nomic Review, First & Second Quarters,
explicit and implicit federal guarantees, even
2007, available at:
<http://www.frbatlanta.org/filelegacydocs/er
as they pursued reckless high-risk invest-
q107_Mester.pdf >.
172
ments.
Loretta J. Mester, Senior Vice President and
Director of Research at the Federal Reserve
Bank of Philadelphia, “Some Thoughts on
the Evolution of the Banking System and the
Merger mania in the financial industry has
Process of Financial Intermediation,” Eco-
nomic Review, First & Second Quarters,
been all the rage for more than 25 years.
2007, available at:
“Bigger is indeed better,” proclaimed the
<http://www.frbatlanta.org/filelegacydocs/er
q107_Mester.pdf >.
CEO of Bank of America in announcing its
173 Loretta J. Mester, Senior Vice President and
Director of Research at the Federal Reserve
merger with NationsBank in 1998.170
Bank of Philadelphia, “Some Thoughts on
In the United States, about 11,500 bank
the Evolution of the Banking System and the
Process of Financial Intermediation,” Eco-
mergers took place from 1980 through 2005,
nomic Review, First & Second Quarters,
2007, available at:
<http://www.frbatlanta.org/filelegacydocs/er
q107_Mester.pdf >.
170 Dean Foust, “BofA: A Megabank in the
174 Loretta J. Mester, Senior Vice President and
Making,” BusinessWeek, September 13,
Director of Research at the Federal Reserve
1999, available at:
Bank of Philadelphia, “Some Thoughts on
<http://www.businessweek.com/archives/19
the Evolution of the Banking System and the
99/b3646163.arc.htm>.
Process of Financial Intermediation,” Eco-
88
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By mid-2008 — before a rash of merg-
called too big to fail, TBTF, and it is a
ers consummated amidst the financial crash
wonderful bank.”176 The Comptroller of the
— the top 5 banks held more than half the
Currency agreed that the eleven largest U.S.
assets controlled by the top 150.175
banks were “too big to fail,” implying they
Regulators rarely challenged bank
would be rescued regardless of how much
mergers and acquisitions as stock prices
risk they took on.
skyrocketed and the financial party on Wall
Seven years later, U.S. banking law
Street drowned out the critics. But many
recognized TBTF with passage of the Fed-
argued that “bigger is not better” because it
eral Deposit Insurance Corporation Im-
raised the specter that any one individual
provement Act of 1991 (FDICIA). The Act
bank could become “too big to fail” (TBTF)
authorizes federal regulators to rescue
or at least “too big to discipline adequately”
uninsured depositors in large failing banks if
by regulators. The current financial crisis
such action is needed to prevent “serious
has confirmed these fears.
adverse effects on economic conditions or
In the modern era, “TBTF” reared its
financial stability.” FDICIA effectively
head in 1984, when the federal government
implies that any bank whose failure poses a
contributed $1 billion to save Continental
serious risk to the stability of the U.S.
Illinois Bank from default. As the seventh
banking system (i.e. “systemic risk”) is
largest bank in the United States, Continen-
exempt from going bankrupt and thus quali-
tal held large amounts of deposits from
fies for a taxpayer-financed rescue. It consti-
hundreds of smaller banks throughout the
tutes a significant exception to the FDICIA’s
Midwest. The failure of such a large institu-
general rule prohibiting the rescue of unin-
tion could have forced many smaller banks
sured depositors.
into default. As a result, the U.S. Comptrol-
The FDICIA also acts as an implicit in-
ler of the Currency orchestrated an unprece-
surance program for large financial institu-
dented rescue of the bank, including its
tions and an incentive for banks to gain
shareholders. During congressional hearings
TBTF status by growing larger through
on the matter, Representative Stewart B.
merger and acquisition. In 1999, economists
McKinney, R-Connecticut, pointedly ob-
within the Federal Reserve System warned
served, “We have a new kind of bank. It is
that “some institutions may try to increase
the value of their access to the government’s
nomic Review, First & Second Quarters,
financial safety net (including deposit insur-
2007, available at:
<http://www.frbatlanta.org/filelegacydocs/er
q107_Mester.pdf >.
176 Hearings before the Subcommittee on Finan-
175 Based on data from American Banker.
cial Institutions, 1984.
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89
ance, discount window access, payments
increased leverage),179 more investments in
system guarantees) through consolidation. If
derivatives,180 higher percentages of unin-
financial market participants perceive very
sured deposits, lower levels of core depos-
large organizations to be ‘too big to fail’ —
its,181 higher percentages of loans,182 and
i.e., that explicit or implicit government
lower levels of cash and marketable securi-
guarantees will protect debtholders or share-
ties. TBTF policy effectively operates as a
holders of these organizations — there may
government subsidy — and worse, an incen-
be incentives to increase size through con-
tive — for this kind of risk-taking, thereby
solidation....”177
increasing the vulnerability of the entire
International comparisons over a 100-
banking system and the likelihood of mas-
year period show that changes in the struc-
sive taxpayer-funded bailouts. Federal
ture and strength of safety net guarantees
Reserve economists found that the banking
may incentivize additional financial institu-
crisis of the late 1980s occurred because
tion risk-taking, and by extension, the
“large banks adopted a riskier stance, be-
motive to consolidate to increase the value
179 Rebecca S. Demsetz and Philip E. Strahan,
of access to the safety net.178
Federal Reserve Bank of New York, Re-
Studies have shown that compared to
search Paper 9506, April 1995, available at:
<http://www.newyorkfed.org/research/staff_
smaller banks, large banks take on greater
reports/research_papers/9506.pdf>. See also
risk in the form of lower capital ratios (i.e.
Arnold Danielson, “Getting Ready for the
21st Century: A Look at Recent Banking
Trends,” Banking Pol'y Rep., March 15,
177 Allen N. Berger, Board of Governors of the
1999. (Banks larger than $50 billion had an
Federal Reserve System, and Rebecca S.
average capital ratio of seven percent while
Demsetz and Philip E. Strahan of the Fed-
banks between $100 million to $2 billion in
eral Reserve Bank of New York, “The Con-
size had an average capital ratio of just over
solidation of the Financial Services Industry:
nine percent).
Causes, Consequences, and Implications for
180 Rebecca S. Demsetz and Philip E. Strahan,
the Future,” J. Banking & Finance, Vol. 23,
Federal Reserve Bank of New York, Re-
1999, available at:
search Paper 9506, April 1995, available at:
<http://www.federalreserve.gov/pubs/feds/1
<http://www.newyorkfed.org/research/staff_
998/199846/199846pap.pdf>.
reports/research_papers/9506.pdf>.
178 Allen N. Berger, Board of Governors of the
181 Ron J. Feldman and Jason Schmidt, Federal
Federal Reserve System, and Rebecca S.
Reserve Bank of Minneapolis, “Increased
Demsetz and Philip E. Strahan of the Fed-
use of uninsured deposits: Implications for
eral Reserve Bank of New York, “The Con-
market discipline,” March 2001. Available
solidation of the Financial Services Industry:
at:
Causes, Consequences, and Implications for
<http://www.minneapolisfed.org/publication
the Future,” J. Banking & Finance, Vol. 23,
s_papers/pub_display.cfm?id=2178>.
1999, available at:
182 Ron J. Feldman and Jason Schmidt, Federal
<http://www.federalreserve.gov/pubs/feds/1
Reserve Bank of Minneapolis, “Increased
998/199846/199846pap.pdf> (citing A.
use of uninsured deposits: Implications for
Saunders and B.K. Wilson, “Bank capital
market discipline,” March 2001. Available
and bank structure: A comparative analysis
at:
of the U.S., U.K., and Canada,” J. Banking
<http://www.minneapolisfed.org/publication
& Finance, 1999).
s_papers/pub_display.cfm?id=2178>.
90
SOLD OUT
yond what could sensibly be explained by
Evidence indicates executive compen-
scale economies.”183
sation plays a central role in the quest for
Supporters of bank consolidation argue
larger banks. This “empire-building,” as
that bigger banks create greater efficiencies
Federal Reserve economists put it, occurs
because of their larger economies of scale.
because compensation tends to increase with
But several studies have shown that large
firm size, “so managers may hope to achieve
bank mergers during the 1980s and 1990s
personal financial gains by engaging in
failed to improve overall efficiency or
[mergers and acquisitions].”186 George
profitability.184 Indeed, most studies found
Washington University banking law profes-
that post-merger cost increases and revenue
sor Arthur E. Wilmarth, Jr. agrees. “Not
losses offset any savings that the resulting
surprisingly,” he said, “studies have shown
banks accrued from cutting staff or closing
that managerial self-interest plays a major
branches.185
role in determining the frequency of mergers
among both corporations and banks.”187
183 John H. Boyd and Mark Gertler, “The Role of
In words that appear prescient today,
Large Banks in the Recent U.S. Banking
Professor Wilmarth aptly observed in 2002
Crisis,” 18 Fed. Res. Bank of Minneapolis
Q. Rev. 1, Winter 1994, available at:
that “the quest by big banks for TBTF status
<http://www.minneapolisfed.org/research/Q
R/QR1811.pdf>.
— like their pursuit of market power —
184 Allen N. Berger and David B. Humphrey,
should be viewed as a dangerous flight from
“The Dominance of Inefficiencies Over
Scale and Product Mix Economies in Bank-
discipline that will likely produce inefficient
ing,” J. Monetary Econ., 117-48, August 28,
1991; Allen N. Berger & David B. Hum-
growth and greater risk.” Reliance on finan-
phrey, “Megamergers in Banking and the
Use of Cost Efficiency as an Antitrust De-
Increased Risks” 2002 U. Ill. L. Rev. 2 215
fense,” 37 Antitrust Bull. 541, 554-65
(2002), available at:
(1992); Simon Kwan & Robert A. Eisenbeis,
<http://papers.ssrn.com/sol3/papers.cfm?abs
“Mergers of Publicly Traded Banking Or-
tract_id=315345>.
ganizations Revisited,” Fed. Res. Bank of
186 Allen N. Berger, Board of Governors of the
Atlanta, Econ. Rev., 4th Qtr. 1999; Jane C.
Federal Reserve System, and Rebecca S.
Linder & Dwight B. Crane, “Bank Mergers:
Demsetz and Philip E. Strahan of the Fed-
Integration and Profitability,” 7 J. Fin.
eral Reserve Bank of New York, “The Con-
Servs. Res. 35, 40-52 (1992); Stavros Peris-
solidation of the Financial Services Industry:
tiani, “Do Mergers Improve the X-
Causes, Consequences, and Implications for
Efficiency and Scale Efficiency of U.S.
the Future,” Journal of Banking and Fi-
Banks? Evidence from the 1980s,” 29 J.
nance, Vol. 23, 1999, available at:
Money, Credit & Banking 326, 329-33, 336-
<http://www.federalreserve.gov/pubs/feds/1
37 (1997); Steven J. Pilloff, “Performance
998/199846/199846pap.pdf>.
Changes and Shareholder Wealth Creation
187 Arthur E. Wilmarth, Jr., “The Transformation
Associated with Mergers of Publicly Traded
of the U.S. Financial Services Industry,
Banking Institutions,” 28 J. Money, Credit
1975-2000: Competition, Consolidation and
& Banking 294, 297-98, 301, 308-09 (1996).
Increased Risks” 2002 U. Ill. L. Rev. 2 215
185 Arthur E. Wilmarth, Jr., “The Transformation
(2002), available at:
of the U.S. Financial Services Industry,
<http://papers.ssrn.com/sol3/papers.cfm?abs
1975-2000: Competition, Consolidation and
tract_id=315345>.
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91
cial derivatives, for example, is extremely
Although the early consolidation of
concentrated among the largest commercial
banks, including related to the authorization
banks (the five largest commercial banks
of interstate banking, had some support
own 97 percent of the
among
public
interest
total amount of notional
advocates as a means to
As banking regulators fel
derivatives), and limited
create competition in very
under the spel of industry
almost entirely to the
localized markets,191 the
biggest 25.188 All of these
lobbyists and propagandists
intensive consolidation of
banks are of a size — and
the last 25 years goes far
who al eged that bigger
most the product of
beyond
whatever
might
banks would be more
mergers — that regulators
have been needed to en-
and antitrust enforcers
efficient, so too did anti-
hance
competition.
Yet
would not have tolerated a
regulators averted their eyes
trust enforcement agencies
quarter century ago.
from the well-known risks
fail to act to slow banking
Taxpayers are now
of banking consolidation.192
footing the bill for the
consolidation.
As banking regulators
financial industry’s in-
fell under the spell of
vestment in risky, over-
industry
lobbyists
and
leveraged and poorly understood financial
propagandists who alleged that bigger banks
schemes. By the end of 2008, the federal
would be more efficient, so too did antitrust
government pledged $8.5 trillion in eco-
enforcement agencies fail to act to slow
nomic assistance for financial institutions,189
banking consolidation.
primarily large commercial banks, that the
As with the erosion of effective bank-
federal government says were TBTF. 190
ing regulation, the corrosion of antitrust
enforcement traces back more than three
188 Comptroller of the Currency, “OCC's Quar-
terly Report on Bank Trading and Deriva-
<http://www.treasury.gov/initiatives/eesa/tra
tives Activities, Second Quarter 2008,”
nsactions.shtml>.
available at:
191 See “The Centralization of Financial Power:
<http://www.occ.treas.gov/ftp/release/2008-
Unintended Consequences of Government-
115a.pdf>.
Assisted Bank Mergers, “An Interview with
189 Kathleen Pender, “Government bailout hits
Bert Foer,” Multinational Monitor, Novem-
$8.5 trillion,” San Francisco Chronicle, No-
ber/December 2008, available at:
vember 26, 2008, available at:
<www.multinationalmonitor.org/mm2008/1
<http://www.sfgate.com/cgi-
12008/interview-foer.html>.
bin/article.cgi?file=/c/a/2008/11/26/MNVN1
192 Jake Lewis, “The Making of the Banking
4C8QR.DTL>.
Behemoths,” Multinational Monitor, June
190 U.S. Department of the Treasury, Troubled
1996, available at:
Asset Relief Program Transaction Report,
<http://www.multinationalmonitor.org/hype
December 9, 2008, available at:
r/mm0696.04.html>.
92
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decades, the victim of industry lobbies and
quarter century were generally permitted
laissez-faire ideology. In the case of anti-
with little quarrel from the Department of
trust, a conservative, corporate-backed
Justice, which typically mandated only the
campaign began in the 1970s to overturn
sell-off of a few overlapping banking
many common-sense insights on the costs of
branches.194
mergers. The “law-and-economics” move-
ment came to dominate law schools, schol-
■ ■ ■
arly writing and, eventually, the thinking of
the federal judiciary. Its principles became
194 See James Brock, “Merger Mania and Its
Discontents: The Price of Corporate Con-
the guiding doctrine for the Reagan-Bush
solidation,” Multinational Monitor,
Justice Department and Federal Trade
July/August 2005, available at:
<http://www.multinationalmonitor.org/mm2
Commission, the two U.S. agencies charged
005/072005/brock.html>. (In a brief review
of mergers through 2005, Brock writes,
with enforcing the nation's antitrust laws.
“Banking and finance has witnessed the
Based on a theoretical understanding of
same scene of cumulative consolidation:
Through two decades of ever-larger acquisi-
market efficiency, law-and-economics holds
tions, NationsBank became one of the coun-
try’s largest commercial banking concerns,
that many outlawed or undesirable anticom-
absorbing C&S/Sovran (itself a merged en-
petitive practices are irrational, and therefore
tity), Boatmen’s Bancshares ($9.7 billion
deal), BankSouth and Barnett Bank ($14.8
should never occur, or are possible only in
billion acquisition). Then, in 1998, Nations-
extreme and unlikely situations.
Bank struck a spectacular $60 billion merger
with the huge Bank of America, which itself
Antitrust enforcers operating under
had been busily acquiring other major
banks. The merger between NationsBank
these premises confined themselves to
and B of A created a financial colossus con-
addressing extreme abuses, like overt price-
trolling nearly $600 billion in assets, with
5,000 branch offices and nearly 15,000
fixing and hard-core cartels. Although the
ATMs. Bank of America then proceeded to
acquire Fleet Boston — which had just
Clinton administration moved away from a
completed its own multi-billion dollar ac-
hard-line law-and-economics approach, it
quisitions of Bank Boston, Bay Bank, Fleet
Financial, Shawmut, Summit Bancorp and
watched over a period of industry consolida-
NatWest. Giants Banc One and First Chi-
cago NBD — their size the product of nu-
tion that had seen no parallel since the
merous serial acquisitions — merged, and
merger wave at the start of the 20th cen-
the combined entity was subsequently ab-
sorbed by J.P. Morgan which, in turn, had
tury.193
just acquired Chase, after the latter had
merged with Manufacturers Hanover and
The great banking mergers of the last
Chemical Bank in the financial business of
underwriting stocks and bonds. Other mega-
mergers include the $73 billion combination
193 See Walter Adams and James Brock, “The
of Citicorp and Travelers Group in 1998, as
Bigness Complex: Industry, Labor, and
well as the acquisition of leading brokerage
Government in the American Economy,”
firms by big banks, including Morgan
Palo Alto: Stanford Economics and Finance,
Stanley’s ill-fated acquisition of Dean Wit-
2004.
ter.”)
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93
RAMPANT CONFLICTS OF
The stability and safety of mortgage-related
assets are ostensibly monitored by private
INTEREST: CREDIT
credit rating companies — overwhelmingly
12 RATINGS FIRMS’ FAILURE the three top firms, Moody’s Investors
Service, Standard & Poor’s and Fitch Rat-
ings Ltd.195 Each is supposed to issue inde-
IN THIS SECTION:
pendent, objective analysis on the financial
Credit ratings are a key link in the financial
soundness of mortgages and other debt
crisis story. With Wall Street combining
traded on Wall Street. Millions of investors
mortgage loans into pools of securitized
rely on the analyses in deciding whether to
assets and then slicing them up into tranches,
buy debt instruments like mortgage-backed
the resultant financial instruments were
attractive to many buyers because they
securities (MBSs). As home prices skyrock-
promised high returns. But pension funds
eted from 2004 to 2007, each agency issued
and other investors could only enter the
the highest quality ratings on billions of
game if the securities were highly rated.
dollars in what is now unambiguously
The credit rating firms enabled these
recognized as low-quality debt, including
investors to enter the game, by attaching
subprime-related mortgage-backed securi-
high ratings to securities that actually were
ties.196 As a result, millions of investors lost
high risk — as subsequent events have
billions of dollars after purchasing (directly
revealed. The credit ratings firms have a bias
or through investment funds) highly rated
to offering favorable ratings to new instru-
MBSs that were, in reality, low quality, high
ments because of their complex relationships
with issuers, and their desire to maintain and
risk and prone to default.
obtain other business dealings with issuers.
The phenomenal losses had many won-
This institutional failure and conflict of
dering how the credit rating firms could
interest might and should have been fore-
have gotten it so wrong. The answer lies in
stalled by the SEC, but the Credit Rating
the cozy relationship between the rating
Agencies Reform Act of 2006 gave the SEC
companies and the financial institutions
insufficient oversight authority. In fact, the
whose mortgage assets they rate. Specifi-
SEC must give an approval rating to credit
ratings agencies if they are adhering to their
195
own standards — even if the SEC knows
Often labeled “credit ratings agencies,” these
are private, for-profit corporations.
those standards to be flawed.
196 Edmund L. Andrews, “U.S. Treasury Secre-
tary Calls for Stronger Regulation on Hous-
ing Finance,” International Herald Tribune,
March 13, 2008, available at:
<http://www.iht.com/articles/2008/03/13/bu
siness/credit.php>.
94
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cally, financial institutions that issue mort-
“Originators of structured securities [e.g.
gage and other debt had been paying the
banks] typically chose the agency with the
three firms for credit ratings. In effect, the
lowest standards,”199 allowing banks to
“referees” were being paid by the “players.”
engage in “rating shopping” until a desired
One rating analyst observed, “This egre-
credit rating was achieved. The agencies
gious conflict of interest may be the single
made millions on MBS ratings and, as one
greatest cause of the present global eco-
Member of Congress said, “sold their inde-
nomic crisis ... . With enormous fees at
pendence to the highest bidder.”200 Banks
stake, it is not hard to see how these [credit
paid large sums to the ratings companies for
rating] companies may have been induced,
advice on how to achieve the maximum,
at the very least, to gloss over the possibili-
highest quality rating. “Let’s hope we are all
ties of default or, at the worst, knowingly
wealthy and retired by the time this house of
provide inflated ratings.”197 A Moody’s
cards falters,” a Standard & Poor’s em-
employee stated in a private company e-mail
ployee candidly revealed in an internal e-
that “we had blinders on and never ques-
mail obtained by congressional investiga-
tioned the information we were given [by
tors.201
the institutions Moody was rating].”
Other evidence shows that the firms ad-
The CEO of Moody’s reported in a
justed ratings out of fear of losing custom-
confidential presentation that his company is
ers. For example, an internal e-mail between
“continually ‘pitched’ by bankers” for the
senior business managers at one of the three
purpose of receiving high credit ratings and
ratings companies calls for a “meeting” to
that sometimes “we ‘drink the kool-aid.’”198
A former managing director of credit policy
199Testimony of Jerome S. Fons, Former Manag-
ing Director of Credit Policy, Moody’s, Be-
at Moody’s testified before Congress that,
fore the Committee on Oversight and Gov-
ernment Reform, U.S. House of Representa-
tives, October 22, 2008, available at:
197 Testimony of Sean J. Eagan, before the
<http://oversight.house.gov/documents/2008
Committee on Oversight and Government
1022102726.pdf>.
Reform, U.S. House of Representatives, Oc-
200 Rep. Christopher Shays, Before the Commit-
tober 22, 2008, available at:
tee on Oversight and Government Reform,
<http://oversight.house.gov/documents/2008
U.S. House of Representatives, October 22,
1022102906.pdf>.
2008, available at:
198 Opening Statement of Rep. Henry Waxman,
<http://oversight.house.gov/documents/2008
Chairman, Committee on Oversight and
1023162631.pdf>.
Government Reform, U.S. House of Repre-
201 Opening Statement of Rep. Henry Waxman,
sentatives, October 22, 2008, available at:
Chairman, Committee on Oversight and
<http://oversight.house.gov/documents/2008
Government Reform, U.S. House of Repre-
1022102221.pdf> (quoting a confidential
sentatives, October 22, 2008, available at:
presentation made by Moody’s CEO Ray
<http://oversight.house.gov/documents/2008
McDaniel to the board of directors in Octo-
1022102221.pdf> (quoting a confidential e-
ber 2007).
mail from an S&P employee).
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95
“discuss adjusting criteria for rating CDOs
MBSs and CDOs — heavily weighted with
[collateralized debt obligations] of real
toxic subprime mortgages — contributed to
estate assets this week because of the ongo-
more than half of the company’s ratings
ing
threat
of
losing
revenue by 2006.205
deals.”202 In another e-mail,
Although the ratings
“With enormous fees at
following a discussion of a
firms are for-profit com-
competitor’s share of the
stake, it is not hard to see
panies, they perform a
ratings market, an employee
quasi-public
function.
how these [credit rating]
of the same firm states that
Their failure alone could
aspects of the firm’s ratings
companies may have been
be considered a regulatory
methodology would have to
failure. But the credit
induced, at the very least, to
be revisited in order to
rating failure has a much
gloss over the possibilities
recapture market share from
more direct public con-
the competing firm.203
of default or, at the worst,
nection.
Government
The credit rating busi-
agencies explicitly relied
knowingly provide inflated
ness
was
spectacularly
on private credit rating
ratings.”
profitable, as the firms
firms to regulate all kinds
increasingly focused in the
of public and private
first part of this decade on structured finance
activities. And, following the failure of the
and new complex debt products, particularly
credit ratings firms in the Enron and related
credit derivatives (complicated instruments
scandals, Congress passed legislation giving
providing a kind of insurance on mortgages
the SEC regulatory power, of a sort, over the
and other loans). Moody’s had the highest
firms. However, the 2006 legislation prohib-
profit margin of any company in the S&P
ited the SEC from actually regulating the
500 for five years in a row.204 Its ratings on
credit ratings process.
The Securities and Exchange Commis-
202 “Summary Report of Issues Identified in the
sion was the first government agency to
Commission Staff’s Examinations of Select
Credit Rating Agencies,” Securities and Ex-
man, Before the Committee on Oversight
change Commission, July 2008, available at:
and Government Reform, October 22, 2008,
<http://www.sec.gov/news/studies/2008/cra
available at:
examination070808.pdf>.
<http://oversight.house.gov/documents/2008
203 “Summary Report of Issues Identified in the
1022102221.pdf>.
Commission Staff’s Examinations of Select
205 Rep. Jackie Speier, Before the Committee on
Credit Rating Agencies,” Securities and Ex-
Oversight and Government Reform, U.S.
change Commission, July 2008, available at:
House of Representatives, October 22, 2008,
<http://www.sec.gov/news/studies/2008/cra
available at:
examination070808.pdf>.
<http://oversight.house.gov/documents/2008
204Opening Statement of Rep. Henry A. Wax-
1023162631.pdf>.
