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Washington and Wall Street: A ‘Democracy’ in Denial

Some Americans get all bent out of shape when they hear someone label the United States a ‘plutocracy.’ But if we have an honest-to-goodness democracy, where the people really rule, then how can we explain Goldman Sachs?

By Sam Pizzigati

The outsized political role of Goldman Sachs, America’s most powerful bank, has been attracting widespread attention — and flack — ever since the U.S. economy went freefall in 2008. But many defenders of our democratic virtue appear convinced that the Goldman Sachs power trip may soon be ancient history.

Sure, the argument goes, Goldman had a good run. But democracy has caught up with Wall Street profiteering. The stunning new federal SEC fraud case against Goldman, filed just over a week ago, once again “proves” that no group, not even an enormously rich one, can stand above the law.

And the upcoming Senate action on financial reform, the argument continues, shows that lawmakers do have the backbone to take on Wall Street, no matter how much Wall Street spends on lobbyists or campaign contributions.  

Feel ready to start cheering? Hit your pause button. The SEC fraud charges and the Senate’s willingness to tackle financial reform both certainly do come as welcome developments. But neither move, held up to the light, qualifies as much of a stake in the heart of Wall Street greed and power.

Goldman, many observers believe [1], may even beat the fraud charges in court.

The SEC complaint [2] is essentially charging, as veteran analyst William Greider explains [3], that Goldman “sold poison to unwitting customers,” mortgage-related “financial instruments deliberately designed to fail.”

CEO pay comparisonBut Goldman has a strong defense. Goldman execs, the defense will contend, were merely conducting Wall Street business as usual. And that’s true, as recent news reports have been documenting [4] with convincing detail [5].

Wall Street giants, we’ve learned from these reports, have been brewing and hawking [6] poison all along, exploiting the freedom to “innovate” they gained when the Clinton and Bush administrations wiped away the last of those pesky banking regulations put in place back in the Great Depression. In effect, Wall Street has become [7] a giant gambling den — and bought off the “cops.”

Congress and the White have yet to acknowledge this reality. They continue to treat financial reform as an exercise in yanking bad apples out of an otherwise A-OK barrel. As President Obama put it last Thursday: “Some on Wall Street forgot that behind every dollar traded or leveraged, there is a family looking to buy a house, pay for an education, open a business, or save for retirement.”

“Some”? Top economic commentators found that characterization bizarre.

“It’s been decades,” retorted [8] Washington Post business analyst Steven Pearlstein, “since the old investment and banking cultures gave way to a trading culture in which the driving principle behind every dollar traded or leveraged is to use whatever advantage you have to ‘rip the face’ off some other trader.”

Wall Street’s original missions — “raising and efficiently allocating capital for businesses and households” — today stand, added Pearlstein, as “mere pretexts for a financial system that is now focused on reaping profits from high-frequency trading and sales of purely speculative instruments.”

The financial reform bill expected to hit the Senate floor this week doesn’t much recognize this new reality . The legislation doesn’t yet cap how big banks can grow or crack down adequately on the trading of shadowy “derivatives” or ensure all consumers of financial products an independent watchdog.

The financial reform we need would do all this — and more. The financial reform we need would start peeling off the tentacles that institutions like Goldman have wrapped around our would-be democracy’s day-to-day business. 

In California right now, 3,000 miles from the U.S. Senate, media coverage of billionaire Meg Whitman’s campaign for the GOP gubernatorial nomination is offering still another glimpse at how tightly these tentacles can squeeze.

The story, as related by some top-notch reporting [9] from the San Francisco Chronicle and California Watch: Whitman, who piled up the bulk of her fortune as the CEO at eBay, joined the Goldman Sachs board in 2001 after steering “millions of dollars of her company’s investment banking business to Goldman.”

Goldman returned the favor by handing Whitman the chance to buy stock — at bargain-basement prices — in companies Goldman was taking public. The favors would keep flowing. As a Goldman board member, Whitman okayed [10] $79 million in bonuses, over two years, for Goldman’s top execs.

Whitman would leave the Goldman board in 2002, after reports surfaced about her Goldman stock deals. But Goldman still manages Whitman’s personal fortune.

Here’s where the plot thickens. Goldman also manages $1.3 billion in retirement funds for California state employees and rakes in even larger fees for underwriting the billions in bonds and revenue anticipation notes California has to issue to pay its bills. Who has the authority [11] to appoint retirement board decision makers and “propose and promote” bond issues? The governor of California.

But California voters, even if they reject Meg Whitman, will still be stuck with a governor entangled with Goldman. Whitman’s GOP primary rival, state insurance commissioner Steve Poizner, borrowed a half-million from Goldman for a 2003 legislative run. And the sister of Whitman’s top Democratic challenger, Jerry Brown, just happens to be a Goldman exec in Los Angeles.

Goldman’s California executive corps has spent the last few years touting “solutions” for the state’s massive fiscal crisis that would bring the bank hundreds of millions in new deal-making fees. One of these fixes would privatize the state lottery, another would sell off the state agency that insures student loans. 

Goldman Sachs, in other words, isn’t just turning average people’s mortgages “into gambling chips [12]” — and helping billionaires bet against the people. Goldman is actively maneuvering to manipulate everyday government public policy decisions, all simply to refresh and refill the Goldman bonus pool.

We need to be precise here. We’re not talking about a Goldman Sachs conspiracy to run the world. We’re talking about the institutional relationships that allow gangs of extremely wealthy people to bend government to their parochial pecuniary purposes. We’re talking, in a word, about plutocracy.

A century ago, in a Wall Street-dominated era much like own, America’s most public-spirited civic and political leaders feared plutocratic power and waged unrelenting war against it. Never be afraid to take on “predatory plutocracy,” as the great newspaper publisher Joseph Pulitzer exhorted [13] in 1907.

Over the next half-century, Americans took exhortations like that to heart. They battled, on multiple fronts, to cut America’s plutocracy down to democratic size.

And they succeeded. By the mid 20th century, high taxes on high incomes had drained the political war chests of the wealthy. And laws and regulations, on everything from investment banking to labor rights, limited the political and economic manipulations that had stuffed those war chests in the first place.

Can we, in our new century, repeat this victory? We surely can. But first we have to accept the challenge before us. We’re not confronting bad apples. We’re confronting plutocratic power.

Sam Pizzigati edits Too Much, the online newsletter on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Too Much appears weekly. Read the current issue [14] or sign up [15] to receive Too Much in your email inbox.