How did the U.S. fall into this Economic Climate?

1. Stained Glass –or ­ How We Got Where We Are?
Over the past couple of years, many clients and associates have asked us “how did we get
where we are”???
Rising gold prices are a cold sore on the lip of central bankers. In the world of paper money,
it’s a clear sign something’s not right
Central bankers are the keepers of the keys to the kingdom. The kingdom, however, is on
the edge of bankruptcy and in danger as never before. Comparisons are now being made to
the Great Depression of the 1930s. The comparisons, however, are just that.
In some ways, the situation is similar. In many ways, it is not. In a very fundamental
way, the conditions are much worse. The systemic strains on the global financial
system are today much more profound than even during the Great Depression.
One reason banks are losing money is the repeal nine years ago of the 1933 Glass‐Steagall
Act, which separated securities and commercial and investment banking after
excessive risk­ taking contributed to the Great Depression
The repeal enabled commercial lenders such as Citigroup, 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.
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2.
A short “history lesson” – or –
Don’t we ever learn?:
When William Jefferson Clinton first ran for office, he neglected to tell us that he would
mount, nearly single handedly, a campaign to change the very law that has protected the
Nation’s economic and banking community since just after the Great Depression. Why the
man launched an unprecedented lobby effort on Congress to basically repeal such a law
is completely enigmatic to us.
What law was established decades ago that was changed under the Clinton White House?
The Glass‐Steagall Act of 1933. Like most Americans, you have probably never even heard
of it….
(the below is quoted from Wikipedia – normally not the most reliable source, but we have
direct knowledge of the facts, and this is a very well written and accurate article – bold
type, underline, and italics added for emphasis and commentary):
“The Glass­Steagall Act of 1933 established the Federal Deposit Insurance
Corporation (FDIC) in the United States and included banking reforms, some
of which were designed to control speculation.[citation needed] Some provisions
such as Regulation Q that allowed the Federal Reserve to regulate interest
rates in savings accounts were repealed by the Depository Institutions
Deregulation and Monetary Control Act of 1980. Provisions that prohibit a
bank holding company from owning other financial companies were
repealed on November 12, 1999 by a bipartisan, conference committee
version of the Gramm­Leach­Bliley Act signed by President Bill
Clinton.[1][2]
Contents
• 1 Background
• 2 First Glass‐Steagall Act
• 3 Second Glass‐Steagall Act
o 3.1 Impact on other countries
• 4 Repeal of the Act
• 5 References
• 6 External links
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3. Background
Senator Glass, co‐sponsor of the bill that became the Glass‐Steagall Act, and
Senator Robinson:
Mr. Glass: Here [section 21] we prohibit the large private banks whose chief
business is investment business, from receiving deposits. We separate them
from the deposit banking business.
Mr. Robinson of Arkansas: That means if they wish to receive deposits they
must have separate institutions for that purpose?
Mr. Glass: Yes.
The Court also rejected the argument that a bank and its holding company
should be treated as a single entity for the purposes of sections 16 and 21,
stating that the structure of the Glass‐Steagall Act itself indicates the
contrary. Id. at n. 24.
“ Although the Supreme Court in Board
of Governors v. ICI did not consider
section 21 in the context of a bank and
its subsidiary, we are of the opinion
that the Court's conclusion regarding
section 21 and holding company
affiliates is equally applicable in this
instance. Thus, the FDIC does not
believe that it would be warranted in
extending the reach of the prohibitions
of section 21 of the Glass‐Steagall Act to
bona fide subsidiaries of insured
nonmember banks. The FDIC intends,
however, to continue to monitor
closely developments related to the
securities activities of bank
subsidiaries. ”
[3]
Two separate United States laws are known as the Glass‐Steagall Act. The
Acts (Glass & Steagall) were both reactions of the U.S. government to cope
with the collapse of a large portion of the American commercial banking
system in early 1933. While many economic histories attribute the collapse
to the economic problems which followed the Stock Market Crash of 1929 it
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4. is clear that the U.S. banking collapse of 1933, which came three and a
half years later, could only have been partially the result of the stock
market collapse in October 1929.
The Republican Hoover administration had lost the November 1932 election
to Franklin Delano Roosevelt, but his administration did not take office until
March 1933. The lame duck Hoover Administration and the incoming
Roosevelt Administration could not, or would not, coordinate actions to stop
the run on banks affiliated with the Henry Ford family that began in Detroit
Michigan in January 1933. The Federal Reserve chairman Eugene Meyer was
equally ineffectual.
Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg,
Virginia, a former Secretary of the Treasury, and Democratic Congressman
Henry B. Steagall of Alabama, Chairman of the House Committee on Banking
and Currency.
Congressional Research Service Summary:
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.[4]
First Glass­Steagall Act
The first Glass‐Steagall Act was the first time currency (non‐specie, paper
currency etc.) was permitted to be allocated for the Federal Reserve. In
addition, the G.S.A. separated investment banking from commercial banking,
in effect curbing speculation. The resulting FDIC (Federal Deposit Insurance
Corporation) insured all bank deposits up to $5000.
The Glass Steagall Act, as well as FDIC, CCC (Civilian Conservation Corps),
Emergency Banking Act, and the TVA (Tennessee Valley Authority) were all
products of Roosevelt’s 'Hundred Days', Roosevelt's first one hundred in
office.[5]
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5. Second Glass­Steagall Act
The second Glass‐Steagall Act, passed on 16 June 1933, and officially named
the Banking Act of 1933, introduced the separation of bank types according
to their business (commercial and investment banking), and it founded the
Federal Deposit Insurance Company for insuring bank deposits.[citation needed]
Literature in economics usually refers to this simply as the Glass‐Steagall Act,
since it had a stronger impact on US banking regulation.[citation needed]
Impact on other countries
The Glass‐Steagall Act has had influence on the financial systems of other
areas such as mainland China which maintains a separation between
commercial banking and the securities industries.[6][7]
Repeal of the Act
See also Depository_Institutions_Deregulation_and_Monetary_Control_Act
passed in 1980, the Garn‐St._Germain_Depository_Institutions_Act
deregulating the Savings and Loan industry in 1982, and the Gramm‐Leach‐
Bliley Act in 1999.
The bill that ultimately repealed the Act was introduced in the Senate by Phil
Gramm (R‐TX) and in the House of Representatives by James Leach (R‐IA) in
1999. The bills were passed by a 54‐44 vote along party lines with
Republican support in the Senate[8] and by a 343‐86 vote in the House of
Representatives[9]. Nov 4, 1999: After passing both the Senate and House the
bill was moved to a conference committee to work out the differences
between the Senate and House versions. The final bipartisan bill resolving
the differences was passed in the Senate 90‐8‐1 and in the House: 362‐57‐15.
Without forcing a veto vote, this bipartisan, veto proof legislation was signed
into law by President Bill Clinton on November 12, 1999. [10]
The banking industry had been seeking the repeal of Glass­Steagall since
at least the 1980s. In 1987 the Congressional Research Service prepared
a report which explored the case for preserving Glass­Steagall and the
case against preserving the act.[11]
The repeal enabled commercial lenders such as Citigroup, 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.[citation
needed] Citigroup played a major part in the repeal. Then called Citicorp, the
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6. company merged with Travelers Insurance company the year before using
loopholes in Glass‐Steagall that allowed for temporary exemptions. With
lobbying led by Roger Levy, the "finance, insurance and real estate
industries together are regularly the largest campaign contributors and
biggest spenders on lobbying of all business sectors [in 1999]. They laid
out more than $200 million for lobbying in 1998, according to the Center
for Responsive Politics..." These industries succeeded in their two decades
long effort to repeal the act.[12]
The argument for preserving Glass­Steagall (as written in 1987):
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 argument against preserving the Act (as written in 1987):
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.
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7. 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.[13]
References
1. ^ "The Repeal of Glass‐Steagall and the Advent of Broad Banking".
2. ^ "GRAMM'S STATEMENT AT SIGNING CEREMONY FOR GRAMM‐LEACH‐BLILEY ACT".
3. ^ "FDIC Statement of Policy on the Applicability of the Glass‐Steagall Act to Securities
Activities of Subsidiaries of Insured Member Banks".
4. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1
5. ^ America's History, Fifth edition by; James A. Henretta, David Brody, Lyum Dumenil, Susan
Ware.