96
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incorporate
credit
rating
requirements
gives a rank of “C” for the lowest rated (i.e.
directly into its regulations. In response to
high risk) bonds and a rank of “Aaa” —
the credit crisis of the early 1970s, the SEC
“triple A” — for bonds that are low risk and
promulgated Rule 15c3-1 (the net capital
earn its highest rating. Examples of highly
rule) which formally approved the use of
rated bonds include those issued by well-
credit rating firms as National Recognized
capitalized corporations, while bonds issued
Statistical
Ratings
Organizations
by corporations with a history of financial
(NRSROs).206 Rule 15c3-1 requires invest-
problems earn a low rating.
ment banks to set aside certain amounts of
If a bank begins experiencing financial
capital whenever they purchase a bond from
problems, Moody’s may downgrade the
a corporation or government. By requiring
bank’s bonds. It might downgrade from a
“capital set asides,” a financial “cushion” is
high grade of “Aaa” to a medium grade of
created on which investment banks can fall
“Baa” or even the dreaded “C,” depending
in the event of bond default. The amount of
on the severity of the bank’s financial prob-
capital required to be set aside depends on
lems. Downgrading bonds can trigger a
the risk assessment of each bond by the
requirement imposed by regulations or
credit rating firms. Purchasing bonds that
private contracts that require the corporation
have a high risk of default, as determined by
to immediately raise capital to protect its
one of the credit rating companies, requires
business. Banks might be forced to raise
a larger capital set asides than bonds that are
capital by selling securities or even the real
assessed to present a low risk of default. The
estate it owns.
“risk” or probability of default is determined
Evidence of falling home values began
for each bond by a credit rating company
emerging in late 2006, but there were no
hired by the issuer of the bond.
downgrades of subprime mortgage-related
Since the SEC’s adoption of the net
securities by credit rating agencies until June
capital rule, credit ratings have been incor-
2007.207 Indeed, the credit ratings firms had
porated into hundreds of government regula-
207
tions in areas including securities, pensions,
Testimony of Jerome S. Fons, Former Manag-
ing Director of Credit Policy, Moody's, Be-
banking, real estate, and insurance.
fore the Committee on Oversight and Gov-
ernment Reform, U.S. House of Representa-
For example, Moody’s Investor Service
tives, October 22, 2008, available at:
<http://oversight.house.gov/documents/2008
206 Arthur R. Pinto, “Section III: Commercial and
1022102726.pdf> (citing Gary Gorton,
Labor Law: Control and Responsibility of
2008, “The Panic of 2007,” NBER working
Credit Rating Agencies in the United
paper #14358); but see Gretchen Mo-
States,” American Journal of Comparative
regenson, “Investors in mortgage-backed se-
Law, 54 Am. J. Comp. L. 341, Supplement,
curities fail to react to market plunge,” In-
Fall 2006.
ternational Herald Tribune, February 18,
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97
failed to recognize the housing bubble, and
SEC broad authority to examine all books
the inevitability that when the enormous
and records of the companies. However,
bubble burst, it would lead to massive
intense lobbying by the rating firms blocked
mortgage defaults and the severe deprecia-
further reforms, and the law expressly states
tion in value of mortgage-backed securities.
that the SEC has no authority to regulate the
The firms also failed to consider that many
“substance of the credit ratings or the proce-
mortgage-backed securities were based on
dures and methodologies” by which any
dubious subprime and exploitative predatory
firm determines credit ratings. In 2007, SEC
loans that could not conceivably be repaid.
Chair Christopher Cox said, “it is not our
The current financial crisis is not the
role to second-guess the quality of the rating
first time credit rating companies dropped
agencies’ ratings.”210
the ball. During the dot-com bubble of the
In the highly deregulated financial
late 1990s, they were the “last ones to react,
markets of the last few decades, the credit
in every case” and “downgraded companies
rating firms were supposed to be the inde-
only after all the bad news was in, fre-
pendent watchdogs that carefully scrutinized
quently just days before a bankruptcy fil-
corporations and the financial products that
ing.”208 In addition, the firms were criticized
they offered to investors. Like the federal
in 2003 for failing to alert investors to the
agencies and Congress, the credit rating
impending collapse of Enron and World-
companies failed to protect the public.
Com. As a result, Congress passed the
Credit Rating Agency Reform Act of
■ ■ ■
2006209 which requires disclosure to the
SEC of a general description of each firm’s
procedures and methodologies for determin-
ing credit ratings, including historical down-
grade and default rates within each of its
credit rating categories. It also grants the
2007, available at:
<http://www.iht.com/articles/2007/02/18/yo
urmoney/morgenson.php>. (Moody’s
“downgraded only 277 subprime home eq-
uity loan tranches [in 2006], just 2 percent
of the home equity securities rated by the
210 Testimony of SEC Chairman Christopher
agency.”)
Cox, Before the U.S. Senate Committee on
208 Frank Partnoy, Infectious Greed: How Deceit
Banking, Housing and Urban Affairs, Sep-
and Risk Corrupted the Financial Markets
tember 26, 2007, available at:
352, New York: Times Books (2003).
<http://www.sec.gov/news/testimony/2007/t
209 15 U.S.C. § 78o-7.
s092607cc.htm>.
98
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Part II:
Wall Street’s
Washington Investment
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99
Wal Street’s Campaign
reporting rules.
During the decade-long period:
Contributions and
• Commercial banks spent more than
$154 million on campaign contribu-
tions, while investing $383 million
Lobbyist Expenditures
in officially registered lobbying;
• Accounting firms spent $81 million
The financial sector invested more than $5
on campaign contributions and $122
billion in political influence purchasing in
million on lobbying;
the United States over the last decade.
• Insurance companies donated more
The entire financial sector (finance, in-
than $220 million and spent more
surance, real estate) drowned political
than $1.1 billion on lobbying; and
candidates in
campaign
contributions,
• Securities firms invested more than
spending more than $1.738 billion in federal
$512 million in campaign contribu-
elections from 1998-2008. Primarily reflect-
tions, and an additional nearly $600
ing the balance of power over the decade,
million in lobbying. Hedge funds, a
about 55 percent went to Republicans and
subcategory of the securities indus-
45 percent to Democrats. Democrats took
try, spent $34 million on campaign
just more than half of the financial sector’s
contributions (about half in the 2008
2008 election cycle contributions.
election cycle); and $20 million on
The industry spent even more — top-
lobbying. Private equity firms, a
ping $3.3 billion — on officially registered
subcategory of the securities indus-
lobbyists during the same period. This total
try, contributed $58 million to fed-
certainly underestimates by a considerable
eral candidates and spent $43 mil-
amount what the industry spent to influence
lion on lobbying.
policymaking. U.S. reporting rules require
Individual firms spent tens of millions
that lobby firms and individual lobbyists
of dollars each. During the decade-long
disclose how much they have been paid for
period:
lobbying activity, but lobbying activity is
• Goldman Sachs spent more than $46
defined to include direct contacts with key
million on political influence buy-
government officials, or work in preparation
ing;
for meeting with key government officials.
Public relations efforts and various kinds of
• Merrill Lynch spent more than $68
million;
indirect lobbying are not covered by the
100
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• Citigroup spent more than $108 mil-
whopping 6,738.
lion;
Within the financial sector, industry
• Bank of America devoted more than
groups deployed legions of lobbyists. In
$39 million;
2007:212
• JPMorgan Chase invested more than
• Accounting firms employed 178
$65 million; and
lobbyists;
• Accounting
giants
Deloitte
&
• Insurance companies had 1,219 lob-
Touche, Ernst & Young, KPMG and
byists working for them;
Pricewaterhouse spent, respectively,
• Real estate interests hired 1,142
$32 million, $37 million, $27 mil-
lobbyists;
lion and $55 million.
• Finance and credit companies em-
The number of people working to ad-
ployed 415 lobbyists;
vance the financial sector’s political objec-
• Credit unions maintained 96 lobby-
tives is startling. In 2007,211 the financial
ists;
sector employed a staggering 2,996 separate
• Commercial banks employed 421
lobbyists to influence federal policy making,
lobbyists;
more than five for each Member of Con-
• Securities and investment firms
gress. This figure only counts officially
maintained 1,023 lobbyists; and
registered lobbyists. That means it does not
• Miscellaneous other financial com-
count those who offered “strategic advice”
panies employed 134 lobbyists.
or helped mount policy-related PR cam-
A great many of those lobbyists entered
paigns for financial sector companies. The
and exited through the revolving door
figure counts those lobbying at the federal
connecting the lobbying world with gov-
level; it does not take into account lobbyists
ernment. Surveying only 20 leading firms in
at state houses across the country. To be
the financial sector (none from the insurance
clear, the 2,996 figure represents the number
industry or real estate), we found that 142
of separate individuals employed by the
212 These figures do not double count within the
financial sector as lobbyists in 2007. We do
industry group, but total more than the fig-
not double count individuals who lobby for
ure for the entire financial sector because we
did not eliminate overlaps between industry
more than one company; the total number of
sectors. Thus, for these totals, if John Smith
works as a lobbyist for two accounting
financial sector lobby hires in 2007 was a
firms, he counts as only one lobbyist for the
accounting industry. If he works as a lobby-
ist for an accounting firm and an insurance
211 We chose 2007 as the most recent year for
company, he counts as one for the account-
which full data was available at the time we
ing industry and one for the insurance indus-
conducted our research.
try.
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101
industry lobbyists during the period 1998-
of their campaign contributions for each
2008 had formerly worked as “covered
election cycle over the last decade; the lobby
officials” in the government. “Covered
firms they employed each year, and the
officials” are top officials in the executive
amount paid to those firms; and covered
branch (most political appointees, from
official lobbyists they employed (i.e., lobby-
members of the cabinet to directors of
ists formerly employed as top officials in the
bureaus embedded in agencies), Members of
executive branch, or as former Members of
Congress, and congressional staff.
Congress or congressional staff).
Nothing evidences the revolving door —
or Wall Street’s direct influence over poli-
■ ■ ■
cymaking — more than the stream of Gold-
man Sachs expatriates who left the Wall
Methodological Note
Street goliath, spun through the revolving
door, and emerged to hold top regulatory
Our information on campaign contributions
positions. Topping the list, of course, are
and lobby expenditures comes from man-
former Treasury Secretaries Robert Rubin
dated public filings, and the enormously
and Henry Paulson, both of whom had
helpful data provided by the Center for
served as chair of Goldman Sachs before
Responsive Politics.
entering government.
Our figures on total and annual sector,
In the charts that follow in this part, we
industry and firm campaign contributions
detail campaign contributions and lobby
and lobby expenditures are drawn from the
expenditures from 1998-2008 for the overall
Center for Responsive Politics.
financial sector and for the industry compo-
Our campaign contribution data is or-
nents of the sector. We also provide aggre-
ganized by biannual Congressional election
gated information on number of industry
cycles. Thus the total for 1998 also includes
lobbyists and number of industry lobbyists
contributions made in 1997.
circling through the revolving door. In the
Our data on total number of official
appendix to this report, we provide exten-
lobbyists is compiled from data prepared by
sive information on the campaign contribu-
the Center for Responsive Politics. The
tions and lobbyists of 20 leading companies
Center for Responsive Politics lobbyist
in the financial sector — five each from
database lists all individual lobbyists report-
commercial banking, securities, accounting
ing to the Senate Office of Public Records.
and hedge fund industries. For each profiled
We tallied up totals from that database.
company, we identify the top 20 recipients
Our data on number of covered official
102
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lobbyists is drawn from the original disclo-
sure statements filed with the Senate Office
of Public Records.
Our listing of the top 20 biannual re-
cipients of campaign contributions from our
20 profiled firms uses data compiled from
the Center for Responsive Politics where
possible. In four cases where the Center had
not compiled the data, we compiled the
information using the Center’s raw data on
individual campaign contributors and infor-
mation on the company’s political action
committee (PAC) contributions. That is, we
tracked donations from every person with,
for example, Lehman Brothers as an em-
ployer,213 compiled them into a database;
added in the Lehman Brothers PAC contri-
butions; and then list the top 20 recipients.
We compiled donations for Lehman Broth-
ers, Wachovia, Wells Fargo and KPMG.
■ ■ ■
213
Our compilation is based only on the top
1,000 largest contributors affiliated with
each company.
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103
Financial Sector
Campaign Contributions and Lobbying Expenditures
Finance, Insurance, Real Estate
$5,178,835,253
Decade-long campaign contribution total (1998-2008): $1,738,284,032
Decade-long lobbying expenditure total (1998-2008): $3,440,551,221
Campaign Contributions
2008
$442,535,157
2006
$259,023,355
2004
$339,840,847
2002
$233,156,722
2000
$308,638,091
1998
$155,089,860
Lobbying Expenditures
2008
$454,879,133
2007
$417,401,740
2006
$374,698,174
2005
$371,576,173
2004
$338,173,874
2003
$324,865,802
2002
$268,886,799
2001
$235,129,868
2000
$231,218,026
1999
$213,921,725
1998
$209,799,907
Source: Center for Responsive Politics, <www.opensecrets.org>.
104
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Financial Sector
Official Lobbyists
Finance, Insurance, Real Estate
2007 total official lobbyists for financial sector: 2,996
Covered official lobbyists for 20 profiled firms,
Decade-long total (1998-2008): 142
Source: Center for Responsive Politics, <www.opensecrets.org>.
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105
Securities Firms
Decade-long campaign contribution industry total (1998-2008):
$512,816,632
Decade-long lobbying expenditure industry total (1998-2008):
$599,955,649
Campaign Contributions for 5 Leading Firms
Bear Stearns
$6,355,737
Goldman Sachs
$25,445,983
Lehman Brothers
$6,704,574
Merrill Lynch
$9,977,724
Morgan Stanley
$14,367,857
Lobbying Expenditures for 5 Leading Firms
Bear Stearns
$9,550,000
Goldman Sachs
$21,637,530
Lehman Brothers
$8,660,000
Merrill Lynch
$59,076,760
Morgan Stanley
$20,835,000
Source: Center for Responsive Politics, <www.opensecrets.org>.
106
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Commercial Banks
Decade-long campaign contribution industry total (1998-2008):
$154,868,392
Decade-long lobbying expenditure industry total (1998-2008):
$382,943,342
Campaign Contributions for 5 Leading Firms
Bank of America
$11,629,260
Citigroup
$19,778,382
JP Morgan Chase & Co
$15,714,953
Wachovia Corp.
$3,946,727
Wells Fargo
$5,330,022
Lobbying Expenditures for 5 Leading Firms
Bank of America
$28,635,440
Citigroup
$88,460,000
JP Morgan Chase & Co
$49,372,915
Wachovia Corp.
$11,996,752
Wells Fargo
$16,637,740
Source: Center for Responsive Politics, <www.opensecrets.org>.
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107
Hedge Funds*
Decade-long campaign contribution industry total (1998-2008):
$33,742,815
Decade-long lobbying expenditure industry total (1998-2008):
$20,252,000
Campaign Contributions for 5 Leading Firms
Bridgewater Associates
$274,650
DE Shaw Group
$3,100,255
Farallon Capital Management
$1,058,953
Och-Ziff Capital Management
$338,552
Renaissance Technologies
$1,560,895
Lobbying Expenditures for 5 Leading Firms
Bridgewater Associates
$855,000
DE Shaw Group
$680,000
Farallon Capital Management
$1,005,000
Och-Ziff Capital Management
$200,000
Renaissance Technologies
$740,000
* Hedge fund contributions are included in the overall securities campaign contributions and lobbying
expenditure totals.
Source: Center for Responsive Politics, <www.opensecrets.org>.
108
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Accounting Firms
Decade-long campaign contribution industry total (1998-2008):
$81,469,000
Decade-long lobbying expenditure industry total (1998-2008):
$121,658,156
Campaign Contributions for 5 Leading Firms
Arthur Andersen
$3,324,175
Deloitte & Touche
$12,120,340
Ernst & Young
$12,482,407
KPMG LLP
$8,486,392
Pricewaterhouse
$10,800,772
Lobbying Expenditures for 5 Leading Firms
Arthur Andersen
$1,900,000
Deloitte & Touche
$19,606,455
Ernst & Young
$25,108,536
KPMG LLP
$19,103,000
Pricewaterhouse
$44,291,084
Source: Center for Responsive Politics, <www.opensecrets.org>.
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109
Conclusion and
The dangers inherent in these policies
were evident to any careful observer. Con-
sumer groups, some investor advocates,
Recommendations:
independent economists and analysts, and
some regulators all sounded the alarm as
Principles for a New
each of the actions chronicled in this report
were first proposed.
Financial Regulatory
Those warnings were ignored, how-
ever. They were drowned out by the ca-
Architecture
cophony of well-paid lobbyists and the
jingle of cash registers opening and closing
as Wall Street handed out hundreds of
For more than 25 years, regulatory control
millions in political contributions.
over the financial sector has steadily eroded.
Now, after the trillions of dollars in
This deregulatory trend accelerated in the
taxpayer money has been spent, there is
last decade: In 1999, Congress, with the
widespread agreement that deregulation
support of the Clinton White House passed
went too far, and that new regulatory initia-
the Gramm-Leach-Bliley Act of 1999,
tives are required. But as with each of the
removing the firewalls between commercial
twelve steps on the road to financial ruin,
banking on the one hand and investment
the financial industry is resisting meaningful
banking and insurance on the other; federal
reforms.
agencies declined to regulate financial
The repeal of Glass-Steagall and the
derivatives and Congress then enshrined this
bank mergers already authorized cannot
head-in-the-sand policy as law; federal
easily be undone, but both those issues
regulators rationalized the subprime lending
require very careful scrutiny. The leading
boom as good housing policy rather than the
independent investment banks have all
ticking time bomb that it self-evidently was;
merged into commercial banks or converted
and federal officials collaborated with Wall
themselves into bank holding companies;
Street to permit extraordinary increases in
the very severe risk is that the investment
the amount of money firms could lend or
bank culture will again influence traditional
borrow for every dollar of their own capital.
banking operations, and encourage danger-
All of these deregulatory moves created
ous and unsustainable risk-taking. The bank
the conditions for the current financial
merger trend is actually escalating as a
implosion.
consequence of the financial crisis, as fed-
110
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eral regulators bless shot-gun marriages in
been treated as — conclusive evidence of a
order to avoid committing still more tax-
financial system out of control, one that was
payer money to making depositors whole.
beginning to devour rather than serve the
But much more care should taken in author-
real economy. There should be no deference
izing additional mergers. Also, as Bert Foer
shown to Wall Street interests complaining
of the American Antitrust Institute points
that a new regulatory regime will hurt their
out, many of the recently consummated
profitability. The Wall Street operators have
mergers are almost certain to fail. Policy-
destroyed their own institutions, and their
makers need to take a comprehensive as-
earlier profits are now revealed to be only
sessment of banking concentration; for if the
the froth from a bubble economy and finan-
existing high levels of concentration are to
cial sleight-of-hand. In any case, the Ameri-
be permitted, regulatory review must be
can economy cannot be based on finance
much more intensive, and controls on big
and the trading of paper. Looking back, we
bank activity much more extensive.
see that the financial economy did not
Beyond undoing the deregulatory ma-
increase America’s true wealth, but just the
neuvers documented in this report, an af-
opposite: Wall Street siphoned profits from
firmative regulatory agenda must establish a
the real economy, and from the checking
new framework for financial sector regula-
accounts of consumers, workers and inves-
tion. It should aim to reduce the size of the
tors, until the system collapsed, and con-
financial sector, reduce reliance on overly
sumer, workers and investors were asked to
complicated financial instruments, and
foot the bill.
provide robust and multi-faceted protections
for consumers. We, and many others, will be
2. Hedge funds and financial derivatives
proposing specific regulatory reforms over
must be regulated.
the course of the next year. Here, we con-
What is a hedge fund? As a legal matter, the
cluded with overarching premises that
term references investment funds that escape
should guide the new financial regulatory
Securities
and
Exchange
Commission
architecture.
regulatory authority on the grounds that they
serve sophisticated investors. But the evi-
1. The financial sector should serve and
dence is once again overwhelming that
be subordinate to the real economy.
sophisticated investors cannot be trusted to
From 2004-2007, financial sector profits
protect their own interests (see Bernard
amounted to more than a third of overall
Madoff). But more important, these non-
corporate profits. This is — and should have
regulated entities pose systemic risks to the
SOLD OUT
111
financial sector, not just to the wealthy.
Other mechanisms will enhance transpar-
Cities, states, colleges, non-profit organiza-
ency and simplify some overly complicated
tions, and every American turned out to be
financial instruments: these include “skin in
at risk from the machinations of the so-
the game” requirements and prohibitions on
called sophisticated financial sector. All
certain practices (for example, tranching of
investment vehicles must be subjected to the
securities214) that add complexity and confu-
same regulatory requirements — and those
sion, but no social value.
standards must be elevated dramatically.
Finally, not all financial derivatives should
4. Prohibit certain financial instruments.
be permitted to continue to trade. But those
Wall Street has proved Warren Buffett right
for which a legitimate purpose can be shown
in labeling financial derivatives “weapons of
must be brought into the regulatory system,
financial destruction.” Synthetic collateral-
with guarantees of transparency, restrictions
ized debt obligations — a kind of credit
on leverage and requirements for “skin in
default swap215 — are among the worst
the game.”
abuses of the current system, enabling
legalized, large-scale betting by entities not
3. Enhanced standards of transparency.
party to the underlying transaction. What-
Hedge funds, investment banks, insurance
ever hypothetical benefit such instruments
companies and commercial banks have
have for establishing a market price for
engaged in such complicated and inter-
credit default swaps is vastly outweighed by
twined transactions that no one could track
the actual and demonstrable damage they
who owes what, to whom. AIG apparently
have done to the real economy. They should
didn't even know who it had insured, and on
what terms, through the credit default swaps
214 For further discussion of the case for
it participated in. Moreover, the packaging
prohibiting tranching, see Robert Kuttner,
“Financial Regulation: After the Fall,”
and re-packaging of mortgages into various
Demos, January 2009, available at:
<http://www.demos.org/publication.cfm?cur
esoteric securities undermined the ability of
rentpublicationID=B8B65B84%2D3FF4%2
the financial markets to correctly value these
D6C82%2D5F3F750B53E44E1B>.
215 See also this helpful discussion explaining
financial instruments. Baseline transparency
synthetic CDOs from Portfolio’s Felix
Salmon, available at:
requirements must include an end to off-the-
<http://www.portfolio.com/views/blogs/mar
books transactions, detailed reporting of
ket-movers/2008/11/28/understanding-
synthetics>. Essential, synthetic CDOs
holdings by all investment funds, and selling
involve the creation of insurance on a bond
(someone pays for the insurance, and
and trading of all permitted financial deriva-
someone agrees to insure against failure of
tives on regulated and public exchanges.
the bond), with one important condition:
neither party actually holds the bond.
112
SOLD OUT
be prohibited.
6. Limit leverage.
High flyers like leveraged investments
5. Adopt the precautionary principle216
because they offer the possibility of very
for exotic financial instruments.
high returns. But, as we have seen, they also
The burden should be placed on those
enable extremely risky investments that can
urging the creation or trade of exotic finan-
vastly exceed an investor's actual assets.
cial instruments — existing and those yet to
This degree of leverage turns the financial
be invented — to show why they should be
system into a game of musical chairs —
permitted. They should be required to show
those left standing when the music stops are
the affirmative, social benefit of the new
wiped out. The entire financial system is
instrument, and prove why these benefits
presently at risk because the amount of
outweigh risks. They should be specifically
leverage far exceeded the assets needed to
required to explain why the instrument does
back it up once investors sought to convert
not worsen financial systemic risk, taking
their holdings to cash. There should be
into account recent experience where pur-
stringent restrictions on the use of leverage
ported diversification of risk led to its spread
by all players in the financial system. These
and exponential increase. Regulators should
include enhanced capital requirements for
maintain a strong bias against complicated
banks and investment banks (and especially
new instruments, recognizing that complex-
the build-up of capital in good times); and
ity both introduces inherent uncertainty and
increased margin requirements, so that
is often used to obscure dangers, risks and
parties buying securities, futures or options
bad investments.217
must put up more collateral.
216 The precautionary principle is a term most
7. Impose a financial transactions tax.
frequently used in the environmental
A small tax on each financial transaction218
context. It suggests that, for example, before
a chemical can be introduced on the market,
it must be shown to be safe. This approach
stands against the notion that a new
[collateralized debt obligations] built on top
chemical is presumed safe and permitted on
of the other CDOs, they hide what the
the market, until regulators can prove that it
underlying assets are really like, or what the
is not.
underlying mortgages are really like. In
217 See “Plunge: How Banks Aim to Obscure
some of the off-balance sheet special
Their Losses,” An Interview with Lynn
purpose entities, like with Enron, it was to
Turner, Multinational Monitor,
hide their financing.”)
