Through his hard-charging and entertaining investigative pieces in Rolling Stone, Matt Taibbi has repeated snuffed out that little spark of hopefulness in me. His latest article in Rolling Stone was the most crushing of all: “Wall Street’s Big Win: Finance reform won’t stop the high-risk gambling that wrecked the economy – and Republicans aren’t the only ones to blame.” Taibbi proposes that the recent Wall Street “reform” fixed about 10% of the problem, and that it was designed primarily to cover up an uncomfortable political truth:

The huge profits that Wall Street earned in the past decade were driven in large part by a single, far-reaching scheme, one in which bankers, home lenders and other players exploited loopholes in the system to magically transform subprime home borrowers into AAA investments, sell them off to unsuspecting pension funds and foreign trade unions and other suckers, then multiply their score by leveraging their phony-baloney deals over and over. It was pure ­financial alchemy – turning ­manure into gold, then spinning it Rumpelstiltskin-style into vast profits using complex, mostly unregulated new instruments that almost no one outside of a few experts in the field really understood. With the government borrowing mountains of Chinese and Saudi cash to fight two crazy wars, and the domestic manufacturing base mostly vanished overseas, this massive fraud for all intents and purposes was the American economy in the 2000s; we were a nation subsisting on an elaborate check-­bouncing scheme.

And it was all made possible by two major deregulatory moves from the Clinton era: the Gramm-Leach-Bliley Act of 1999, which allowed investment banks, insurance companies and commercial banks to merge, and the Commodity Futures

Modernization Act of 2000, which ­exempted the entire derivatives market from federal regulation. Together, these two laws transformed Wall Street into a giant casino, allowing commercial banks to act like high-risk hedge funds, with a whole new galaxy of derivative bets to lay action on. In fact, the laws made Wall Street even crazier than a casino, because in a casino you have to put up actual money to make bets. But thanks to deregulation, financial companies like AIG could bet billions, if not trillions, without having any money at all to back up their gambles.

The Republicans are to blame, right? That’s only half right. Consider what happened to the “Volcker rule,” a proposal designed to restore the firewall between investment houses and commercial banks. It never had a chance, and Taibbi discusses the legislative process in detailed ways that makes sausage-making machine seem quaint and desirable:

If the Volcker rule was a regulatory Godzilla threatening to stomp out Wall Street’s self-serving investments, the proposal to shut down derivatives was nothing short of a planet-smashing asteroid headed straight at the heart of the financial industry’s most reckless abuses. The key battle involved the so-called “Lincoln rule,” put forward by Sen. Blanche Lincoln of Arkansas, which would have forced big banks to spin off their derivatives desks in the same way the Volcker rule would have forced them to give up proprietary trading. Banks would have to make a choice: Either forgo access to the cheap cash of the Federal Reserve, or give up gambling with dangerous instruments like credit-default swaps. Banks, in short, would have to go back to making money the old-fashioned way – making smart loans, underwriting new businesses, earning simple fees on customer trades. No more leveraged gambling on whacked-out acid-trip derivatives deals, no more walking around with torches and taking out fire insurance on other people’s houses, no more running up huge markers on the taxpayer’s dime. This, obviously, could not be permitted. Thanks to Clinton-era deregulation, the market for derivatives is now 100 times larger than the federal budget, and five of the country’s biggest banks control more than 90 percent of the business. So the leadership of both parties pulled out all the stops to ensure that the Lincoln rule would be Swiss-cheesed to death before it ever saw the light of day.

But at least the Obama Administration was out there fighting for middle class Americans, right? Wrong.

In what amounted to an open handout to the financial interests represented by Brown, insurers, mutual funds and trusts were exempted from the Merkley-Levin ban. Then, with the floodgates officially open, every financial company in America was granted a massive loophole – one that allowed them to skirt the ban on risky gambling by investing a designated percentage of their holdings in hedge funds and private-equity companies.

The common justification for this loophole, known as the de minimis exemption, was that banks need it to retain their “traditional businesses” and remain competitive against hedge funds. In other words, Congress must allow banks to act like hedge funds because otherwise they’d be unable to compete with hedge funds in the hedge-fund business. With the introduction of the de minimis exemption, Merkley-Levin went from being an absolute ban on federally insured banks engaging in high-risk speculation to a feeble, half-assed restriction that will be difficult, if not impossible, to enforce.

The driving force behind the exemption was not Scott Brown, but the Obama administration itself. By all accounts, Geithner lobbied hard on the issue. “Treasury’s official position went from opposed to supportive,” one aide told reporters. “They may have even overshot Brown’s desires by a bit.” Throughout the negotiations over the bill, in fact, Geithner acted almost like a liaison to the financial industry, pushing for Wall Street-friendly changes on everything from bailouts (his initial proposal ­allowed the White House to unilaterally fork over taxpayer money to banks in unlimited amounts) to high-risk investments (he fought to let megabanks hold on to their derivatives desks).

See Taibbi’s detailed investigative article for far more gory details, if you dare.