6. ^ Developing Institutional Investors in the People's Republic of China, paragraph 24,
<http://www.worldbank.org.cn/english/content/insinvnote.pdf>
7. ^ Langlois, John D. (2001), "The WTO and China's Financial System", China Quarterly 167:
610‐629, doi:10.1017/S0009443901000341
8. ^ On Passage of the Bill (S.900 as amended ),
<http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106
&session=1&vote=00105>. Retrieved on 19 June 2008
9. ^ On Agreeing to the Conference Report ­ Financial Services Modernization Act,
<http://clerk.house.gov/evs/1999/roll276.xml>. Retrieved on 19 June 2008
10. ^ http://www.govtrack.us/congress/bill.xpd?bill=s106‐900#votes
11. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1
12. ^ Editorial (1999‐11‐15), "Breaking Glass‐Steagall", The Nation
13. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1
External links
• Glass‐Steagall Act ‐ Further Readings
• On the systematic dismemberment of the Act from PBS Frontline
• Back to the Twenties Through the Looking Glass ‐ Steagall Hour long Wizards of Money
MP3 explaining the Glass‐Steagall Act, background to it and impact of it. “
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8. Bill Balanced the Budget! – or –
What Bill forgot to tell us about his agenda in office…
Those of us back in the days when Mr. Clinton went on his unprecedented campaign to
overturn the protections afforded our Nation’s economic and banking system that realized
what a terrible negative impact such an action would afford are not surprised by the scope
and magnitude of the ramifications. How he convinced the lion’s share of both parties in
both the House and Senate to go along with this disaster is beyond comprehension.
Many associated with the Clinton White House hail the times “when we balanced the
budget”. As you can see, the fact that there was a balanced budget is more than over‐
compensated, in the most negative way, by the effects the repeal of Glass‐Steagall has had
on our Nation’s economic and banking system. One of the most “successful” lobbying
efforts (against) Congress and a President pulling together an almost unprecedented
Congressional cooperation is suspect, to say the least.
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9. We Should Have Seen It Comin’
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
co­chairman 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?"
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10.
A little about our friends John & Sandy – or –
So now the players get to be the umpires too, huh???
Sandy Weill:
In 2001, Sanford I. Weill became a Class A Director of the Federal Reserve Bank of New York.
Class A Directors are Board Members who are elected by Member Banks (of the Federal
Reserve System) to represent the interests of Member Banks. (See article on Federal Reserve
Bank Board Membership).
In 2002 the company was hit by the wave of "scandals" that followed the stock market
downturn of 2002. Chuck Prince replaced Mr. Weill as the CEO of Citigroup on October 1,
2003.
In 2003 Citigroup repurchased $300 million worth of shares from Mr. Weill. It was reported
among the $1.967 billion of "treasury stock acquired" in the Citigroup consolidated statement
of changes in stockholders' equity
He is a billionaire, with a net worth estimated to be $1.9 billion by Forbes Magazine
(2007). As of April 2006 he held 16,518,365 shares of Citigroup, Inc. and another
3,109,173 unexercised options.
John Shepard Reed:
The former Chairman of the New York Stock Exchange. He previously served as
Chairman and CEO of Citicorp, Citibank, and post-merger, Citigroup.
What was different this time from the previous 24 attempts to persuade
Congress to gut this law???
Never before had a President to arduously supported the revision of the
legislation. We have to hand it to old “slick Willey” – he did a great job
selling both sides of the isle on this one – 90 out of 100 Senators voted
for it, and 343 of 429 Congressman did also – a real cooperation with
the President on Capitol Hill (or should it be spelled Capital????).
– you should ask yourself why??????????
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11. “The Consumerist
2:47PM on Thu Apr 17 2008
By Ben Popken
20,013 views
EXPLAINERS, BANKS, CITIGROUP, FEATURES, MORTGAGES, TOP, GAWKER, GLASS‐STEAGALL ACT...
Blame the Subprime Meltdown on the Repeal of Glass‐
Steagall
A lot of blame has sloshed around for the sub‐prime meltdown, from greedy borrowers to
greedy mortgage brokers to Alan Greenspan, but if you want the real culprit, it was the
repeal of the Glass‐Steagall Act. On November 12, 1999, the champagne must have been
shooting from the walls at Citigroup, which had worked behind the scenes for over 30 years
to get the act overturned. After recovering from their hangover, they and their banking
buddies went on a sub‐prime lending orgy. But what was Glass‐Steagall and how did it use to
protect us?
