Following the Great Crash of 1929, one of every five banks in America
fails. Many people, especially politicians, see market speculation
engaged in by banks during the 1920s as a cause of the crash.
In 1933, Senator Carter Glass (D-Va.) and Congressman Henry Steagall
(D-Ala.) introduce the historic legislation that bears their name,
seeking to limit the conflicts of interest created when commercial banks
are permitted to underwrite stocks or bonds. In the early part of the
century, individual investors were seriously hurt by banks whose
overriding interest was promoting stocks of interest and benefit to the
banks, rather than to individual investors. The new law bans commercial
banks from underwriting securities, forcing banks to choose between
being a simple lender or an underwriter (brokerage). The act also
establishes the Federal Deposit Insurance Corporation (FDIC), insuring
bank deposits, and strengthens the Federal Reserve's control over
credit.
The Glass-Steagall Act passes after Ferdinand Pecora, a politically
ambitious former New York City prosecutor, drums up popular support for
stronger regulation by hauling bank officials in front of the Senate
Banking and Currency Committee to answer for their role in the
stock-market crash.
In 1956, the Bank Holding Company Act is passed, extending the
restrictions on banks, including that bank holding companies owning two
or more banks cannot engage in non-banking activity and cannot buy banks
in another state.
The Timeline of Change Accelerates
In August 1987, Alan Greenspan -- formerly a director of J.P. Morgan and
a proponent of banking deregulation -- becomes chairman of the Federal
Reserve Board. One reason Greenspan favors greater deregulation is to
help U.S. banks compete with big foreign institutions.
In January 1989, the Fed Board approves an application by J.P.
Morgan, Chase Manhattan, Bankers Trust, and Citicorp to expand the
Glass-Steagall loophole to include dealing in debt and equity securities
in addition to municipal securities and commercial paper. This marks a
large expansion of the activities considered permissible under Section
20, because the revenue limit for underwriting business is still at 5
percent. Later in 1989, the Board issues an order raising the limit to
10 percent of revenues, referring to the April 1987 order for its
rationale.
In 1990, J.P. Morgan becomes the first bank to receive permission
from the Federal Reserve to underwrite securities, so long as its
underwriting business does not exceed the 10 percent limit.
| 1980s-90s | Congress repeatedly tries and fails to repeal Glass-Steagall |
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In 1984 and 1988, the Senate passes bills that would lift major
restrictions under Glass-Steagall, but in each case the House blocks
passage. In 1991, the Bush administration puts forward a repeal
proposal, winning support of both the House and Senate Banking
Committees, but the House again defeats the bill in a full vote. And in
1995, the House and Senate Banking Committees approve separate versions
of legislation to get rid of Glass-Steagall, but conference negotiations
on a compromise fall apart.
Attempts to repeal Glass-Steagall typically pit insurance companies,
securities firms, and large and small banks against one another, as
factions of these industries engage in turf wars in Congress over their
competing interests and over whether the Federal Reserve or the Treasury
Department and the Comptroller of the Currency should be the primary
banking regulator.
| 1996-1997 | Fed renders Glass-Steagall effectively obsolete |
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In December 1996, with the support of Chairman Alan Greenspan, the
Federal Reserve Board issues a precedent-shattering decision permitting
bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).
This expansion of the loophole created by the Fed's 1987
reinterpretation of Section 20 of Glass-Steagall effectively renders
Glass-Steagall obsolete. Virtually any bank holding company wanting to
engage in securities business would be able to stay under the 25 percent
limit on revenue. However, the law remains on the books, and along with
the Bank Holding Company Act, does impose other restrictions on banks,
such as prohibiting them from owning insurance-underwriting companies.
In August 1997, the Fed eliminates many restrictions imposed on
"Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states
that the risks of underwriting had proven to be "manageable," and says
banks would have the right to acquire securities firms outright.
In 1997, Bankers Trust (now owned by Deutsche Bank) buys the
investment bank Alex. Brown & Co., becoming the first U.S. bank to
acquire a securities firm. |
| Oct.-Nov. 1999 | Congress passes Financial Services Modernization Act |
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After 12 attempts in 25 years, Congress finally repeals
Glass-Steagall, rewarding financial companies for more than 20 years and
$300 million worth of lobbying efforts. Supporters hail the change as
the long-overdue demise of a Depression-era relic.
