How Wall Street and Its Backers on Capitol Hill Silenced a Critic Calling for Greater Regulation of Derivatives

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Democracy Now!
Nov. 2, 2009

How Wall Street and Its Backers on Capitol Hill Silenced a Critic Calling for Greater Regulation of Derivatives

Last month, when the a subcommittee of the House Financial Services Committee held a hearing on the derivatives market, Robert Johnson was the only non-industry expert invited to speak. The former economist at the Senate Banking Committee and the Senate Budget Committee was invited just sixteen hours before the hearing. His testimony was cut short after five minutes by Congresswoman Melissa Bean, and the committee has since refused to post online his full testimony along with the statements of the other panelists. Robert Johnson comes on Democracy Now! to explain what he tried to tell Congress. [includes rush transcript]

Robert Johnson, former economist at the Senate Banking Committee and the Senate Budget Committee. He’s now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and serves on the United Nations Commission of Experts on Finance and International Monetary Reform.


AMY GOODMAN: The embattled CIT Group, a century-old commercial lender to thousands of small and medium-sized businesses, filed for Chapter 11 bankruptcy Sunday. It’s the fifth-largest bankruptcy in US history.

CIT’s so-called “pre-packaged” bankruptcy plan reportedly allows its creditors to ultimately own the company and would give most bondholders 70 percent of what they were owed. But all existing common and preferred stock will likely be canceled. That’s an enormous blow to the US government, which invested $2.3 billion of taxpayer money in CIT last December through the Troubled Asset Relief Program.

CIT also reached a separate agreement with Goldman Sachs Friday to change the terms of a financial rescue package it had received from Goldman in June of this year. Prior to that announcement, Goldman Sachs was poised to collect $1 billion when CIT filed for bankruptcy, this according to a report last month in the Financial Times.

Well, for more on the credit crisis and the prospects for financial reform, I’m joined now here in New York in our firehouse studio by the economist Rob Johnson. He’s the former chief economist of the Senate Banking Committee and the Senate Budget Committee. He’s now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute and serves on the United Nations Commission of Experts on Finance and International Monetary Reform.

Last month, he was the only non-industry expert invited to speak at the House Financial Services Committee panel on reform of the derivatives market. But his testimony was cut short after five minutes by Congresswoman Melissa Bean. Nearly a month later, his full testimony is still not on the committee’s website along with the statements of the other pro-industry panelists.

Rob Johnson, welcome to Democracy Now!

ROBERT JOHNSON: Thank you for having me.

AMY GOODMAN: Let’s start with CIT Group. What about this? Was it a surprise? The fifth-largest bankruptcy in US history.

ROBERT JOHNSON: I think it’s not a surprise, in two respects. First of all, the economy, employment, small business is still being hurt. The “too big to fail” syndrome, which applies to the largest banks, doesn’t apply. You don’t have that much political power in the smaller institutions, so they’re allowed to go bankrupt. I think that, how we say, is a dreadful statement about where we are, but it is where we are. And those smaller institutions provide a tremendous amount of employment, growth and innovation for the economy.

AMY GOODMAN: Now, CIT Group was one of the largest recipients of the TARP funds, right? It was bailed out.

ROBERT JOHNSON: That’s right.

AMY GOODMAN: So what happens now with all of this? Does CIT Group disappear, or does it just reorganize?

ROBERT JOHNSON: It reorganizes, and the taxpayers will be part of the, what you might call, creditor and stockholding group that is hurt. And as a result, the US budget—how we say, the deficit and the future debt will increase. It was a—in essence, if you were a market participant, it was a bad bet.

AMY GOODMAN: Now, CIT Group is not to be confused with Citibank. I want to ask, what did CIT Group do, for people who aren’t familiar? And then let’s talk about—well, some are saying possibly Citibank is next.

ROBERT JOHNSON: Yeah. CIT Group was a lender to small businesses, small and medium-sized businesses, non-financial businesses throughout the country. Citigroup, of which their bank is called Citibank, is one of the two or three largest banks in the United States, and they’re intertwined in all kinds of derivatives, proprietary trading, as well as commercial business, retail business, real estate lending, credit card business. So they’re very different animals.

AMY GOODMAN: So, Citigroup, what’s happening to it?

