"Based on the legislation, Wall Street firms registered as banks would need to spin off derivatives trading desks to be eligible for the protections made available to banks. A Wall Street financial institution engaging in "risky derivative" deals would not be eligible for federal bailouts.
The bill also requires a large segment of the derivatives market to trade through clearinghouses, which are intermediaries between buyers and sellers that make sure both parties have enough capital. Clearinghouses require participants in a transaction to post capital and would cover losses in case a participant in a derivatives contract can't pay up." Marketwatch
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So, what's wrong with Senator Lincoln's bill? Would this amount to a return of Glass-Steagall? Some of you smart people will educate us on that? pl
Sir,
It doesn’t exactly put Glass-Steagal back, but what it does do is fix the glaring omission in the Dodd Bill, which doesn’t regulate this stuff. It appears that SEN Lincoln was pushed to do this to fend off the primary challenge from her political left. And she can get away with it as her funding comes from Wal-Mart not from Wall Street, so she doesn’t have to worry about having her revenue stream cut off over this. The Dodd Bill came with this prenegotiated out of it in his attempts to get the Republicans on his committee to actually support what he was doing. This didn’t work, just as it didn’t when SEN Baucus abandoned his excellent white paper outline for health care reform from Fall 2008 when he did the same thing with his committee’s Republicans. Should SEN Lincoln’s bill pass it will go a long way to fixing the most glaring flaw in the proposed SEN legislation. The only two other fixes that would need to be made then are to ensure that the consumer protection agency is independent and not part of the Fed (that’s what’s in the House version of the bill) and doing something meaningful about the mortgage problem; specifically cram down. The bigger issue, overall, is that like with the health care issue the White House messaging is bad, though better than for health care and they’ve prenegotiated with themselves – the White House just sent word down over the weekend to take the bank paid for $50 billion fund to be used to unwind failing banks out because SEN McConell and REP Boehner have been claiming its a taxpayer supported attempt to have a bailout fund ready, which it isn’t. Fixing this mess in a quick and meaningful way should be a no-brainer right now, instead its going to be ugly. Now some of that is the fact that our press corps can’t report on anything unless it involves he said/she said or sex, but a good chunk of it is that the Democrats just can’t seem to get a good messaging operation going.
Col. Lang, while I haven’t read the entire bill, I think Lincoln’s is a good first step. No, it isn’t a return to Glass-Steagall, which is one aspect of reform that we sorely need. There is a reason we had no financial bank panic between 1945-1998. Glass-Steagall’s provisions were one reason, the other was a broad spectrum of reasonable and enforced regulations. A lot of people like to say “we can’t go backwards, to 30’s type legislation.’ That’s hogwash. Separating trading desks from banks, which are, in a very real sense, public utilities, is an excellent idea. Keeping public deposits separate from trading risks, profits and losses is good public policy. And creates safer banks, banks that aren’t at risk of a collapse and subsequent bailouts on the taxpayers dime.
FWIW: I worked in finance for 11 years at one of the only remaining investment banks.
Glass-Steagall was repealed in 1999, LTCM blew up in 1998 and required a Federal Reserve “sponsored” bailout. If the FR had not intervened the whole system probably would have imploded.
It should be viewed as highly suspicious that many operatives inside the financial community acting as apologists for the corrupt TBTF banks are promoting a new, watered down version of
Glass-Steagall as a panacea which promises to “prevent future crises.”
Pure fantasy, and that’s what these shills do for a living, spin lies and fantasies in pursuit of their own self interest.
LTCM was functioning as a bank, leveraged 30-to-1, yet was untouched by Glass-Steagall. The problems emanate from the FR system itself, where the nation’s currency is issued by a private consortium of banks which masquerade as a federal agency.
Ben S. Bernanke is another Ilana Kass, except he exercises near unlimited power from his throne at the Eccles Building.
from the wiki
Nobel laureate Joseph Stiglitz said about him in an interview:
“Paul Volcker, the previous Fed Chairman known for keeping inflation under control, was fired because the Reagan administration didn’t believe he was an adequate de-regulator. .[9]”
Paulus Adolphus Volcker was fired by Ronnie RayGun’s minions b/c he did not favor repeal of Glass-Steagall.
one of the few economists that predicted the housing bubble and in the correct time frame is Robert Shiller. There is a free open internet course of his available at the Yale University site w/ downloadable videos or mp3 audios.