November/December 2008, available at:
218 Pollin, Baker and Schaberg suggest a .5
<http://www.multinationalmonitor.org/mm2
percent tax on stock trades, and comparable
008/112008/interview-turner.html> (“Wall
burdens on other transactions (for example,
Street typically designs these things so that
this works out to .01 percent for each
they hide something from the public or their
remaining year of maturity on a bond.) See
investors. So when you have the CDOs
Robert Pollin, Dean Baker, and Marc
SOLD OUT
113
would discourage speculation, curb the
for staying out. Wall Street compensation
turbulence in the markets, and, generally,
should be lowered overall, but most impor-
slow things down. It would give real-
tant is imposing legal requirements that
economy businesses more space to operate
compensation be tied to long-term perform-
without worrying about how today's deci-
ance. If employees had to live with the long-
sions will affect their stock price tomorrow,
term consequences of their investment
or the next hour. And it would be a steeply
decisions, they would employ very different
progressive tax that could raise substantial
strategies.
sums for useful public purposes.
9. Adopt a financial consumer protection
8. Crack down on excessive pay and the
agenda.
Wall Street bonus culture.
Commercial banks and Wall Street backers
Wall Street salaries and bonuses are out of
have, to a considerable extent, built their
control. The first and most simple demand is
business model around abusive lending
to ensure no bonus payments for firms
practices. Predatory mortgage lenders, credit
receiving governmental bailout funds. If
card companies, student loan corporations
they had to be bailed out, why does anyone
— all pushed unsustainable levels of credit,
in the firm deserve a bonus? Even more
on onerous terms frequently indecipherable
importantly, bonus payments with taxpayer
to borrowers, and with outrageous hidden
money is an outrageous misuse of public
fees and charges. A new financial consumer
funds.
protection agency should be established;
Beyond the bailouts, however, there is
interest rates, fees and charges should all be
a need to address the Wall Street bonus
capped (especially now that Americans who
culture. Paid on a yearly basis, Wall Street
are in effect borrowing their own money
bonuses can be 10 or 20 times base salary,
from banks and credit card companies who
and commonly represent as much as four
received bailout funds). Impediments to
fifths of employees' pay. In this context, it
legal accountability for fraud and other
makes sense to take huge risks. The payoffs
unlawful conduct, such as the holder in due
from benefiting from risky investments or a
course rule, preemption of state laws, and
bubble are dramatic, and there’s no reward
the Private Securities Litigation Reform Act
should be withdrawn or repealed.
Schaberg, “Financial Transactions Taxes for
the U.S. Economy,” 2002, Political
Economy Research Institute, available at:
<http://www.peri.umass.edu/236/hash/aef97
d8d65/publication/172>.
114
SOLD OUT
10. Give consumers the tools to organize
almost every step, public interest advocates
themselves.
and independent-minded regulators and
Federal law should empower consumers to
Members of Congress cautioned about the
organize into independent financial consum-
hazards that lay ahead — and they were
ers associations. Lenders should be required
proven wrong only in underestimating how
to facilitate such organization by their
severe would be the consequences of de-
borrowers (through mailings to borrowers,
regulation. Good arguments could not
on behalf of independent consumer organi-
compete with the combination of political
zations), as should corporations to their
influence and a reckless and fanatical zeal
shareholders. With independent organiza-
for deregulation. $5 billion buys a lot of
tions funded by small voluntary fees, con-
friends. In one sense, this report can be
sumers could hire their own independent
considered a case study in the need for the
representatives to review financial players’
elimination of special interest money from
activities, scour their books, and advocate
American politics, but Congress will address
for appropriate public policies.
financial re-regulation this year, and reform
of our political process does not appear on
■ ■ ■
the horizon. The emergent consensus on the
imperative to re-regulate the financial sector
Is this agenda politically feasible? It has the
demonstrates that, in the wake of the finan-
advantage of being necessary: Recent years'
cial meltdown, the prevailing regulatory
experience shows beyond any reasonable
paradigm has shifted. Whether the forces
argument that a deregulated and unre-
that brought America’s economy to the
strained financial sector will destroy itself
precipice can be forced to accede to that
— and threaten the U.S. and global econo-
shift — whether the public interest will
mies in the process.
prevail — remains to be seen.
The deregulatory decisions profiled in
this report were not made on their merits. At
■ ■ ■
Appendix 115
Appendix: Leading Financial Firm Profiles of Campaign
Contributions and Lobbying Expenditures
Securities Firms .…………………………………………………….
115
1. Bear Stearns ………………………………………………...…...…………..
115
2. Goldman Sachs ………………………………………………………………
121
3. Lehman Brothers ….........................................................................................
129
4. Merrill Lynch …..............................................................................................
135
5. Morgan Stanley …………………………………………………...………....
142
Commercial Banks ………………………………………………….
148
1. Bank of America ...…….…………………………………...…...…………...
148
2. Citigroup ........………….……………………………………………………
155
3. JP Morgan Chase & Co...................................................................................
164
4. Wachovia Corp. ..............................................................................................
171
5. Wells Fargo .....…………………………………………………...………....
177
Hedge Funds …………………………………………….......………
183
1. Bridgewater Associates ..…………………………………...…...…………...
183
2. DE Shaw Group ..……………………………………………………………
185
3. Farallon Capital Management .........................................................................
189
4. Och-Ziff Capital Management ........................................................................
193
5. Renaissance Technologies ...……………………………………...………....
196
Accounting Firms ……………………………………………………
199
1. Arthur Andersen .…………………………………………...…...…………...
199
2. Deloitte & Touche ...………………………………………………………....
203
3. Ernst & Young ...….........................................................................................
210
4. KPMG LLG ..…..............................................................................................
217
5. Pricewaterhouse ……...…………………………………………...………....
224
116
Appendix
Investment Banks: Bear Stearns
Decade-long campaign contribution total (1998-2008): $6,355,737
Decade-long lobbying expenditure total (1998-2008): $9,550,000
Bear Stearns Campaign Contributions:219
2008 Top Recipients
2006 Top Recipients
TOTAL:
$1,241,290
TOTAL:
$938,619
1.
Rudy Giuliani (R)
$130,091
1.
Chris Dodd (D)
$67,850
2.
Hillary Clinton (D)
$127,460
2.
Joe Lieberman (I)
$49,610
3.
John McCain
$98,200
3.
Martha Rainville (R)
$14,800
4.
Barack Obama (D)
$60,503
4.
Hillary Clinton (D)
$13,575
5.
Christopher Dodd (D)
$48,700
5.
Deborah Pryce (R)
$13,000
6.
Mitt Romney (R)
$31,550
6.
Spencer Bachus (R)
$10,000
7.
Nita Lowey (D)
$12,200
7.
Rick Santorum (R)
$8,700
8.
Frank Lautenberg (D)
$11,600
8.
Richard Baker (R)
$7,500
9.
Paul Kanjorski (D)
$7,500
8.
Jim McCrery (R)
$7,500
9.
Elizabeth Dole (R)
$7,500
10. Paul Kanjorski (D)
$6,500
11. Charles Rangel (D)
$7,300
11. Rudy Giuliani (R)
$6,300
12. John Edwards (D)
$6,850
Christopher Shays
12. (R)
$6,165
13. Kirsten Gillibrand (D)
$6,600
13. Barney Frank (D)
$5,500
14. Dick Durbin (D)
$6,400
13. Pete Sessions (R)
$5,500
15. Steny Hoyer (D)
$6,000
15. Evan Bayh (D)
$5,000
16. Bill Richardson (D)
$5,250
15. Mike Crapo (RD)
$5,000
17. Tim Johnson (D)
$5,000
15. Michael Oxley (R)
$5,000
17. Spencer Bachus (R)
$5,000
15. Bill Thomas (R)
$5,000
17. Barney Frank (D)
$5,000
Christopher Shays
15. Patrick Tiberi (R)
$5,000
20. (R)
$4,800
20. Mike Ferguson (R)
$4,600
219 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix 117
2004 Top Recipients220
7.
John Kerry (D)
$7,000
TOTAL:
$1,458,005
8.
Ron Kirk (D)
$6,990
1.
George W Bush (R)
$198,200
9.
Tim Johnson (D)
$6,000
2.
John Kerry (D)
$65,400
9.
Pete Domenici (R)
$6,000
3.
Wesley Clark (D)
$41,000
9.
Michael Oxley (R)
$6,000
4.
Rick Santorum (R)
$20,500
9.
Charles Rangel (D)
$6,000
5.
Charles Schumer (D)
$18,000
13. Artur Davis (D)
$5,400
6.
Richard Gephardt (D)
$13,500
14. Denise Majette (D)
$5,250
7.
John Peterson (R)
$12,000
15. Paul Kanjorski (D)
$5,000
Charles Wieder Dent
8.
(R)
$11,080
16. Max Baucus (D)
$4,500
9.
Pete Sessions (R)
$10,580
16. Pat Toomey (R)
$4,000
10. Lowey, Nita M (D)
$10,000
16. Bill Thomas (R)
$4,000
11. Erskine Bowles (D)
$8,080
19. Deborah Pryce (R)
$3,500
12. Tom Daschle (D)
$8,000
20. Joe Biden (D)
$3,250
12. James DeMint (R)
$8,000
12. John Thun, (R)
$8,000
2000 Top Recipients
12. David Vitter (R)
$8,000
TOTAL:
$1,243,379
16. Rahm Emanuel (D)
$7,000
1.
Rick Lazio (R)
$40,000
16. Luis Fortuno (3)
$7,000
2.
Jon Corzine (D)
$23,250
18. John Edwards (D)
$6,250
3.
Spencer Abraham (R)
$18,500
Charles Boustany Jr
4.
Hillary Clinton (D)
$15,500
19. (R)
$6,080
5.
Vito Fossella (R)
$11,000
20. Timothy Bishop (D)
$5,500
6.
Al Gore (D)
$10,000
7.
Charles Schumer (D)
$9,500
2002 Top Recipients
8.
George W Bush
$7,000
TOTAL:
$661,838
9.
Charles Rangel (D)
$5,811
1.
Charles Schumer (D)
$94,900
10. Orrin Hatch (R)
$5,500
2.
Christopher Dodd (D)
$92,900
David Lawther John-
3.
Chuck Grassley (R)
$16,000
10. son (D)
$5,500
4.
Jack reed (R)
$13,000
12. Edolphus Towns (D)
$5,000
5.
Nita Lowey (D)
$11,250
13. Tom Harkin (D)
$3,000
6.
Jack Conway (D)
$7,750
13. Marge Roukema (R)
$3,000
13. Howard Berman (D)
$3,000
13. George Allen (R)
$3,000
220 Based on highest 1,000 contributions and
17. Richard Neal (D)
$2,500
PAC money.
118
Appendix
18. Steve Forbes (R)
$2,250
10. Newt Gingrich (R)
$3,000
18. John McCain (R)
$2,250
13. Rick White (R)
$2,550
20. William Roth (R)
$2,000
14. Jerry Weller (R)
$2,500
20. Trent Lott (R)
$2,000
15. Billy Tauzin (R)
$2,050
20. Rod Grams (R)
$2,000
15. Thomas Manton (D)
$2,050
20. Robert Torricelli (D)
$2,000
17. Amo Houghton (R)
$2,000
20. Richard Lugar (R)
$2,000
17. Bob Graham (D)
$2,000
20. Phil Gramm (R)
$2,000
17. Charles Grassley (R)
$2,000
20. Phil Crane (R)
$2,000
17. Christopher Bond (R)
$2,000
20. Paul Sarbanes (D)
$2,000
17. Fritz Hollings (D)
$2,000
20. Kent Conrad (D)
$2,000
17. Jerry Kleczka (D)
$2,000
20. John Kerry (D)
$2,000
17. John Ensign (R)
$2,000
20. Jim Maloney (D)
$2,000
17. John LaFalce (D)
$2,000
20. E Clay Shaw (R)
$2,000
17. Robert Bennett (R)
$2,000
20. Deborah Pryce (R)
$2,000
20. Dan Quayle (R)
$2,000
20. Christopher Dodd (D)
$2,000
20. Bill McCollum (R)
$2,000
20. Amo Houghton (R)
$2,000
1998 Top Recipients
TOTAL:
$812,606
1.
Alfonse D'Amato (R)
$38,950
2.
Charles Rangel (D)
$7,050
Blanche Lambert
3.
Lincoln (D)
$7,000
3.
John Edwards (D)
$7,000
5.
Tom Daschle (D)
$6,250
6.
Scotty Baesler (D)
$6,000
7.
Rick Lazio (R)
$5,800
8.
Evan Bayh (D)
$5,000
9.
John Breaux (D)
$4,000
Carol Moseley-Braun
10. (D)
$3,000
10. John Kerry (D)
$3,000
Appendix 119
Bear Stearns Lobbying Expenditures221:
2004
2008
TOTAL:
$900,000
TOTAL:
$460,000
Bear Stearns
$680,000
Bear Stearns
$420,000
Steptoe & Johnson
$220,000
Steptoe & Johnson
$40,000
Venable LLP
> $10,000*
Venable LLP
> $10,000*
2003
2007
TOTAL:
$920,000
TOTAL:
$1,120,000
Bear Stearns
$620,000
Bear Stearns
$900,000
Steptoe & Johnson
$240,000
Steptoe & Johnson
$200,000
Venable LLP
$60,000
Venable LLP
$20,000
2002
2006
TOTAL:
$800,000
TOTAL:
$1,200,000
Bear Stearns
$520,000
Bear Stearns
$780,000
Steptoe & Johnson
$200,000
Venable LLP
$220,000
Venable LLP
$80,000
Steptoe & Johnson
$160,000
Angus & Nickerson
$40,000
2001
TOTAL:
$960,000
2005
Bear Stearns
$640,000
TOTAL:
$820,000
Steptoe & Johnson
$200,000
Bear Stearns
$540,000
Venable LLP
$80,000
Steptoe & Johnson
$180,000
O'Connor & Hannan
$40,000
Venable LLP
$60,000
Angus & Nickerson
$40,000
2000
TOTAL:
$750,000
Bear Stearns
$440,000
Steptoe & Johnson
$190,000
O'Connor & Hannan
$120,000
221 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
120
Appendix
1999
TOTAL:
$760,000
Bear Stearns
$500,000
Steptoe & Johnson
$140,000
O'Connor & Hannan
$120,000
1998
TOTAL:
$860,000
Bear Stearns
$560,000
Steptoe & Johnson
$160,000
O'Connor & Hannan
$140,000
Appendix 121
Bear Stearns Covered Official Lobbyists:222
Firm / Name of Lobbyist
Covered Official Position
Year(s)
Bear Stearns
Counsel, Office of Congressman Michael
Dombo III, Fred
Forbes
1999-2000
Venable LLP
Olchyk, Sam
Joint Committee on Taxation Staff
2004-2008
Legislative Counsel, Joint Committee on
Beeman, E. Ray
Taxation Staff
2006-2008
222 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
122
Appendix
Investment Banks: Goldman Sachs
Decade-long campaign contribution total (1998-2008): $25,445,983
Decade-long lobbying expenditure total (1998-2008): $21,637,530
Goldman Sachs Campaign Contributions223
2008 Top Recipients
2006 Top Recipients
TOTAL:
$5,635,501
TOTAL:
$3,502,866
1. Barack Obama (D)
$884,907
1. Hillary Clinton (D)
$138,570
2. Hillary Clinton (D)
$405,475
2. Robert Menendez (D)
$80,500
3. John McCain (R)
$229,695
3. Harold E Ford Jr (D)
$80,497
4. Mitt Romney (R)
$229,675
4. Evan Bayh (D)
$52,750
5. Jim Himes (D)
$140,448
5. Sherrod Brown (D)
$42,600
6. Chris Dodd (D)
$110,000
6. Maria Cantwell (D)
$39,800
7. Rudy Giuliani (R)
$109,450
7. Joe Lieberman (I)
$33,950
8. John Edwards (D)
$66,450
8. Ben Cardin (D)
$33,150
9. Arlen Specter (R)
$47,600
9. Kent Conrad (D)
$30,600
10. Rahm Emanuel (D)
$35,250
10. Thomas H Kean Jr (R)
$29,500
11. John Sununu (R)
$31,400
11. Rick Santorum (R)
$27,000
12. Jack Reed (D)
$30,100
12. Bill Nelson (D)
$25,400
13. Max Baucus (D)
$26,000
Sheldon Whitehouse
13. (D)
$24,600
14. Tom Harkin (D)
$24,580
14. Mike DeWine (R)
$23,500
15. Frank Lautenberg (D)
$24,100
Michael Peter Skelly
15. Eric Cantor (R)
$23,300
16. (D)
$23,364
Kay Bailey Hutchison
16. (R)
$22,500
17. Susan M Collins (R)
$21,900
17. Richard Baker (R)
$22,400
18. Mark Warner (D)
$21,800
18. Max Baucus (D)
$21,900
19. Mary L Landrieu (D)
$20,700
19. Rahm Emanuel (D)
$18,800
20. Norm Coleman (R)
$19,200
20. George Allen (R)
$17,800
223 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix 123
2004 Top Recipients
10. Tom Harkin (D)
$21,355
TOTAL:
$6,426,438
11. Lamar Alexander (R)
$20,500
1. George W Bush (R)
$390,600
12. John E Sununu (R)
$20,250
2. John Kerry (D)
$303,250
13. Robert Menendez (D)
$18,500
3. Jack Ryan (R)
$218,161
14. Jean Carnahan (D)
$18,355
4. Tom Daschle (D)
$143,500
15. Max Cleland (D)
$18,230
5. John Edwards (D)
$102,300
16. John Cornyn (R)
$18,000
6. Evan Bayh (D)
$72,000
16. John Kerry (D)
$18,000
7. Charles Schumer (D)
$58,040
18. Norm Coleman (R)
$15,500
8. Chris Dodd (D)
$58,000
19. Saxby Chambliss (R)
$15,250
8. Barack Obama (D)
$58,000
20. Maria Cantwell (D)
$14,250
10. Hillary Clinton (D)
$55,000
11. Arlen Specter (R)
$51,000
2000 Top Recipients
12. Erskine Bowles (D)
$37,250
TOTAL:
$4,432,977
13. Tony Knowles (D)
$34,050
1. Jon S Corzine (D)
$554,900
14. Joe Lieberman (D)
$34,000
2. Bill Bradley (D)
$271,200
15. Dylan C Glenn (R)
$33,000
3. Rick A Lazio (R)
$175,300
16. Wesley Clark (D)
$32,500
4. George W Bush (R)
$137,499
17. Howard Dean (D)
$30,500
5. Charles Schumer (D)
$99,500
18. Robert Menendez (D)
$30,000
6. Al Gore (D)
$95,050
19. Richard Burr (R)
$29,496
7. Hillary Clinton (D)
$88,170
20. John McCain (R)
$29,000
8. John McCain (R)
$67,320
9. Dick Zimmer (R)
$53,200
2002 Top Recipients
10. Rudolph Giuliani (R)
$40,000
TOTAL:
$3,510,035
11. Phil Gramm (R)
$29,000
1. Charles Schumer (D)
$124,550
12. Rush Holt (D)
$26,000
2. Jon Corzine (D)
$47,970
13. Frank Pallone Jr (D)
$19,000
3. John Edwards (D)
$41,000
14. Nita M Lowey (D)
$18,000
4. Robert Torricelli (D)
$34,750
Brian David
5. Tom Strickland (D)
$34,000
15. Schweitzer (D)
$16,250
6. Arlen Specter (R)
$30,000
16. Dylan C Glenn (R)
$15,500
Kay Bailey Hutchi-
7. Tim Johnson (D)
$28,980
17. son (R)
$15,000
8. Erskine Bowles (D)
$28,000
17. Bill McCollum (R)
$15,000
9. Max Baucus (D)
$26,000
19. Eliot L Engel (D)
$14,000
124
Appendix
19. Edolphus Towns (D)
$14,000
1998 Top Recipients
TOTAL:
$1,938,166
1. Charles Schumer (D)
$107,550
2. Alfonse D'Amato (R)
$70,050
3. Evan Bayh (D)
$33,500
4. Chris Dodd (D)
$21,000
5. Bob Kerrey (D)
$17,495
6. Shawn D Terry (R)
$15,000
7. Rick A Lazio (R)
$14,500
8. John Breaux (D)
$14,158
Kay Bailey Hutchi-
9. son (R)
$14,000
10. Geraldine Ferraro (D)
$11,750
11. Amo Houghton (R)
$11,500
12. Check Hagel (R)
$11,000
13. John McCain (R)
$10,400
Daniel Patrick
14. Moynihan (R)
$10,000
15. Jay R Pritzker (D)
$9,200
16. Arlen Specter (R)
$9,000
17. Nita M Lowey (D)
$8,500
18. Paul Coverdell (R)
$8,375
19. Lauch Faircloth (R)
$8,000
19. Bob Graham (D)
$8,000
Appendix 125
Goldman Sachs Lobbying Expenditures224:
Sullivan & Cromwell
$120,000
2008
RR&G
$90,000
TOTAL:
$5,210,000
Williams & Jensen
$80,000
Goldman Sachs
$3,280,000
Law Offices of John T
O'Rourke
$80,000
Duberstein Group
$400,000
Maddox Strategies
$60,000
ML Strategies
$280,000
Capitol Tax Partners
$60,000
Baptista Group
$270,000
Clark & Weinstock
$60,000
Capitol Tax Partners
$240,000
Williams & Jensen
$160,000
Rich Feuer Group
$130,000
2006
Angus & Nickerson
$120,000
TOTAL:
$3,651,250
RR&G
$80,000
Goldman Sachs
$2,620,000
Bingham McCutchen LLP
$50,000
Baptista Group
$200,000
Law Offices of John T
DLA Piper
$160,000
O’Rourke
$60,000
Rich Feuer Group
$120,000
Sullivan & Cromwell
$30,000
Angus & Nickerson
$120,000
Vinson & Elkins
$40,000
RR&G
$110,000
Mattox Woolfolk LLC
> $10,000*
Duberstein Group
$100,000
Gephardt Group
$70,000
Law Offices of John T
O'Rourke
$81,250
Vinson & Elkins
$80,000
2007
Williams & Jensen
$60,000
TOTAL:
$4,610,000
Clark & Assoc
> $10,000*
Goldman Sachs
$2,720,000
Baptista Group
$280,000
Duberstein Group
$260,000
2005
Vinson & Elkins
$160,000
TOTAL:
$1,712,000
ML Strategies
$140,000
Goldman Sachs
$600,000
Clark Consulting Federal
DLA Piper
$140,000
Policy Group
$140,000
Angus & Nickerson
$120,000
Vinson & Elkins
$140,000
Bigham McCutchen LLP
$120,000
Thelen, Reid & Priest
$120,000
Rich Feuer Group
$120,000
Law Offices of John T
O'Rourke
$102,000
224
Rich Feuer Group
$100,000
Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
* Not included in totals
126
Appendix
DCI Group
$100,000
2002
Mattox Woolfolk LLC
$90,000
TOTAL:
$910,000
Duberstein Group
$80,000
Clark & Assoc.
> $10,000*
Clark Consulting Federal
Angus & Nickerson
$80,000
Policy Group
$200,000
Clark & Assoc
$80,000
Duberstein Group
$220,000
Williams & Jensen
$80,000
Johnson, Madigan et al
$120,000
Law Offices of John T
O'Rourke
$110,000
2004
PriceWaterhouseCoopers
$40,000
TOTAL:
$1,230,000
Sullivan & Cromwell
> $10,000*
Clark & Assoc
$60,000
Clark Consulting Federal
Verner, Liipfert et al
$40,000
Policy Group
$260,000
Vinson & Elkins
$120,000
DCI Group
$100,000
Williams & Jensen
$20,000
Duberstein Group
$40,000
Winning Strategies Wash-
Law Offices of John T
ington
$40,000
O'Rourke
$200,000
Mattox Woolfolk LLC
$90,000
2001
Rich Feuer Group
$60,000
TOTAL:
$810,000
Thelen, Reid & Priest
$240,000
Duberstein Group
$100,000
Vinson & Elkins
$160,000
Johnson, Madigan et al
$80,000
Williams & Jensen
$20,000
Law Offices of John T
O'Rourke
$30,000
2003
PriceWaterhouseCoopers
$240,000
TOTAL:
$1,030,000
Verner, Liipfert et al
$260,000
Clark & Assoc
$100,000
Vinson & Elkins
$100,000
Clark Consulting Federal
Policy Group
$240,000
2000
Duberstein Group
$80,000
TOTAL:
$500,000
Law Offices of John T
O'Rourke
$80,000
Duberstein Group
$80,000
Mattox Woolfolk LLC
$70,000
Law Offices of John T
O'Rourke
$40,000
Thelen, Reid & Priest
$240,000
Morgan, Lewis & Bockius
$20,000
Vinson & Elkins
$100,000
PriceWaterhouseCoopers
$240,000
Williams & Jensen
$40,000
Verner, Liipfert et al
$40,000
Wilmer, Culter & Pickering
$60,000
Winning Strategies Wash.
