Bailout Backlash: Congress Must Examine Its Own House

Cross-posted from The Hill Blog

It has been a long time since there has been such an outpouring of voter outrage on Capitol Hill. Although partisans are busily pointing fingers across the aisle about the defeat of the hurried, behind-the-scenes bailout deal in the House on Monday, the failures are so fundamental that it is increasingly clear that Washington will never be the same again. The bailout is stirring an intensely populist backlash across the political spectrum, and that much anger will not dissipate anytime soon.

On Monday, when Congressional leaders most needed constituents to trust them to negotiate a deal that would protect their interests, both the deal and the trust were not there. The reasons for this lack of faith are obvious: Congress snoozed through a housing boom that replaced our national economy with, as President Bush personally acknowledged last week, a house of cards.

As an institution, Congress abdicated its core job of safeguarding the interests of retirees, taxpayers and homeowners. While politicians lambaste Wall Street and blow airy kisses towards Main Street, suspicion of the K Street machinations that were on conspicuous display over the past week are equally problematic for a public largely shut out of the political process.

The economic bubble years were a time in which the members of the Senate and House banking committees – with jurisdiction over the nation’s financial markets, banks, and insurance companies – allowed private equity and hedge fund barons to continue to claim preferential capital gains tax treatment of their outsized incomes, left the SEC underfunded and with a free-for-all mandate, and, perhaps most regrettably, bowed to industry pressure to leave large segments of new, complicated markets, such as the credit default swap market, unregulated.

Wall Street routinely doles out large campaign contributions to members of Congress. In the current election cycle, the financial services sector (which includes insurance and real sector), contributed more money to candidates for Congress, the presidency and political parties than did any other sector, totaling $339.6 million from 2007 through today. Both chambers’ banking committees also benefit handsomely. According to the Center for Responsive Politics, PACs and employees of the securities and investment industry are the second largest source of cash for members of the Senate Banking committee. During the 2008 election cycle, these contributors raised $11.7 million for the 21 members of that Committee. Banking Committee Chairman Sen. Christopher Dodd (D-Conn) received about $4.3 million since 2003, or half of all contributions to his campaign coffers.

Does campaign cash influence legislation and regulation? When Congress last debated regulation (or rather, de-regulation) of the financial industry in 1999, a study by the Center for Responsive Politics showed that members of Congress who supported the Gramm-Leach-Bliley Act received twice as much money from commercial banks, investment banks, and insurance companies as those who opposed the measure. The Gramm-Leach-Bliley Act was the product of many years of lobbying by the financial industry and allowed for the loosening of bank regulations that had been in place since the Great Depression.

Even more worrisome, in hindsight, is how campaign cash from generous industry donors might have influenced the lack of legislation, regulation and oversight. Since 2000, when passage of the Commodity Futures Modernization Act (CFMA) ensured that the credit default swap market would remain unregulated, the market for credit default swaps grew from $900 billion to $45.5 trillion, or twice the size of the entire U.S. stock market. Unregulated and private, difficulties valuing the instruments contributed to the current collapse and were the direct cause of the now-failed American Insurance Group’s problems. Bank examiners, a few economists and others had expressed concerns, but Congress never seriously considered a proposal to allow proper oversight of the market. Passage of the CFMA was furtively pushed through by then-Senator Phil Gramm, himself a beneficiary of industry largesse while in office who, since leaving the Senate, has become vice-chairman of the investment bank UBS.

Since the bailout package was announced a week ago, industry lobbyists have swarmed Capitol Hill, a spectacle that fed the fires of public anger. As a consequence, the current bailout does not include a single proposal for greater regulation and oversight of swaps, derivatives and the other private, unregulated markets now in panic and disarray. Instead, the mainstream press is filled with stories of weekend efforts by lobbyists to forge broad changes to the recovery plan to benefit their clients – by convincing the Treasury to allow foreign banks to participate and otherwise expanding the definition of financial instruments, which will likely add billions to the cost of the plan. They also defeated a key consumer protection that would have allowed homeowners to renegotiate the terms of their loans in bankruptcy court and prevented a tax on banks to pay for part of the costs of the bailout.

Lobbyists for groups like the American Bankers’ Association (ABA) get their clout in a traditional way: they buy it. A weekend story in The New York Timesdescribed this week’s Herculean efforts of ABA’s large lobbying staff, and the details of a $1,000 per ticket fundraiser sponsored by ABA for House Financial Services Chairman Rep. Barney Frank (D-Mass.) last spring. Members of Congress benefit mightily from the largesse of financial interests. “I’m not allergic to business, I’m not hostile at all,” Dodd reassured his listening potential donors when he assumed the reins of the Senate Banking Committee in December 2006, according to a report in The Hartford Courant. Dodd was the single largest recipient of campaign contributions from Fannie and Freddie PACs and employees in the Congress since 1989.

Such clear evidence that the system is broken demonstrates the need for a fundamental restructuring to assure that members of Congress act as the people’s representatives, rather than merely as powerful proxies for monied interests. A solution to break the stranglehold of special interests is already being considered, and must be taken up by the new Congress when it returns in the spring.

Just last week, the Fair Elections Now Act, which would establish a system of voluntary public financing for Congressional elections, was introduced with bi-partisan support in the House. Last year, Senators Durbin (D-Ill.) and Specter (R-Pa.) introduced the Senate version of the Fair Elections Now Act, which would create a voluntary public financing system for Senate candidates. With the introduction of its House counterpart this week by Representatives Larson (D-Conn.) and Jones (R-N.C.) (both from Clean Elections states), lawmakers are presented with a bipartisan, bicameral effort to undertake serious and lasting structural reform. Public financing would eliminate the perils of special interest cash by establishing strict spending limits, enabling small donors and greatly increasing the power of ordinary voters to hold Congress accountable. Dependent on Wall Street cash, Congress has proven incapable of effectively regulating the financial system; Congressional public funding offers voters a timely way to insist that Congress end the reign of big-money politics.

Public financing systems are already in place for legislative and statewide candidates in Maine, Arizona, and Connecticut, for judicial candidates in North Carolina, and for municipal candidates in several cities.

In language crafted before the current economic crisis, the bill’s sponsors presciently warned in no uncertain terms that our democracy is being undermined by the “large, unwarranted costs on taxpayers through legislative and regulatory outcomes shaped by unequal access to lawmakers for campaign contributions.” The costs of business-as-usual politics, it turns out, are staggeringly high. The American people deserve a political system that answers to their interests first, and public funding of elections would return power to the people, where it belongs.