ECON 252 – Financial Markets
I have not read the bill just the highlights as reported by Bloomberg. If the key elements as reported do become legislation it would be the first step to bring transparency and impose skin in the game to the OTC swaps market. It would hopefully prevent the “gaming” of the system that we have seen with profits retained mostly by managements and key employees while the gigantic losses have been transferred to taxpayers. With banks spending $1 million a day in lobbying Congress this may be just some kabuki for the mid-term elections.
I would hope that Sen. Lincoln and others would take a trip down to Brazil and emulate what they have done where managements, directors and controlling shareholders of banks have their personal net worth at stake for any systemic losses.
Not too long ago firms like Goldman Sachs had the net worth of their partners tied to the performance of the firm. Since 1999 when they converted to a C corp management has nothing to lose and everything to gain by taking highly leveraged bets.
We need to return to a system of personal responsibility and accountability in our financial system. Not only for managements of public companies but also public officials. Bill Clinton had the opportunity to listen to Brooksley Born but Slick Willy was all about the money. But in fairness so was Ronnie and Dubya – substituting Wall Street led asset inflation for real wages through increased competitiveness of the US economy.
We will know we are making progress when Bob Rubin, Hank Paulson, Larry Summers, Geithner and Bernanke get indicted for malfeasance and dereliction of duty. I am not holding my breath.
My understanding is that there are too many problems for legislation to succeed in imposing prudential controls on Wall Street. Wall Street has too much money to give to politicians. I expect whatever band aid legislation that is passed will be riven with deliberate loop holes.
The contributing factors include an incentive system that rewards short term thinking and bad behaviour, as well as “revolving door” appointments of people from industry to the regulators themselves.
Some inkling of the size of the problem may be obtained from this blog by a banking insider:
http://thefourteenthbanker.wordpress.com/
The corruption of the regulators and the activities of hedge funds using the notorious tactic of naked short selling (which is like myself taking out a life insurance policy on Col. Lang and then arranging his demise so that I collect) are discussed here, with examples of shady practices.
http://www.deepcapture.com/
Blanche is doing good. Banks should be spending their time lending to and supporting the real economy, not the financial economy. Derivatives can be a legitimate means of hedging (reducing risk) the foreign exchange and interest rate exposure of multinational and domestic corporations, but the place to do this is the futures markets like the CME, CBOT, etc. Financial innovation evolved into financial sneakiness. Banks should provide a supportive, lubricating function facilitating The Real Economy; they shouldnt be the star players out there trading and speculating and manipulating the markets as they are doing now with The Fed’s help.
No topic is more critical than this today, but it is an extremely large one.
Is Senator Blanche Lincoln’s bill a return to the Glass-Steagall Act?
No.
In fact, finding a copy of the original Glass-Steagall legislation is not easy. Pam Martens tried, finally found one, and describes her search in an informative article here–
http://www.counterpunch.org/martens03262010.html
She will give you a copy if you will send her an e-mail with “Save Glass-Steagall From Extinction” in the subject line to her address given in the article.
From and after this financial tap dance started in September 2008, has the U.S. Congress ever subpoenaed and presented to the public examples of “derivatives” and “credit default swaps”, so we can read them? The number of times this was done, to my knowledge, is zero.
Have the mechanics of U.S. fractional reserve banking and the Non-Federal Reserve Bank (“the Fed”) been explained to the public, meaning the physical acts done by employees at your local commercial bank or at the central bank? This would be a description similar to those made by people who design industrial assembly lines in which each act of an assembly line worker is described in order to create an automobile or other product. Congress has not done this, either.
Certainly the grifters who have run this racket — with names like Timothy Geithner, Ben Bernanke, Henry Paulson, and Alan Greenspan — are not going to explain it to you.