$20,000
* Not included in totals
Appendix
127
Vinson & Elkins
$80,000
1999
TOTAL:
$1,264,000
Duberstein Group
$140,000
Law Offices of John T
O'Rourke
$32,000
Morgan, Lewis & Bockius
> $10,000*
PriceWaterhouseCoopers
$240,000
Sullivan & Cromwell
> $10,000*
Verner, Liipfert et al
$60,000
Vinson & Elkins
$160,000
1998
TOTAL:
$710,280
Duberstein Group
$140,000
Law Offices of John T
O'Rourke
$115,000
PriceWaterhouseCoopers
> $10,000*
Sullivan & Cromwell
> $10,000*
Verner, Liipfert et al
$80,000
Vinson & Elkins
$120,000
Washington Counsel
$40,000
* Not included in totals
128
Appendix
Goldman Sachs Covered Official Lobbyists:225
Firm / Name of Lobbyist Covered Official Position
Year(s)
PriceWaterhouseCoopers
Business Tax Counsel, Committee on Taxa-
Angus, Barbara
tion
1999- 2000
Kies, Kenneth
Chief of Staff, Committee on Taxation
1999- 2000
Hanford, Tim
Tax Counsel, Counsel on Ways and Means
2001
Verner, Liipfert et al
Hawley, Noelle M.
Legislative Director, Rep. Bill Archer
1999
Investigator, Perm. Subcommittee on Inves-
Jones, Brian C.
tigations
2002
Madigan, Johnson et al
Staff Director, Senate Appropriations, Min
English, James
Staff
2001- 2002
Griffin, Patrick J.
Director of Legal Affairs, White House
2001- 2002
Winning Strategies Washington
Mullins, Donna
Chief of Staff, Rep. Frelinghuysen
2002-2003
Angus & Nickerson
Tax Counsel, Committee on Ways and
Angus, Barbara
Means
2005-2008,
Nickerson, Gregory
International Tax Counsel, Dept. of Treasury 2005- 2008
Capitol Tax Partners LLP
Talisman, Johnathan
Assistant Treasury Secretary for Tax Policy
2008
Grafmeyer, Richard
Deputy Chief of Staff, JCT
2008
Mikrut, Joseph
Tax Legislative Counsel - US Treasury
2008
Staff Director, Ways and Means Over Sub-
McKenney, William
committee
2008
225 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
Appendix
129
Staff Director, Senate Republican Policy
Wilcox, Lawrence
Committee
2008
Tax Counsel, Sen. Robb - Counsel, Sen
Dennis, James
Bingaman
2008
Tax Counsel, Sen. Grassley, Senate Finance
Javens, Christopher
Committee
2008
The Goldman Sachs Group. Inc
S.A. Director of Office of Environmental
Connolly, Ken
Policy; LD,
2008
Sen. Jeffords; LD, CEPW
Dept. Nat’l Security Adv. For Int’l Econ.
Shirzad, Faryar
Affairs
2008
130
Appendix
Investment Banks: Lehman Brothers
Decade-long campaign contribution total (1998-2008): $6,704,574
Decade-long lobbying expenditure total (1998-2008): $8,660,000
Lehman Campaign Contributions:226
19. Arlen Specter (R)
$5,300
2008 Top Recipients227
2006 Top Recipients
TOTAL:
$2,211,761
TOTAL:
$917,414
1.
Barack Obama (D)
$288,538
1.
Joe Lieberman (I)
$82,900
2.
Hillary Clinton (D)
$227,150
2.
Hillary Clinton (D)
$54,190
3.
Rudy Giuliani (R)
$140,000
3.
Pete Ricketts (R)
$13,600
4.
John McCain (R)
$116,907
4.
Rick Santorum (R)
$10,500
5.
Mitt Romney (R)
$96,200
5.
Harold Ford Jr (D)
$9,600
6.
Chris Dodd (D)
$31,400
6.
Frank Lautenberg (D)
$9,000
7.
Rahm Emanuel (D)
$23,000
7.
Robert Menendez (D)
$8,900
8.
Jack Reed (D)
$21,600
8.
Bill Nelson (D)
$7,300
9.
Joseph Biden Jr (D)
$21,100
9.
Ron Klein (D)
$6,800
10. John Edwards (D)
$20,400
10. Rudy Giuliani (R)
$6,300
11. Bill Richardson (D)
$13,800
11. Mike Crapo (R)
$5,300
12. Charles Rangel (D)
$11,900
12. Dianne Feinstein (D)
$5,100
13. Steny Hoyer (D)
$9,300
13. Michael Oxley (R)
$5,000
14. Jim Himes (D)
$8,100
13. Orrin Hatch (R)
$5,000
15. Mark Warner (D)
$7,600
13. Dennis Hastert (R)
$5,000
16. Lee Terry (R)
$7,100
13. Barney Frank (D)
$5,000
17. Steve Israel (D)
$6,600
13. Vito Fossella (R-NY)
$5,000
18. Jerrold Nadler (D)
$5,600
18. Claire McCaskill (D)
$4,500
19. Norm Coleman (R)
$5,300
18. Jon Kyl (R)
$4,500
18. Richard Baker (R)
$4,500
226 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
227 Based on highest 1,000 contributions plus
PAC money.
Appendix
131
2004 Top Recipients
9.
Richard Baker (R)
$5,000
TOTAL:
$1,985,718
9.
Billy Tauzin (R)
$5,000
1.
George Bush (R)
$237,650
11. Lamar Alexander (R)
$4,000
2.
John Kerry (D)
$92,312
11. Erskine Bowles (D)
$4,000
3.
Chris Dodd (D)
$55,000
11. Nita Lowey (D)
$4,000
4.
Joe Lieberman (D)
$35,950
14. Timothy Carden (D)
$3,250
5.
Charles Schumer (D)
$35,250
14. Ron Kirk (D)
$3,250
6.
Wesley Clark (D)
$28,500
16. Rick Boucher (D)
$3,000
7.
Richard Gephardt (D)
$19,500
16. Chris Dodd (D)
$3,000
8.
John Edwards (D)
$18,650
16. Vito Fossella (R)
$3,000
9.
Tom Daschle (D)
$16,970
16. Tom Harkin (D)
$3,000
10. Erskine Bowles (D)
$10,000
16. Dennis Hastert (R)
$3,000
10. Nancy Pelosi (D)
$10,000
16. Amo Houghton (R)
$3,000
12. Barack Obama (D)
$9,062
16. Tim Johnson (D)
$3,000
13. John Spratt Jr (D)
$9,000
16. Mary Landrieu (D)
$3,000
14. Arlen Specter (R)
$8,812
16. Carolyn Maloney (D)
$3,000
15. Mel Martinez (R)
$8,500
16. Jay Rockefeller (D)
$3,000
16. Alcee Hastings (D)
$7,500
16. John Spratt Jr (D)
$3,000
17. Richard Baker (R)
$7,000
17. James Stork (D)
$7,000
Joseph Edward Dris-
2000 Top Recipients
19. coll (D)
$6,500
TOTAL:
$929,780
20. Judd Gregg (R)
$6,000
1.
Bill Bradley (D)
$51,800
Brendan Thomas
2.
Byrne Jr (D)
$31,300
2002 Top Recipients
3.
Jon Corzine (D)
$20,200
TOTAL:
$231,970228
4.
Rick Lazio (R)
$19,750
1.
Charles Schumer (D)
$14,500
5.
George W Bush (R)
$11,000
2.
Robert Torricelli (D)
$14,250
6.
Hillary Clinton (D)
$10,550
3.
Max Baucus (D)
$11,000
7.
Dianne Feinstein (D)
$10,500
4.
Michael Castle (R)
$10,000
8.
Charles Schumer (D)
$10,000
4.
Michael Oxley (R)
$10,000
9.
Michael Oxley (R)
$9,250
6.
Tom Strickland (D)
$8,000
10. William Roth Jr (R)
$9,000
7.
Max Cleland (D)
$7,000
11. Michael Castle (R)
$8,000
8.
Dan Wofford (D)
$5,550
11. Chris Dodd (D)
$8,000
228
13. Spencer Abraham (R)
$6,000
Based only on campaign contributions
132
Appendix
13. Bob Kerrey (D)
$6,000
15. Dennis Hastert (R)
$5,500
16. Charles Rangel (D)
$4,500
16. Edolphus Towns (D)
$4,500
18. Richard Lugar (R)
$4,000
19. Rick Boucher (D)
$3,500
19. Rod Grams (R)
$3,500
19. Joe Lieberman (D)
$3,500
1998 Top Recipients
TOTAL:
$427,931
1.
Charles Schumer (D)
$10,200
2.
Chris Dodd (D)
$9,500
3.
Tom Daschle (D)
$7,500
4.
Alfonse D'Amato (R)
$7,400
5.
Rick Lazio (R)
$6,000
6.
Charles Rangel (D)
$5,500
Brendan Thomas
7.
Byrne Jr (D)
$5,000
8.
John Breaux (D)
$4,000
9.
Bob Kerrey (D)
$3,500
10. Christopher Bond (R)
$3,000
11. Rick White (R)
$2,550
11. Jerry Weller (R)
$2,500
13. Thomas Manton (D)
$2,050
13. Billy Tauzin (R)
$2,050
15. Robert Bennett (R)
$2,000
15. John Ensign (R)
$2,000
15. Newt Gingrich (R)
$2,000
15. Bob Graham (D)
$2,000
15. Fritz Hollings (D)
$2,000
15. Amo Houghton (R)
$2,000
15. Jerry Kleczka (D)
$2,000
15. John LaFalce (D)
$2,000
Appendix
133
Lehman Lobbying Expenditures:229
2008
2004
TOTAL:
$720,000
TOTAL:
$740,000
Lehman Brothers
$590,000
Lehman Brothers
$620,000
O'Neill, Athy & Casey
$60,000
O'Neill, Athy & Casey
$80,000
DLA Piper
$70,000
Piper Rudnick LLP
$40,000
2007
2003
TOTAL:
$840,000
TOTAL:
$660,000
Lehman Brothers
$720,000
Lehman Brothers
$540,000
O'Neill, Athy & Casey
$80,000
O'Neill, Athy & Casey
$80,000
DLA Piper
$40,000
Piper Rudnick LLP
$40,000
2006
2002
TOTAL:
$1,140,000
TOTAL:
$660,000
Lehman Brothers
$920,000
Lehman Brothers
$540,000
American Continental
O'Neill, Athy & Casey
$80,000
Group
$100,000
Verner, Liipfert et al
$40,000
O'Neill, Athy & Casey
$80,000
Piper Rudnick LLP
> $10,000*
DLA Piper
$40,000
2001
2005
TOTAL:
$600,000
TOTAL:
$1,080,000
Lehman Brothers
$320,000
Lehman Brothers
$820,000
Verner, Liipfert et al
$200,000
American Continental
Group
$140,000
O'Neill, Athy & Casey
$80,000
O'Neill, Athy & Casey
$80,000
DLA Piper
$40,000
2000
TOTAL:
$560,000
Lehman Brothers
$280,000
Verner, Liipfert et al
$200,000
O'Neill, Athy & Casey
$80,000
229 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
134
Appendix
1999
TOTAL:
$860,000
Lehman Brothers
$580,000
Verner, Liipfert et al
$200,000
O'Neill, Athy & Casey
$80,000
1998
TOTAL:
$800,000
Lehman Brothers
$560,000
Verner, Liipfert et al
$140,000
O'Neill, Athy & Casey
$80,000
Palmetto Group
$20,000
Appendix
135
Lehman Covered Official Lobbyists:230
Firm / Name of Lobbyist
Covered Official Position
Year(s)
Verner, Liipfert et al
Hawley, Noelle M.
Legislative Director, Rep. Bill Archer
1999-2001
Sr. Cloakroom Asst., Sen. Dem. Cloak-
Krasow, Cristina L.
room
1999-2000
230 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
136
Appendix
Investment Banks: Merrill Lynch
Decade-long campaign contribution total (1998-2008): $9,977,724
Decade-long lobbying expenditure total (1998-2008): $59,076,760
Merrill Lynch Campaign Contributions:231
2008 Top Recipients
2006 Top Recipients
TOTAL:
$2,780,347
TOTAL:
$1,153,733
1. John McCain (R)
$360,620
1. Chris Dodd (D)
$61,650
2. Barack Obama (D)
$264,720
2. Harold E Ford Jr (D)
$50,450
3. Rudy Giuliani (R)
$210,275
3. Hillary Clinton (D)
$49,510
4. Hillary Clinton (D)
$202,568
4. Bob Corker (R)
$33,900
5. Mitt Romney (R)
$172,025
5. Mike DeWine (R)
$30,000
6. Chris Dodd (D)
$67,300
6. Robert Menendez
$28,450
7. Mitch McConnell (R)
$31,600
7. Ben Nelson (D)
$18,200
8. Mark Pryor (D)
$23,900
8. Chuck Hagel (R)
$17,300
9. Debbie Stabenow (D)
$23,850
9. Rick Santorum (R)
$16,800
10. Rahm Emanuel (D)
$20,800
10. George Allen (R)
$14,050
11. John Edwards (D)
$19,075
11. Mike Ferguson (R)
$12,400
12. Max Baucus (D)
$17,800
12. Jim Matheson (D)
$11,500
13. Joseph Biden (D)
$15,900
13. Christopher Shays (R)
$10,450
Christopher Shays
14. Joe Lieberman (/I)
$10,400
14. (R)
$14,675
15. Sheldon Whitehouse (D)
$10,200
15. Jack Reed (D)
$10,500
16. Thomas Kean Jr (R)
$10,150
16. Linda Ketner (D)
$10,200
17. Michael McGavick (R)
$9,900
17. Chuck Hagel (R)
$10,000
18. Ed Royce (R)
$9,000
18. Gregory Meeks (D)
$9,600
19. Geoff Davis (R)
$8,700
19. Tim Ryan (D)
$9,200
20. David Dreier (R)
$8,300
20. Ron Paul (R)
$9,001
231 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix
137
2004 Top Recipients
9. Douglas Forrester (R)
$6,750
TOTAL:
$2,187,763
10. Chellie Pingree (D)
$6,250
1. George W Bush (R)
$580,004
11. Wayne Allard (R)
$6,000
2. David M Beasley (R)
$118,500
11. Hillary Clinton (D)
$6,000
3. John Kerry (D)
$111,526
13. Rob Simmons (R)
$5,500
4. Charles Schumer (D)
$50,250
14. Suzanne Terrell (R)
$5,000
5. Scott Paterno (R)
$41,000
15. James M Talent (R)
$4,700
6. Arlen Specter (R)
$29,600
David Howard Fink
7. Joe Lieberman (D)
$27,900
16. (D)
$4,500
8. Barack Obama (D)
$21,000
17. Jim Marshall (D)
$4,250
9. Rick Santorum (R)
$17,500
17. Tom Strickland (D)
$4,250
10. Tom Daschle (D)
$13,000
19. Max Baucus (D)
$4,200
11. Wesley Clark (D)
$11,750
19. Norm Coleman (R)
$4,200
12. Richard C Shelby (R)
$11,000
13. Howard Dean (D)
$10,400
2000 Top Recipients
Christopher s 'Kit'
TOTAL:
$1,873,044
14. Bond (R)
$9,000
Christopher Shays
1. George W Bush (R)
$132,425
15. (R)
$8,200
2. Bill Bradley (D)
$87,780
16. Jay Helvey (R)
$8,150
3. John McCain (R)
$69,400
17. Christopher Cox (R)
$7,675
4. Rick A Lazio (R)
$63,550
18. Jim Bunning (R)
$7,500
5. Al Gore (D)
$28,500
19. Lamar Alexander (R)
$7,000
6. Jon S Corzine (D)
$24,250
20. Michael R Turner (R)
$6,750
7. Hillary Clinton (D)
$22,925
8. Charles Schumer (D)
$20,000
2002 Top Recipients
9. Spencer Abraham (R)
$19,000
TOTAL:
$955,306
10. Phil Gramm (R)
$17,000
1. Charles Schumer (D)
$76,750
11. Rudy Giuliani (R)
$15,350
2. Robert Torricelli (D)
$13,500
12. Dick Zimmer (R)
$14,000
3. Erskine Bowles (D)
$12,000
13. George Allen (R)
$10,242
4. Arlen Specter (R)
$10,700
14. Orrin Hatch (R)
$8,750
5. Lamar Alexander (R)
$9,750
15. William Gormley (R)
$8,500
6. Elizabeth Dole (R)
$9,200
16. Kent Conrad (D)
$8,000
Christopher Shays
17. William Roth Jr (R)
$7,250
7. (R)
$9,000
18. Joe Lieberman (D)
$7,000
8. John Kerry (D)
$7,250
18. Paul S Sarbanes (D)
$7,000
138
Appendix
18. Robert Torricelli (D)
$7,000
1998 Top Recipients
TOTAL:
$1,027,531
1. Alfonse D'Amato (R)
$53,200
2. Charles Schumer (D)
$31,150
Carol Moseley Braun
3. (D)
$17,750
4. Bob Kerrey (D)
$16,000
5. Chris Dodd (D)
$14,250
6. Geraldine Ferraro (D)
$10,500
7. Lauch Faircloth (R)
$10,400
8. Evan Bayh (D)
$10,300
Daniel Patrick
9. Moynihan (R)
$10,000
10. James M Casso (D)
$9,000
10. Paul Coverdell (R)
$9,000
12. Tom Daschle (D)
$7,450
13. Gary A Franks (R)
$6,750
Christopher Shays
13. (R)
$6,750
15. Spencer Abraham (R)
$6,500
15. Michael Coles (D)
$6,500
Ben Nighthorse
17. Campbell (R)
$6,000
18. David Wu (D)
$5,750
19. Matt Fong (R)
$5,500
19. Ellen Tauscher (D)
$5,500
Appendix
139
Merrill Lynch Lobbying Expenditures:232
Brownstein, Hyatt et al
$120,000
2008
James E Boland Jr
$80,000
TOTAL:
$6,174,000
John Kelly Consulting
$80,000
Merrill Lynch
$4,700,000
Baptista Group
$20,000
Ernst & Young
$604,000
Johnson, Madigan et al
$240,000
2005
Mayer, Brown et al
$150,000
TOTAL:
$5,480,000
DLA Piper
$210,000
Merrill Lynch
$4,160,000
Brownstein, Hyatt et al
$120,000
Ernst & Young
$600,000
Davis & Harman
$80,000
DLA Piper
$200,000
Baptista Group
$60,000
Brownstein, Hyatt et al
$140,000
John Kelly Consulting
$10,000
Davis & Harman
$140,000
Deloitte Tax
$120,000
2007
James E Boland Jr
$80,000
TOTAL:
$6,000,000
John Kelly Consulting
$40,000
Merrill Lynch
$4,420,000
Seward & Kissel
> $10,000*
Ernst & Young
$600,000
DLA Piper
$340,000
2004
Mayer, Brown et al
$160,000
TOTAL:
$5,770,000
Brownstein, Hyatt et al
$120,000
Merrill Lynch
$4,210,000
Davis & Harman
$120,000
Ernst & Young
$600,000
Baptista Group
$80,000
Piper Rudnick LLP
$380,000
James E Boland Jr
$80,000
Deloitte Tax
$240,000
John Kelly Consulting
$80,000
Brownstein, Hyatt et al
$140,000
Davis & Harman
$120,000
2006
James E Boland Jr
$80,000
TOTAL:
$6,397,760
Seward & Kissel
> $10,000*
Merrill Lynch
$3,952,760
Mayer, Brown et al
$1,100,000
2003
Ernst & Young
$605,000
TOTAL:
$4,825,000
DLA Piper
$300,000
Merrill Lynch
$3,300,000
Davis & Harman
$140,000
Ernst & Young
$600,000
232 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
140
Appendix
Piper Rudnick LLP
$460,000
Verner, Liipfert et al
$240,000
Deloitte Tax
$240,000
Davis & Harman
$200,000
Davis & Harman
$140,000
OB-C Group
$160,000
James E Boland Jr
$65,000
Ernst & Young
$140,000
Brownstein, Hyatt et al
$20,000
Swidler, Berlin et al
> $10,000*
Seward & Kissel
> $10,000*
Wilmer, Culter & Pickering
> $10,000*
2002
1999
TOTAL:
$4,960,000
TOTAL:
$5,400,000
Merrill Lynch
$3,100,000
Merrill Lynch
$3,580,000
Ernst & Young
$600,000
Ernst & Young
$600,000
Verner, Liipfert et al
$580,000
Swidler, Berlin et al
$460,000
Piper Rudnick LLP
$320,000
Verner, Liipfert et al
$300,000
Davis & Harman
$160,000
Davis & Harman
$200,000
James E Boland Jr
$80,000
Rhoads Group
$180,000
Seward & Kissel
$60,000
Seward & Kissel
$40,000
Deloitte & Touche
$40,000
George C Tagg
$40,000
Capitol Tax Partners
$20,000
OB-C Group
> $10,000*
2001
1998
TOTAL:
$4,160,000
TOTAL:
$5,510,000
Merrill Lynch
$2,940,000
Merrill Lynch
$3,800,000
Ernst & Young
$620,000
Washington Counsel
$480,000
Verner, Liipfert et al
$300,000
Swidler, Berlin et al
$300,000
Davis & Harman
$140,000
Verner, Liipfert et al
$260,000
OB-C Group
$80,000
Rhoads Group
$200,000
James E Boland Jr
$60,000
OB-C Group
$160,000
Seward & Kissel
$20,000
Davis & Harman
$160,000
Seward & Kissell
$100,000
2000
George C Tagg
$50,000
TOTAL:
$4,400,000
Merrill Lynch
$3,660,000
* Not included in totals
* Not included in totals
Appendix
141
Merrill Lynch Covered Official Lobbyists:233
Firm / Name of Lobbyist
Covered Official Position
Year(s)
Ernst & Young
Badger, Doug
Chief of Staff, Senate Majority Whip 12/98
1999-2002
Minority Chief, Tax Counsel, Senate Com-
1999-2000
Giordano, Nick
mittee on Finance
2003-2008
Conklin, Brian
Special Assistant to the President
2004
Merrill Lynch & Co, Inc
Vice President, Director of Government
Thompson Jr, Bruce E.
Relations
1999-2008
Kelly, John F.
Vice President, Government Relations
1999-2005
Costantino Jr, Louis A.
Director, Government Relations
2003-2008
Goldstein, Lon N.
Director, Government Relations
2008
Micali, Mark A.
Director, Government Relations
2008
Thibau, Janelle C. M.
Director, Government Relations
2007-2008
Berry, Steven K.
Managing Director, Government Relations
2008
Verner, Liipfert et al
Sr. Cloakroom Assistant, Sen. Dem. Cloak-
Krasow, Cristina L.
room
1999
Hyland, James E.
Legislative Director, Senator Kay Bailey
2003
Hutchison
OB-C Group
Calio, Nicholas E.
Assistant to the President
2000-2005
Capitol Tax Partners, LLP
Dep. Asst. Secretary for Legislative Affairs
Fant, William
- Treasury
2002
Mikrut, Joseph
Tax Legislative Counsel - US Treasury
2002
Talisman, Johnathan
Asst. Treasury Secretary for Tax Policy
2002
233 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
142
Appendix
Piper Rudnick, LLP
Hyland, James E.
Legislative Director, Senator Hutchison
2002-2004
Brownstein Hyatt & Farber, P.C.
Sr. Telecommunications Counsel - Com-
Mottur, Alfred
merce Committee
2003-2008
Sr. Legislative Asst. - Cong. Harold Ford,
Chube, Ellen
Jr.
Staff Director - Subcommittee on House
Whonder, Carmencita
Transport and
2008
Commercial Development; Min Stf Dir -
Subcomm on Econ.
