Based on an article by this name by William Greider, The Nation 

(published at Alternet by this blog title) 

Most of us at the Café are Warren fans; she minds The People's business in a most spectacular fashion.  What she and her committee (Congressional Oversight Panel on TARP) is hard-reading, but, IMO, a must read for anyone who gives a fig for the future of our economy.  Greider believes that Warren's investigation was the best and most complete of the three bodies that investigated the responses of to the financial crisis.

You may remember watching the Tim Geithner confirmation hearings for Treasury Secretary in which he accidentally damned himself by declaring that, "As Chairman of the New York Fed, I wasn't a regulator."  Of course, that job actually was a big part of his job description; he just didn't take it seriously apparently.  His part in the crisis was major; the NY Fed of course, is in charge of Wall Street and the Big Banks. 

Some of the bailout directives happened at the end of Bush's term; the rest proceeded under Obama.

This piece tells the story, and hits a lot of the high places (or low, more specifically) and takes note of the incestuous relationship between the Fed and Wall Street, and addresses the impact (or not) of the recent Regulatory Reform bill.  Geider believes that the AIG story is useful as a 'touchstone' since many other deals were like it, but AIG's reach was massive; many counterparties, including many foreign banks.

 

 

The investigation was damning; it would be best to read all of it if you can make the time.  What this government chooses to do now will affect us all in the future.  Much of the Reform bill involves regulatory agencies to make smart moves and identify banks that are in trouble, and unwind them.  The big trouble is, the Fed always had that mandate, and did nothing.  The White House is putting most of its eggs in the Regulatory Basket; Simon Johnson says that right now the Fed and the Lobbyists are busy gutting the rules, and that Tim doesn't even like the watered-down version of the Volcker Rule that made it into the Reform Bill.

Here are some excerpts from Greider's piece:

The five-member COP, chaired by Harvard professor Elizabeth Warren, has produced the most devastating and comprehensive account so far. Unanimously adopted by its bipartisan members, it provides alarming insights that should be fodder for the larger debate many citizens long to hear--why Washington rushed to forgive the very interests that produced this mess, while innocent others were made to suffer the consequences. The Congressional panel's critique helps explain why bankers and their Washington allies do not want Elizabeth Warren to chair the new Consumer Financial Protection Bureau.

The report concludes that the Federal Reserve Board's intimate relations with the leading powers of Wall Street--the same banks that benefited most from the government's massive bailout--influenced its strategic decisions on AIG. The panel accuses the Fed and the Treasury Department of brushing aside alternative approaches that would have saved tens of billions in public funds by making these same banks "share the pain."Bailing out AIG effectively meant rescuing Goldman Sachs, Morgan Stanley, Bank of America and Merrill Lynch (as well as a dozens of European banks) from huge losses. Those financial institutions played the derivatives game with AIG, the esoteric practice of placing financial bets on future events. AIG lost its bets, which led to its collapse. But other gamblers--the counterparties in AIG's derivative deals--were made whole on their bets, paid off 100 cents on the dollar. Taxpayers got stuck with the bill.

(Long sections report the committee's findings on (Time Person of the Year) Ben Bernanke, Paulson, Geithner, Obama, et.al....)

During the larger crisis, the central bank dispensed trillions of dollars in imaginative and unprecedented ways, often with no explicit authority. The law is deliberately vague and says the Fed can lend to virtually anyone in "exigent circumstances." The Fed itself gets to define what that vague phrase means. The Federal Reserve proved to be a weak and unreliable regulator for the public interest, but blamed its weakness on inadequate laws. That excuse has now been taken away by the new financial-reform legislation, which gives the central bank more explicit legal authority to intervene and take control of troubled financial institutions. The Fed has always been able to do this--if it had the nerve to use its implicit powers in strong-armed ways. For longstanding reasons, it has lacked the will.

 Conclusions from Greider:

 The Congressional Oversight Panel did not address the new law and its potential effectiveness. What follows is my analysis, based on many years of observing the central bank during its turmoil of the past generation. The Fed is weak for many reasons, some revealed in the AIG story, but like any proud institution, it dares not speak candidly about its predicament. The political system is likewise still too intimidated to challenge the myth and mystery, but sharp questions have been raised since the financial crisis. If I am right, a stronger reform critique will be forthcoming when the Fed fails again to put its public obligations ahead of the banks.

Lots of ordinary citizens have figured this out. If some banks are too big to fail, then government should compel them to become smaller banks. The harsh reality is that our bloated financial sector is too large for the economy it serves, its power too concentrated at the top. Neither the president nor either political party is yet ready to face the imperative of breaking up the mega-banks. Until they do, the system will remain unstable and prone to excesses, maybe worse.

Meanwhile, the Federal Reserve's dilemma has been made much larger. It has been given broad discretion to enforce many structural changes on the financial system. But discretion can be fatal for regulators, as AIG illustrated. It asks Fed leaders to get tough with their principal clients, when Congress didn't have the nerve to do the same. Congress needs to write hard-nosed laws with concrete prohibitions and specific enforcement triggers, not wishful requests. If the Fed again fails to act, as I fear, another crisis becomes more likely. If that occurs, the Federal Reserve will be the next big subject for reform.

* An addendum for those who are livid about Robert Rubin's part in our Economic Meltdown, and his Revolving-door career.  Robert Scheer talks about Rubin's recent appearance on Fareed Zakaria's program in which Fareed allows Rubin to re-write history: he claims he believed Brooksley Born, and was concerned about derivatives being unregulated.  The liar; the schmucks.

 ** Second addendum: While searching for the Time Cover, I found this History of the Fed slideshow.  Investigations, anyone?  You betcha!

***Third addendum: Present Board of Governors of the Federal Reserve