Luckily, the so-called “financial system” was created by human beings, and figuring out how it works is easier than what confronted Sir Isaac Newton and Richard Feynman as they tried to understand physics.
Although the hucksters promoting the transactions like to say they are so “opaque” and “complex” that the unwashed masses cannot understand them, each one boils down to a single, simple act: the transfer of what is defined as “money” from the pocket of one person to the pocket of another, or a corporation, government, or other organization, as the case may be. Once you locate that point and find out who transferred how much money to whom, you can then reverse engineer the transaction in both directions, track the physical acts of the people and the movement of the money, and begin to understand it.
Think for yourself. Here are a few questions and thoughts to get you started.
1. What is “money”?
2. How is money created? Most new money is created by new debt, an intriguing issue in itself.
3. A bank is unique among businesses because it is a place where people park their money for alleged safekeeping. When you hand your money to a retail store for new clothes, you get the clothes and do not care whether the store goes bankrupt the next day or not. But if a bank goes bankrupt, you can lose all the money you deposited there.
4. Now the fun begins. When you hand your hard-earned money to the bank teller to put in your checking account, it legally is no longer “your money”. A debtor-creditor relationship is automatically created: you are the creditor and the bank is the debtor, but it doesn’t pay you any interest.
5. Since your money is legally no longer your money, your local bank can do with it as it pleases, such as lending it to others, as long as it keeps a “fraction” as reserves, and can counterfeit new money out of thin air to lend to others as well, within certain limits.
6. If many or all of the people who have checking accounts at your local bank go there at the same time foolishly thinking that they are going to get “their money” in the form of cash, they are in for a big surprise, because “their money” is not all there! This is euphemistically called a “bank run”, and is usually followed by another Orwellian term, the “bank holiday”, in which the bank is closed so that the suckers don’t figure out the scam. President Franklin D. Roosevelt did it by “proclamation” number 2039 on March 6, 1933–
http://www.presidency.ucsb.edu/ws/index.php?pid=14661&st=2039&st1=
As you can see, FDR called the people’s desire to get “their money” something else — “hoarding”.
7. Enter the Federal Deposit Insurance Corporation (FDIC), which laughingly claims that “your” deposits are “insured”. What is the total dollar amount of all bank deposits in the U.S.? How much money does the FDIC have on hand to insure those deposits? And what is the FDIC “insuring” against? Bank robbers breaking into the vault (sarcasm alert)?
8. The Federal Reserve Bank is, of course, not “federal” and is not a federal agency. It is a private organization with its own enabling statute, and is partly a monopoly and partly a cartel creating device for banks. It got the concession to issue the federal public debt. It in effect controls the rate of interest for banks in the entire country, and can lower it so that your savings pay you next to nothing, as is the case now. It can counterfeit money out of thin air. It claims the sole authority to issue pieces of paper called a “Federal Reserve Note” that are “legal tender for all debts, public and private”. And much, much more.
9. Article I, section 10 of the U.S. Constitution states: “No State shall … coin Money … [or] make any Thing but gold and silver Coin a Tender in Payment of Debts ….”
FDR issued an “executive order” number 6102 on April 5, 1933, which told all people in the U.S. to turn in to the Federal Reserve Bank or any member bank of the Federal Reserve System “all gold coin, gold bullion and gold certificates …”, by May 1, 1933, with four narrow exceptions, none of which would allow gold to be used as money by people as it had been. If you didn’t turn over your gold to the “Federal” Reserve System, except for up to $100, you could be fined up to $10,000, put in prison for up to 10 years, or both.
http://www.presidency.ucsb.edu/ws/index.php?pid=14611&st=6102&st1=
10. Article I, section 8 of the U.S. Constitution, which lists the enumerated powers of Congress, states: “The Congress shall have Power … To coin money, regulate the value thereof, and of foreign Coin ….” Can Congress delegate and give any of its enumerated powers to a private organization, such as the power to declare war, the power to regulate commerce among the several states, or, perhaps, to coin money and regulate the value thereof?
11. The two main reasons given for the Fed’s existence are to be sure the banking system is always solvent and to prevent prices from rising (price inflation). Both reasons have been proven false and are pure fiction. The Fed also was to do some financial regulation, which it obviously did not do.