On Oct. 21, with the House-Senate conference committee deadlocked
after marathon negotiations, the main sticking point is partisan
bickering over the bill's effect on the Community Reinvestment Act,
which sets rules for lending to poor communities. Sandy Weill calls
President Clinton in the evening to try to break the deadlock after
Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup
lobbyist Roger Levy that Weill has to get White House moving on the bill
or he would shut down the House-Senate conference. Serious negotiations
resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill
made any difference in precipitating a deal is unclear.
On Oct. 22, Weill and John Reed issue a statement congratulating
Congress and President Clinton, including 19 administration officials
and lawmakers by name. The House and Senate approve a final version of
the bill on Nov. 4, and Clinton signs it into law later that month.
Just days after the administration (including the Treasury
Department) agrees to support the repeal, Treasury Secretary Robert
Rubin, the former co-chairman of a major Wall Street investment bank,
Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as
Weill's chief lieutenant. The previous year, Weill had called Secretary
Rubin to give him advance notice of the upcoming merger announcement.
When Weill told Rubin he had some important news, the secretary
reportedly quipped, "You're buying the government?"
PBS Frontline on Demise of Wall Street
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Make the Market-The Government Takes the Risk For Profit
2002 2002 Fannie Freddie Report-Stigllitz and Orszags
"This analysis shows that, based on historical data, the
probability of a shock as severe as embodied in the riskbased
capital standard is substantially less than one in
500,000 – and may be smaller than one in three million.20
Given the low probability of the stress test shock
occurring, and assuming that Fannie Mae and Freddie
Mac hold sufficient capital to withstand that shock, the
exposure of the government to the risk that the GSEs will
become insolvent appears quite low.
Given the extremely small probability of default by the
GSEs, the expected monetary costs of exposure to GSE
insolvency are relatively small — even given very large
levels of outstanding GSE debt and assuming that the
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| Conclusion 2002 Stiglitz Orszags |
government would bear the costs of all GSE debt in the
case of insolvency. For example, if the probability of the
stress test conditions occurring is less than one in
500,000, and if the GSEs hold sufficient capital to
withstand the stress test, the implication is that the
expected cost to the government of providing an explicit
government guarantee on $1 trillion in GSE debt is just
$2 million.
Two other points are worth noting. First, analysis of the
risks posed by Fannie Mae and Freddie Mac must
carefully consider the alternatives. In the absence of
Fannie Mae and Freddie Mac, mortgage risk would likely
be held by large banks and other types of financial
institutions, which themselves benefit from the perception
that they are “too big to fail.” Fannie Mae and Freddie
Mac are among the largest financial institutions in the
country. Even in the absence of a GSE charter it is likely
that they would continue to benefit from their size, since
the government has intervened on behalf of other large
institutions in the past.21
Secondly, and more broadly, Fannie Mae and Freddie
Mac would likely require government assistance only in a
severe housing market downturn. Such a severe housing
downturn would, in turn, likely occur only in the presence
of a substantial economic shock. Regardless of the
structure of the mortgage market, the government would
almost surely be forced to intervene in a variety of
markets — including the mortgage market — in such a
scenario. Fundamentally, given the public’s aspirations to
homeownership and the myriad ways in which government
subsidies are channeled to homeownership, the
government is indirectly exposed to risks from the
mortgage market regardless of the existence of the GSEs."
(Assumptions-The housing market would not be the cause of a market collapse and that the private Banks were already too big to fail in 2002 and would need rescuing, so the Government should make more home loans to make more money for the risk they say wasn't present. )
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"In July, the Department of Housing and Urban Development proposed
that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's
portfolio be made up of loans to low and moderate-income borrowers. Last
year, 44 percent of the loans Fannie Mae purchased were from these
groups.
