Wall Street’s Junk Yields; Washington’s Junk Confirmation Hearings

By Pam Martens: March 14, 2013

President Obama Nominates Mary Jo White for Chair of the Securities and Exchange Commission

When Wall Street wants to sell junk bonds to the public – those corporate bonds trading below an investment grade rating – a BBB rating by Standard and Poor’s or Baa by Moody’s – it simply puts lipstick on a pig by renaming the bond fund a “High Yield” fund.

Since February, Senator Chuck Schumer (D-NY) has been providing the same service to the U.S. Senate with his slobbering introductions of the nominees to head the U.S. Treasury and Securities and Exchange Commission without noting any of the high risks to installing these deeply conflicted individuals.

Schumer’s most recent spectacle came this past Tuesday when he grinned and fawned through his introduction of Mary Jo White at her confirmation hearing before the Senate Banking Committee. Schumer felt it was relevant for the U.S. public to know that the future watchdog to oversee one of the most serially corrupt industries in America “indulged a fondness for motorcycle riding” and “was a fierce competitor in the Women’s Basketball League in New York.” If that isn’t enough to inspire you, Schumer also wanted you to know that White likes a cold can of Bud from time to time and chairs the Board of the American Society for Prevention of Cruelty to Animals – ergo, a beer drinking animal lover with motorcycle-riding and basketball skills should end all questions regarding her fitness to hold Wall Street accountable.

Schumer neglected to mention, as did the rest of the Senators in the room, that between White and her husband, also a partner at a Wall Street law firm, they represent every too-big-to-fail firm on Wall Street. (Under ethics laws for members of the Executive branch, the conflicts of interest of White’s spouse become her conflicts of interest. And he will remain in his job.)

White appeared without makeup at the hearing – possibly because so many others are willing to cosmetically enhance her. Corporate media did their part by running with headlines like the Washington Post’s “SEC Nominee Mary Jo White to Take Hard Line on Wall Street.” It is now universally accepted wisdom among corporate media that the American people can be easily sold lipstick on a pig if enough headline writers agree on the message.

Jack Lew Nominated by President Obama for U.S. Treasury Secretary as Tim Geithner Looks On

Schumer was also tapped (perhaps not so coincidentally) to introduce Jack Lew at his confirmation hearing to become U.S. Treasury Secretary. Schumer has exceeded all expectations on behalf of Wall Street for that endeavor, achieving a 71- 26 vote for Lew by the full Senate. In an ethical government, Lew’s shady money deals would have had him thrown out of the executive branch, rather than ushered in. But this is not an ethical government. This is, for the most part, a group of Wall Street lapdogs sitting in the august Senate chambers and following the script determined by their Wall Street overlords.

Also on Tuesday of this week, the very same day that White was frolicking through her love fest with the Senate Banking committee, those junk bonds mentioned earlier were setting new record highs in price – meaning their underlying risks were being ignored by investors. Seeking high yields while ignoring risk played a key role in the subprime mortgage bond/derivative fiasco that collapsed the economy along with century old Wall Street firms in 2008. But the real roots of that date back to 1998/1999 and another lapdog Congress.

On Friday, July 28, 1998, I testified before the Federal Reserve Bank of New York concerning the proposed merger of Citicorp (parent of insured depositor bank, Citibank) with Sandy Weill’s Traveler’s Group, an insurance company which owned an investment bank (Salomon Brothers) and securities brokerage firm, Smith Barney. It was an illegal combination at the time and, if approved, would force Congress to repeal the depression era investor protection legislation known as the Glass-Steagall Act which prevented insured deposit banks from merging with Wall Street casino operations – a combination widely blamed for causing the 1929 – 1932 stock market crash and the ensuing Great Depression. The repeal of Glass-Steagall, which occurred the following year with the passage of the Gramm-Leach-Bliley Act on November 12, 1999, led just 9 years later to the 2008 to 2010 economic collapse — whose impact is still being felt here and around the globe.

This is an excerpt of my testimony to the Federal Reserve Bank of New York on July 28, 1998:

“It is amazing how soon we forget. It was just 60 years ago that 4,835 of America’s banks went broke and closed their doors, leaving shareholders and depositors destitute. The underlying reason that this happened was the lack of moral courage by our regulators and elected representatives to just say no to powerful money interests. Instead of just saying no, Washington handed the banks the equivalent of an ATM card to the Fed’s discount window to speculate in stocks.

“At a time when Japan, the second largest industrialized nation, is reliving the 1930s in America, complete with banking insolvency, it is amazing and preposterous that we should be discussing rolling back Glass-Steagall.

“We also want to remember that the political dynamics that created the backdrop for the banking meltdown in the ‘30s grew from a corrupt cozy culture between Wall Street and Washington. U.S. Supreme Court Justice William O. Douglas, (who knew a thing or two about the matter, having just served as chairman of the young, new SEC, before he went to the Supreme Court) called it what it was, chicanery and corruption.

“Frank Vanderlip, coincidentally, an actual former president of National City Bank, wrote in the Saturday Evening Post at the time that lack of separation of banking and securities contributed to the stock market losing 90 per cent – I’d like to repeat that, 90 per cent – of its value from 1929 to 1933. The public was so sickened by the hubris and corruption that an entire generation stayed away from the stock market. It was not until 1954, 25 years later, that Wall Street once again reached the level it had set in 1929.

“There is a compelling body of evidence that suggests a corrupt cozy culture has once again enveloped the brains of Washington. We can hardly look to the safekeepers of the public trust when they are falling over themselves to reap campaign windfalls from Wall Street.”

I was not the only one to warn of dire ramifications at this Federal Reserve hearing. Amidst the sycophantic calls for approval from politicians and charities on the take, a handful of uncompromised Americans sounded the alarm.

One might accept that our elected representatives could forget the lessons of 1929 and the Great Depression. But how does one explain or justify our President and our Congress forgetting the horrific economic lessons of just five years ago?

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