12. Keep your eye on the section in the House financial services bill to audit the Non-Federal Reserve Bank, including its secret deals with domestic and foreign entities. I think that section was stripped from the Senate Banking Committee’s proposed bill.
I should expand a little on point number 7 in my comment for clarification. The Federal Deposit Insurance Corporation (FDIC) tries to get you to believe that “your” deposits at a bank are “insured” for up to $100,000 in an account, and, beginning with the first bailout bill in 2008 — the Troubled Asset Relief Program (TARP) bill — each account would be insured up to $250,000. So the question is, more specifically, what is the total dollar amount of all bank deposits in the U.S. for distinct accounts of up to $250,000, and how much money does the FDIC have on hand to “insure” those deposits? The point remains the same: The FDIC does not have enough money to “insure” all such bank deposits, and it knows full well that the only bank robbery it is “insuring” against is the conduct of the bank itself.
I am not seeing much in the bill write-up on what types of derivatives this bill seeks to regulate. Does the bill propose to regulate synthetic CDO derivatives? If so, then I’d caution passage of it. Synthetic CDOs should be banned not regulated. They are a scam that should be abolished outright.
I’d agree with willman above comment – the Fed should open their books. That should must definitely be included in any financial reform bill language.
We need to return to a system of personal responsibility and accountability in our financial system. Not only for managements of public companies but also public officials. Bill Clinton had the opportunity to listen to Brooksley Born but Slick Willy was all about the money. But in fairness so was Ronnie and Dubya – substituting Wall Street led asset inflation for real wages through increased competitiveness of the US economy.
We will know we are making progress when Bob Rubin, Hank Paulson, Larry Summers, Geithner and Bernanke get indicted for malfeasance and dereliction of duty. I am not holding my breath.
And yet these same rogues, along with clueless Ann Rand acolyte and ideologue Alan “There’s no fool like an old fool” Greenspan, continue to try and ride the storm by not accepting responsibility for the regulatory disaster.
At least Clinton recently said that he, Rubin and Summers were wrong in deregulating derivatives, a statement you can bet did not endear him to his former financial mavens.
I continue to be astounded that Summers has a position of power in this Administration. Why listen to the advice of an arrogant ego-maniac who was totally wrong on a root cause of the current crisis?
I believe that the big banks–commercial and investment–need to be re-segregated, broken up and strictly regulated. Pressure for re-regulation is building, but break-ups?
At least the SEC has gone after Goldman. The pursuit of this despicable Bank should be utterly ruthless. We’ll know some progress is being made when that weasel Lloyd Blankfein is forced out.
Robt,
A lot of what you say about the FDIC is really interesting and on point, but the FDIC is an insurance corporation, and what insurance company keeps reserves equal to the totality of possible claims? The insurance company should simply have reserves equal to a very liberal estimate of the maximum drawdown risk, no? We can argue about whether the FDIC is evaluating risk properly, but I don’t think it necessarily needs to keep reserves equal to the totality of deposits for us to be comfortable with it.
The simplest (though not easiest) way to restore Glass-Steagall would to pass and get-signed a law repealing the law which repealed Glass-Steagall. If that is not enough to automatically restore Glass-Steagall to the force of law; then the Restore Glass Steagall Law will have to also say (in plain lawyer-free English for engineers) that the passage of said law hereby restores Glass-Steagall to its former status OF law.
And then the financial institutions will have to be made forcibly Glass-Steagall compliant with New Dealer zeal.
Anything that says less will deliver less.
1. Here’s a piece on Goldman Sachs:
http://www.rollingstone.com/politics/news/;kw=%5B3351,11459%5D
2. On the financial issue, we can start with our Federal Reserve System. The technique of “fractional reserve central banking” may well be problematic in itself particulary if not very carefully and tightly regulated.
In the old days, “sound banking” was considered by many to mean that a bank should have reserves equal to its extension of credit. A dollar loaned should be backed up by a dollar in reserve. By the fractional reserve style of banking, ten dollars loaned (or whatever) would be covered by just one dollar in reserves. So a multiplier effect creating “money” out of nothing.
