Yeah, I discussed (4.00 / 5)

this in a diary....blog whore warning...Summers and Greenspan cooked it up at their weekly meeting, and it greatly benefited the employer of Summers's mentor, the conflict-of-interest King, Bob Rubin:

A long-time target of Rubin's was the Glass-Steagall Act of 1933, which limited the kind of conflict-of-interest-tainted speculation that had contributed to the Great Depression. The law prevented speculative investment banks from joining with government-supervised and-insured commercial banks. Over the years regulatory exceptions had weakened Glass-Steagall, but the Financial Services Modernization Act killed it. The bill was concocted by Summers and Greenpsan. In his book, "The Age of Turbulence," Greenspan describes this "unsung moment of policymaking."

As it happened, October 14th was the day slated for Larry and me to have our weekly breakfast. We looked at each other and said, "We have to settle this thing."...After an hour or two we divided the pie. Treasury and the Fed came together on a single bill, and up it went to Capitol Hill, where it passed. Historians view the Financial Services Modernization Act as a milestone of business legislation, and I'll always remember it as an unsung moment of policymaking for which there ought to be a little song.

Summers's and Greenspan's bill was known in known in some circles as the "Citigroup Authorization Act" because it served so beautifully the interests of Sandy Weill's emerging behemoth. When Congress passed the bill in November 1999, Citigroup had recently announced a new hire.

Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.

http://www.openleft.com/showDi...

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by: david mizner @ Wed Mar 25, 2009 at 22:29:05 PM UTC

Why it is (4.00 / 1)

that European and Canadian financial systems avoided implosion, while never having a Glass-Steagall rule, but the United States' financial system couldn't function more than a few years after Glass Steagall's repeal?

The obvious answer is that a financial system can run without a sharp division between investment and commercial banking.  Whatever protection Glass Steagall provided could be acheived in other ways.

Those that have tried to make a serious argument that Glass Steagall is directly responsible for the financial mess have either pointed to something vague like the "culture" of the financial industry changing, or note that Glass-Steagall was an impediment to certain mergers.  But, again, Europe didn't suffer a pollution of its commercial banking system because of the absense of Glass-Steagall, and the mergers at issue still needed to be approved by other federal agencies.  

Unlike the Commidity Futures Modernization Act, which has a direct relationship to the growth of credit default swaps, there doesn't appear to be any direct, or even circumstantial, argument that Glass Steagall is necessary.

Of course the Democrats won't reinstitute Glass Steagall, in the absence of an argument for doing so.

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by: kanzeon @ Wed Mar 25, 2009 at 22:49:46 PM UTC

Euro banks avoided implosion? Says who? (4.00 / 4)

I would heartily recommend you start reading the Financial Times of London. Because if you do, you'll notice some startling things: the British banking system is vastly worse off than ours because they are even less regulated than our is; the continental banking system is most definitely imploding for a lot of reasons, none more compelling than their financial relations with Brit and US institutions who pedaled all those derivatives that are killing the entire global economy.

I'm not sure how you can seperate Gramm-Leach-Bliley and CFMA. The simple fact is these two laws separately couldn't possibly achieve what they did together. Without G-L-B, CFMA wouldn't have done nearly as much damage.

When the wall came down between boring old banking, which is to say largely community based investment in the real economy, and the wacky world of financial shenanigans, the die of catastrope was cast. The financial industry grew from a sustainable 7% GDP to 22% GDP in less than a decade. All that finance was about "making money on money," which has nothing to do with real investment. Our masters also did this at the same time they were cannibalising our domestic economy in favor of global wage, tax, labor and environmental arbitrage.

The only real solution to fixing the banking system is to make it "boring old banking" again. It's not sexy, but it worked just fine, thank you very much.

The only real solution to the financial side is to let them fail, as they are not really crucial to the economy. Banks are crucial, hedge funds and other Ponzi schemes are not crucial and have very little (if any) real economic utility in the first place.

