The negative effects of the 2008 financial collapse are still lingering in the U.S. economy, making it harder for people to find long-term employment and also impeding the efforts of college graduates to keep up with their student loan payments. Yet the biggest Wall Street financial institutions seem to be doing extremely well, bringing in jaw-dropping revenues and profits.
Wall Street is not just thriving economically, though. No Wall Street executive has been prosecuted for fraud arising from the 2008 financial meltdown. Why? After all, Wall Street was instrumental in creating the conditions for its own economic collapse. The answer is Wall Street banks are not just “too big to fail,” they are also “too big to jail.” It’s time to hold Wall Street accountable for its actions and limit its future economic power.
Wall Street institutions were a main contributor to the 2008 economic collapse. The Glass-Steagall Act was enacted as part of the New Deal after the 1929 stock market crash in order to prevent a similar economic collapse from ever happening again. This law did many things, but perhaps its most important provision was the one separating investment from commercial banking. This way, an investment bank could not use consumer funds to engage in risky investments. It made sure that if investment banks became insolvent — unable to pay their debts — no consumer deposits would be at risk.
This important provision did not survive, though. The wealthiest American financial institutions made sure it wouldn’t. The Glass-Steagall Act was repealed in the now infamous Financial Services Modernization Act of 1999, a law deregulating the financial industry. As PBS reports, the real estate, insurance and finance industries spent $350 million on political donations and lobbying efforts during the 1997-98 election cycle to support the enactment of the Modernization Act. As a result of this lobbying, Wall Street got its wish: Investment banks could now acquire and merge with other commercial banks and insurance companies.
Wall Street certainly got rich off this legislation. Just ask Robert Rubin, former President Bill Clinton’s treasury secretary. He helped get Congress to agree to the final legislative language. Shortly after this, Citigroup hired Rubin, a former Goldman Sachs executive, and gave him a lucrative compensation package.
After the passage of this legislation, Wall Street banks merged with and acquired each other. They eventually became “too big to fail.” This was because they were too financially interdependent with each other. If one Wall Street financial institution became insolvent, the rest were at serious risk of the same result. The 2008 financial collapse demonstrates precisely this. In the years preceding the financial crisis, banks created a variety of financial instruments they used to bet on the housing market. When the housing market collapsed in 2008, so did the value of these assets. And since the financial sector was so interdependent, this collapse put the country’s, and perhaps the world’s, entire financial system at risk.
A taxpayer-funded bailout saved the banks from their own irresponsible actions. Not one bank executive from Wall Street has been criminally prosecuted. This may be because Wall Street banks are not just too big to fail; they are also too big to jail. As U.S. Attorney General Eric Holder told PBS, “I am concerned that the size of some of these institutions becomes so large that it does become difficult to prosecute them.” Not only have Wall Street bank executives escaped criminal prosecution, they have also escaped from admitting to any wrongdoing in most of the biggest civil cases brought against them by entering into settlement agreements with the U.S. government.
This isn’t right.
When someone violates the law, they should be held accountable. As has been stated time and time again, our system of government is “a government of laws, and not of men.” I don’t care how big or powerful Wall Street financial institutions are. The people managing them should be prosecuted for the crimes they committed. Even during the savings and loan crisis, the Justice Department convicted more than 1,000 bankers. I don’t see why financial executives should have a “get out of jail free” card this time around.
There’s really only one way to get our government officials to prosecute financial wrongdoers such as these in the future: break up the Wall Street banks. When our biggest financial institutions are so large that even the federal government fears prosecuting them, we know they have some serious political and economic power. By reinstating the Glass-Steagall Act, Wall Street banks would have to be separated into commercial and investment banking once again, thus reducing their economic and political clout. With this reduced power, the federal government would be able to fully prosecute these financial institutions without fear, and give the American people the justice they deserve.
Wall Street financial institutions created the 2008 economic crisis by lobbying for the 1999 Modernization Act and subsequently engaging in risky speculative bets on the housing market. Once the housing market collapsed, the banks were already too big to fail and were then bailed out by the federal government. The Justice Department should be zealously prosecuting those Wall Street executives who committed crimes but have failed to do so. Unless we break up Wall Street banks in the future, banks may have a perpetual get-out-of-jail-free card.
Aaron Loudenslager ([email protected]) is a first-year law student.