3. The Federal Reserve System was created and designed by Wall Street specialists (Jekyll Island meeting and all that) and then legislated by Congress in 1913.
http://www.jekyllislandhistory.com/federalreserve.shtml
It is a private monopoly in effect to the degree that its shares are held by private investors rather than by the US public (via say Treasury).
Logically, the Fed should be fully audited and the results made public. But as far as I know this has not occurred.
3. Glass-Steagall should be brought back naturally. Countries and nations learn from experience. This is why we had Glass-Steagall in the first place — to regulate the banking industry in behalf of national financial stability.
The “deregulation” mania of the delusional Right and others handed our national financial stability and security back to Wall Street and we have seen the results. As a nation, we forgot the lessons learned from the 1920s and 1930s…and the general matter of human nature and the deadly sin of “avarice” (avaritia).
On this sin,
”
By Richard Newhauser. Cambridge Studies in Medieval Literature 41. Cambridge: Cambridge University Press, 2000. xiv + 246 pp. $64.95 cloth.
It is safe to say that Richard Newhauser has written the definitive book on avarice in the early church. His study traces the narrow topic of greed or avarice through a broad span of late antiquity and early medieval history–the first through tenth centuries, C.E. In describing the purpose of his book, Newhauser explains that traditional views of avarice argue that the vice comes especially under attack by the church in the late …”
http://www.encyclopedia.com/doc/1G1-89816083.html
For a realistic assessment of context:
“Even in the best case, the United States will emerge from the current crisis with fundamental handicaps. The Federal Reserve and Treasury have pumped massive amounts of dollars into circulation in hope of reviving the economy. Add to that the $1 trillion-plus budget deficits that the Congressional Budget Office (CBO) predicts the United States will incur for at least a decade. When the projected deficits are bundled with the persistent U.S. current-account deficit, the entitlements overhang (the unfunded future liabilities of Medicare and Social Security), and the cost of the ongoing wars in Iraq and Afghanistan, there is reason to worry about the United States’ fiscal stability. As the CBO says, “Even if the recovery occurs as projected and the stimulus bill is allowed to expire, the country will face the highest debt/GDP ratio in 50 years and an increasingly unsustainable and urgent fiscal problem.”
The dollar’s vulnerability is the United States’ geopolitical Achilles’ heel. Its role as the international economy’s reserve currency ensures American preeminence, and if it loses that status, hegemony will be literally unaffordable. As Cornell professor Jonathan Kirshner observes, the dollar’s vulnerability “presents potentially significant and underappreciated restraints upon contemporary American political and military predominance.”
Fears for the dollar’s long-term health predated the current financial and economic crisis. The meltdown has amplified them and highlighted two new factors that bode ill for continuing reserve-currency status. First, the other big financial players in the international economy are either military rivals (China) or ambiguous allies (Europe) that have their own ambitions and no longer require U.S. protection from the Soviet threat. Second, the dollar faces an uncertain future because of concerns that its value will diminish over time. Indeed, China, which has holdings estimated at nearly $2 trillion, is worried that America will leave it with huge piles of depreciated dollars. China’s vote of no confidence is reflected in its recent calls to create a new reserve currency.
In coming years, the U.S. will be under increasing pressure to defend the dollar by preventing runaway inflation. This will require it to impose fiscal self-discipline through some combination of budget cuts, tax increases, and interest-rate hikes. Given that the last two options could choke off renewed growth, there is likely to be strong pressure to slash the federal budget.
But it will be almost impossible to make meaningful cuts in federal spending without deep reductions in defense expenditures. …”
http://amconmag.com/article/2010/may/01/00030/
I wonder a bit about the focus on Glass Steagal. That law dealt with commercial banks. The vast bulk of the losses in the financial crisis actually came from firms that were not commercial banks and would not have been covered by it.
I should clarify. Commercial banks did lose lots of money too, but mostly from holding soured mortgage assets that they would have been permitted to hold under Glass Steagal. It wasn’t the trading desk that got them in trouble.
