Page 2 of 6 THE SHAPE OF US POPULISM, Part 5 Rubin's poisoned chalice
By Henry C K Liu
phenomenon, but a contrived mechanism with the purpose of reconciling
individual pursuit of self interest with the welfare of society. It was
becoming clear that this reconciliation was again failing in the 1920s and it
had been in the 1860s.
Reacting against economic individualism, other populist voices beside Henry
George included Lester Frank Ward (1841-1913), Thorstein Veblen (1857-1929) and
Edward Bellamy (1850-1898). Ward asserts that man should use his intelligence
to control and direct his future, making a distinction between the "telic" and
the
"genetic", insisting that there is "no natural harmony between natural law and
human advantage". Thus laissez-faire market capitalism does not necessarily
promote human progress, and when it runs amuck, could pervert economic progress
to reverse human progress in civilization. Ward's views paved the way to
positive socio-economic planning by government that the Progressive and the New
Dealers promoted.
Veblen published The Theory of the Leisure Class in 1899 in which he
separates industry, the production of wealth, from business, the acquisition of
wealth. Veblen coined the term "robber Baron" to describe the titans of
business in the 1860s and also the term "conspicuous consumption" to describe
the behavioral pattern of the nouveau riches.
Bellamy advocated a state socialism based on Christian ethics. His best-selling
utopian novel: Looking Backward, became influential and sparked the
formation of the "Nationalist" political movement and several accompanying
utopian living experiments during the 1890s.
By late 1888, the first of the Bellamy Nationalist Clubs was formed and the
movement soon spread across the country. The main purpose of the clubs was to
create and promote the practical realization of Bellamy's utopian vision.
Members became involved with other reform political groups and the Nationalists
were represented at the 1891 Populist Party convention. Eugene Debs, the
up-and-coming Socialist leader, also advocated some of Bellamy's programs.
However, the Nationalist movement stressed an evolutionary not revolutionary
approach to social change. A small group of educated leaders, not masses of
laborers or workers, would usher in the new society.
This attitude alienated some of the more radical Socialist and Populist
supporters of Nationalism. Despite temporary solidarity with these groups, the
Nationalist movement lost popularity and was essentially defunct by 1894.
Populism and new security laws
With a backdrop of such populist ideas, the 1932 hearings and findings of the
reconstituted Pecora Commission galvanized broad public support for new
securities laws. As a result, Congress passed and Roosevelt signed into law the
Security Act of 1933, referred to as the "truth in securities" law, with two
basic objectives: 1) require that investors receive financial and other
significant information concerning securities being offered for public sale;
and 2) prohibit deceit, misrepresentations, and other fraud in the sale of
securities.
Congress also passed in 1933 the Glass-Steagall Act, which mandated a
separation of commercial banks that took deposits and extended loans, from
investment banks that underwrote, issued, and distributed stocks, bonds and
other securities. The House of Morgan had to split into JP Morgan Bank, a
commercial bank, and Morgan Stanley, an investment bank to satisfy
Glass-Steagall, even though both were still controlled by Morgan.
The next year, Congress passed the new Security Exchange Act of 1934, creating
the Securities and Exchange Commission (SEC) to protect the interests of the
small investor. The act empowers the SEC with broad authority over all aspects
of the securities industry, including the power to register, regulate, and
oversee brokerage firms, transfer agents, and clearing agencies as well as the
nation's securities self regulatory organizations (SROs). The various stock
exchanges, such as the New York Stock Exchange, American Stock Exchange and
National Association of Securities Dealers which operates the NASDAQ system are
SROs.
President Roosevelt appointed Joseph P Kennedy as first SEC chairman. Kennedy
was a highly successful speculator on Wall Street with a wide network of
business dealings, some of which were questionable, whose appointment Newsweek
described as "a former speculator and pool operator will now curb speculation
and prohibit pools".
Unlike other run-of-the-mill speculators, Kennedy had farsighted political
vision, which he realized by the shrewd use of his considerable wealth gained
from market tactics that he was now responsible for policing. In his first
speech as SEC chairman, Kennedy pronounced a new populist path for the stock
market: "The New Deal in finance will be found to be a better deal for all."
Kennedy's populism paved the way for his son, John F Kennedy, to the White
House three decades later in 1961.
Clinton's rejection of the FDR/Kennedy tradition
Ironically, another Democratic president, Clinton, elected on a populist
platform in 1992 another three decades later, repealed in 1999 the
Glass-Steagall Act that had created the SEC. (The Front Line program of
Public Television produced a documentary detailing the role of Clinton
Administration in The Long Demise of Glass-Steagall).
