US Congress Sells Out to Wall Street

President Barack Obama speaking to U.S. legislators on Capitol Hill (Washington D.C., 24 February 2009) about the economic crisis, the budget, the national deficit and medical health reform.

Federal lawmakers responsible for overseeing the US economy have received millions of dollars from Wall Street firms.
Since 2001, eight of the most troubled firms have donated $64.2 million to congressional candidates, presidential candidates and the Republican and Democratic parties [1].
As senators, Barack Obama and John McCain received a combined total of $3.1 million.
The donors include investment bankers
 Bear Stearns,
 Goldman Sachs,
 Lehman Brothers,
 Merrill Lynch,
 Morgan Stanley,
 insurer American International Group,
 mortgage giants Fannie Mae and
 Freddie Mac.

Some of the top recipients of contributions from companies receiving Troubled Assets Relief Program (TARP) [2] money are the same members of Congress who chair committees charged with regulating the financial sector and overseeing the effectiveness of this unprecedented government program. In total, members of the Senate Committee on Banking, Housing and Urban Affairs, Senate Finance Committee and House Financial Services Committee received $5.2 million from TARP recipients in the 2007-2008 election cycle. President Obama collected at least $4.3 million from employees at these companies for his presidential campaign.

Nearly every member of the House Financial Services Committee, who in February 2009 oversaw hearings on how the $700 billion of TARP bailout was being spent, received contributions associated with these financial institutions during the 2008 election cycle. “You could say that the finance industry got their money’s worth by supporting members of Congress who were inclined to look the other way,” said Lawrence Jacobs, the director of the University of Minnesota’s Center for the Study of Politics and Governance.

For instance, in 2004 when the Securities and Exchange Commission adopted a major rule change that freed investment banks to plunge tens of billions of dollars in borrowed money into subprime mortgages and other risky plays, congressional banking committees held no oversight hearings. Congressional inaction also allowed mortgage agents to earn high fees for peddling loans to unqualified homebuyers and prevented states from toughening regulations on predatory lending practices.

Author Matt Taibbi writes [3] that some of the most egregious selling of the US government to Wall Street happened in the late nineties, when “Democrats, tired of getting slaughtered in the fundraising arena by Republicans, decided to throw off their old reliance on unions and interest groups and become more ‘business-friendly.’
Wall Street responded by flooding Washington with money, buying allies in both parties.”
In the ten-year period beginning in 1998, financial companies spent $1.7 billion on federal campaign contributions and another $3.4 billion on lobbyists. Wise political investments enabled the nation’s top bankers to effectively scrap any meaningful oversight of the financial industry.

In 1999, Texas Senator Phil Gramm co-sponsored the bill that repealed key aspects of the Glass-Steagall Act, which, since the Great Depression, prevented banks from getting into the insurance business. The very next year Gramm wrote sweeping new legislation called the Commodity Futures Modernization Act, which made it impossible to regulate credit swaps as either gambling or securities. Trading in risky credit was thus deregulated.

In 1997 and 1998—the years leading up to Phil Gramm’s act that gutted Glass-Steagall—the banking, brokerage, and insurance industries spent $350 million on political contributions and lobbying. Gramm, then the chairman of the Senate Banking Committee, collected $2.6 million in only five years. The law passed 90-8 in the Senate, with the support of thirty-eight Democrats, including Joe Biden, John Kerry, Tom Daschle, Dick Durbin and John Edwards. The act helped create the too-big-to-fail financial behemoths like Citigroup, AIG and Bank of America—and in turn helped those companies slowly crush their smaller competitors, leaving the major Wall Street firms with even more money and power to lobby for further deregulation.

By early 2009, a whole series of new government operations have been invented to inject cash into the economy, most all of them under the completely secretive control of the financial sector. Taibbi points out that “While the rest of America, and most of Congress, have been bugging out about the $700 billion bailout program called TARP, newly created organisms in the Federal Reserve zoo have quietly been pumping not billions, but trillions of dollars into the hands of private companies (at least $3 trillion so far in loans, with as much as $5.7 trillion more in guarantees of private investments).” Taibbi continues, “This new, secretive activity by the Fed completely eclipses the TARP program in terms of its influence on the economy. . . . No one knows who’s getting that money or exactly how much of it is disappearing through these new holes in the hull of America’s credit rating. Moreover, no one can be sure that these new institutions are really temporary, or whether they are being set up as permanent, state-aided crutches to Wall Street, designed to systematically suck bad investments off the ledgers of irresponsible lenders.”

Taibbi concludes, “The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.”

Fraud and crisis continue to deepen and expand with significant conflicts of interest in Congress and the executive branch of US government. Simon Johnson, former IMF chief economist, says, “The finance industry has effectively captured our government.”

Update by Lindsay Renick Mayer

Even as the federal government has continued to figure out ways to help the struggling finance sector and give the economy a boost, they’ve been collecting input from the very companies that have accepted taxpayer dollars and are, in part, being held responsible for the current crisis. But that’s not all they’ve collected—Congress has been busy fundraising from the finance sector, including those companies that received billions of dollars from TARP.

Since this story was written in February, the finance sector has, of course, continued to give money to candidates, party committees and political action committees. Since the start of 2009, Wall Street has donated $12.6 million—more than any other sector this year. And 58 percent of that has gone to Democrats, marking a change, perhaps, in political strategy. Not since the 1990 election cycle have finance, insurance and real estate companies given more than 52 percent of its overall donations to Democrats, and from 1991 to 2006 finance gave the majority of its money to Republicans.

Many of the companies that we wrote about in this story that sent their CEOs to testify before the House Financial Services Committee have actually scaled back their overall giving in the first quarter of 2009 compared to the first quarters of 2007 and 2005.
This includes JPMorgan Chase, Bank of America, Goldman Sachs (which ranks No. 1 for a decline in contributions this year compared to the start of 2008), Morgan Stanley, Citigroup and Wells Fargo.
However, it is still very early in the cycle, and campaign contributions generally don’t start flowing in until closer to an election.
For the most part these companies, like the rest of the industry, targeted Democrats with a majority of their political giving.

Of course, a big story this year will be whether lawmakers took a hit to their personal finances like much of the rest of the country, or whether they personally benefited by infusing the Wall Street companies with taxpayer cash, especially members of the banking and finance committees. The 2008 personal financial disclosure reports with those answers are now available on OpenSecrets.org.

To read more about how lobbying and influence peddling are shaping legislation, keep up with CRP’s blog.

And to do some investigating yourself, dive into our industry profiles.

We also follow the cash flow to committees. Check out the Senate Finance Committee data.