Sheperd’s point is crucial. What needs to be regulated are “non-bank banks” entities that handle trades and other transactions but are essentially under no regulation at present.
Glass-Steagall matters to me as much for its symbolic meaning as for its actual technical effects. It stands for a time when bussiness and finance were reasonably regulated, fraud and swindle were kept limited, and economic stability was somewhat maintained. Bringing back Glass-Steagall in its pristine form might allow us to think about bringing back other beneficial Depression-era laws; like PUHCA (Public Utilities Holding Company Act).
http://www.citizen.org/cmep/energy_enviro_nuclear/electricity/deregulation/puhca/
I remember reading a book about the Federal Reserve called Secrets Of The Temple by William Greider. I remember thinking at the time that it was pretty good. There is another book about the Federal Reserve by G. Edward
Griffin which is supposed to be very good though very hostile. It is called The Creature From Jekyll Island.
Robt. Willman very usefully reminds us that we should start thinking about things like…what is money and how does it get that way? Where did it come from and where does it go? Is money the same thing as wealth? If not, then what is the difference?
Redhand, I suspect the weasels are all interchangeable parts at Goldman Sachs. I wonder if we should hope that it gets lawsuited all the way into liquidation.
Will, another economist who predicted the popping of the housing bubble is Dean Baker. On radio interviews I heard him claiming to be putting his money where his mouth is by saying that he refuses to buy a house in this environment. He rents one instead and will keep renting until house prices in his area fall back to some rational level. So he too has the credibility of accurate prediction.
I must respectfully demur from the CBO’s contention that Social Security is part of the problem. Ever since 1983 we wage and salary earners have been paying the elevated FICA tax on the theory that the surplus money thereby harvested would be set aside and held for us upon the day of our Social Security retirement. That was (and remains) the money that has been legally stolen by being lent to other parts of government, and by being pre-spent to zero to “pay for” President Bush’s upper class tax cuts.
Social Security did not cause the problem. The problem was carefully engineered around Social Security to try creating a social climate whereby Social Security payouts might be sacrificed and we who pre-payed in will not recieve the benefits we pre-payed for. The fair way to solve this artificially engineered problem around Social Security would be to raise taxes on “Bush’s base” high enough to claw back every bit of their ill-gotten tax cuts and put all that money into the Autonomous Federal Agency equivalent of a Sovereign Wealth Fund beyond the reach of the rest of government. It could then be spent back down to zero paying the benefits to us “boomers” who prepayed the elevated FICA taxes. Not to say the fair thing will be done, of course.
Anyway, I can think of even deeper Achilles Heels rendering our economy vulnerable. What will happen to our economy when we have depleted all the oil, natural gas, and underground water within our own borders down to zero? What’s a dollar worth when there is nothing left to buy with that dollar?
Wiki has a short summary of Glass Steagall:
According to a summary by the Congressional Research Service of the Library of Congress:
“ In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.[8]
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
Full text of the Glass Steagall Act at
http://www.archive.org/details/FullTextTheGlass-steagallActA.k.a.TheBankingActOf1933
Senator Phil Gramm (R-Tx) in 1999 introduced legislation to vitiate Glass Steagall which passed as “Gramm-Leach” and was signed into law by Pres. Clinton.
“The repeal enabled commercial lenders such as Citigroup, which was in 1999 the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.[15] Elizabeth Warren,[16] author and one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program, has said that the repeal of this act contributed to the Global financial crisis of 2008–2009.[17] [18]”…
from Wiki above cited
Economic, including financial, security issues are national security issues. Wall Street (“the markets”), following the tradition of the cosmopolitan European financiers, does not want to permit governments (and the citizenry) to exercise their sovereignty in matters economic. Thus, “de-regulation” so that Wall Street (“the markets”) can manipulate matters to its own profit and beggar the nation.
Dumbed down, propagandized, and manipulated Americans have yet to sufficiently “get it.”
But on the other hand, a nice cocktail after work in “The Markets” at an exclusive NYC club, summer sailing off Newport, some weekends in London-Paris-wherever..ah yes, well the masses what they don’t know won’t hurt them and after all we need some cannon fodder for the next war..say Iran?