ROBERT JOHNSON: Citigroup was very weak in back in February and March, when Secretary Geithner of the Treasury and Lawrence Summers decided to forbear, meaning feed them what I’ll call an intravenous drip of capital. They’ve been limping along. Their stock recovered a little bit when people realized they weren’t going to be shut down. But the question is, even with these usurious large credit card interest rates, can they earn their way back to health, given what a deep ditch they were in? And it’s not clear that they can. Gretchen Morgenson wrote about this yesterday in the New York Times.

AMY GOODMAN: I want to turn now to a clip of Timothy Geithner speaking on Meet the Press.

    TIMOTHY GEITHNER: Barney Frank and Chris Dodd are moving comprehensive financial reform through both houses of Congress now. Chairman Dodd is drafting a comprehensive bill. Chairman Frank, working with the House Financial Services Committee, has passed through the committee very important reforms to give consumers better protection and to prevent kind of risk building up in the system that brought us this system to the edge of collapse, left taxpayer exposed. And I think we’re making a lot of progress. I’m very encouraged by how much progress they’ve made.

AMY GOODMAN: That was Treasury Secretary Timothy Geithner. I’d like you to talk about what he said.

ROBERT JOHNSON: He speaks as though they’re doing very comprehensive reform. Unfortunately, in the United States, one of the reasons we had the bubble and the crisis was because we have a broken political system, where campaign money, lobbying influence of the financial sector is enormous, and it created bad regulations, bad laws. I’m going back into the Reagan period, Bush the senior, particularly the Clinton era. We’ve made a mess, and now we come back from a crisis where the population knows darn well what a mess we’ve made. But the problem is, at this point, the people in power, the moneyed interests are still in power. And a large portion of these reforms are either cosmetic or designed by the industry and quite ineffective.

AMY GOODMAN: What do you mean the people who have always been in power are still in power? I thought a new administration was elected last year.

ROBERT JOHNSON: We’ve got a new administration, but we have the funders from the four or five largest banks—Citibank, JPMorgan, Goldman Sachs. JPMorgan, I understand, has hired many of the lobbyists that used to represent Freddie Mac and Fannie Mae. The amount of money they’re spending has induced Dick Durbin from Illinois to say the banks own this place. So it’s really the lobbyists and the executives of the financial sector that I’m talking about.

AMY GOODMAN: So, Obama is not in control?

ROBERT JOHNSON: Well, it’s a good question. He’s, like the members of the House and Senate, ultimately very dependent upon campaign finances, so I would say he’s very sensitive, disproportionately sensitive, to their needs, as he must be. This is a structural problem. This is not about bad wiring of Barack Obama; this is about a social architecture that’s malfunctioning.

AMY GOODMAN: Well, let’s talk about that. Of course, this is—we’ve got some elections right now on Tuesday.


AMY GOODMAN: So President Obama is going from Virginia to New Jersey, and he’s campaigning for various candidates. 2010, of course, is right around the corner.


AMY GOODMAN: So, how much influence here is—how much influence do the moneyed interests have? And how are you seeing it played out, from the health insurance debate to the banking crisis?

ROBERT JOHNSON: In the health insurance debate, it appears to me that each of the moneyed interests—pharmaceuticals, physicians’ groups, insurance companies—are being honored in full, and citizens, such as the ones that wanted single payer, are arrested when they are not invited but try to work their way into Senate Finance Committee hearings.

In the realm of finance, a group that I’m affiliated with called Americans for Financial Reform, which is consumers, labor unions and others, 200 groups, had to kind of protest and express rage to Congressman Frank in order to get me added to the scroll when they had eight industry groups. The dysfunction I’m talking about—you mentioned Melissa Bean—she cut off my opening statement.

AMY GOODMAN: Well, let’s start from the beginning on this.


AMY GOODMAN: This story of—tell us what happened. When were you called to testify before the House committee?

ROBERT JOHNSON: About sixteen hours before the hearing.

AMY GOODMAN: Where were you?

ROBERT JOHNSON: I was in New York.


ROBERT JOHNSON: And I had heard from a friend that I was going to be called, because AFR, Americans for Financial Reform, said the committee has agreed that you can testify. As you know from our previous discussions, I used to work with Pete Domenici on the Republican side, so I had sort of a bipartisan credential, and apparently the Republicans approved of my appearance, as well as the Democrats. So I told them I can’t do the written statement before the hearing.