Policy; Legislative Corresp. - Office of
Sen. Charles Schumer
Johnson, Madigan et al
Murphy, Sheila
LD, Senator Klobuchar
2008
Appendix
143
Investment Banks: Morgan Stanley
Decade-long campaign contribution total (1998-2008): $14,367,857
Decade-long lobbying expenditure total (1998-2008): $20,835,000
Morgan Stanley Campaign
Contributions:234
2008 Top Recipients
2006 Top Recipients
TOTAL:
$3,573,627
TOTAL:
$1,943,033
1. Barack Obama (D)
$425,502
1. Hillary Clinton (D)
$116,060
2. Hillary Clinton (D)
$376,980
2. Harold Ford Jr (D)
$43,650
3. John McCain (R)
$258,677
3. Chris Dodd (D)
$42,200
4. Mitt Romney (R)
$165,750
4. Joe Lieberman (I)
$24,700
5. Rudy Giuliani (R)
$133,750
5. Rick Santorum (R)
$19,250
6. Chris Dodd (D)
$69,400
6. Orrin G Hatch (R)
$19,000
7. Fred Thompson (R)
$42,800
7. Jon Kyl (R)
$17,100
8. Max Baucus (D)
$30,500
8. Michael N Castle (R)
$16,100
9. Mark Kirk (R)
$23,850
9. Mike DeWine (R)
$15,600
10. Jack Reed (D)
$21,350
10. Dennis Hastert (R)
$14,100
11. Mark Warner (D)
$19,450
Kathleen Troia
11. McFarland (R)
$14,000
12. Michael N Castle (R)
$17,850
12. Mark Kirk (R)
$13,900
13. Niki Tsongas (D)
$17,100
13. Thomas Kean Jr (R)
$12,550
14. Rahm Emanuel (D)
$16,200
Christopher Shays
15. Susan M Collins (R)
$15,933
14. (R)
$12,350
16. Bill Richardson (D)
$14,900
15. Bob Corker (R)
$12,200
17. John Boehner (R)
$14,300
16. Robert Menendez (D)
$12,150
17. Al Franken (D)
$14,300
17. Tom Carper (D)
$11,880
19. Jim Himes (D)
$13,200
18. Ned Lamont (D)
$11,850
19. Scott Kleeb (D)
$13,200
19. Conrad Burns (R)
$11,100
20. Scott Kleeb (D)
$11,050
234 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
144
Appendix
2004 Top Recipients
9. Michael N Castle (R)
$14,800
TOTAL:
$3,286,484
10. Evan Bayh (D)
$14,450
1. George W Bush (R)
$600,480
11. Richard Baker (R)
$14,000
2. John Kerry (D)
$180,979
11. Lindsey Graham (R)
$14,000
3. Charles Schumer (D)
$57,000
13. James M Talent (R)
$13,000
4. Chris Dodd (D)
$46,000
14. Mike Ferguson (R)
$12,250
5. Robert Bennett (R)
$38,000
15. Billy Tauzin (R)
$12,000
6. Dennis Hastert (R)
$34,750
16. Roy Blunt (R)
$11,000
7. John Edwards (D)
$33,050
17. Arlen Specter (R)
$10,250
8. Erskine Bowles (D)
$32,750
18. Mark Foley (R)
$10,200
9. Howard Dean (D)
$29,350
19. Wayne Allard (R)
$10,000
10. Arlen Specter (R)
$27,750
19. Spencer Bachus (R)
$10,000
11. James DeMint (R)
$20,750
12. Barack Obama (D)
$20,250
2000 Top Recipients
13. Wesley Clark (D)
$19,550
TOTAL:
$2,656,627
14. Tom Daschle (D)
$18,000
1. George W Bush (R)
$148,050
15. Michael N Castle (R)
$17,000
Andrew McKenna
2. Rick A Lazio (R)
$139,450
15. (R)
$17,000
3. Charles Schumer (D)
$126,000
17. Richard Burr (R)
$16,549
4. Bill Bradley (D)
$97,850
Christopher S 'Kit'
5. Al Gore (D)
$52,300
18. Bond (R)
$15,400
6. Phil Gramm (R)
$41,500
19. Evan Bayh (D)
$15,000
7. John McCain (R)
$38,050
19. Mel Martinez (R)
$15,000
8. Hillary Clinton (D)
$30,400
9. Tom Campbell (R)
$24,500
2002 Top Recipients
10. Charles S Robb (D)
$23,000
TOTAL:
$1,899,242
11. Bill McCollum (R)
$18,700
1. Charles Schumer (D)
$52,500
12. Spencer Abraham (R)
$16,050
2. Erskine Bowles (D)
$27,000
13. Rudy Giuliani (R)
$15,800
3. Elizabeth Dole (R)
$23,750
14. William Roth Jr (R)
$14,700
4. Rob Portman (R)
$19,000
15. John J LaFalce (D)
$14,000
5. Frank Lautenberg (D)
$18,150
16. Kent Conrad (D)
$13,000
6. Saxby Chambliss (R)
$16,000
17. Mark Kirk (R)
$12,150
7. Max Baucus (D)
$15,500
17. Carolyn Maloney (D)
$12,000
8. Norm Coleman (R)
$15,450
19. Jon S Corzine (D)
$11,500
Appendix
145
20. Bob Franks (R)
$11,250
1998 Top Recipients
TOTAL:
$1,008,844
1. Lauch Faircloth (R)
$48,100
2. Evan Bayh (D)
$31,750
3. Charles Schumer (D)
$31,500
4. Alfonse D'Amato (R)
$30,500
5. Barbara Mikulski (D)
$7,500
6. Robert Bennett (R)
$7,000
7. Tom Daschle (D)
$6,500
8. Jon D Fox (R)
$6,250
8. Arlen Specter (R)
$6,250
10. Michael N Castle (R)
$5,750
11. Chris Dodd (D)
$5,225
12. Phil Crane (R)
$5,000
12. Edward Kennedy (D)
$5,000
12. Rick A Lazio (R)
$5,000
12. Trent Lott (R)
$5,000
12. Michael G Oxley (R)
$5,000
12. Larry Schneider (D)
$5,000
12. Billy Tauzin (R)
$5,000
19. Rick White (R)
$4,800
20. John J LaFalce (D)
$4,750
146
Appendix
Morgan Stanley Lobbying Expenditures235:
Kate Moss Co
$40,000
2008
American Capitol Group
$40,000
TOTAL:
$3,005,000
Baptista Group
$20,000
Morgan Stanley
$2,500,000
DCI Group
> $10,000*
Capitol Tax Partners
$240,000
Eris Group
$120,000
2005
American Capitol Group
$45,000
TOTAL:
$2,840,000
Baptista Group
$60,000
Morgan Stanley
$2,280,000
Kate Moss Co
$40,000
Capitol Tax Partners
$240,000
DCI Group
> $10,000*
Bartlett & Bendall
$120,000
James E Boland Jr
$120,000
2007
Kate Moss Co
$40,000
TOTAL:
$3,040,000
Alston & Bird
$40,000
Morgan Stanley
$2,360,000
Capitol Tax Partners
$240,000
2004
Eris Group
$120,000
TOTAL:
$2,750,000
American Capitol Group
$80,000
Morgan Stanley
$2,180,000
Baptista Group
$80,000
Capitol Tax Partners
$240,000
James E Boland Jr
$80,000
Bartlett & Bendall
$120,000
Kate Moss Co
$40,000
James E Boland Jr
$120,000
Alston & Bird
$40,000
Kate Moss Co
$50,000
DCI Group
> $10,000*
Alston & Bird
$40,000
2006
2003
TOTAL:
$3,360,000
TOTAL:
$2,580,000
Morgan Stanley
$2,720,000
Morgan Stanley
$2,000,000
Capitol Tax Partners
$240,000
Capitol Tax Partners
$200,000
James E Boland Jr
$120,000
Bartlett & Bendall
$120,000
Bartlett & Bendall
$60,000
James E Boland Jr
$100,000
Alston & Bird
$60,000
Alston & Bird
$100,000
Eris Group
$60,000
Kate Moss Co
$60,000
235 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
* Not included in totals
Appendix
147
2002
TOTAL:
$1,960,000
Morgan Stanley
$1,540,000
Capitol Tax Partners
$200,000
Alston & Bird
$80,000
James E Boland Jr
$80,000
Kate Moss Co
$60,000
2001
TOTAL:
$1,300,000
Morgan Stanley
$920,000
James E Boland Jr
$80,000
Capitol Tax Partners
$80,000
Kate Moss Co
$80,000
Alston & Bird
$70,000
Palmetto Group
$40,000
George C Tagg
$30,000
1998-2000
N/A
148
Appendix
Morgan Stanley Covered Official Lobbyists:236
Firm / Name of Lobbyist
Covered Official Position
Year (s)
Capitol Tax Partners
Deputy Asst Sec. (treasury) for legislative
Fant, William
affairs
2001-2004
Mikrut, Joseph
Tax Legislative Counsel - US Treasury
2001-2008
Talisman, Jonathan
Assistant Treasury Secretary for Tax Policy
2001-2008
Staff Director, Senate Republican Policy
Wilcox, Lawrence
Committee
2006-2008
McKenny, William
Chief of Staff, Rep. Amo Hougton
2004-2008
Grafmeyer, Richard
Deputy Chief of Staff - JCT
2003-2008
Tax Counsel, Sen. Robb - Counsel, Sen.
Dennis, James
Bingaman
2008
Tax Counsel, Sen. Grassley, Sen. Finance
Javens, Christopher
Committee
2008
Bartlett & Bendall
Amy D. Smith
Deputy Assistant Secretary, US Treasury
2003
2004-2005
Gill, Shane
Legislative Director, Rep. Spencer Bachus
2007
Alston & Bird
Martino, Paul G
Tax Counsel, Senate Finance Committee
2006
Eris Group
Kadesh, Mark
Chief of Staff, Sen. Feinstein
2006-2007
236 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
Appendix
149
Commercial Banks: Bank of America
Decade-long campaign contribution total (1998-2008): $11,292,260
Decade-long lobbying expenditure total (1998-2008): $28,635,440
BOA Campaign Contributions:237
2008 Top Recipients
2006 Top Recipients
TOTAL:
$2,212,369
TOTAL:
$2,098,533
1. Barack Obama (D)
$230,552
1. John M. Spratt Jr. (D)
$64,500
2. John McCain (R)
$126,175
2. Hillary Clinton (D)
$53,085
3. Hillary Clinton (D)
$106,071
3. David McSweeney (R)
$33,800
4. Rudy Giuliani (R)
$69,050
4. Harold E. Ford Jr. (D)
$32,400
5. Chris Dodd (D)
$63,100
5. Michael N. Castle (R)
$31,250
6. Mitt Romney (R)
$52,550
6. Rick Santorum (R)
$21,250
7. Joseph R. Biden Jr. (D)
$44,000
7. Tom Carper (D)
$20,130
8. Michael N. Castle (R)
$25,250
8. Spencer Bachus (R)
$18,500
Dutch Ruppersberger
9. Jack Reed (D)
$17,828
9. (D)
$17,200
10. Pete Sessions (R)
$17,700
10. Melissa Bean (D)
$16,000
11. Patrick McHenry (R)
$16,999
10. Rahm Emanuel (D)
$16,000
Dutch Ruppersberger
12. Dick Durbin (D)
$13,600
12. (D)
$16,450
13. Robert Menendez (D)
$16,000
13. Melvin L. Watt (D)
$13,500
14. Melissa Bean (D)
$15,130
14. Mark Warner (D)
$12,800
Michael Fitzpatrick
15. Barney Frank (D)
$12,750
15. (R)
$15,000
16. Kay R. Hagen (D)
$12,600
16. Sue Myrick (R)
$14,900
17. Peter Roskam (R)
$11,500
17. John E. Sununu (R)
$14,607
18. Jack Reed (D)
$11,321
18. Olympia J. Snowe (R)
$14,600
19. James E. Clyburn (D)
$11,000
19. Joe Lieberman (I)
$14,549
20. John E. Sununu (R)
$10,950
20. James M. Talent (R)
$14,500
237 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
150
Appendix
2004 Top Recipients
10. David Dreier (R)
$9,000
TOTAL:
$2,360,786
11. Michael G. Oxley (R)
$8,500
1. George W. Bush (R)
$195,761
12. Charlie Gonzalez (D)
$8,000
2. John Kerry (D)
$126,202
12. Tim Johnson (D)
$8,000
3. John M. Spratt Jr. (D)
$50,700
14. Lindsey Graham (R)
$7,750
4. Richard Burr (R)
$44,100
14. Richard Baker (R)
$7,500
5. Erskine B. Bowles (D)
$43,800
16. Richard Gephardt (D)
$7,000
6. Barack Obama (D)
$28,500
16. Robin Hayes (R)
$7,000
7. Elizabeth Dole (R)
$20,750
16. John Linder (R)
$7,000
8. John Edwards (D)
$18,050
19. Jerry Weller (R)
$6,888
9. Melvin L. Watt (D)
$17,500
20. Ken Bentsen (D)
$6,500
10. Richard Gephardt (D)
$17,450
11. Sue Myrick (R)
$16,500
2000 Top Recipients
12. Harold E. Ford Jr. (D)
$16,000
TOTAL:
$1,649,522
13. Jay Helvey (R)
$15,250
1. George W. Bush (R)
$113,500
14. Michael G. Oxley (R)
$15,000
2. Bill Bradley (D)
$56,450
15. Dennis Hastert (D)
$14,500
3. John M. Spratt Jr. (D)
$26,500
16. Mike Ferguson (R)
$13,000
4. Phil Gramm (R)
$25,500
17. David Vitter (R)
$12,800
5. Dianne Feinstein (D)
$18,139
18. Pete Sessions (R)
$11,065
6. Sue Myrick (R)
$16,850
19. Tim J. Michels (R)
$10,950
7. Al Gore (D)
$16,750
20. Johnny Isakson (R)
$10,700
8. Martin Frost (D)
$15,000
9. Rick A. Lazio (R)
$13,550
2002 Top Recipients
10. Bill Nelson (D)
$13,000
TOTAL:
$1,193,660
11. John McCain (R)
$12,450
1. Charles Schumer (D)
$57,500
12. Bill McCollum (R)
$11,500
2. Erskine B. Bowles (D)
$37,600
13. Zell Miller (D)
$11,000
3. Elizabeth Dole (R)
$22,150
14. David Dreier (R)
$10,000
4. John M. Spratt Jr. (D)
$20,750
14. Richard Gephardt (D)
$10,000
5. Max Baucus (D)
$18,450
16. John Edwards (D)
$9,750
6. John Cornyn (R)
$11,000
17. Mel Carnahan (D)
$8,150
7. Spencer Bachus (R)
$10,000
18. Elizabeth Dole (R)
$7,750
7. Martin Frost (D)
$10,000
18. Charles S. Robb (D)
$7,750
9. Sue Myrick (R)
$9,250
18. Ellen Tauscher (D)
$7,750
Appendix
151
1998 Top Recipients
TOTAL:
$2,114,390
1. Lauch Faircloth (R)
$56,000
Christopher S. 'Kit'
2. Bond
$21,900
3. Bill McCollum (R)
$18,500
4. Bob Graham (D)
$17,950
5. John McCain (R)
$17,550
6. John M. Spratt Jr. (D)
$17,500
7. Richard Baker (R)
$17,000
Carol Moseley Braun
8. (D)
$16,050
9. Robert F. Bennett (R)
$16,000
9. Tom Daschle (D)
$16,000
11. John Linder (R)
$15,000
12. Evan Bayh (D)
$14,000
12. Martin Frost (D)
$14,000
14. Matt Fong (R)
$13,000
15. Paul Coverdell (R)
$12,500
15. Alfonse D'Amato (R)
$12,500
15. Richard Gephardt (D)
$12,500
15. Rick A. Lazio (R)
$12,500
19. Ellen Tauscher (D)
$12,300
20. Dick Armey (R)
$12,000
152
Appendix
BOA Lobbying Expenditures:238
2008
2006
TOTAL:
$5,755,000
TOTAL:
$3,486,014
Bank of America
$4,090,000
Bank of America
$1,986,014
King & Spalding
$480,000
Kilpatrick Stockton
$400,000
Quinn, Gillespie & Assoc
$360,000
Quinn, Gillespie & Assoc
$360,000
Smith-Free Group
$250,000
Clark Consulting Federal
Bryan Cave Strategies
$160,000
Policy group
$300,000
Public Strategies
$165,000
Smith-Free Group
$240,000
Clark Consulting Federal
Covington & Burling
$120,000
Policy group
$100,000
Angus & Nickerson
$40,000
Quadripoint Strategies
$90,000
Cypress Advocacy
$20,000
American Capitol Group
$60,000
Kate Moss Co
$20,000
Covington & Burling
> $10,000*
2005
2007
TOTAL:
$1,900,000
TOTAL:
$4,946,400
Bank of America
$1,000,000
Bank of America
$3,220,000
Clark Consulting Federal
Quinn, Gillespie & Assoc
$360,000
Policy group
$300,000
Kilpatrick Stockton
$300,000
Quinn, Gillespie & Assoc
$240,000
Clark Consulting Federal
Smith & Assoc
$240,000
Policy group
$300,000
Kilpatrick Stockton
$60,000
Smith-Free Group
$280,000
Angus & Nickerson
$20,000
King & Spalding
$180,000
Covington & Burling
$20,000
Covington & Burling
$100,000
Kate Moss Co
$20,000
Bryan Cave Strategies
$100,000
Winston & Strawn
> $10,000*
Quadripoint Strategies
$76,400
Public Strategies
$30,000
238 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
* Not included in totals
Appendix
153
2004
Holmes, Weddle & Barcott
> $10,000*
TOTAL:
$1,020,000
Bank of America
$660,000
Clark Consulting Federal
2000
Policy group
$300,000
TOTAL:
$1,947,331
Kate Moss Co
$40,000
Bank of America
$1,567,331
Perkins, Smith & Cohen
$20,000
PriceWaterhouseCoopers
$240,000
Reed Smith LLP
> $10,000*
Beck, Edward A III
$40,000
Covington & Burling
> $10,000*
Kate Moss Co
$40,000
O'Connor & Hannan
$40,000
2003
Hyjek & Fix
$20,000
TOTAL:
$1,196,141
Winston & Strawn
> $10,000*
Bank of America
$656,141
Clark Consulting Federal
Policy group
$300,000
1999
Perkins, Smith & Cohen
$160,000
TOTAL:
$340,000
Covington & Burling
$40,000
Beck, Edward A III
$20,000
Kate Moss Co
$40,000
Covington & Burling
> $10,000*
Reed Smith LLP
> $10,000*
Hyjek & Fix
$20,000
Kate Moss Co
$40,000
PriceWaterhouseCoopers
$260,000
2002
Winston & Strawn
> $10,000*
TOTAL:
$1,179,350
Bank of America
$679,350
Clark Consulting Federal
1998
Policy group
$200,000
TOTAL:
$4,933,000
PriceWaterhouseCoopers
$140,000
Bank of America
$3,960,000
O'Connor & Hannan
$120,000
NationsBank
$620,000
Kate Moss Co
$40,000
Bergner, Bockorny et al
$140,000
Kate Moss Co
$73,000
PriceWaterhouseCoopers
$60,000
2001
Beck, Edward A III
$60,000
TOTAL:
$1,932,204
Covington & Burling
> $10,000*
Bank of America
$1,552,204
Covington & Burling
$20,000
PriceWaterhouseCoopers
$240,000
O'Connor & Hannan
$100,000
Kate Moss Co
$40,000
* Not included in totals
154
Appendix
BOA Covered Official Lobbyists:239
Firm / Name of Lobbyist Covered Official Position
Year(s)
American Capitol Group
Nate Gatten
Prof. Staff, Senate Banking Comm.
2008
Leg. Asst, Sen. Bennett
Staff, Sen. Budget Comm.
Brian Cave Strategies LLC
Waldo McMillan
Intern, Rep. Chaka Fattah
2008
Floor Asst, Counsel for Bus. Affairs, Sen.
Harry Reid
Federal Policy Group (Clark & Wamberg)
Ken Kies
Chief of Staff, Joint Comm on Taxation
2008
Matt Dolan
Counsel, Sen. David Durenberger
2008
Pat Raffaniello
Chief of Staff, Cong. Bill Brewster
2008
King & Spalding
William Clarkson
Legislative Asst, Sen. Susan Collins
2007-2008
Sr. Defense Policy Advisor, Sen. Jeff Ses-
Archibald Galloway III
sions
2008
Quinn Gillespie & Associates
Counsel, Pres. Clinton; Chief of Staff, VP
Jack Quinn
Gore
2008
Staff Dir/CoS, Sen Lott; CoS Rep. Kemp and
Dave Hoppe
Coats
2008
Jeff Connaughton
Special Asst to chair of Sen. Judiciary Comm 2008
Special Asst to White House Counsel
Allison Giles
Chief of Staff, Ways & Means Comm
2007-2008
Legislative Asst, Rep. Thomas
Elizabeth Hogan
Special Asst, Dept of Commerce
2005-2008
Assoc. Dir, EOP; Intern, Rep. McCrery
Bonnie Hogue Duffy
Staff, Sen. Comm on Aging
2008
239 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
Appendix
155
Legislative Asst, Sen. Reed
Harriet James Melvin
Prof. Staff, Rep Charles Hatcher
2008
Kevin Kayes
Chief Counsel, Sen. Reid
2006-2008
Marc Lampkin
Policy Dir, Sen Coverdell
2008
Nick Maduros
Cloakroom assistant; Intern, Sen Lehman
2008
Christopher McCannell
Chief of Staff, Cong. Crowley
2007-2008
Amy Jensen Cunniffee
Special Asst to the Pres for Legal Affairs
2005-2006
Mike Hacker
Comm Dir, Rep. Dingell
2005
Covington & Burling
Holly Fechner
Policy Dir, Sen. Edward Kennedy
2007
Angus & Nickerson
Barbara Angus
Int’l Tax Counsel, Dept of Treausry
2006
Gregory Nickerson
Tax Counsel, Ways and Means Comm
2006
Cypress Advocacy
Patrick Cave
Asst Sec, Dept of Treasury
2006
Kilpatrick Stockton
Armand Dekeyser
Chief of Staff, Sen. Jeff Sessions
2005-2006
The Smith-Free Group
Jon Deuser
Chief of Staff, Sen. Bunning
2006
PricewaterhouseCoopers
Tim Hanford
Tax Counsel, Ways and Means Comm.
2001-2002
Kenneth Kies
Chief of Staff, Joint Comm. on Taxation
2000-2001
Business Tax Counsel, Joint Comm. on
Barbara Angus
Taxation
2000-2001
156
Appendix
Commercial Banks: Citigroup
Decade-long campaign contribution total (1998-2008): $19,778,382
Decade-long lobbying expenditure total (1998-2008): $88,460,000
Citigroup Campaign Contributions:240
2008 Top Recipients
2006 Top Recipients
TOTAL:
$4,270,678
TOTAL:
$2,576,066
1. Barack Obama (D)
$543,430
1. Hillary Clinton (D)
$134,610
2. Hillary Clinton (D)
$423,417
2. Christopher J. Dodd (D)
$107,800
3. John McCain (R)
$301,301
3. Joe Lieberman (I)
$59,450
4. Mitt Romney (R)
$168,550
4. Tom Carper (D)
$55,300
5. Chris Dodd (D)
$157,244
5. Kent Conrad (D)
$36,000
6. Rudy Giuliani (R)
$151,100
6. John E. Sununu (R)
$35,250
7. Charles B. Rangel (D)
$61,450
7. Jim McCrery (R)
$34,300
8. John Edwards (D)
$44,600
8. Mitch McConnell (R)
$33,700
9. Saxby Chambliss (R)
$40,350
9. Jon Kyl (R)
$33,400
10. Dick Durbin (D)
$40,250
10. Rick Santorum (R)
$29,850
11. Spencer Bachus (R)
$35,450
11. Christopher Shays (R)
$23,000
12. David Landrum (R)
$30,450
12. Mike DeWine (R)
$21,850
13. Rahm Emanuel (D)
$28,000
13. Thomas H. Kean Jr. (R)
$21,550
14. John E. Sununu (R)
$26,850
14. Harold E. Ford Jr. (D)
$19,800
Shelley Moore Capito
15. (R)
$25,700
15. Robert Menendez (D)
$19,550
16. Richard C. Shelby (R)
$25,200
16. Ben Nelson (D)
$18,200
17. Max Baucus (D)
$24,500
17. Doris O. Matsui (D)
$18,050
18. Chuck Hagel (R)
$24,100
18. Bob Corker (R)
$17,250
19. Joe Biden Jr. (D)
$23,950
19. David Yassky (D)
$16,050
20. Jim Marshall (D)
$23,050
20. James M. Talent (R)
$15,900
240
Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix
157
2004 Top Recipients
10. Nancy L. Johnson (R)
$15,250
TOTAL:
$3,003,758
10. Ron Kirk (D)
$15,250
1. George W. Bush (R)
$315,820
12. Max Cleland (D)
$14,950
2. John Kerry (D)
$280,881
13. Rahm Emanuel (D)
$14,250
3. Hillary Clinton (D)
$91,250
14. Norm Coleman (R)
$12,000
4. Charles Schumer (D)
$80,800
14. Elizabeth Dole (R)
$12,000
5. Richard Shelby (R)
$65,000
16. Bill Janklow (R)
$11,000
6. Tom Daschle (D)
$56,700
16. Jim Maloney (D)
$11,000
7. Chris Dodd (D)
$50,200
16. Billy Tauzin (R)
$11,000
8. Michael G. Oxley (R)
$40,550
19. Nita M. Lowey (D)
$10,500
9. Mike Crapo (R)
$34,450
19. Carolyn Maloney (D)
$10,500
10. Harry Reid (D)
$32,250
11. Wesley Clark (D)
$30,650
2000
12. Rob Portman (R)
$30,000
TOTAL:
$4,157,926
13. Joe Lieberman (D)
$29,000
1. Charles Schumer (D)
$135,550
14. Howard Dean (D)
$26,886
2. Bill Bradley (D)
$127,500
15. Erskine B. Bowles (D)
$25,550
3. Rick A. Lazio (R)
$127,390
16. Barack Obama (D)
$21,350
4. George W. Bush (R)
$115,700
17. Mel Martinez (R)
$20,600
5. Al Gore (D)
$115,500
18. Evan Bayh (D)
$17,543
6. Hillary Clinton (D)
$99,650
19. Arlen Specter (R)
$17,500
7. Joe Lieberman (D)
$55,296
20. James W. DeMint (R)
$17,250
8. John McCain (R)
$42,700
9. Rudy. Giuliani (R)
$37,015
2002 Top Recipients
10. Spencer Abraham (R)
$29,750
TOTAL:
$3,021,725
11. Bob Franks (R)
$28,208
1. Tim Johnson (D)
$54,560
12. Carolyn Maloney (D)
$22,000
2. Chris Dodd (D)
$41,550
13. William Roth Jr. (R)
$20,650
3. Charles B. Rangel (D)
$40,500
14. Charles S. Robb (D)
$19,250
4. Jean Carnahan (D)
$39,750
15. Tim Johnson (D)
$18,500
5. Charles Schumer (D)
$30,750
16. Nita M. Lowey (D)
$18,000
Shelley Moore Capito
17. John J. LaFalce (D)
$15,250
6. (R)
$17,448
18. Bill Nelson (D)
$14,750
7. Amo Houghton (R)
$17,050
19. Nancy L. Johnson (R)
$14,050
8. Max Baucus (D)
$16,250
20. Phil Gramm (R)
$13,500
9. John E. Sununu (R)
$15,750
158
Appendix
1998 Top Recipients
TOTAL:
$2,748,229
1. Alfonse D'Amato (R)
$105,914
2. Charles Schumer (D)
$99,116
3. Chris Dodd (D)
$40,250
4. Tom Daschle (D)
$39,000
5. Nancy L. Johnson (D)
$26,975
6. Geraldine Ferraro (D)
$25,724
7. Charles B. Rangel (D)
$25,500
8. Paul Coverdell (R)
$19,964
9. Bob Graham (D)
$19,857
10. Rick A. Lazio (R)
$19,500
10. Nita M. Lowey (D)
$19,500
12. Richard Gephardt (D)
$18,000
13. Bob Kerrey (D)
$16,500
14. Newt Gingrich (R)
$16,000
15. Lauch Faircloth (R)
$15,775
Carol Moseley Braun
16. (D)
$15,450
Daniel Patrick Moyni-
17. han (D)
$14,949
18. Richard Baker (R)
$14,000
19. Evan Bayh (D)
$13,750
20. Tom Delay (R)
$12,000
Appendix
159
Citigroup Lobbying Expenditures:241
Timmons & Co
$300,000
2008
TOTAL:
$7,875,000
2006
Citigroup Management
TOTAL:
$9,100,000
Corp
$5,520,000
Citigroup Inc
$6,760,000
Avenue Solutions
$100,000
Kilpatrick Stockton
$400,000
Barnett, Sivon & Natter
$260,000
Ernst & Young
$340,000
Capitol Hill Strategies
$240,000
Barnett, Sivon & Natter
$340,000
Capitol Tax Partners
$200,000
Federalist Group
$320,000
Cypress Advocacy
$200,000
Avenue Solutions
$170,000
Ernst & Young
$320,000
O'Melveny & Myers
$160,000
Ogilvy Government Rela-
tions
$320,000
Capitol Hill Strategies
$120,000
Cypress Advocacy
$120,000
Elmendorf Strategies
$140,000
Capitol Tax Partners
$110,000
BGR Holding
$110,000
Angus & Nickerson
$60,000
Roberti Assoc
$225,000
Timmons & Co.