Glass‐Steagall was passed under the Roosevelt administration in 1933 in direct response to
the Wall Street shenanigans that ushered in the Great Depression where banks shoved their
own depositors into buying the stocks the banks were dealing. The basic idea was to keep
banks from speculating with the savings that American citizens were entrusting within
their vaults.
Its repeal, under the Gramm‐Leach‐Bliley Act, drafted and passed by a Republican congress,
and signed by William Jefferson Clinton, allowed commercial banks to merge with
investment banks. For instance, Citigroup merged with Traveler's Insurance (although this
merger was announced in 1998, before the act was passed, at the time Citigroup CEO
Sanford I. Weill said that he spoke with the Feds and, "that over that time the legislation will
change...we have had enough discussions to believe this will not be a problem.").
Now, on the one side they could sell mortgages to homeowners, and then invent fancy
investment structures which they sold on Wall Street. Because they were "covered" on
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12. both ends, banks felt free to sell increasingly dicey mortgages, just so long as another
sucker was picking up the garbage. This sucker was picking it up because he had a plan to
repackage it and sell it to another sucker, and so on. Eventually we end up with no‐doc
stated income interest‐only option‐ARM no money down mortgages being repackaged as
"sound investments" being sold as "stable assets" for city pension plans to park their money
in. (See "Subprime Meltdown As Told By Stick Figures").
We can only imagine the level of machination exerted over those 30 years, but we do know
this.
Robert Rubin was (Clinton’s) Secretary of
Treasury, which had oversight over Glass­
Steagall regulation. Days before he
resigned, Glass­Steagall was repealed. Just
over a year later, he became chairman of
the Citi executive committee, with an
annual compensation of $40 million, a
position he still holds, despite Citigroup's
$24 billion in subprime­related losses.”
Hummm. The media is always telling us poor folks that can’t think for ourselves that
Republicans are all for the rich and Democrats are for the little guy. Wonder what
happened that idea Bill & Bob???
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13. The Timeline of the Decade of Decline – or –
plenty of blame on both sides of the isle since 1999:
“MotherJones
Where Credit Is Due: A Timeline of the Mortgage Crisis
By Nomi Prins
N E W S : A field guide to the loan sharks and politicos who got us into the predatory lending mess
July/August 2008 Issue
June 20, 2000: Treasury and HUD urge March 6, 2001: FTC sues Citigroup and
Fed to investigate subprime units of its subsidiary Associates, nation's 2nd‐
major banks. No Fed action follows. largest subprime originator, charging
"systematic abusive lending practices"
June 26: First Union closes The Money involving 2 million borrowers; 18 months
Store, takes $2.8 billion write‐down. later Citigroup settles for a paltry $215
million.
April 6: Fed chair Alan Greenspan signals
concern with "abusive lending practices
that target vulnerable segments of the
population and can result in unaffordable
payments, equity stripping, and
foreclosure."
July 27: "'Predatory' is really a high‐
profile word with no definition,"
Ameriquest chairman Stephen W. Prough
Dec 14: As Congress heads for Christmas tells Congress, urging rollback of
recess, Sen. Gramm attaches 262‐page subprime regulations.
amendment to an omnibus
appropriations bill. Commodity Futures
Modernization Act will deregulate
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14. derivatives trading, give rise to Enron
debacle, and open door to an explosion
in new, unregulated securities.
Dec 27: American Homeownership and
Economic Opportunity Act makes it
harder for consumers to get out of
lender‐required insurance. National
Association of Realtors lobbies hard for it,
spending $9 million, plus $4 million in
contributions.
April 22, 2002: Georgia's new anti‐ March 2003: HSBC acquires Household
predatory law signed; Ameriquest helps Finance, nation's 4th‐largest subprime
lead campaign against it and announces lender.
that it won't do business in Georgia until
law is changed. Standard & Poor's refuses May 1: New Jersey's anti‐predatory‐
to rate Georgia mortgage securities, lending law signed. Again, Ameriquest
choking credit supply to state's home and other lenders launch campaign to kill
buyers; law gutted within a year. it and Standard & Poor's says it won't
rate certain New Jersey securities; law
Oct 7: Swiss investment bank UBS gutted within a year.
announces that Sen. Gramm is joining it
to "advise clients on corporate finance
issues and strategy"; he will also lobby
Congress, Treasury, and Fed on banking
and mortgage issues as industry pushes
to eliminate predatory‐lending rules.