The FDR administration was brilliant in surmising that banks should be as safe and stable as possible. That's where the real economy keeps its dough and gets it's credit. Yes it makes them dull. But who cares?

By keeping them separate, speculators can speculate and do so freely, more or less. They can engage in risky behaviors at their own peril and no one will give a rat's ass about regulating them.  And they can't threaten the rest of society in the process.

So yes, there is more than enough direct evidence that G-S was necessary. The nation had just been torn asunder by many of the very same forces that's tearing us to pieces now. So now we're just going to ignore all that history because, "Hey, it's the 21st century and we're like soooo much smarter than those other guys!"?

Twice in one century we now we've managed to destroy much of our country's future and for what? Greed. Corruption. Stupidity. The stupidity that thinks the first two items somehow don't exist.

"More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness. The other, to total extinction. Let us pray we have the wisdom to choose correctly." -Woody Allen, My Speech to the Graduates

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by: Emocrat @ Thu Mar 26, 2009 at 01:58:28 AM UTC

[ Parent ]

but "Saving and Loan" banks still would have sold shit mortgages, and "Investment" firms still would have bought, and repackaged them, etc -- (0.00 / 0)

there would still be the same giant players gambling and losing, and their staffers would still be running economic policy in this administration.

the "toxic assets" that "need" to be taken off their hands would still exist -- the only difference i can see is that Goldman and other Wall St. Cos. wouldn't have re-branded themselves as "Bank Holding Companies" to get the billions --- but they still would have gotten them, i bet.

there would still be the utter refusal to use all the many many tools available minus G-S -- like the tons of regs and laws and oversight of the FDIC, SEC, OTS, DOJ, etc -- too.

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by: amberglow @ Thu Mar 26, 2009 at 03:11:07 AM UTC

[ Parent ]

The financial crisis (0.00 / 0)

didn't start in Britian.  It started in the United States.

I know it makes for a nice narrative, but a nice narrative isn't reality.

Every banking system in the world, except the United States, existed from 1930 to 2000 with nothing resembling the Glass-Steagall Act, without any uncontrolled growth or wild real estate bubbles.  Therefore, a banking system can function without wild speculation and without Glass-Steagall.  That's indisputable, frankly.

I'm not separating the two acts, by the way - you're combining them.  This isn't a simple morality play.  It's real life.

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by: kanzeon @ Thu Mar 26, 2009 at 03:33:37 AM UTC

[ Parent ]

So there was no real estate speculation (4.00 / 1)

bubble in Japan in the 90s?  Hmm!

My blog  

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by: Dameocrat @ Thu Mar 26, 2009 at 06:26:27 AM UTC

[ Parent ]

Not obvious (0.00 / 0)

The question posed in your first paragraph, "why did the U.S. have this problem when others didn't?" is not answered by your second paragraph.  Your second paragraph is a claim about the proper running of banks, but doesn't directly address the "why in the U.S.?" question that you pose though your phrasing indicates that you think it does.  Perhaps you mean your comment on the CFMA to be an answer to your question, but if so then that's unclear and ought to be fleshed out.  

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by: JBen @ Thu Mar 26, 2009 at 13:26:50 PM UTC

[ Parent ]

Cowboy culture (0.00 / 0)

Unfortunately the top of the pyramid in the financial industry is loaded with overpaid "cowboys" who take risks at other's expense.  Europe and Japan, otoh, have more laid back team players.

We may need another layer to prevent against the excesses of these cowboys.  Speaking of cowboys, did you see the goodbye rant of AIG exec VP Jake Disantis.  He went way over the top in  amove described as career killing.  Like Santelli only this guy was a major player.

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by: David Kowalski @ Thu Mar 26, 2009 at 01:40:32 AM UTC

The sales pitch for Gramm-Leach-Bliley was "to compete in a global economy" (4.00 / 3)

I'm now convinced that anytime you hear that phrase -- or the newer more up-to-date version "to compete in a 21st Century economy" -- you know you're getting a version of "reform" that's designed by and for the benefit of corporate business interests and not the public interests.