On November 12, 1999, Clinton signed into law the Gramm-Leach-Bailey Financial
Services Modernization Act which repealed the Glass-Steagall Act, to allow
commercial and investment banks to re-consolidate. The repeal of the
Glass-Steagall Act, by combining the conflicting roles of lending institutions
and security issuing institutions, facilitated the development of structured
finance and debt securitization that contributed structurally to the 2007
credit crisis.
Phil Gramm, who began his political career as a Democratic congressman in the
Texas populist tradition, changed party affiliation to become a neo-liberal
Republican senator from Texas. As Republican chairman and ranking member of the
Senate Banking Committee, he spearheaded the Gramm-Leach-Bailey Act of 1999
with the conviction that higher bank profits commensurate with higher risk were
the salvation of the economy, reversing the age-old principle that banks should
be the economy's most risk-averse institution.
Between 1995 and 2000, Gramm received more than $1 million in campaign
contribution from the securities and investment industry, more than he received
from oil and gas interests that traditionally were a key source of financial
energy in Texas politics. After retiring from politics, Gramm became
vice-chairman of the investment banking arm of Union Bank of Switzerland (UBS),
an institution at present in the spotlight for massive losses from subprime
mortgage exposure. Gramm has been an economic adviser to the presidential
campaign of Republican candidate John McCain since summer 2007. He is also
rumored to be one of several possible running mates to McCain for 2008.
Gramm became linked to the Enron scandal when it came to light that his wife,
Wendy, while serving on the Commodity Futures Trading Commission, was involved
in granting an exemption for Enron from federal oversight, immediately after
which she was named a director at Enron. It came to light later that Gramm had
helped to turn the regulatory exemption into law as well as push through the
deregulation of energy markets that led to the Enron scandal. During this
period, Enron was a major contributor to Gramm's political campaigns.
Populist litigation against Enron fraud
The University of California, lead plaintiff for an investors class action in
the Enron securities litigation, obtained court approval of a settlement
reached on October 6, 2004 with certain of Enron's former directors in which
the investor class received $168 million, consisting of $155 million in
insurance proceeds and more than $13 million in personal contributions of
insider trading proceeds by Enron directors, including Wendy Gramm.
Pursuant to the agreement, the $200 million remaining balance of Enron's
directors and officers insurance policy was paid into the registry of the court
and the personal contributions of the directors, totaling over $13 million, was
deposited in trust with class counsel.
The agreement marked the fourth settlement in the case, totaling almost
$500,000 million already recovered for the class. UC reached a $222.5 million
settlement with Lehman Brothers in October 2004, a $69 million settlement with
Bank of America in July 2004, and a $40 million settlement in July 2002 with
Arthur Andersen’s international umbrella organization that released Andersen
Worldwide SC and its non-US member firms from liability and dismissed them from
the suit.
Arthur Andersen's US arm, which served as Enron's auditor, remains a defendant
in the case. On December 15, 2004, a unanimous three-judge panel of the US
Court of Appeals for the Fifth Circuit, sitting in New Orleans, upheld the
Anderson Worldwide SC settlement.
The defendants in the shareholders' lawsuit included the financial institutions
of JP Morgan Chase, Citigroup, Merrill Lynch, Credit Suisse First Boston,
Canadian Imperial Bank of Commerce, Barclays Bank, Toronto-Dominion Bank and
the Royal Bank of Scotland, all considered key players in a series of
fraudulent transactions that ultimately cost Enron investors billions of
dollars. Other defendants included various former officers of Enron, its
accountants, Arthur Andersen, and two law firms.
These defendant banks set up false investments in clandestinely controlled
Enron partnerships, used offshore companies to disguise loans and facilitated
the phony sale of phantom Enron assets. As a result, Enron executives were able
to deceive investors by reporting increased cash flow from operations and by
moving billions of dollars of debt off their balance sheets, thereby
artificially inflating securities prices. Unlike Lehman Brothers, Bank of
America and the settling directors, the remaining bank defendants are
potentially liable for Enron investors' entire loss.
In February 2002, the University of California was named lead plaintiff in the
Enron shareholders' class action suit previously filed against 29 top
executives of Enron Corp and its accounting firm, Arthur Andersen LLP. UC filed
a consolidated complaint on April 8, 2002, adding nine banks and two law firms
as defendants in the case. In April 2003, US District Court Judge Melinda
Harmon completed her rulings on the various defendants' motions to dismiss and
lifted the stay on discovery. Following those rulings, UC filed a second
amended complaint on May 14, 2003.
Other institutional investors acting as representative plaintiffs on behalf of
Enron investors include Washington State Investment Board, the UNITE Family of
Funds, San Francisco City and
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