$200,000
Timmons & Co
$240,000
2005
2007
TOTAL:
$5,140,000
TOTAL:
$10,640,000
Citigroup Inc
$3,600,000
Citigroup Inc
$8,180,000
Barnett, Sivon & Natter
$360,000
Ernst & Young
$320,000
Ogilvy Government Rela-
Barnett, Sivon & Natter
$320,000
tions
$240,000
Ogilvy Government Rela-
Avenue Solutions
$180,000
tions
$320,000
Ernst & Young
$160,000
Kilpatrick Stockton
$300,000
Cypress Advocacy
$120,000
Capitol Hill Strategies
$240,000
Capitol Hill Strategies
$120,000
Avenue Solutions
$240,000
Capitol Tax Partners
$120,000
Capitol Tax Partners
$200,000
Angus & Nickerson
$80,000
Cypress Advocacy
$120,000
Kilpatrick Stockton
$60,000
Dewey Square Group
$40,000
Cleary, Gottlieb et al
$100,000
Angus & Nickerson
$40,000
King & Spalding
$20,000
241 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
160
Appendix
2004
Barnett, Sivon & Natter
$400,000
TOTAL:
$8,520,000
Ernst & Young
$240,000
Citigroup Inc
$7,200,000
Verner, Liipfert et al
$220,000
Barnett, Sivon & Natter
$360,000
Avenue Solutions
$150,000
Ernst & Young
$280,000
Barbour, Griffith & Rogers
$120,000
Federalist Group
$240,000
Mayer, Brown et al
$80,000
Avenue Solutions
$180,000
Baker & Hostetler
$80,000
Capitol Hill Strategies
$120,000
Campbell-Crane & Assoc
$80,000
Capitol Tax Partners
$120,000
Franzel, Brent S
$80,000
Walker, Lynda K
> $10,000*
Thaxton, Richard R
$70,000
Skadden, Arps et al
$20,000
Tonio Burgos & Assoc
$50,000
Van Scoyoc Assoc
$40,000
2003
Venn Strategies
$40,000
TOTAL:
$10,400,000
Hogan & Hartson
$20,000
Citigroup Inc
$7,800,000
Heidepriem & Mager
> $10,000*
Akin, Gump et al
$960,000
Capitol Tax Partners
$40,000
Barnett, Sivon & Natter
$360,000
Quinn, Gillespie & Assoc
$240,000
2001
Ernst & Young
$200,000
TOTAL:
$5,930,000
Van Scoyoc Assoc
$180,000
Citigroup Inc
$4,100,000
Barbour, Griffith & Rogers
$160,000
Barnett, Sivon & Natter
$440,000
Federalist Group
$120,000
Verner, Liipfert et al
$380,000
Avenue Solutions
$90,000
Baker & Hostetler
$260,000
Tonio Burgos & Assoc
$50,000
Ernst & Young
$240,000
Campbell-Crane & Assoc
$40,000
Mayer, Brown et al
$100,000
Franzel, Brent S
$40,000
PodestaMattoon
$100,000
Mayer, Brown et al
$40,000
Campbell-Crane & Assoc
$80,000
Capitol Tax Partners
$120,000
Thaxton, Richard R
$60,000
Hogan & Hartson
$40,000
2002
Franzel, Brent S
$40,000
TOTAL:
$7,730,000
Tonio Burgos & Assoc
$30,000
Citigroup Inc
$5,400,000
Heidepriem & Mager
$20,000
Akin, Gump et al
$620,000
Rhoads Group
$40,000
* Not included in totals
* Not included in totals
Appendix
161
2000
Campbell-Crane & Assoc
$60,000
TOTAL:
$6,420,000
Silbey, Franklin R
$40,000
Citigroup Inc
$4,120,000
Thaxton, Richard R
$40,000
Associates First Capital
$300,000
Barrett, Michael F Jr
$30,000
Verner, Liipfert et al
$560,000
Heidepriem & Mager
$20,000
Barnett, Sivon & Natter
$480,000
Rhoads Group
$120,000
Akin, Gump et al
$120,000
Cleary, Gottlieb et al
> $10,000*
Ernst & Young
$120,000
Baker & Hostetler
$120,000
1998
Thaxton, Richard R
$90,000
TOTAL:
$9,135,000
Mayer, Brown et al
$80,000
Citigroup Inc
$7,290,000
Campbell-Crane & Assoc
$80,000
Verner, Liipfert et al
$420,000
Franzel, Brent S
$60,000
Barnett, Sivon & Natter
$320,000
Barrett, Michael F Jr
$60,000
Arter & Hadden
$260,000
Walker, Lynda K
$50,000
Baker & Hostetler
$260,000
Arter & Hadden
$40,000
Akin, Gump et al
$180,000
Heidepriem & Mager
> $10,000*
Walker, Lynda K
$80,000
Rhoads Group
$120,000
Campbell-Crane & Assoc
$60,000
Wilmer, Cutler &
Pickering
$20,000
Franzel, Brent S
$40,000
Callister, Nebeker &
McCullough
$40,000
1999
Thaxton, Richard R
$35,000
TOTAL:
$7,570,000
Silbey, Fanklin R
$20,000
Citigroup Inc
$5,080,000
Ely & Co
$20,000
Associates First Capital
$300,000
Barrett, Michael F Jr
$20,000
Barnett, Sivon & Natter
$500,000
Davis & Harman
> $10,000*
Verner, Liipfert et al
$480,000
Heidepriem & Mager
> $10,000*
Baker & Hostetler
$240,000
Biklen, Stephen C
> $10,000*
Walker, Lynda K
$180,000
Alston & Bird
$30,000
Akin, Gump et al
$160,000
Cleary, Gottlieb et al
$60,000
Arter & Hadden
$140,000
Franzel, Brent S
$100,000
Wilmer, Cutler &
Pickering
$80,000
* Not included in totals
* Not included in totals
162
Appendix
Citigroup Covered Official Lobbyists:242
Firm / Name of Lobbyist Covered Official Position
Year(s)
Angus & Nickerson
Tax Counsel, Committee on Ways and
Angus, Barbara
Means
2005-2007
Nickerson, Gregory
International Tax Counsel, Dept. of Treasury
2005-2007
Avenue Solutions
Tejral, Amy
Legislative Director, Senator Ben Nelson
2007
Baker & Hostetler
Assoc. Commissioner - Social Securty
Kennelly, Barbara
Admin.
2001
Barnett, Sivon & Natter
Barnett, Robert E.
President (Attorney)
1999
Sivon, James C.
VP/ Secretary (Attorney)
1999
Rivas, Jose S.
Legislative/Regulatory Specialist
1999
Capitol Tax Partners
Deputy Asst. Secr (Treasury) for Legislative
Fant, William
Afrs
2002-2008
Mikrut, Joseph
Tax Legislative Counsel - US Treasury
2002-2008
Talisman, Johnathan
Assistant Treasury Secretary for Tax Policy
2002-2008
Grafmeyer, Rick
Deputy Chief of Staff - JCT
2002-2008
McKenney, William
Chief of Staff - Rep. Amo Houghton
2002-2008
Staff Director, Senate Republican Policy
Willcox, Lawrence G.
Committee
2006-2008
Tax Counsel, Sen. Robb - Counsel, Sen.
Dennis, James
Bingaman
2008
Tax Counsel, Sen. Grassley, Sen. Finance
Javens, Christopher
Committee
2008
Cypress Advocacy
Cave, J. Patrick
Deputy Asst. Sec./Acting Asst. Sec, Treasury 2005-2007
242 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
Appendix
163
Ernst & Young
Badger, Doug
Chief of Staff, Office of Senator Nickles
2000-2002
Conklin, Brian
Special Assistant to the President
2004
Federalist Group LLC
Deputy Asst. Sec./ Acting Asst. Sec., Treas-
Cave, J. Patrick
ury
2003-2004
Dammann, Julie
Chief of Staff, Senator Christopher S. Bond
2006
Sternhall, Alexander
Deputy Staff Director, Sen. Banking Comm.
2008
Hogan & Hartson
Kyle, Robert D.
Associate Director, OMB
2001
Kilpatrick Stockton
Dekeyser, Armand
C/S Senator Jeff Sessions
2005-2006
King & Spalding LLP
Clarkson, William
Legislative Assistant, Sen. Susan Collins
2007-2008
Ogilvy Government Relations
Dammann, Julie
Chief of Staff, Senator Christopher S. Bond
2007-2008
PodestaMattoon
Executive Office of POTUS - Office of
Clark, Bill
Personnel
2001
Tornquist, David
Office of Management and Budget
2001
PriceWaterhouseCoopers
Angus, Barbara
Business Tax Counsel, JCT
1999-2000
Kies, Kenneth J.
Chief of Staff, JCT
1999, 2000
Timmons & Co
Shapiro, Daniel
Deputy Cos - Office of Sen. Bill Nelson
2007-2008
Paone, Martin
Secretary for the Majority, US Senate
2008
164
Appendix
Van Scoyoc Assoc
Porterfield, Lendell
Maj. Econ. US Committee on Banking
2002
Appendix
165
Commercial Banks: JP Morgan Chase & Co.
Decade-long campaign contribution total (1998-2008): $15,714,953
Decade-long lobbying expenditure total (1998-2008): $49,372,915
JP Morgan Campaign
Contributions:243
2008 Top Recipients
2006 Top Recipients
TOTAL:
$4,247,991
TOTAL:
$2,163,356
1. Barack Obama (D)
$559,210
1. Hillary Clinton (D)
$113,965
2. Hillary Clinton (D)
$272,694
2. Richard Baker (R)
$45,100
3. John McCain (R)
$205,657
3. Tom Carper (D)
$38,268
4. Rudy Giuliani (R)
$94,300
4. Michael G. Oxley (R)
$35,100
5. Mitt Romney (R)
$78,250
5. Chris Dodd (D)
$31,300
6. Chris Dodd (D)
$68,950
6. Mitch McConnell (R)
$31,000
7. Harry Reid (D)
$53,300
7. Mel Martinez (R)
$30,600
8. John Cornyn (R)
$48,598
8. Tim Johnson (D)
$29,600
9. Charles B. Rangel (D)
$47,900
9. Steny H. Hoyer (D)
$29,500
10. Rahm Emanuel (D)
$44,700
10. Harold E. Ford Jr. (D)
$27,100
11. Mary L. Landrieu (D)
$41,399
11. Max Baucus (D)
$27,000
12. Steny H. Hoyer (D)
$34,300
12. Kent Conrad (D)
$25,000
13. Spencer Bachus (R)
$33,000
13. Joe Lieberman (I)
$23,901
14. Richard C. Shelby (R)
$31,500
14. Mike DeWine (R)
$23,500
15. Dave Camp (R)
$30,500
15. John E. Sununu (R)
$22,500
16. Fred Thompson (R)
$29,450
16. Orrin G. Hatch (R)
$21,000
17. Jack Reed (D)
$27,850
17. Christopher Shays (R)
$19,366
18. Norm Coleman (R)
$26,900
18. Melissa Bean (D)
$18,542
19. Tim Johnson (D)
$26,495
David McSweeney
19. (R)
$17,950
20. Eric Cantor (R)
$24,000
20. Debbie Stabenow (D)
$15,650
243 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
166
Appendix
2004 Top Recipients
10. Jim Maloney (D)
$17,000
TOTAL:
$3,042,399
11. Mike Enzi (R)
$16,000
1. John Kerry (D)
$200,565
11. Carolyn Maloney (D)
$16,000
2. George W. Bush (R)
$187,150
13. Ken Bentsen (D)
$15,000
3. Erskine B. Bowles (D)
$59,750
13. Phil English (R)
$15,000
4. Jay Helvey (R)
$54,750
13. Bart Gordon (D)
$15,000
5. Charles Schumer (D)
$47,550
13. Pat Toomey (R)
$15,000
6. Barack Obama (D)
$47,300
17. John Edwards (D)
$14,500
7. Michael G. Oxley (R)
$36,250
18. Michael G. Oxley (R)
$14,000
8. Richard C. Shelby (R)
$35,000
18. Rob Portman (R)
$14,000
9. Chris Dodd (D)
$30,500
20. Tom Strickland (D)
$13,146
10. Tom Daschle (D)
$28,450
11. Spencer Bachus (R)
$20,000
2000 Top Recipients
12. John Edwards (D)
$19,750
TOTAL:
$2,502,414
13. Jeb Hensarling (R)
$19,500
1. Bill Bradley (D)
$133,255
14. Tom Carper (D)
$19,411
2. Rick A. Lazio (R)
$122,361
15. Blanche Lincoln (D)
$18,357
3. George W. Bush (R)
$101,205
16. Martin Frost (D)
$17,250
4. Charles Schumer (D)
$89,250
17. Michael N. Castle (R)
$17,000
5. Hillary Clinton (D)
$53,750
18. Pete Sessions (R)
$16,800
6. Phil Gramm (R)
$36,250
19. Richard Baker (R)
$16,500
7. Al Gore (D)
$36,050
20. Howard Dean (D)
$16,161
8. Rudy Giuliani (R)
$24,850
9. John McCain (R)
$24,703
2002 Top Recipients
10. Richard G. Lugar (R)
$24,550
TOTAL:
$2,277,188
Peter Staub Wareing
1. Charles Schumer (D)
$160,000
11. (R)
$21,500
2. Ron Kirk (D)
$85,400
12. Spencer Abraham (R)
$21,250
Kay Bailey Hutchison
3. Max Baucus (D)
$41,604
13. (R)
$21,000
4. Erskine B. Bowles (D)
$38,556
14. John J. LaFalce (D)
$19,750
5. John Kerry (D)
$37,000
15. Richard Baker (R)
$17,000
6. Richard Baker (R)
$24,000
16. Tom Campbell (R)
$14,250
7. Amo Houghton (R)
$21,000
17. Pat Toomey (R)
$13,500
8. Wayne Allard (R)
$20,000
18. Martin Frost (D)
$13,000
8. Spencer Bachus (R)
$20,000
18. Marge Roukema (R)
$13,000
Appendix
167
20. Bill McCollum (R)
$12,500
1998 Top Reciepients
TOTAL:
$1,481,605
1. Alfonse D'Amato (R)
$32,850
2. Charles Schumer (D)
$27,650
3. Lauch Faircloth (R)
$24,500
4. Rick A. Lazio (R)
$19,350
5. Chris Dodd (D)
$19,023
Kay Bailey Hutchison
6. (R)
$16,500
6. John J. LaFalce (D)
$16,500
Christopher S. 'Kit'
8. Bond (R)
$13,000
8. Chuck Hagel (R)
$13,000
10. Robert F. Bennett (R)
$12,500
10. Tom Daschle (D)
$12,500
12. Bill McCollum (R)
$12,000
13. Martin Frost (D)
$11,250
13. Pete King (R)
$11,250
15. Richard Baker (R)
$11,000
15. Bart Gordon (D)
$11,000
17. Michael N. Castle (R)
$10,550
17. Dick Armey (R)
$10,500
19. Paul E. Gillmor (R)
$10,000
19. Sue Kelly (R)
$10,000
168
Appendix
JP Morgan Lobbying Expenses:244 Bryan Cave LLP
$20,000
2008
Thaxton, Richard R
$45,000
TOTAL:
$6,336,000
JP Morgan Chase & Co
$5,390,000
2006
OB-C Group
$240,000
TOTAL:
$7,204,040
Equale & Assoc
$147,500
JP Morgan Chase & Co
$6,120,000
BKSH & Assoc
$120,000
American Continental
Group
$200,000
Richard F Hohlt
$130,000
Tongour Simpson Group
$140,000
Triangle Assoc
$88,000
BKSH & Assoc
$120,000
Mayer, Brown et al
$80,000
Mayer, Brown et al
$100,000
Walter Group
$80,500
Triangle Assoc
$80,000
Fennel Consulting
$50,000
Zeliff Enterprises
$80,000
David L Horne LLC
$10,000
Richard F Hohlt
$74,800
B&D Consulting
> $10,000*
Private/Public Solutions
$62,500
Angus & Nickerson
$40,000
2007
B&D Consulting
$36,740
TOTAL:
$6,452,500
David L Horne LLC
$20,000
JP Morgan Chase & Co
$5,440,000
Fennel Consulting
$20,000
OB-C Group
$240,000
OB-C Group
$20,000
BKSH & Assoc
$140,000
Thaxton, Richard R
$90,000
Richard F Hohit
$95,500
Triangle Assoc
$80,000
2005
Mayer, Brown et al
$80,000
TOTAL:
$4,448,500
David L Horne LLC
$60,000
JP Morgan Chase & Co
$3,540,000
Equale & Assoc
$60,000
Mayer, Brown et al
$140,000
Fennel Consulting
$52,000
American Continental
B&D Sagamore
$120,000
Group
$40,000
BKSH & Assoc
$120,000
Walter Group
$40,000
Tongour Simpson Group
$100,000
Wilmer, Cutler &
Richard F Hohit
$83,500
Pickering
$40,000
Zeliff Enterprises
$80,000
B&D Consulting
$20,000
Triangle Assoc
$70,000
Patton Boggs LLP
$60,000
244 Source: Center for Responsive Politics.
Angus & Nickerson
$20,000
Lobbying amounts accessed February 2009.
* Not included in totals
Appendix
169
Clark & Weinstock
$20,000
Thaxton, Richard R
$60,000
Kerrigan & Assoc
> $10,000*
Carmen Group
$20,000
Thaxton, Richard R
$95,000
2002
2004
TOTAL:
$5,062,800
TOTAL:
$5,072,500
JP Morgan Chase & Co
$4,700,000
JP Morgan Chase & Co
$3,580,000
B&D Sagamore
$120,000
Bank One Corp
$415,000
BKSH & Assoc
$96,000
Clark & Weinstock
$310,000
Williams & Jensen
$80,000
B&D Sagamore
$140,000
Richard F Hohit
$66,800
Mayer, Brown et al
$140,000
Triangle Assoc
> $10,000*
BKSH & Assoc
$120,000
Kerrigan & Assoc
> $10,000*
Zeliff Enterprises
$80,000
Richard F Hohit
$67,500
2001
Patton Boggs LLP
$60,000
TOTAL:
$6,550,000
Triangle Assoc
$40,000
JP Morgan Chase & Co
$6,300,000
Kerrigan & Assoc
$40,000
BKSH & Assoc
$88,000
Covington & Burling
> $10,000*
Richard F Hohit
$62,000
Thaxton, Richard R
$60,000
B&D Sagamore
$60,000
Brownstein, Hyatt et al
$20,000
Williams & Jensen
$40,000
2003
1998-2000
TOTAL:
$8,246,575
N/A
JP Morgan Chase & Co
$6,706,575
BankOne Corp
$720,000
Patton Boggs LLP
$220,000
Williams & Jensen
140,000
BKSH & Assoc
$120,000
B&D Sagamore
$100,000
Richard F Hohit
$80,000
Kerrigan & Assoc
$40,000
Triangle Assoc
> $10,000*
Covington & Burling
$40,000
* Not included in totals
* Not included in totals
170
Appendix
JP Morgan Covered Official Lobbyists:245
Firm / Name of Lobbyist
Covered Official Position
Year(s)
Carmen Group, Inc
Hoitsma, Gary
Press Secretary, Senator Inhofe
2003
Program Examiner, Transport Branch,
Wassmer, Victoria
OMB
2003
Clark & Wienstock
Godes, Niles
Chief of Staff to Sen. Byron Dorgan
2003
Spec. Asst. for Legal Affairs for the Presi-
Lehman, Dirksen
dent
2003
Angus & Nickerson
Tax Counsel, Committee on Ways and
Angus, Barbara
Means
2005-2006
International Tax Counsel, Dept. of Treas-
Nickerson, Gregory
ury
2005-2006
Zeliff Enterprises
Former member of Congress: NH 1991-
Zeliff, William H.
1997
2005-2006
OB-C Group LLC
Stevenson, Robert
Sen. Bill Frist Communications Director
2006
Private Public Solutions
Moffett, Anthony J.
Former Member of Congress
2006
BKSH & Associates
Asst. Sec for LA Homeland Security,
Turner, Pam
2003-2006
2008
Dep Asst to Pres for LA 82-89
245 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
Appendix
171
Fennel Consulting
Fennel, Melody
Assistant Secretary, HUD
2005-2008
172
Appendix
Commercial Banks: Wachovia Corp.
Decade-long campaign contribution total (1998-2008): $3,946,727
Decade-long lobbying expenditure total (1998-2008): $11,996,752
Wachovia Campaign
18. David Scott (D)
$10,000
Contributions:246
18. John Boehner (R)
$10,000
2008 Top Recipients247
TOTAL:
$934,381
2006 Top Recipients
1.
Barack Obama (D)
$178,382
TOTAL:
$742,384
2.
John McCain (R)
$155,658
1.
George Allen (R)
$30,650
3.
Hillary Clinton (D)
$77,000
2.
Rick Santorum (R)
$26,600
4.
Rudy Giuliani (R)
$49,400
3.
Robin Hayes (R)
$21,470
5.
Mitt Romney (R)
$36,550
4.
Sue Myrick (R)
$17,700
6.
Robin Hayes (R)
$18,929
5.
Eric Cantor (R)
$16,700
7.
Eric Cantor (R)
$17,750
6.
Patrick McHenry (R)
$15,250
8.
Elizabeth Dole (R)
$16,700
7.
Richard Burr (R)
$13,250
9.
Mark Warner (D)
$15,550
8.
Michael Fitzpatrick (R)
$11,050
10. Lindsey Graham (R)
$15,400
9.
Michael Steele (R)
$10,450
11. Patrick McHenry (R)
$15,350
10. Vernon Buchanan (R)
$10,100
11. Sue Myrick (R)
$15,350
11. Robert Menendez (D)
$10,000
11. Deborah Pryce (R)
$10,000
13. James Clyburn (D)
$13,500
11. Jim McCrery (R)
$10,000
14. Chris Dodd (D)
$12,750
11. David Dreier (R)
$10,000
15. Melvin Watt (D)
$12,500
11. John Boehner (R)
$10,000
16. Artur Davis (D)
$10,250
11. Richard Baker (R)
$10,000
16. Tim Johnson (D)
$10,250
11. Spencer Bachus (R)
$10,000
18. Spencer Bachus (R)
$10,000
18. Jon Kyl (R)
$9,000
18. Mitch McConnell (R)
$9,000
246 Source: Center for Responsive Politics.
20. John Spratt Jr (D)
$8,800
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
247
Based on highest 1,000 contributions plus
PAC contributions.
Appendix
173
2004 Top Recipients248
8.
Richard Baker (R)
$10,000
TOTAL:
$1,237,468
8.