The mentality that gave us Gramm-Leach-Bliley is now running... education policy?  This is featured on the Ed.gov front page by Secretary of Education Arne Duncan:

http://www.dallasnews.com/shar...

That Barack Obama and Arne Duncan genuinely seek to improve education in this country I do not doubt.

But the mentality that looks at education as the engine of economic competition... please.

Read the blog posts by Deborah Meier and Diane Ravitch (no wild-eyed liberal she, a former Assistant Secretary of Education under George H. W. Bush) in "Bridging Differences" on the far-left (joke) Education Week blog, such as:

http://blogs.edweek.org/edweek...

If there are two things progressives should understand better, but don't, it's financial regulation and education.

Maybe now we will and have our voices heard.


Not Ideas About The Thing, But The Thing Itself -- Wallace Stevens

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by: catchlightning @ Thu Mar 26, 2009 at 02:46:35 AM UTC

how many shifting rationales and big lies are we gonna get about this "crisis"? (4.00 / 1)

now it's "it was the lack of regulations" (lie), and "we need increased power" (lie).

last fall at first it was "these toxic assets are at fault--preventing banks from doing business" (TARP actually includes "Troubled Assets" in its name -- and now they're reviving that one in a giant way)

then it was "businesses on Main St can't get credit" (lie -- they can still get it even now -- it's demand and not credit that's the problem -- http://www.nytimes.com/2009/03... )

then it was "systemic risk" and "too big to fail" (lies)

and it was "We're not Sweden so can't nationalize" (blatant strawman lie)

and on and on and on ,,,

from that NYT link above, debunking one of the ongoing lies --

Timothy Geithner, Ben Bernanke and President Obama have been trying to persuade us that the latest financial rescue plan is meant to help us, not Wall Street. The goal, as Mr. Geithner said Monday, is to fix the markets for "small-business lending, large-business borrowing, consumer borrowing, auto finance, student loans, et cetera." ...

the number of homeowners refinancing their mortgages has tripled over the last few months. The salesmen at my local Toyota dealership tell me that getting a car loan is not a problem. No large company has failed to meet its weekly payroll, as Mr. Obama warned last year might happen. Indeed, if you try to come up with a single prominent victim of the credit squeeze on Main Street - as opposed to victims of the recession - you will have a hard time. ...
But their examples tend to be hypothetical - hypothetical businesses that can't expand or hypothetical families who can't borrow. Meanwhile, Wall Street is benefiting from the bailout in concrete ways. A.I.G. traders receive bonuses. Money managers like BlackRock will receive subsidies in the latest bailout. As a banner on CNN put it on Monday afternoon, "Bankers Get Billions."

So over the last few weeks, I've set out to figure out just how the financial crisis is - and is not - affecting Main Street. There is no doubt that the economy is in terrible shape. The overall volume of loans is, in fact, falling. But is that because banks won't lend? Or because businesses and families don't want to borrow? ...

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by: amberglow @ Thu Mar 26, 2009 at 02:58:14 AM UTC

NYT on what they want -- it's not G-S - related in any way at all -- (0.00 / 0)

http://www.nytimes.com/2009/03... -- U.S. to Detail Plan to Rein in Finance World --

 The Obama administration will detail on Thursday a wide-ranging plan to overhaul financial regulation by subjecting hedge funds and traders of exotic financial instruments, now among the biggest and most freewheeling players on Wall Street, to potentially strict new government supervision, officials said.

The Treasury secretary, Timothy F. Geithner, will outline the broad revamping of the regulatory system, which goes further than expected, in a hearing on Thursday. He is expected to say that the new rules are necessary to prevent a repeat of the excesses that nearly wrecked the global financial system and plunged the economy into a recession.

The plan, which would require Congressional approval, would give the government vast new powers over "systemically important" banks and other financial institutions that are so big that their collapse would jeopardize the economy as a whole.

