Daylight appeared between former Sen. Christopher Dodd, D-Conn., and former Rep. Barney Frank, D-Mass., as they recounted their recollection of the events of Sept. 18, 2008, at a recent panel discussion moderated by Amy Friend, chief counsel of the Office of the Comptroller of the Currency, who was the lead counsel in drafting Dodd-Frank while serving on the staff of the Senate Banking Committee. The panel was part of a daylong program sponsored by the Boston University Law School.
Dodd recounted from memory the now-immortal words of Federal Reserve Chairman Ben Bernanke to the assembled leaders of the Senate, House and their respective banking committees: Unless you act, in a matter of days, the financial system of this country and a good part of the world will melt down.
Later, Dodd recalled, at 2:00 a.m., Treasury Secretary Hank Paulson distributed a bill somewhat longer than two pages that called for $700 billion to be made available in a manner that would preclude any intervention by courts or regulators. At that, Dodd said, "The country erupted," and the response of Congress "went beyond partisanship."
For his part, Frank repeated the opt-repeated narrative of the efforts of Congressional Democrats to slow the growth of subprime mortgages. The Wall Street Journal attacked the would-be reformers for interfering with the delivery of housing to poor people and minorities. Frank added, "Conservatives never had a problem until the crash hit."
He could have said the same about liberals, and this is where Dodd reminded the audience, "There was a lot of information around." He admitted that the intervention should have been done earlier, but "people weren't willing to acknowledge the problems with securitization [of mortgages]. Dodd cited hearings that two senior senators, Jim Bunning, R-Ky., and Jack Reed, D-R.I., had held on the problems developing in mortgage finance.
Remarkably, he went on to name names of people who had opposed reform — Fannie Mae, Freddie Mac, the Republicans who had controlled Congress before the 2006 elections and his colleague Sen. Chuck Schumer, D-N.Y. who worked with New York Mayor Michael Bloomberg and Harvard Law Professor Hal Scott to develop the case against reform.
From the perspective of this writer, who attempted to sound alarms as early as 1981 as to what would happen if the authorities did not stop the growth of risky and insolvent, "too big to fail" financial institutions, the appointment of Paulson as head of the Treasury in 2006 should have been warning enough that something was wrong on Wall Street and specifically at Goldman Sachs.
Furthermore, this writer foresaw a series of bailouts to occur in the fall of 2008, much as a wave of bailouts had been conducted for the savings and loan industry 20 years before. However, not being cynical enough, the scenario held that the George W. Bush administration would not be so incompetent that it could not postpone the blowup until after the election, but this was wrong.
When one dons special goggles to cut through the fog laid down by apologists for the administration, the regulators and the industry, what is left is a record of decades of neglect by the authorities, including the feckless regulators who enabled the reckless conduct of the too big to fail banks. A telling point is that Congress seemed to have no independent view of the circumstance at the time of the meeting cum shakedown that would have led someone to say, wait a minute, and at least exact a costly price that would have prevented the financial industry from ramping up its risk yet again, even more secure in its reliance on the backing of the federal government.
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