Originally published on Status Equity Research on
SEPTEMBER 21, 2008 - www.statusequity.com
THE GLASS JAW IS FINALLY BROKEN - TIME FOR "THE NEW-NEW DEAL"
On Meet The Press this morning Treasury Secretary Hank Paulson and New York City Mayor Mike Bloomberg both railed about regulation. Regulation is the key. Regulation is what we need. Ok, on that note, why then isn't anyone talking about the centerpiece of regulation, that if never repealed, would likely have kept the glass at least half full rather than empty. To date, as far as we know, there has been no pundit, politician, market guru, journalist, analyst or administrative official that has talked about it, the repeal of the Glass-Steagall Act.The repeal of the Act was born after such incredible pieces of de-regulatory genius, the Depository Institutions Deregulation and Monetary Control Act of 1980; the Garn-St. Germain Depository Institutions Act, deregulating the Savings and Loan Industry in 1982 and the kingpiece of stupidity, the Gramm-Leach-Bliley Act of 1999.
The bill was veto-proof and put before a President who was getting slobber-knocked by impeachment proceedings, with no choice but to sign it in late 1999. When we review the case of how large corporate lobby groups weild a powerful and insistent approach to moving the government, there is arguably no larger group than banking and insurance in terms of pure monetary power. One can argue that the cycle of this power starts with the Fed and spins on end.
The repeal of the Act literally enabled commercial lenders such as Citigroup, at that time, the largest U.S. bank by assets, to underwrite and trade instruments such as... drum roll please... mortgage-backed securities, CDOs and, the big ticket in non-transparent structured investment vehicles (sometimes called hedge funds). These SIVs (prononced "sive" and might as well be called a sieves, which is also pronounced "sive") created and bought complex derivative securities and traded them with reckless abandon.
Citigroup played a major part in the repeal. Only a year earlier, Citigroup merged with Travelers Insurance seeking and using temporary exemptions in the Act while at the same time enlisting lobbyist Roger Levy to do their bidding. Again, it is no secret that finance, insurance and real estate industries together were regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors that year. It is estimated that they laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics.
Ultimately, these industries succeeded in their two decades long effort to repeal the act.The repeal opened the flood gates on both sides of the fence. Traditional investment banks now got into the game as well. The end result is systemic collapse.The handwritting was on the wall with LTCM and John Merriweather. Yet, in the face of derivative risk, the repeal did nothing to slow the pace of cross line financial alchemy and everything to throw gasoline on the fire. In the interim, small boutique investment banking firms and retail brokerage got their asses handed to them by the U.S. banking Chaebol, further eliminating any competition to the new landscape of post-Steagall finance.
Key conclusions regarding the preservation or dismantling of the Act came in a Congressional Research Service report written in 1987 by William D. Jackson, Economics Division.
The Conclusory Arguments For Preserving Glass-Steagall
1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act
2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The Conclusory Arguments Against Preserving Glass-Steagall
1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.
Our Argument - Destruction of U.S. Assets, Including Individual & Retirement Wealth is Treason
Make it a federal offense to lobby, punishable by a minimum of five years in prison for the first offense, fifteen years for the second offense and life in prison for the third offense. We passed a bill called the Foreign Corrupt Practices Act (FCPA) yet there should be a Domestic Corrupt Practices Act (DCPA). Big business and politicians have advertently destroyed the wealth affect in this country in a period of less than ten years. From November 12, 1999 (at the passage of the bill) to March 10, 2000, the NASDAQ composite ran from 3,220 to the all-time high exaulted mystic price of 5,046 a whopping 56.7% gain in four months.
Here is the string that broke the wealthiest country in the world and has now put The Republic on its knees. Stock Market Collapse 2000... Real Estate Collapse 2007... Banking Collapse 2008. In all of this, the Bush Administration's abject failure to manage domestic policy, while allowing its black ops campaigning in the Middle East to ring tens of billions of unaccounted for funds in an $800 billion dollar fiasco called Iraq (riddled with sex, drugs, oil and strange bedfellows) is unforgivable. Enron, Worldcom, Refco, Bear Stearns, Fannie Mae, Freddie Mac, AIG, Lehman, Merrill Lynch, names you would think are the top listed for the CEO's confernce in Davos, Switzerland every year are now nothing but ashes. Citigroup would be next if it weren't for the sovereign wealth fund, Abu Dhabi and Prince Al-Waleed bin Talal. There is certainly oodles of Arab money to be put to work since our wealth was evaporated into the Saharan-Arabian desert sands.
Shame on all of us for putting America into the hands of the politicians who have succeeded in bankrupting our system by allowing the private sector to crowd out competition through deregulation without oversight. Now, the Government has no choice but to crowd out the private sector in it quest to restore balance in a credit market that is tighter than...
A.) a piss clam (otherwise known on Long Island as a Steamer)
B.) a virgin's virtue (which should get terrorists more excited than Tom Coughlin at the Super Bowl)
C.) disco spandex (which maybe making a comeback real soon)
D.) All of the above
The sad reality is decades of wealth have been systematically destroyed by policy makers who bought into America's baby-boomers paying the ticket for Globalization. Instead of using its crowding out powers to invigorate the most depressed segment of our economy, post- internet bubble (that being technology), the Bush Administration sought to fight a war on terrorism on highly specious grounds. In making this choice of how to spend the taxpayer's hard earned dollars and the trillion dollar surplus amased in the Treasury during the Clinton Administration, not only did this policy (now known as the Bush Doctrine) exacerbate the price of oil, it did so to the direct benefit of those that harbor and fund terrorism (the Saudis). Economic policy is clear on failing to fill gaps.
The Government should have bailed out the tech industry by spending more money on initiatives that would ultimately be bid on by this sector in Federal Technology Transfer programs. Technology is where we have our leadership around the world, but in absence of supporting next generation research, a gap will form and compounded by the problems already in place, we are looking at a negative GDP gap that is in excess of 6% that can stretch for a very long period of time.The next President of the U.S. must have a lobby free mentality and the guts to start shrinking borders. I've never been anything but pro-business and a free market capitalist. But I do know when "enough is enough".
Feet of Clay and a Glass Jaw. How sad. Now it remains to be seen how the Presidential candidates stack up to the task of managing a financial fiasco not seen since the Great Depression in what Americans will soon be calling, "The New-New Deal".
Post Script - On Friday, March 6, 2009, Time Magazine published, on-line, an interactive article named "25 People to Blame for the Financial Crisis". Topping the list of vote getters, is Phil Gramm, the chief legislative architect of repealing Glass-Steagall.