Spencer Bachus (R)
$10,000
1.
George W Bush (R)
$223,960
11. Walter Jones Jr (R)
$9,500
2.
Erskine Bowles (D)
$95,750
12. Ed Royce (R)
$6,000
3.
Richard Burr (R)
$76,000
12. Eric Cantor (R)
$6,000
4.
John Kerry (D)
$33,850
12. Max Baucus (D)
$6,000
5.
Eric Cantor (R)
$23,000
15. Calder Clay (R)
$5,900
6.
Robin Hayes (R)
$18,750
16. Cass Ballenger (R)
$5,000
7.
Sue Myrick (R)
$16,500
16. Gregory Meeks (D)
$5,000
8.
Melvin Watt (D)
$15,550
16. Jim Maloney (D)
$5,000
9.
Arlen Specter (R)
$14,300
16. Sue Myrick (R)
$5,000
10. Elizabeth Dole (R)
$13,250
16. Wayne Allard (R)
$5,000
10. Jay Helvey (R)
$13,250
16. Pete King (R)
$5,000
12. Charlie Condon (R)
$12,200
13. Johnny Isakson (R)
$10,070
2000 Top Recipients
14. Chris Dodd (D)
$10,000
TOTAL:
$130,175
14. Tom Carper (D)
$10,000
1.
Elizabeth Dole (R)
$9,450
16. John Thune (R)
$9,500
2.
Richard Burr (R)
$8,450
17. Mel Martinez (R)
$8,700
3.
Robin Hayes (R)
$8,000
18. Pete Sessions (R)
$8,250
4.
Walter Jones Jr (R)
$6,500
19. Howard Dean (D)
$7,460
5.
John Edwards (D)
$5,250
20. Jim McCrery (R)
$7,250
6.
Zell Miller (D)
$4,000
6.
Sue Myrick (R)
$4,000
2002 Top Recipients
8.
Al Gore (D)
$3,250
TOTAL:
$790,969
8.
Bill McCullum (R)
$3,250
1.
Erskine Bowles (D)
$77,200
10. Johnny Isakson (R)
$3,000
2.
Elizabeth Dole (R)
$31,325
10. Melvin Watt (D)
$3,000
3.
Robin Hayes (R)
$19,470
12. Lindsey Graham (R)
$2,825
4.
Melvin Watt (D)
$12,500
13. Bob Barr (R)
$2,500
5.
Richard Burr (R)
$11,800
13. George W Bush (R)
$2,500
6.
Saxby Chambliss (R)
$10,500
13. Roger Kahn (D)
$2,500
7.
Lindsey Graham (R)
$10,250
13. Trent Lott (R)
$2,500
8.
Michael Oxley (R)
$10,000
13. Floyd Spence (R)
$2,500
248 Based on highest 1,000 contributions plus
18. Charles Norwood (R)
$2,250
PAC contributions.
174
Appendix
19. Bill Bradley (D)
$2,000
18. John Kasich (R)
$1,000
19. George Allen (R)
$2,000
18. Bob Barr (R)
$1,000
19. Jack Kingston (R)
$2,000
18. David Price (D)
$1,000
19. John Linder (R)
$2,000
18. Dan Page (R)
$1,000
19. Lamar Alexander (R)
$2,000
18. Howard Coble (R)
$1,000
19. Mack Mattingly (R)
$2,000
18. Cass Ballenger (R)
$1,000
19. Richard Baker (R)
$2,000
18. Jesse Helms (R)
$1,000
19. Saxby Chambliss (R)
$2,000
18. Michael Fair (R)
$1,000
19. William Roth Jr (R)
$2,000
18. John Spratt Jr (D)
$1,000
19. Doug Haynes (R)
$2,000
19. Mike McIntyre (D)
$2,000
19. Charles Taylor (R)
$2,000
1998 Top Recipients
TOTAL:
$102,350
1.
Lauch Faircloth (R)
$15,100
2.
Richard Burr (R)
$13,000
3.
Max Cleland (D)
$7,500
4.
Paul Coverdell (R)
$5,750
5.
Frank Lautenberg (R)
$5,000
6.
Fritz Hollings (D)
$4,600
7.
Walter Jones Jr (R)
$4,500
8.
Michael Coles (D)
$4,000
9.
Robin Hayes (R)
$3,500
9.
Mike McIntyre (D)
$3,500
11. Melvin Watt (D)
$3,250
12. Bob Ethridge (D)
$3,000
13. John Linder (R)
$2,500
13. Sue Myrick (R)
$2,500
15. Charles Taylor (R)
$2,250
15. Johnny Isakson (R)
$2,250
17. James Clyburn (D)
$1,500
18. Bob Graham (D)
$1,000
18. Ernest Hollings (D)
$1,000
Appendix
175
Wachovia Lobbying Expenditures:249
2008
2006
TOTAL:
$2,561,000
TOTAL:
$1,740,000
Wachovia Corp
$1,781,000
Wachovia Corp
$900,000
C2 Group
$200,000
Kilpatrick Stockton
$400,000
Angus & Nickerson
$120,000
C2 Group
$240,000
Porterfield & Lowenthal
$120,000
Capitol Hill Strategies
$100,000
Public Strategies
$80,000
Jenkins Hill Group
$80,000
Dixon, Dan
$60,000
Cypress Advocacy
$20,000
Jenkins Hill Group
$80,000
Capitol Hill Strategies
$80,000
2005
Cypress Advocacy
$20,000
TOTAL:
$1,220,000
Barnett, Sivon & Natter
$20,000
Wachovia Corp
$840,000
Sullivan & Cromwell
> $10,000*
C2 Group
$240,000
Jenkins Hill Group
$60,000
Kilpatrick Stockton
$60,000
2007
Capitol Hill Strategies
$20,000
TOTAL:
$2,295,752
Wachovia Corp
$1,360,000
Kilpatrick Stockton
$365,752
2004
C2 Group
$240,000
TOTAL:
$1,030,000
Wachovia Corp
$720,000
Capitol Hill Strategies
$120,000
C2 Group
$240,000
Jenkins Hill Group
$100,000
Jenkins Hill Group
$70,000
Dixon, Dan
$40,000
Public Strategies
$30,000
Angus & Nickerson
$20,000
2003
Cypress Advocacy
$20,000
TOTAL:
$320,000
Wachovia Corp
$220,000
Sullivan & Cromwell
> $10,000*
C2 Group
$100,000
249 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not counted in total
176
Appendix
2002
TOTAL:
$420,000
Wachovia Corp
$120,000
Williams & Jensen
$300,000
Sullivan & Cromwell
> $10,000*
2001
TOTAL:
$730,000
Wachovia Corp
$10,000
Williams & Jensen
$620,000
2000
TOTAL:
$480,000
Wachovia Corp
> $10,000*
Williams & Jensen
$460,000
Groom Law Group
$20,000
1999
TOTAL:
$600,000
Wachovia Corp
$20,000
Williams & Jensen
$440,000
Groom Law Group
$140,000
Sullivan & Cromwell
> $10,000*
Bradley, Arant et al
> $10,000*
1998
TOTAL:
$600,000
Groom Law Group
$20,000
Sullivan & Cromwell
> $10,000*
Williams & Jensen
$580,000
* Not included in total
Appendix
177
Wachovia Covered Official Lobbyists:250
Firm / Name of Lobbyist Covered Official Position
Year(s)
William & Jensen, PC
General Counsel - Senate Banking Commit-
Bechtel, Phillip
tee
1999-2002
Landers, David M.
Legislative Counsel for Lauch Faircloth
1999-2002
McCarlle, Christine C.
Special Assistant to Trent Lott
1999-2002
C2 Group, LLC
Hanson, Michael
Chief of Staff to Congressman Sam Johnson
2003-2008
Murray, Jefferies
Chief of Staff to Congressman Bud Cramer
2003-2008
Litterst, Nelson
Special Asst. to the President for Leg Affairs
2004-2008
Senior Advisor to Chair of Ways & Means
Knight, Shahira
Committee
2006-2008
Elliott, Lesley
Deputy Chief of Staff, Secretary of the Senate 2007-2008
Golden West Financial Corp
LaFalce, John
Member of Congress
2005
Kilpatrick Stockton LLP
Dekeyser, Armand
C/S Sen. Jeff Sessions
2005-2007
Cypress Advocacy
Deputy Asst. Sec./ Acting Asst. Sec., Treas-
Cave, J. Patrick
ury
2005-2008
250 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
178
Appendix
Commercial Banks: Wells Fargo
Decade-long campaign contribution total (1998-2008): $5,330,022
Decade-long lobbying expenditure total (1998-2008): $16,637,740
Wells Fargo Campaign Contributions:251
15. James Clyburn (D)
$10,000
2008 Top Recipients252
15. James Clyburn (D)
$10,000
TOTAL:
$1,448,197
15. Spencer Bachus (R)
$10,000
1.
Barack Obama (D)
$160,089
15. John Barrasso (R)
$10,000
2.
Hillary Clinton (D)
$103,322
3.
John McCain (R)
$42,436
2006 Top Recipients
4.
Norm Coleman (R)
$36,500
TOTAL:
$1,054,492
5.
Mitt Romney (R)
$33,200
1.
Dianne Feinstein (D)
$21,750
6.
Rudy Giuliani (R)
$19,450
2.
Amy Klobuchar (D)
$18,585
7.
John Edwards (D)
$16,950
3.
Rick Santorum (R)
$14,750
8.
Max Baucus (D)
$14,700
4.
Michael McGavick (R)
$14,250
9.
Erik Paulsen (R)
$12,700
5.
Orrin Hatch (R)
$13,900
10. Ed Royce (R)
$12,300
6.
Richard Baker (R)
$13,500
10. Paul Kanjorski (D)
$12,300
7.
Ed Royce (R)
$13,000
12. John Cornyn (R)
$11,500
8.
Jon Kyl (R)
$11,250
13. John Sununu (R)
$11,000
9.
Christopher Shays (R)
$11,000
13. Tom Latham (R)
$11,000
10. Jeffery Lamberti (R)
$10,350
15. Pete Sessions (R)
$10,000
11. Deborah Pryce (R)
$10,000
15. Collin Peterson (D)
$10,000
11. Nancy Pelosi (D)
$10,000
15. Nancy Pelosi (D)
$10,000
11. Jim McCrery (R)
$10,000
15. George Miller (D)
$10,000
11. Robert Byrd (D)
$10,000
15. Steny Hoyer (D)
$10,000
11. Conrad Burns (R)
$10,000
16. Tom Latham (R)
$9,750
251 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
17. Joe Lieberman (I)
$9,200
ruary 2009. Individual recipient numbers do
18. Earl Pomeroy (D)
$9,000
not include the 4th Quarter of 2008.
252 Based on highest 1,000 contributions plus
18. Spencer Bachus (R)
$9,000
PAC contributions.
Appendix
179
20. Ben Nelson (D)
$8,650
6.
Max Baucus (D)
$9,000
7.
John Cornyn (R)
$8,950
2004 Top Recipients253
8.
Chuck Hagel (R)
$8,000
TOTAL:
$1,190,226
9.
Jim Ramstad (R)
$6,750
1.
John Kerry (D)
$67,700
10. Gordon Smith (R)
$6,500
2.
George W Bush (R)
$63,735
11. Larry Craig (R)
$6,000
3.
Chuck Grassley (R)
$21,250
11. Mike Enzi (R)
$6,000
4.
Tom Daschle (D)
$19,250
11. Jack Reed (D)
$6,000
5.
Nancy Pelosi (D)
$16,000
14. Earl Pomeroy (D)
$5,750
6.
Howard Dean (D)
$13,750
15. Dick Armey (R)
$5,000
7.
Jim Bunning (R)
$13,000
15. Chuck Grassley (R)
$5,000
7.
Randy Neugebauer (R)
$13,000
17. Mark Kennedy (R)
$4,900
7.
Richard Baker (R)
$13,000
18. Nancy Pelosi (D)
$4,750
10. Barney Frank (D)
$11,800
19. Ron Kirk (D)
$4,500
11. Bob Beuprez (R)
$11,000
19. Silvestre Reyes (D)
$4,500
12. Lisa Murkowski (R)
$10,250
19. Ted Stevens (R)
$4,500
13. Robert Bennett (R)
$10,000
19. Michael Oxley (R)
$4,500
13. Michael Oxley (R)
$10,000
19. Charlie Gonzalez (D)
$4,500
13. Spencer Bachus (R)
$10,000
13. Pete Domenici (R)
$10,000
2000 Top Recipients
17. Richard Shelby (R)
$9,750
TOTAL:
$676,676
18. John Thune (R)
$9,400
1.
Dianne Feinstein (D)
$24,000
19. Jeb Hensarling (R)
$9,000
2.
Jim Ramstad (R)
$11,400
20. Mark Kennedy (R)
$8,250
3.
Bill Bradley (D)
$10,500
3.
Kent Conrad (D)
$10,500
2002 Top Recipients
5.
Jon Kyl (R)
$10,250
TOTAL:
$613,262
6.
George W Bush (R)
$10,000
1.
Wayne Allard (R)
$23,550
7.
Rod Grams (R)
$9,500
2.
Norm Coleman (R)
$18,500
8.
Bob Kerrey (D)
$8,500
3.
John Thune (R)
$16,500
8.
Bruce Vento (D)
$8,500
4.
Richard Baker (R)
$12,000
8.
Kay Bailey Hutchison (R)
$8,250
5.
Tim Johnson (D)
$11,750
11. Al Gore (D)
$7,550
12. Conrad Burns (R)
$7,250
253 Based on highest 1,000 contributions plus
12. John Ensign (R)
$7,250
PAC contributions.
180
Appendix
14. Slade Gorton (R)
$6,900
18. Jerry Kleczka (D)
$3,000
15. Jeff Bingaman (D)
$6,750
18. Armando Falcon (D)
$3,000
15. Paul Sarbanes (D)
$6,750
18. Mark Baker (R)
$3,000
17. Hillary Clinton (D)
$6,460
18. Chuck Hagel (R)
$3,000
18. Charlie Gonzalez (D)
$5,500
18. Max Baucus (D)
$5,500
18. Rick Lazio (R)
$5,500
18. Tom Carper (D)
$5,500
1998 Top Recipients
TOTAL:
$347,169
1.
Robert Bennet (R)
$10,550
2.
Chuck Grassley (R)
$10,000
3.
Chris Dodd (D)
$8,000
4.
Byron Dorgan (D)
$7,500
5.
Rod Grams (R)
$6,500
6.
Jeff Sessions (R)
$6,000
7.
Matt Fong (R)
$5,500
8.
Bill Clinton (D)
$5,000
8.
Bob Kerrey (D)
$5,000
10. Bruce Vento (D)
$4,750
12. Pete Sessions (R)
$4,500
12. Steven Kuykendall (R)
$4,000
12. Richard Baker (R)
$4,000
12. Tom Daschle (D)
$4,000
15. Buck McKeon (R)
$3,500
15. Blanche Lincoln (D)
$3,500
17. Robert Greenlee (R)
$3,300
18. John McCain (R)
$3,000
18. David Dreier (R)
$3,000
18. Earl Pomeroy (D)
$3,000
18. Scott McInnis (R)
$3,000
18. Rick Lazio (R)
$3,000
18. Ray LaHood (R)
$3,000
Appendix
181
Wells Fargo Lobbying
Expenditures:254
2008
2003
TOTAL:
$1,674,740
TOTAL:
$1,560,000
Wells Fargo
$1,200,740
Wells Fargo
$960,000
Doremus, Theodore A Jr
$444,000
Doremus, Theodore A Jr
$400,000
Chesapeake Enterprises
$30,000
Davis, Polk & Wardwell
$200,000
2007
2002
TOTAL:
$2,347,000
TOTAL:
$820,000
Wells Fargo
$1,919,000
Wells Fargo
$620,000
Doremus, Theodore A Jr
$428,000
Doremus, Theodore A Jr
$200,000
2006
2001
TOTAL:
$2,565,000
TOTAL:
$870,000
Wells Fargo
$1,765,000
Wells Fargo
$650,000
HD Vest Financial Ser-
Doremus, Theodore A Jr
$400,000
vices
$20,000
Kilpatrick Stockton
$400,000
Davis, Pol & Wardwell
$100,000
Doremus, Theodore A Jr
$100,000
2005
Kirkpatrick & Lockhart
> $10,000*
TOTAL:
$2,050,000
Wells Fargo
$1,590,000
2000
Doremus, Theodore A Jr
$400,000
TOTAL:
$800,000
Kilpatrick Stockton
$60,000
Wells Fargo
$720,000
Davis, Pol & Wardwell
$80,000
2004
TOTAL:
$1,680,000
1999
Wells Fargo
$1,280,000
TOTAL:
$671,000
Doremus, Theodore A Jr
$400,000
Wells Fargo
$471,000
Davis, Polk & Wardwell
$200,000
254 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in the total amount
182
Appendix
1998
TOTAL:
$1,600,000
Norwest Corp
$1,180,000
Canfield & Assoc
$20,000
Hogan & Hartson
> $10,000*
Davis, Polk & Wardwell
$200,000
Miller & Chevalier
$20,000
Vickers, Linda
$180,000
* Not included in the total amount
Appendix
183
Wells Fargo Covered Official Lobbyists:255
Firm / Name of Lobbyist
Covered Official Position
Year(s)
Kilpatrick Stockton LLP
Dekeyser, Armand
C/S Sen. Jeff Sessions
2005-2006
255 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
184
Appendix
Hedge Funds: Bridgewater Associates
Decade-long campaign contribution total (1998-2008): $274,650
Decade-long lobbying expenditure total (1998-2008): $855,000
Bridgewater Campaign Contributions:256
2008 All Recipients
2004 All Recipients
TOTAL:
$239,400
TOTAL:
$25,500
1. John McCain (R)
$69,050
1. George W Bush (R)
$250
2. Barack Obama (D)
$13,700
1. Wesley Clark (D)
$250
David John Cappiello
3. (R)
$4,600
4. Rudolph Giuliani (R)
$3,300 2002
N/A
5. Mitt Romney (R)
$2,300
5. Paul Hodes (D)
$2,300 2000 All Recipients
7. Christopher Shays (R)
$2,000
TOTAL:
$1,000
8. Patrick Murphy
$200
1. Stephanie Hunter Sanchez (D)
$1,000
2006 All Recipients
1998-1999
N/A
TOTAL:
$8,750
1. Christopher Shays (D)
$2,250
2. Ned Lamont (D)
$1,250
3. Paul Hodes (D)
$1,000
4. Jon Tester (D)
$750
5. Diane Goss Farrell (D)
$250
5. James Webb (D)
$250
256 Source: Center for Responsive Politics. Cam-
paign contribution totals accessed February
2009. Individual recipient numbers do not in-
clude the 4th Quarter of 2008.
Appendix
185
Bridgewater Lobbying Expenses:257
2008
TOTAL:
$135,000
Rich Feuer Group
$135,000
2007
TOTAL:
$220,000
Quinn, Gillespie & Assoc.
$60,000
Rich Feuer Group
$160,000
2006
TOTAL:
$440,000
Quinn, Gillespie & Assoc.
$340,000
Rich Feuer Group
$100,000
2005
TOTAL:
$60,000
Rich Feuer Group
$60,000
1998-2004
N/A
Bridgewater Covered Official Lobbyists:
N/A
257 Source: Center for Responsive Politics. Lobbying amounts accessed January 2009 and may not include
4th Quarter amounts.
186
Appendix
Hedge Funds: DE Shaw Group
Decade-long campaign contribution total (1998-2008): $3,100,255
Decade-long lobbying expenditure total (1998-2008): $680,000
DE Shaw Campaign Contributions:258
17. Norm Coleman (R)
$1,000
2008 All Recipients
TOTAL:
$841,541
2006 All Recipients
1.
Hillary Clinton (D)
$18,650
TOTAL:
$485,200
2.
Barack Obama (D)
$13,320
1.
Bob Casey (D)
$4,100
3.
Max Baucus (D)
$3,250
2.
Maria Cantwell (D)
$4,000
4.
Jeff Merkley (D)
$2,700
3.
Robert Menendez (D)
$3,600
5.
Darcy Burner (D)
$2,300
4.
Healther Wilson (R)
$3,000
5.
Kay Hagan (D)
$2,300
5.
Tim Mahoney (D)
$2,100
5.
Chellie Pingree (D)
$2,300
5.
Jerry McNerney (D)
$2,300
5.
Ben Nelson (D)
$2,100
5.
Jeanne Shaheen (D)
$2,300
5.
Evan Bayh (D)
$2,100
5.
Andrew Rice (D)
$2,300
8.
Jo Bonner (R)
$2,000
5.
Jim Himes (D)
$2,300
8.
Chet Edwards (D)
$2,000
5.
Mary Landrieu (D)
$2,300
8.
Joe Lieberman (I)
$2,000
13. Bob Inglis (R)
$2,000
8.
Mike Ferguson (R)
$2,000
13. Susan Collins (R)
$2,000
8.
Clay Shaw (R)
$2,000
14. Mitch McConnell (R)
$2,000
8.
Mark Pryor (D)
$2,000
15. Ron Klein (D)
$1,500
8.
Baron Hill (D)
$2,000
16. Ron Paul (R)
$1,100
8.
Darcy Burner (D)
$2,000
17. Heather Wilson (R)
$1,000
17. Steny Hoyer (D)
$1,000
8.
Patricia Madrid (D)
$2,000
17. Roger Wicker (R)
$1,000
17. Edwin Perlmutter (D)
$1,000
17. James Risch (R)
$1,000
17. Olympia Snowe (R)
$1,000
17. Micahel Johanns (R)
$1,000
17. Max Baucus (D)
$1,000
17. Nancy Johnson (R)
$1,000
258 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix
187
2004 All Recipients
TOTAL:
$256,250
1.
John Kerry (D)
$6,250
2.
Blanche Lincoln (D)
$4,000
2.
Patty Murray (D)
$4,000
4.
Hillary Clinton (D)
$2,000
5.
Erskine Bowles (D)
$1,000
5.
Joseph Hoeffel (D)
$1,000
5.
Charles Rangel (D)
$1,000
8.
Joe Lieberman (D)
$500
2002 All Recipients
TOTAL:
$769,296
1.
Erskine Bowles (D)
$1,000
1.
Jeanne Shaheen
$1,000
2000
TOTAL:
$503,968
1.
Richard Gephardt (D)
$1,000
2.
John McCain (R)
$750
1998
TOTAL:
$244,000
No contributions to individual candi-
dates
188
Appendix
DE Shaw Lobbying Expenses:259
2008
2001
TOTAL:
$20,000
TOTAL:
$20,000
Mehlman Vogel Castagnetti
Commonwealth Group
$20,000
Inc
$20,000
2000
2007
TOTAL:
$160,000
N/A
DE Shaw & Co
$120,000
Commonwealth Group
$40,000
2006
TOTAL:
$70,000
Mehlman Vogel Castagnetti
1999
Inc
$30,000
TOTAL:
$80,000
Navigant Consulting
$40,000
DE Shaw & Co
$40,000
Commonwealth Group
$40,000
2005
TOTAL:
$110,000
1998
Mehlman Vogel Castagnetti
TOTAL:
$120,000
Inc
$30,000
DE Shaw & Co
$80,000
Navigant Consulting
$80,000
Commonwealth Group
$40,000
2004
TOTAL:
$80,000
Mehlman Vogel Castagnetti
Inc
$20,000
Navigant Consulting
$60,000
2003
TOTAL:
$20,000
Navigant Consulting
$20,000
2002
N/A
259 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
Appendix
189
DE Shaw Covered Official Lobbyists:260
Firm / Name of Lobbyist
Covered Position
Year(s)
Mehlman Vogel Castagnetti Inc
Kelly Bingel
Chief of Staff, Sen. Blanche Lincoln
2005-2006
Chief of Staff, Rep. Shaddegg; Exec Direc-
Elise Finley Pickering
tor, RPC
2006
Health Policy Director, Senate Majority
Dean Rosen
Leader
2005-2006
David Thomas
Chief of Staff, Rep. Zoe Lofgren
2006
C. Stewart Verdery Jr
Asst Sec for Homeland Security
2005
Alex Vogel
Chief Council, Senate Majority Leader
2005
260 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
190
Appendix
Hedge Funds: Farallon Capital Management
Decade-long campaign contribution total (1998-2008): $1,058,953
Decade-long lobbying expenditure total (1998-2008): $1,005,000
Farallon Campaign Contributions:261
3.
Rahm Emanuel (D)
$8,000
2008 All Recipients
4.
Evan Bayh (D)
$6,300
TOTAL:
$372,863
5.
John Thune (R)
$4,400
1.
Hillary Clinton (D)
$94,600
6.
Judy Aydelott (D)
$4,200
2.
Barack Obama (D)
$15,550
6.
John Hall (D)
$4,200
3.
David Obey (D)
$13,800
8.
Joe Sestak (D)
$2,100
3.
Chris Dodd (D)
$13,800
8.
Ken Lucas (D)
$2,100
4.
Rahm Emanuel (D)
$10,200
8.
Chris Carney (D)
$2,100
5.
John McCain (R)
$8,900
8.
Michael Arcuri (D)
$2,100
6.