The government would have the power to peer into the inner workings of companies that currently escape most federal supervision - insurance companies like the American International Group, multibillion-dollar hedge funds like the Citadel Group and private equity firms like the Carlyle Group or Kohlberg, Kravis & Roberts.

If regulators decided that a company had become "too big to fail," as was the case with A.I.G. in September, they would subject it to much stricter capital requirements than smaller rivals and much closer scrutiny of its borrowing levels and its trading partners, or counterparties.

But the most striking new proposals, and the ones that may provoke the most heated opposition from the industry, would regulate so-called private pools of capital - hedge funds, private equity funds and venture capital funds - and the gigantic market in financial derivatives, including instruments like credit-default swaps, the insurancelike instruments that allow investors to hedge against bond defaults.

...  

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by: amberglow @ Thu Mar 26, 2009 at 03:32:35 AM UTC

and from there (if true) -- hedge funds are already "registered with the S.E.C., they are regulated with the C.F.T.C., and they are subject to Federal Reserve margin requirements," (0.00 / 0)

... subject to oversight from the S.E.C., the Commodity Futures Trading Commission, the Fed and other organizations.

"The truth of the matter is, most major hedge funds are registered with the S.E.C., they are regulated with the C.F.T.C., and they are subject to Federal Reserve margin requirements," he said, referring to the Fed's rules that require all investors to set aside funds when buying securities on credit. "The regulatory system is already in place. Let them enforce what they have." ...

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by: amberglow @ Thu Mar 26, 2009 at 03:34:55 AM UTC

[ Parent ]

If John Edwards were POTUS (0.00 / 0)

a version of it. Yes, he worked for hedge fund companies, made a little money, but he also saw the wrongs of it.  Sometimes you have to see the inner workings to understand how to correct them.

But Obama is our POTUS and he hired Clintons folks.  Yeah, that's real change.  

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by: Benny @ Thu Mar 26, 2009 at 04:32:17 AM UTC

Glass-Steagall? (4.00 / 1)

I'm not at all sure the key component of Glass-Steagall repealed by Gramm-Leach-Biley, the separation of insurance, investment banking and commercial banking, would have done anything to prevent the present crisis. The key problems were 1) financial institutions that became too large, 2) excessive risk-taking and leverage, and 3) corruption in the rating agencies. These problems could have been avoided with better regulation, but the commingling of investment banking and commercial banking was a minor factor at most.

Restrictions on the size of banks and their geographic reach were eased in the 1990s; I don't know for sure whether those regulations were eased in the 1999 act, but I think for the most part those changes were made a bit earlier. In retrospect, this was a terrible idea. Otherwise I don't think anything in the 1999 bill was directly responsible for the current crisis.

My prescription for new regulation would be:

1) Place extremely onerous regulatory restrictions, mainly leverage restrictions, on financial institutions as their size increases. If they're going to be too big to fail, then they can't fail. Essentially the goal would be to legislate really large entities out of existence; once they get so big that the restrictions kick in, their margins will decline and the shareholders will demand that the thing is broken up.

2) Get a handle on the rating agencies. I have seen various proposals; some say they should be required to own a stake in the instruments they rate. Others say maybe this should be a government function. Clearly, however, the current system, where issuers pay the rating agencies for the rating they want, is utterly corrupt and must be revamped.

3) Some sort of reform to mortgage writing. At least I would like to see the issuer forced to carry a portion of the loan on their own books.

I wouldn't reimpose restrictions on commingling of financial services. I don't see how that addresses the problems that led to the current unpleasantness. I suppose I am willing to be convinced that it might prevent other problematic conflicts that could potentially cause a future crisis.

I see many people proposing regulatory fixes that envision, for example, the repeal of the 1999 act, assuming that since that bill passed shortly before the crisis that it must have caused the crisis. I'm hoping people will look more carefully at the actual causes and try to address those.

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by: dbeach @ Thu Mar 26, 2009 at 06:26:34 AM UTC