AMY GOODMAN: Because you just had sixteen hours before the hearing.

ROBERT JOHNSON: I’ve got to read a 187-page bill, come down there. “I’m not going to have anything expert to say in a short timeframe, but within a week ago I’ll get you the testimony.”

AMY GOODMAN: But you spoke then.

ROBERT JOHNSON: I spoke, and during my verbal testimony, Bean cut me off. And then I asked her—

AMY GOODMAN: Congressman Bean.


AMY GOODMAN: Congresswoman.

ROBERT JOHNSON: And I asked her to continue, and she said to sum it up. And I said, “I’ll put my statement and my interpretations of your bill in the record.” But I said, “There are people other than industry groups that should be heard. And in particular, taxpayers and working people in this country should have a voice, because they’ve been paying the bills.”

AMY GOODMAN: Now, we’re talking about a Democratic-led Congress, a Democratic-led committee.


AMY GOODMAN: You’ve got Barney Frank, who was considered one of the most progressive members of the Democratic Party in Congress.


AMY GOODMAN: So, why is it that you’re forced in at the last minute? It sounds a little like the whole single-payer representative controversy.


AMY GOODMAN: When President Obama had his healthcare summit, 120 people, none of them represented single payer, until there was an outcry, and Conyers, Congress member Conyers, got invited.


AMY GOODMAN: But why are they just having pro-industry representatives for starters?

ROBERT JOHNSON: My interpretation of this is that we have a lot of people in the House of Representatives in the Democratic Party who believe that the banks are strong enough they can block anything in derivatives legislation that they don’t like. Number two, we have a situation where, in 2006 and 2008, many traditional Republican districts went Democratic. Now the Democrats are in a place where, with roughly ten percent or more unemployment, they’re going to have to go up for reelection, and they see this as a way to build their war chest for their reelection campaign.

AMY GOODMAN: What were you trying to say in the Senate Finance Committee and the House Finance Committee hearing?

ROBERT JOHNSON: What I was trying to say is that Ground Zero, the San Andreas Fault of our financial system, where it blew up last time, was in the intersection between “too big to fail” firms and over-the-counter derivatives and that these derivatives need to be put on exchanges, because they’re too complex, and when they’re combined with the “too big to fail” firms, which have a 95 percent market share in OTC derivatives, five banks, that it can create a situation, like we were talking about moments ago, where Citibank could not be restructured. The spider web of positions in derivatives is so complex and so entangled that it deters policy officials from being able to put them through restructuring, because they’re afraid of what kind of spin-offs and consequences will happen.

I spoke about the credit default swap market and the illusion of safety that those credit default swap contracts created when they’re unregulated, because everybody thought AIG was going to be able to pay the bill, but they weren’t, and then the taxpayer got to provide that capital.

AMY GOODMAN: We’re talking to Rob Johnson, the former chief economist at the Senate Banking Committee, now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute. You spoke for five minutes. Congress member Bean cut you off. What would you say—how would you assess her orientation to the banks? And where does she come from?

ROBERT JOHNSON: If you study the Federal Election Commission data, like at the, you’ll see that she has very, very large contributions from the financial sector.

AMY GOODMAN: And what is your assessment of Chair Barney Frank?

ROBERT JOHNSON: He was not—first of all, I was grateful to him for allowing me to testify, because that wasn’t necessary, and he did that. So in that respect, it’s a positive. Secondly, he was not there at the hearing, so when Congresswoman Bean was in the chair, he was not in the room.

My assessment of Barney Frank is that he, both in the TARP bailout, which you and I discussed last fall, and in the present tense, is not adequately representing the American people. He’s in a difficult situation, because we have a structurally dysfunctional money politics system. But when the—how we say, when you have to measure and give him a final score, he’s not getting it done.

AMY GOODMAN: What does he need to do right now?

ROBERT JOHNSON: Make much stronger acknowledgment to the industry and to the American people that this crisis that, how would I say, cost us tremendous amounts of money could happen again, and we need to repair these structural fault lines.

AMY GOODMAN: Who is he answering to?

ROBERT JOHNSON: Who is he answering to? Ultimately, probably the leadership of the Democratic Party—Nancy Pelosi, Rahm Emanuel, the White House.