Howard Berman (D)
$8,600
8.
Edwin Perlmutter (D)
$2,100
7.
John Thune (R)
$7,100
8.
Charles Brown (D)
$2,100
8.
Tim Johnson (D)
$4,600
8.
Chris Murphy (D)
$2,100
8.
Gary Trauner (D)
$4,600
15. Dianne Feinstein (D)
$1,000
9.
Mark Warner (D)
$3,300
15. Howard Berman (D)
$1,000
10. Donna Edwards (D)
$2,000
16. Patrick Murphy (D)
$500
11. Charles Rangel (D)
$1,000
12. Allyson Schwartz (D)
$500
2004 All Recipients
13. Mitt Romney (R)
$250
TOTAL:
$233,950
1.
John Kerry (D)
$14,000
2006 All Recipients
2.
Tom Daschle (D)
$9,250
TOTAL:
$328,890
3.
Russell Feingold (D)
$4,000
1.
Hillary Clinton (D)
$33,190
3.
Chris John (D)
$4,000
2.
Kent Conrad (D)
$8,400
3.
Tony Knowles (D)
$4,000
3.
Brad Carson (D)
$4,000
7.
Lisa Quigley (D)
$2,500
261 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
8.
Erskine Bowles (D)
$2,000
ruary 2009. Individual recipient numbers do
8.
Howard Dean (D)
$2,000
not include the 4th Quarter of 2008.
Appendix
191
8.
Ken Salazar (D)
$2,000
1998 All Recipients
8.
Inez Tenenbaum (D)
$2,000
TOTAL:
$7,500
8.
Joe Lieberman (D)
$2,000
1.
John McCain (R)
$1,000
8.
Harold Ford, Jr (D)
$2,000
1.
Matt Fong (R)
$1,000
8.
Betty Castor (D)
$2,000
3.
Dick Lane (D)
$750
15. Rob Bishop (R)
$1,200
4.
Matt Fong (R)
$250
16. Robert Bennett (R)
$1,000
17. Jamie Metzl (D)
$500
2002 All Recipients
TOTAL:
$97,250
1.
John Kerry (D)
$17,000
2.
Tom Daschle (D)
$7,500
3.
John P Murtha (D)
$4,000
4.
Howard Berman (D)
$2,500
5.
Robert Bennett (R)
$1,000
5.
Rahm Emanuel (D)
$1,000
5.
Howard Berman (D)
$1,000
5.
John Thune (R)
$1,000
Steven Peter Andreasen
9.
(D)
$750
2000 All Recipients
TOTAL:
$18,500
1.
Norm Dicks (D)
$9,000
2.
Bill Bradley (D)
$5,000
3.
John McCain (R)
$1,000
3.
Ed Bernstein (D)
$1,000
3.
Nancy Pelosi (D)
$1,000
192
Appendix
Farallon Lobbying Expenses:262
2004-2008
N/A
2003
TOTAL:
$310,000
Timmons & Co.
$310,000
2002
TOTAL:
$335,000
Timmons & Co.
$335,000
2001
TOTAL:
$360,000
Fleischman & Walsh
$40,000
Timmons & Co.
$320,000
1998-2000
N/A
262 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
Appendix
193
Farallon Covered Official Lobbyists:263
Firm / Name of Lobbyist Covered Position
Year(s)
Fleischman & Walsh
Senate Judiciary Subcommittee on Antitrust,
2001,
Louis Dupart
Business Rights & Competition
2003-2005
Timmons & Co.
Richard Tarplin
Asst Secretary for Legislation, Dept of HHS
2001-2004
263 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
194
Appendix
Hedge Funds: Och-Ziff Capital Management
Decade-long campaign contribution total (1998-2008): $338,552
Decade-long lobbying expenditure total (1998-2008): $200,000
Och-Ziff Campaign Contributions:264
5.
Jon Kyl (R)
$1,000
2008 All Recipients
5.
Bill Nelson (D)
$1,000
TOTAL:
$106,300
11. Chris Shays (R)
$250
1. Mark Pryor (D)
$11,500
2. Barack Obama (D)
$7,900
2004 All Recipients
3. Hillary Clinton (D)
$6,800
TOTAL:
$95,002
4. John Thune (R)
$4,600
1.
John Kerry (D)
$14,802
5. Mitt Romney (R)
$2,300
2.
Tom Daschle (D)
$3,000
5. Eric Cantor (R)
$2,300
2.
Charles Schumer (D)
$3,000
7. Rahm Emanuel (D)
$1,000
4.
Evan Bayh (D)
$2,000
7. Norm Coleman (R)
$1,000
4.
Steny Hoyer (D)
$2,000
7. Joe Biden (D)
$1,000
4.
Charles Rangel (D)
$2,000
4.
Rahm Emanuel (D)
$2,000
2006 All Recipients
4.
Barack Obama (D)
$2,000
TOTAL:
$82,650
4.
Joe Lieberman (D)
$2,000
Sheldon Whitehouse
10. Patty Murray (D)
$1,000
1.
(D)
$3,000
10. Barbara Boxer (D)
$1,000
2.
Olympia Snowe (R)
$2,000
10. James DeMint (R)
$1,000
2.
James Talent (R)
$2,000
10. John McCain (R)
$1,000
2.
George Allen (R)
$2,000
10. Jamie Metzl (D)
$1,000
5.
Mitch McConnell (R)
$1,000
10. Peter Deutsch (D)
$1,000
5.
Eric Cantor (R)
$1,000
10. Daniel Inouye (D)
$1,000
5.
Rahm Emanuel (D)
$1,000
10. Denise Majette (D)
$1,000
5.
Robert Menendez (D)
$1,000
264 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix
195
2002 All Recipients
TOTAL:
$26,600
1. Charles Schumer (D)
$3,000
2. Denise Majette (D)
$2,000
3. Tom Harkin (D)
$1,000
3. Arlen Specter (R)
$1,000
2000 All Recipients
TOTAL:
$26,000
1. Charles Schumer (D)
$8,000
2. Hillary Clinton (D)
$2,000
3. Conrad Burns (R)
$1,000
1998 All Recipients
TOTAL:
$2,000
1. Charles Schumer (D)
$1,000
1. Russell Feingold
$1,000
196
Appendix
Och-Ziff Lobbying Expenses:265
2007-2008
N/A
2006
TOTAL:
$40,000
Navigant Consulting
$40,000
2005
TOTAL:
$80,000
Navigant Consulting
$80,000
2004
TOTAL:
$60,000
Navigant Consulting
$60,000
2003
TOTAL:
$20,000
Navigant Consulting
$20,000
1998-2002
N/A
Och-Ziff Covered Official Lobbyists:
N/A
265 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
Appendix
197
Hedge Funds: Renaissance Technologies
Decade-long campaign contribution total (1998-2008): $1,560,895
Decade-long lobbying expenditure total (1998-2008): $740,000
Renaissance Campaign Contributions:266
15. Dina Titus (D)
$2,300
2008 Top Recipients
15. Bart Gordon (D)
$2,300
TOTAL:
$721,250
15. Dan Maffei (D)
$2,300
1.
Hillary Clinton (D)
$59,600
15. Jerry McNerney (D)
$2,300
2.
Barack Obama (D)
$39,250
15. Rahm Emanuel (D)
$2,300
3.
Chris Dodd (D)
$16,450
15. Steve Buehrer (R)
$2,300
4.
Timothy Bishop (D)
$12,000
15. Andy Harris (R)
$2,300
5.
Tom McClintock (R)
$6,900
15. Paul Broun Jr (R)
$2,300
6.
Jeff Merkley (D)
$6,100
15. Bob Schaffer (R)
$2,300
7.
John McCain (R)
$5,100
15. Charlie Ross (R)
$2,300
8.
Rudy Giuliani (R)
$4,850
15. Woody Jenkins (R)
$2,300
Christopher L Hackett
9.
Nancy Pelosi (D)
$4,600
15. (R)
$2,300
9.
Charles Rangel (D)
$4,600
15. Kirsten Gillibrand (D)
$2,300
9.
Sean Parnell (R)
$4,600
9.
Steve Pearce (R)
$4,600
2006 All Recipients
9.
Steve Israel (D)
$4,600
TOTAL:
$364,700
9.
Gary Ackerman (D)
$4,600
1.
Hillary Clinton (D)
$21,125
15. Scott Kleeb (D)
$2,300
2.
Timothy Bishop (D)
$4,200
15. Jeanne Shaheen (D)
$2,300
2.
Chris Dodd (D)
$4,200
15. Gabrielle Giffords (D)
$2,300
2.
Michael McGavick (R)
$4,200
15. Harry Mitchell (D)
$2,300
2.
Ben Cardin (D)
$4,200
15. Bob Lord (D)
$2,300
6.
Steve Israel (D)
$4,100
15. Ann Kirkpatrick (D)
$2,300
7.
John Yarmuth (D)
$2,100
266 Source: Center for Responsive Politics.
7.
Michael Steele (R)
$2,100
Campaign contribution totals accessed Feb-
7.
John Gard (R)
$2,100
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
198
Appendix
7.
Michael Bouchard (R)
$2,100
2002 All Recipients
7.
Sharron Angle (R)
$2,100
TOTAL:
$92,445
7.
Adrian Smith (R)
$2,100
1.
Charles Schumer (D)
$15,000
Vivian Viloria-Fisher
7.
Rick O'Donnell (R)
$2,100
2.
(D)
$4,000
7.
William Sali (R)
$2,100
3.
Steve Israel (D)
$2,000
7.
Chris Chocola (R)
$2,100
3.
Denise Majette (D)
$2,000
16. John Sununu (R)
$2,000
5.
Hillary Clinton (D)
$1,000
17. Francine Busby (D)
$1,000
5.
Frank Lautenberg (D)
$1,000
17. Claire McCaskill (D)
$1,000
Jill Long Thompson
17. Debbie Stabenow (D)
$1,000
7.
(D)
$300
Martha Fuller Clark
20. Kirsten Gillibrand (D)
$500
8.
(D)
$250
20. Scott Kleeb (D)
$500
8.
Carol Roberts (D)
$250
20. Tammy Duckworth (D)
$500
8.
Stephanie Herseth (D)
$250
8.
Jim Maloney (D)
$250
2004 All Recipients
8.
Rick Larsen (D)
$250
TOTAL:
$239,950
8.
Rush Holt (D)
$250
1.
John Kerry (D)
$8,200
8.
Jay Inslee (D)
$250
2.
Timothy Bishop (D)
$7,500
2.
Hillary Clinton (D)
$7,500
2000 All Recipients
4.
George Bush (R)
$4,000
TOTAL:
$49,550
5.
Betty Castor (D)
$2,000
1. Hillary Clinton (D)
$14,700
5.
Joe Lieberman (D)
$2,000
2. John McCain (R)
$1,000
5.
Michael Oxley (R)
$2,000
2. Bill Bradley (D)
$1,000
5.
Steve Israel (D)
$2,000
9.
Stephanie Herseth (D)
$1,000
1998 All Recipients
9.
Patricia Lamarch (3)
$1,000
TOTAL:
$93,000
11. Howard Dean (D)
$550
1. Charles Schumer (D)
$4,000
12. Inez Tenenbaum (D)
$500
12. Daniel Montiardo (D)
$500
12. Allyson Schwartz (D)
$500
12. Tom Daschle (D)
$500
Appendix
199
Renaissance Lobbying Expenditures:267
2008
TOTAL:
>$10,000*
E-Copernicus
> $10,000*
2005-2006
N/A
2004
TOTAL:
$200,000
Liz Robbins Assoc.
$200,000
2003
TOTAL:
$220,000
Liz Robbins Assoc.
$220,000
2002
TOTAL:
$220,000
Liz Robbins Assoc.
$220,000
2001
TOTAL:
$100,000
Liz Robbins Assoc.
$100,000
1998-2000
N/A
Renaissance Official Covered Lobbyists:
N/A
267 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
200
Appendix
Accounting Firms: Arthur Andersen
Decade-long campaign contribution total (1998-2008): $3,324,175
Decade-long lobbying expenditure total (1998-2008): $1,900,000
Arthur Andersen
Campaign Contributions:268
2006-2008
2002 Top Recipients
N/A
TOTAL:
$705,263
2004 Top Recipients
1. Rahm Emanuel (D)
$11,250
TOTAL:
$86,586
2. Billy Tauzin (R)
$10,000
1. George W Bush (R)
$12,950
3. Tom Harkin (D)
$9,000
2. John Edwards (D)
$7,000
4. Wayne Allard (R)
$7,500
3. John Kerry (D)
$6,750
5. Ron Wyden (D)
$7,050
4. George Allen (R)
$1,000
6. Mike Ferguson (R)
$6,950
4. Orrin G Hatch (R)
$1,000
7. Max Baucus (D)
$6,500
4. Paul Kanjorski (D)
$1,000
7. Walter B Jones Jr (R)
$6,500
4. Jim Moran (D)
$1,000
9. Ken Bentsen (D)
$6,250
4. David Vitter (R)
$1,000
10. Jim McCrery (R)
$6,000
Charles "Chip"
9. Bob Graham (D)
$500
10. Pickering Jr (R)
$6,000
9. Nancy Johnson (R)
$500
12. Christopher Cox (R)
$5,500
9. Pete Sessions (R)
$500
13. Dick Armey (R)
$5,335
12. Barack Obama (D)
$300
14. John Shadegg (R)
$5,250
13. Mike Ferguson (R)
$250
15. Martin Frost (D)
$5,000
13. Barbara Mikulski (D)
$250
15. Dennis Hastert (R)
$5,000
George Nethercutt Jr
13. (R)
$250
15. Jim Moran (D)
$5,000
13. Earl Pomeroy (D)
$250
15. Harry Reid (D)
$5,000
13. David Scott (D)
$250
19. Dennis Moore (D)
$4,750
20. Vito Fosella (R)
$4,500
268
Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009.
Appendix
201
2000 Top Recipients
1998 Top Recipients
TOTAL:
$1,564,270
TOTAL:
$968,056
1. George W Bush (R)
$150,900
1. Alfonse D'Amato (R)
$27,000
2. Rick A Lazio (R)
$44,550
2. Evan Bayh (D)
$13,750
3. Charles Schumer (D)
$34,334
3. Matt Fong (R)
$13,536
4. Bill Bradley (D)
$30,600
4. Paul Coverdell (R)
$10,700
5. Jon Kyl (R)
$20,101
5. Ron Wyden (D)
$10,650
6. Al Gore (D)
$19,350
Carol Moseley Braun
6. (D)
$9,750
7. Spencer Abraham (R)
$17,650
7. Peter Fitzgerald (R)
$9,350
8. John Ensign (R)
$17,000
8. John Ensign (R)
$8,350
9. John McCain (R)
$14,750
George Voinovich
10. John Ashcroft (R)
$11,500
9. (R)
$8,250
11. Chris Dodd (D)
$10,500
10. Sherrod Brown (D)
$8,187
12. Mel Carnahan (D)
$9,000
11. Lauch Faircloth (R)
$8,000
12. Billy Tauzin (R)
$9,000
11. Billy Tauzin (R)
$8,000
14. E Clay Shaw Jr (R)
$8,500
13. Robert F Bennett (R)
$7,805
15. Rudy Giuliani (R)
$8,250
14. Joe Barton (R)
$7,500
16. Rod Grams (R)
$8,199
15. Fritz Holings (D)
$7,460
17. Lamar Alexander (R)
$8,000
Leslie Ann Touma
16. (R)
$7,250
17. Cal Dooley (D)
$8,000
17. Rick White (R)
$7,200
19. Peter Fitzgerald (R)
$7,565
18. Barbara Mikulski (D)
$7,000
20. George Allen (R)
$7,500
19. Jim Bunning (R)
$6,874
Christopher S 'Kit'
20. Bond (R)
$6,250
202
Appendix
Arthur Andersen Lobbying
Expenditures:269
1999-2008
N/A
1998
TOTAL:
$1,900,000
Arthur Andersen & Co
$1,600,000
Johnson, Madigan et al
$120,000
Mayer, Brown et al
$40,000
OB-C Group
$140,000
269 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
Appendix
203
Arthur Andersen Covered Official Lobbyists:270
Firm / Name of Lobbyist
Covered Official Position
Year (s)
Mayer, Brown et al
House Sub Comm on Select US Role/Iranian
Rothfeld, Charles A
Arms Transfers to Croatia & Bosnia
1998
OB-C Group
Mellody, Charles J
Aide, House Ways & Means Comm.
1998
270 Source: Senate Office of Public Records <http://soprweb.senate.gov/>. Accessed January 2009.
204
Appendix
Accounting Firms: Deloitte & Touche
Decade-long campaign contribution total (1998-2008): $12,120,340
Decade-long lobbying expenditure total (1998-2008): $19,606,455
Deloitte Campaign Contributions:271
2008 Top Recipients
2006 Top Recipients
TOTAL:
$2,420,112
TOTAL:
$2,180,294
1. Barack Obama (D)
$177,598
1. Mark Kennedy (R)
$42,100
2. John McCain (R)
$90,850
2. Spencer Bachus (R)
$32,500
3. Hillary Clinton (D)
$68,300
3. Chris Dodd (D)
$29,000
4. Mitt Romney (R)
$58,550
Christopher Shays
4. (R)
$22,900
5. Chris Dodd (D)
$51,250
5. Richard Baker (R)
$20,921
6. Norm Coleman (R)
$26,750
6. Tom Price (R)
$20,000
7. Rudy Giuliani (R)
$24,800
7. Sherrod Brown (D)
$19,160
8. Christopher Shays (R)
$21,800
8. Vito Fossella (R)
$18,400
9. Saxby Chambliss (R)
$12,300
9. Henry Bonilla (R)
$18,000
10. Max Baucus (D)
$11,000
10. Hillary Clinton (D)
$17,970
10. Barney Frank (D)
$11,000
11. Rick Santorum (R)
$16,950
10. Michael McCaul (R)
$11,000
12. John Campbell (R)
$16,500
13. Mike Conaway (R)
$10,500
13. Jon Kyl (R)
$14,600
13. Vito Fossella (R)
$10,500
14. George Allen (R)
$14,000
15. Spencer Bachus (R)
$10,000
15. Joe Lieberman ( I)
$13,500
15. Roy Blunt (R)
$10,000
16. Daniel K Akaka (D)
$13,000
15. John Boehner (R)
$10,000
17. Deborah Pryce (R)
$12,498
15. Allen Boyd (D)
$10,000
18. Eric Cantor (R)
$12,000
15. John Campbell (R)
$10,000
18. David Dreier (R)
$12,000
15. Chris Cannon (R)
$10,000
18. Ben Nelson (D)
$12,000
271 Source: Center for Responsive Politics.
Campaign contribution totals accessed Feb-
ruary 2009. Individual recipient numbers do
not include the 4th Quarter of 2008.
Appendix
205
2004 Top Recipients
10. Felix Grucci Jr (R)
$11,200
TOTAL:
$2,233,483
11. James Talent (R)
$11,000
1.
George W Bush (R)
$290,450
12. Anne Northup (R)
$10,500
2.
John Kerry (D)
$73,152
13. Max Baucus (D)
$10,000
3.
Charles Schumer (D)
$39,999
13. Thad Cochran (R)
$10,000
4.
Richard C Shelby (R)
$28,500
13. Susan Collins (R)
$10,000
5.
Chris Dodd (D)
$27,750
13. J D Hayworth (R)
$10,000
6.
Vito Fossella (R)
$23,300
13. Tim Hutchinson (R)
$10,000
7.
Mark Kennedy (R)
$19,700
13. Dennis Moore (D)
$10,000
8.
John Thune (R)
$15,450
Charles “Chip”
Robert "Bob"
13. Pickering Jr (R)
$10,000
9.
Conaway (D)
$15,000
20. Sue Kelly (R)
$9,999
10. James W DeMint (R)
$13,850
11. Daniel K Inouye (D)
$13,500
2000 Top Recipients
12. Eric Cantor (R)
$13,000
TOTAL:
$1,982,826
13. Patty Murray (D)
$12,050
1. George W Bush (R)
$83,850
14. Tom Latham (R)
$12,000
2. Charles Schumer (D)
$48,500
15. Joseph Crowley (D)
$11,000
3. Rick A Lazio (R)
$48,250
15. David Vitter (R)
$11,000
4. Hillary Clinton (D)
$40,750
17. Richard Burr (R)
$10,798
5. Rudy Giuliani (R)
$38,700
18. Tom Davis (R)
$10,500
6. Spencer Abraham (R)
$30,000
19. Erskine Bowles (D)
$10,250
7. Bill Bradley (D)
$25,000
20. Spencer Bachus (R)
$10,000
8. John McCain (R)
$18,200
9. Charles Rangel (D)
$14,750
2002 Top Recipients
10. Chris Dodd (D)
$14,500
TOTAL:
$1,873,011
11. Mike DeWine (R)
$13,650
1.
Mike Enzi (R)
$44,249
12. Vito Fossella (R)
$12,750
2.
Vito Fossella (R)
$16,500
13. Edolphus Towns (D)
$11,000
3.
Connie Morella (R)
$15,172
14. E Clay Shaw, Jr (R)
$10,800
4.
Mark Kennedy (R)
$14,000
15. James E Rogan (R)
$10,724
5.
Eric Cantor (R)
$12,999
16. Jim Maloney (D)
$10,500
6.
Norm Coleman (R)
$12,884
16. Brad Sherman (D)
$10,500
7.
Elizabeth Dole (R)
$12,750
18. John Ashcroft (R)
$10,450
8.
Billy Tauzin (R)
$12,000
19. James M Jeffords (R)
$10,000
9.
John Thune (R)
$11,800
19. Steven Kuykendall (R)
$10,000
206
Appendix
1998 Top Recipients
TOTAL:
$1,430,614
1. Chris Dodd (D)
$66,145
2. Alfonse D'Amato (R)
$45,000
3. Charles Schumer (D)
$28,450
4. Ron Wyden (D)
$22,850
5. Vito Fossella (R)
$20,050
6. Matt Fong (R)
$13,050
7. Lauch Faircloth (R)
$12,875
George Voinovich
8. (R)
$12,000
9. Chuck Grassley (R)
$11,500
10. Anna Eshoo (D)
$10,000
10. Rick White (R)
$10,000
12. Don Nickles (R)
$9,500
Christopher S 'Kit'
13. Bond (R)
$9,000
13. Collin C Peterson (D)
$9,000
13. Heather Wilson (R)
$9,000
Carol Moseley Braun
16. (D)
$8,800
17. Robert F Bennett (R)
$8,000
Ben Nighthorse
17. Campbell (R)
$8,000
17. Trent Lott (R)
$8,000
20. Paul Coverdell (R)
$7,500
Appendix
207
Deloitte Lobbing Expenditures:272
Tew Cardenas LLP
$200,000
2008
TOTAL:
$1,140,000
2005
Deloitte & Touche
$650,000
TOTAL:
$1,440,000
Clark & Assoc
$50,000
Clark & Assoc
$20,000
Clark & Weinstock
$80,000
Clark & Weinstock
$80,000
Johnson, Madigan et al
$240,000
Deloitte Tax
$860,000
Mayer, Brown et al
> $10,000*
Johnson, Madigan et al
$240,000
BGR Holding
$120,000
Barbour, Griffith & Rogers
$120,000
Tew Cardenas LLP
$120,000
2007
TOTAL:
$2,220,000
2004
Deloitte & Touche
$440,000
TOTAL:
$1,520,000
Clark & Assoc
$40,000
Deloitte Tax
$20,000
Clark & Weinstock
$80,000
Barbour, Griffith & Rogers
$120,000
Deloitte LLP
$1,060,000
Holland & Knight
$100,000
Johnson, Madigan et al
$240,000
Tew Cardenas LLP
$60,000
Mayer, Brown et al
$40,000
Clark & Assoc
$20,000
BGR Holding
$120,000
Clark & Weinstock
$80,000
Tew Cardenas
$200,000
Deloitte Tax
$840,000
Johnson, Madigan et al
$240,000
2006
Public Strategies
$40,000
TOTAL:
$1,960,000
2003
Deloitte & Touche
$360,000
TOTAL:
$1,125,000
Clark & Assoc
$40,000
Deloitte Tax
$660,000
Clark & Weinstock
$80,000
Holland & Knight
$145,000
Deloitte LLP
$840,000
Clark & Assoc
$20,000
Johnson, Madigan et al
$240,000
Clark & Weinstock
$60,000
Mayer, Brown et al
$80,000
Johnson, Madigan et al
$240,000
MWW Group
> $10,000*
Barbour, Griffith & Rogers
$120,000
272 Source: Center for Responsive Politics.
Lobbying amounts accessed February 2009.
* Not included in totals
208
Appendix
2002
Ickes & Enright Group
$20,000
TOTAL:
$1,677,455
Deloitte LLP
$240,000
Deloitte & Touche
$1,107,455
Mayer, Brown et al
$40,000
Clark & Assoc
$60,000
Clark & Weinstock
$100,000
1998
Thelen, Reid et al
$10,000
TOTAL:
$420,000
Velasquez Group
$240,000
Deloitte & Touche
$360,000
Johnson, Madigan et al
$160,000
Deloitte & Touche
&
