Muftic: Where were you when the world changed? |

Muftic: Where were you when the world changed?

Those of us who lived through Sept. 11, 2001, can probably remember where we were the moment we heard about the collapse of the Twin Towers.

Do you remember where you were on Sept. 15, 2008? Probably not, but events that day impacted us more directly. It was the day Wall Street imploded, nearly taking our entire economy with it. Layoffs, unemployment, foreclosures and bankruptcies soared. Our retirement funds evaporated and our homes lost 20-30 percent of their value. Restaurants and shops experienced similar declines in business. Teachers got laid off and some schools were closed. Construction jobs dried up.

The Bush administration made the word “bailout” a necessary evil in the short term, but over the long term the word has become a rallying cry for an angry public. Most experts believe the 2008 bailout may have saved us from a repeat of 1929 and a 10-year Great Depression. Instead, we got the Great Recession. Public outcry against bailouts has led to proposed legislation to reform Wall Street.

The cause of the 2008 crash is no mystery. Wall Street banks took their customers’ savings and checking accounts and pension funds, combined them with mostly borrowed money to create new “products” that were sold to other banks and investors. Some banks borrowed from other banks using questionable collateral such as overvalued subprime mortgages. They also sold risky insurance, mostly provided by AIG, in the form of credit default swaps and unregulated derivatives, which were gambles on gambles. All these bets and investments proved too risky and there were just too many of them. Financial services stock prices began to crash, confidence eroded, and the losses could not be covered.

Over $400 million dollars worth of Wall Street lobbying is shaping the reform legislation. Republican threats to filibuster stronger Democratic reform proposals heighten my suspicion that Republicans are carrying Wall Street’s water.  Both parties will try to convince you they are protecting your interests. Ignore the pontificating. Just watch votes on key issues in the Senate debate and note who benefits most, Wall Street or you, the consumer and sometimes victim. The score card so far:

Democrats’ bill would regulate derivatives more like other securities. Republicans oppose regulating derivatives. Democrats would also make it less likely one failing Wall Street bank would bring down the entire financial system by providing a mechanism to close it down, sell off assets, fire management, and eliminate stockholders assets. While none of this would keep banks from failing, it would at least help prevent the failure from infecting others. Democrats wanted banks to pay into a fund to finance the wind-down. Using twisted logic, Republicans claimed the fund would encourage bad investments. The winner so far? Wall Street.

Republicans threatened a filibuster unless Democrats dropped support of the fund. Democrats caved in for now. Wall Street dodged paying into a fund; taxpayers will be stuck with the next “too big to fail” bank resolution.

The Democrats’ bill also proposes a consumer protection agency that would could stop abusive practices of financial institutions, including subprime mortgage companies, payday lenders, money transmitters, and credit card overdraft fees. All but two Republicans and Wall Street opposed this, but the agency survived a vote last week.

Off the table at the beginning of the debate are some heavy-weight measures which could be resurrected as amendments.

One would break up banks that are too big to fail by restoring a separation of traditional functions (checking, savings, lending) from their investment banks. That division existed until 1999. Other possible amendments: forbidding banks to gamble their own money on speculative investments and divestiture of those who reach a certain size.

Another: Reform of Fannie Mae, Freddie Mac, whose loosening of standards contributed to the subprime mortgage problem. The Obama administration promises to propose reform later in separate legislation and for now are controlling both agencies using administrative powers.

– Felicia Muftic is author of the Colorado Consumer Handbook and a former Colorado Uniform Consumer Credit Code Commissioner. Visit

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