The change in policy also comes at the same time that HUD
is investigating allegations of racial discrimination in the automated
underwriting systems used by Fannie Mae and Freddie Mac to determine the
credit-worthiness of credit applicants"
Fannie Mae Eases Credit To Aid Mortgage Lending (1999)
Bill Clinton on the Community Reinvestment Act- Bad Mortgages as Affirmative Action
Here's How The Community Reinvestment Act Led To The Housing Bubble's Lax Lending
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Leveraged and Derived, the OTC Derivatives Market
Clinton Says Rubin, Summers Gave `Wrong' Derivatives Advice
"Former President Bill Clinton said
his Treasury Secretaries Robert Rubin and Lawrence Summers were
wrong in the advice they gave him about regulating derivatives
when he was in office.
“I think they were wrong and I think I was wrong to take”
their advice, Clinton said on ABC’s “This Week” program.
Former U.S. President Bill
Clinton attends the Clinton Global Initiative's annual meeting in New
York in this file photo. Photographer: Jin Lee/Bloomberg
Their argument was that derivatives didn’t need
transparency because they were “expensive and sophisticated and
only a handful of people will buy them and they don’t need any
extra protection,” Clinton said. “The flaw in that argument
was that first of all, sometimes people with a lot of money make
stupid decisions and make it without transparency.”
“Even if less than 1 percent of the total investment
community is involved in derivative exchanges, so much money was
involved that if they went bad, they could affect 100 percent of
the investments,” Clinton said." |
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The 595 Trillion Dollar OTC Derivatives Market
Dodd Franks Fannie-Trap
A bad law and bad administration rules will only make the housing crisis worse
"Ironically, about the only two firms Dodd-Frank doesn’t touch are the two
most responsible for the crisis: the government-sponsored enterprises
(GSEs) Fannie Mae and Freddie Mac. In their new book, Reckless Endangerment, New York Times
financial columnist Gretchen Morgenson and market analyst Joshua Rosner
write that Fannie “led both the private and public sectors down a path
that led directly to the financial crisis of 2008.” At the end of the
book, the authors note with dismay, as have many conservative critics,
that the law doesn’t lay a glove on Fannie and Freddie."
Franklin Raines-Former Head of Fannie Mae and part of Obama2008 Campaign
Franklin Raines Bio at Wiki
Barney Frank on the Housing Market 2005 Barney Frank at Wiki
Thomas Sowell places blame on Greenspan, GW Bush and Barney Frank
Barney Frank on September 25, 2003: "I want to roll the dice a little bit more in this situation towards subsidized housing."
Rahm Emanuel Former Chief of Staff for Barack Obama Rahm Emanuel Wiki
Larry Summers the Deregulator and Conflict of Interest Lawrence Summers at Wiki
"The New Yorker website has a great catch this afternoon: a 57-page memo
that Larry Summers wrote to Barack Obama to frame the debate over the
stimulus. It's a long, detailed, fascinating report, but only one
passage is underlined, or bolded, or italicized. In fact, it was so
important to Summers, it got all three treatments. It's this one:
But it is important to recognize that we can only generate
about $225 billion of actual spending on priority investments over next
two years. and this is after making what some might argue are
optimistic assumptions about the scale of investments in areas like
Health IT that are feasible over this period.
Here's why this passage was critical. The recession was so deep that
it might require up to $1 trillion in stimulus, according to economists
surveyed by Summers' team. But the federal government could "only
generate about $225 billion of actual spending" in Summers' estimation.
To fill the gap, the White House would have to rely on less-than-ideal
sources of stimulus spending. Those sources were tax cuts and state
relief. " Larry Summers and the Secret 57 Page Memo On Stimulus
(A majority of the stimulus money was spent knowing it would have little impact)
Too much on Larry Summers to squeeze into this already long blog.
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Blaming President George W Bush for the crisis is in fashion for the Left. Trillions of dollars have been added to the debt with talks of stimulus and reform. The cause of the crisis and the major players remain obscured from view and relatively untouched by reform or prosecution. Motive and Opportunity. Transparency or stealth? Your Hope and Change is code for "Progress through Crisis" Gane ON and Game Over in 2012.
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| Fabian Socialst Window- London School of Economics |
Fan the flames with art/music, reshape the world as a wolf in sheeps clothing. Get the Masses to worship the words of man. "Remold it nearer to your heart's desire"
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