Internet companies spent lavishly, paid lavishly, spun half-truths, went public, and then went bankrupt by 2001. Wall
Street firms and their star analysts gave these companies high investment ratings in order to obtain their business, often while privately deriding them as junk.
In addition to start-ups, several established companies, including Enron and WorldCom (which had acquired MCI, a large telecommunications provider), had exploited and thereby contributed to the
stockfrenzy by using accounting fraud and claims of Internet-related innovation. Enron also relied on its political connections, which helped keep regulatory oversight lax.
The company contributed heavily to sympathetic candidates, and one member of its board of directors was Wendy Gramm, who was not only a former chairperson of the Commodity Futures Trading
Commission (CFTC), but also the wife of US senator Phil Gramm of Texas, then chairman of the Senate Banking Committee.
The Next Wave of Financial Deregulation
THE CLINTON ADMINISTRATION became the driver of financial deregulation, with frequent assistance from Alan Greenspan and Congress. The result was a wave
of new laws, regulatory changes, and a sharp deceleration in both civil and criminal law enforcement. Issuance of regulations, monitoring, criminal investigation and prosecution of financial
offences, and tax audits of financial executives declined sharply. Ironically, these deregulatory changes were preceded by the one piece of positive regulatory legislation enacted by Clinton. In
1994 Congress passed and Clinton signed the Home Ownership and Equity Protection Act (HOEPA), intended to curb abuses in the emerging market for high-interest subprime loans, particularly for home
equity lines of credit (HELOCs). The law gave the Federal Reserve Board broad authority to issue regulations covering mortgage industry practices. But Alan Greenspan refused to use the law. In
fact, the Federal Reserve issued no mortgage regulations at all until 2008, which was just a little late, and during the bubble Greenspan made several public statements encouraging use of
“innovative” mortgage products.
Rules against interstate banking were dropped in 1994. The GlassSteagall Act, mandating strict separation between investment banks and commercial banks, was substantially weakened in 1996, and
completely repealed in 1999. Citigroup actually violated the law by acquiring an insurance company and investment bank before Glass-Steagall was repealed; Alan Greenspan gave them a waiver until
the law waspassed. Shortly afterwards, Robert Rubin resigned from the government to become vice chairman of Citigroup, where, over the course of the next decade, he made more
than $120 million.
Then came the fight over derivatives. One of the Clinton administration’s final acts, with strong support from Larry Summers, Alan Greenspan, and Senator Phil Gramm, was a law banning any
regulation of over-the-counter (OTC) derivatives, including all the complex securities that were at the heart of the 2008 crisis. Large sections of the bill were drafted by ISDA, the industry
association for derivatives dealers. 8
The total ban on OTC derivatives regulation actually started with a move towards regulation. Brooksley Born, chair of the CFTC, had observed the rapidly growing derivatives market and
concluded that it posed significant risks. She initiated a public comment and review process, which immediately triggered ferocious combined opposition from Rubin, Summers, Greenspan, and SEC
chairman Arthur Levitt. Larry Summers telephoned Born, telling her that he had thirteen bankers in his office who were furious, and demanding that Born desist. (The phone call may have been
illegal, since the CFTC is an independent regulatory agency.) Shortly afterwards, the administration introduced legislation to ban all regulation of OTC derivatives, supported heavily by Phil
Gramm.
Remarkably, the deregulation drive was utterly unaffected
Street firms and their star analysts gave these companies high investment ratings in order to obtain their business, often while privately deriding them as junk.
In addition to start-ups, several established companies, including Enron and WorldCom (which had acquired MCI, a large telecommunications provider), had exploited and thereby contributed to the
stockfrenzy by using accounting fraud and claims of Internet-related innovation. Enron also relied on its political connections, which helped keep regulatory oversight lax.
The company contributed heavily to sympathetic candidates, and one member of its board of directors was Wendy Gramm, who was not only a former chairperson of the Commodity Futures Trading
Commission (CFTC), but also the wife of US senator Phil Gramm of Texas, then chairman of the Senate Banking Committee.
The Next Wave of Financial Deregulation
THE CLINTON ADMINISTRATION became the driver of financial deregulation, with frequent assistance from Alan Greenspan and Congress. The result was a wave
of new laws, regulatory changes, and a sharp deceleration in both civil and criminal law enforcement. Issuance of regulations, monitoring, criminal investigation and prosecution of financial
offences, and tax audits of financial executives declined sharply. Ironically, these deregulatory changes were preceded by the one piece of positive regulatory legislation enacted by Clinton. In
1994 Congress passed and Clinton signed the Home Ownership and Equity Protection Act (HOEPA), intended to curb abuses in the emerging market for high-interest subprime loans, particularly for home
equity lines of credit (HELOCs). The law gave the Federal Reserve Board broad authority to issue regulations covering mortgage industry practices. But Alan Greenspan refused to use the law. In
fact, the Federal Reserve issued no mortgage regulations at all until 2008, which was just a little late, and during the bubble Greenspan made several public statements encouraging use of
“innovative” mortgage products.
Rules against interstate banking were dropped in 1994. The GlassSteagall Act, mandating strict separation between investment banks and commercial banks, was substantially weakened in 1996, and
completely repealed in 1999. Citigroup actually violated the law by acquiring an insurance company and investment bank before Glass-Steagall was repealed; Alan Greenspan gave them a waiver until
the law waspassed. Shortly afterwards, Robert Rubin resigned from the government to become vice chairman of Citigroup, where, over the course of the next decade, he made more
than $120 million.
Then came the fight over derivatives. One of the Clinton administration’s final acts, with strong support from Larry Summers, Alan Greenspan, and Senator Phil Gramm, was a law banning any
regulation of over-the-counter (OTC) derivatives, including all the complex securities that were at the heart of the 2008 crisis. Large sections of the bill were drafted by ISDA, the industry
association for derivatives dealers. 8
The total ban on OTC derivatives regulation actually started with a move towards regulation. Brooksley Born, chair of the CFTC, had observed the rapidly growing derivatives market and
concluded that it posed significant risks. She initiated a public comment and review process, which immediately triggered ferocious combined opposition from Rubin, Summers, Greenspan, and SEC
chairman Arthur Levitt. Larry Summers telephoned Born, telling her that he had thirteen bankers in his office who were furious, and demanding that Born desist. (The phone call may have been
illegal, since the CFTC is an independent regulatory agency.) Shortly afterwards, the administration introduced legislation to ban all regulation of OTC derivatives, supported heavily by Phil
Gramm.
Remarkably, the deregulation drive was utterly unaffected
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