AMY GOODMAN: So you gave your testimony, or tried. You were cut off. You said you would submit your written testimony, which you said was agreed to beforehand anyway, that you would submit it later.

ROBERT JOHNSON: Mm-hmm, mm-hmm.

AMY GOODMAN: So what’s happened to that written testimony?

ROBERT JOHNSON: They’ve told me that it will be in the printed records, which, you know, some day will come back from the government printers, along with all the other testimony transcript and what have you, and that the questions that people could ask you as a follow-on will be added to that. But the verbal testimony was not printed as a transcript, and my written testimony was not what you might call “linked to” on the website, which the eight industry group members—actually, it was seven industry group members and one professor who had a pro-industry perspective on the day when I listened to him. They were all live-linked to the website. And my testimony, I guess it’s on the Roosevelt Institute website, if people would like to see it.

AMY GOODMAN: And we will link it at But what is Congress member Bean, what is Congress member Frank saying about this? Have you talked to them?

ROBERT JOHNSON: I haven’t. I’ve inquired to their chiefs, you know, their staff leaders. I’ve inquired to their general counsel. I’ve only gotten back indirect communications, because I was out of the country last week, but not—nothing respectful or satisfactory.

AMY GOODMAN: Finally, Rob Johnson, I want to ask you about this piece in today’s Financial Times by Nouriel Roubini, who predicted the economic meltdown. He is now saying the world is riding this bubble. He says there’s going to be a world meltdown.


AMY GOODMAN: He’s the NYU professor. Explain.

ROBERT JOHNSON: Well, many people felt the crisis that we experienced in 2007 and ’08 was the collapse of a multi-year bubble. But the response, which I’ll call forbearance, by government’s big expansion of the Fed money supply, interest rates cut to zero, and so forth, rather than being directed to productive investment for the non-financial economy, things that would make your and my livelihood better, is being poured into financial speculation. And what we’re seeing is a simultaneous rise of emerging markets and stock markets and bank stocks as if we’re reinflating the bubble.

And it’s all being financed with dollars provided by the Fed at very low interest rates, approximately zero. And what people are seeing also is the foreign exchange value of the dollar is weakening, because they’re financing with dollars and, say, buying things in Europe or buying things in Asia. What Roubini fears is this is all synchronized, this reinflation of the bubble, and when something happens, like a conflict in the Middle East that scares people, they become more risk averse. The entire world can collapse in a synchronized manner together.

AMY GOODMAN: This is the man who predicted the economic meltdown—

ROBERT JOHNSON: That’s right.

AMY GOODMAN: —who’s writing this.

ROBERT JOHNSON: That’s right.

AMY GOODMAN: And what would that look like, if it all failed together?

ROBERT JOHNSON: It would look like the crisis again, but probably even broader, in the sense that the major markets in the core, meaning the United States and the UK, in particular, melted down last time and then, with a lag, dragged everyone else down. This time, all the peripheral markets, all the developing countries, emerging markets and the core markets would come down at the same time. I think it would be, in light of the fragileness, in light of the pain we’ve experienced, in light of the high unemployment, a very, very severely disruptive act and experience.

AMY GOODMAN: Rob Johnson, finally, on the issue of your testimony not being posted, both the oral testimony and also linking to the written testimony that you have submitted, do you think that you’re being silenced?

ROBERT JOHNSON: I think that the process is distorted so it does not represent all voices. And most of the silence happens by omission, who’s not asked. I was given a window, but when I used that window to say things that were uncomfortable for the people that were raising money and trying to serve the industry, they reacted defensively and, I think, unfortunately.

AMY GOODMAN: We’re about to go into a discussion about the flu vaccine, but I want to ask you one question about healthcare. And that is, you come from the insurance state of Connecticut, where you have now an independent senator, supposedly, Joseph Lieberman, who has said he will join a Republican filibuster if a public option is included. Any comments?

ROBERT JOHNSON: Yeah, I would suspect Senator Lieberman does not want people to compete with the insurance industry. And in that respect, he’s representing those business interests rather than needs of American consumers of healthcare.

AMY GOODMAN: Rob Johnson, I want to thank you for being with us, former chief economist of the Senate Banking Committee, now the director of the Economic Policy Initiative at the Franklin and Eleanor Roosevelt Institute. He also serves on the UN Commission of Experts on Finance and International Monetary Reform.

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