This is the final part of a three-part series on understanding a financial crisis. Click here for Part I and here for Part II.
After TARP was established in late 2008 and just before President Obama's inauguration, The Dow was down over 6,000 points (nearly 50%) and testing the lowest levels in a decade. There was no time for delay and Obama needed to quickly assemble his cabinet. He was faced with a tough decision to make: pick advisers that would force tougher regulations on the banks or pick those who would allow more leniency in order to prevent chaos. Some of the major players were as follows:
Paul Volcker: A former chairman of the federal reserve who is very pro-regulation.
Tim Geithner: A major player in the Bush administration during during the onset of the financial crisis.
Larry Summers: Treasury secretary under Bill Clinton.
While Obama knew that Paul Volcker would likely lead to more effective reform on Wall Street, he didn't have the time to allow Volcker to learn the intricate details of the crisis. Geithner already knew the details, so he was chosen as Obama's Treasury Secretary. Larry Summers would act as the Chief Economic Adviser to Obama. The American people viewed this not as an effective method of "hitting the ground running" but rather as manipulation of the system by the Obama administration, in that the administration had stacked the odds in favor of the banks.
To prove the American people wrong, Obama, before Geithner had even established a staff, made a public press announcement that Geithner would be announcing his plan to fix the economy the next morning. Geithner, of course, wasn't ready at all and completely botched the presentation. His plan (which he had come up with in only a few days) was to "stress test" the internals (i.e. financials) of the nation's biggest banks in order to decide which ones were the most at risk of failure. Those banks would be the ones that were bailed out first using the TARP fund created in October, 2008.
The American people were outraged at what they thought was nothing more than Geithner and the administration beating around the bush and not serving the banks with the justice they deserved. People protested, lobbying for Obama to replace Geithner with someone who would make the banks pay for their greed, but Obama believed that Geithner's plan would work and that it was low-risk since it would keep the banks on the side of the government, and therefore the American people. In response to the erupting anger from the public, Congress called the heads of the nation's 13 largest banks to Capitol Hill to question them. Unfortunately the meeting had no real goals other than to make a public spectacle out of the CEOs and to make it look like the Obama administration was doing its job. The public didn't buy it.
In order to keep pressure on the banks and to prove to the American people that the Obama administration really did want to resolve the problems, rumors began to circulate over firing the CEO of one of these "superbanks" in order to make an example of them. Tim Geithner warned against this because he felt that if the public believed the government was stepping in to take over the financial industry it would scare them off and cause more pandemonium. Larry Summers, Obama's chief economic adviser, took the other side and believed that now was the time for aggressive reform and not simply more investigation as Geithner was suggesting. On March 15th, 2009, there was a meeting at the White House. In attendance were Geithner and all his proponents as well as Summers and all his proponents. The only goal of the meeting was to decide which plan to go with: Geithner's stress tests or Summers' aggressive reform.
Each team presented their case but no decision was made that day. In late March, 2009 President Obama called the heads of the nations banks together at the White House. The impression they had was that they would be slapped with heavy regulation and possibly even fired. Ultimately, Obama chose Geithner's plans. While he had all the bank heads in one room and had the opportunity to take whatever actions he deemed necessary, he chose to do nothing aggressive and instead keep the banks on the side of Washington by delivering a "we're here to help" message. Publicly, Obama wanted to shame the banks but behind closed doors he was afraid of them. The banks felt like they had gotten away with murder. There were no regulation changes, no stipulations, no nothing. All they had to do was prepare for Geithner's stress tests.
In April 2009, Bloomberg News took the Federal Clearing House Association to the US Supreme Court over whether or not they would need to make public the loans that the Federal Reserve had been making to the banks since the crisis began. Bloomberg won, and the papers were made public. It became apparent that the Fed had loaned over 7.75 trillion dollars to the banks since the beginning of the financial crisis, and not just to American banks, but to foreign banks as well. The money was used to prop up the banks' daily operations while legislation was passed over whether or not they would receive the bailouts they ultimately did receive. It was at this point that the American public started to understand the true depth of the financial crisis.
By May of 2009, most of the largest banks that had been bailed out had absorbed the bailout money they'd been given and had begun to recover. Geithner's stress tests showed that all 19 of the banks under investigation were fundamentally healthy. But how could they possibly be fundamentally healthy? In August of 2009 the American public would ask this question via the Tea Party protests, in which they argued that the bailouts had only made the banks profitable again at the expense of the American taxpayer. At this point to relieve pressure on the White House, the White House Chief of Staff Rahm Emanuel urged President Obama to deliver "old testament justice" to the banks. He wanted aggressive reform and he wanted it now. In September of 2009, on the one-year anniversary of the Lehman Brothers collapse, Obama addressed the nation and swore to push for aggressive reforms for Wall Street. None of the nation's top bankers showed up to hear the speech. It was business as usual for them.
Finally, by 2010 as healthcare reform started to take the front burner, Wall Street reform was pushed aside and since the banks were profitable again they began to spend massive amounts of money on lobbyists that would help push for less regulation, just as they had done at the beginning of the crisis. After many months of debate and deliberation, on July 21, 2010 President Obama signed the Dodd-Frank Act, which was designed to produce more transparency in the financial industry and make sure the world's biggest banks were not taking on too much risk. Unfortunately for the American people, the Dodd-Frank Act is a very vague bill that leaves many things open to interpretation. Since many of the provisions in the bill are not clear, it allows for bank heads to pay lobbyists to sway reforms in whichever direction they prefer. In this sense, the financial crisis still has not ended. Unfortunately for the vast majority of Americans, the collapse of the financial system will affect us for years to come, and it is likely that before the end of the century there will be a similar collapse. This is why it's important to take control of your financial future, which is what this blog is designed to help you do! If you understand the mechanics of a financial crisis, perhaps you'll be a little better at recognizing when one is starting to occur and can protect yourself before disaster strikes.