Dec 18: Conseco files for bankruptcy,
mostly due to its purchase of subprime
lender Green Tree. In all, 13 banks have
failed during 2002—most, according to a
Fed report, because of bad loans and
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15. "improper accounting related to the
securitizing of assets."
2004: Ameriquest employees give total March 2005: Rep. Robert Ney (R‐Ohio)—
of $200,000 to Bush campaign; founder who will later go to prison on corruption
Roland Arnall and wife Dawn give more charges related to Abramoff scandal—
than $5 million to pro‐Bush PACS. Arnall introduces Responsible Lending Act,
later appointed ambassador to billed as an anti‐predatory‐lending
Netherlands. measure but in fact designed to preempt
stronger state laws. Key supporters
Jan 7, 2004: Federal Office of the include New Century Financial, nation's
Comptroller of the Currency issues final 2nd‐largest subprime lender, which has
rule to preempt states from applying contributed nearly $50,000 to Ney's
most of their credit laws to national campaign. Consumer advocates call it
banks and their subsidiaries. "Loan Shark Protection Act."
April: Bankruptcy Abuse Prevention and
Consumer Protection Act makes it far
harder for consumers (but not
businesses) to discharge debts. Chief
sponsor, Sen. Charles Grassley (R‐Iowa),
has received $2 million‐plus from fire
sector since 1989.
Sept 1: As housing bubble begins to
deflate, administration economist Patrick
Lawler announces, "There is no evidence
here of prices topping out. On the
contrary, house price inflation continues
to accelerate."
Sept 22: Illinois Supreme Court hands
mortgage lenders a victory, blowing away
a 3% cap on fees for loans with more than
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16. 8% interest.
Jan 23, 2006: Ameriquest settles 49‐
state investigation into deceptive
subprime practices for $325 million.
April 27: Fed chairman Ben Bernanke
acknowledges "signs of softening" in
housing market, but says a "sharp
slowdown" unlikely.
July 10: Henry M. Paulson Jr. sworn in
as Treasury secretary, leaving job as
Goldman Sachs chairman and CEO. In
2005, Goldman securitized $68 billion in
residential mortgages and $23 billion in
"other assets" primarily related to CDOS.
Jan 2, 2007: Rep. Barney Frank (D‐Mass.)
assumes chairmanship of House Financial
Services Committee. FIRE sector tops his
list of contributors, with total of $746,000
for 2005‐06 cycle.
Jan 29: Paulson tells Congress, "One of
the pleasant surprises I had coming to
government has been the strong
economy we have today." July 16: Jim Cramer, host of CNBC's Mad
Money, says the subprime "lending thing"
Feb 22: HSBC's head of mortgage‐lending
is "completely meaningless...It has no
business resigns. Its losses reach $10.5
relevance whatsoever." Less than 3
billion.
weeks later, Cramer will have meltdown
on air, pleading with Fed to cut rates and
Feb 28: Bernanke tells House Budget
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17. Committee the housing sector "is a save Wall Street.
concern, but at this point we don't see it
as being a broad financial concern or a July 19­20: In congressional testimony,
major factor in assessing the course of Bernanke cuts growth forecasts for 2007
the economy." and 2008, blaming problems in housing
market; warns that subprime crisis could
Feb 28: New‐home sales reported down cost up to $100 billion.
20.1% from previous year.
Aug 6: American Home Mortgage, one of
March 12: Sen. John McCain's the largest US independent home‐loan
presidential campaign announces that providers, files for Chapter 11.
Sen. Gramm will join it as cochair and
economic policy adviser. Aug 16: Countrywide, biggest US
mortgage lender, narrowly avoids
April 2: Subprime giant New Century bankruptcy by taking out emergency
Financial files for Chapter 11 after being $11.5 billion loan.
forced to repurchase billions of dollars of
bad loans. Aug 31: Ameriquest goes out of business.
May 3: UBS shuts down Dillon Read Sept 14: Rep. Barney Frank in Boston
Capital Management, its US subprime Globe: Mortgage crisis "was in large part a
arm. GM's finance unit announces deep natural experiment on the role of
losses on subprime mortgages. SEC task regulation." Sept 20: Treasury secretary
force begins meeting to examine Wall Paulson tells House Financial Services
Street's handling of subprime loans. Committee that "fundamental
reappraisals in the pricing and appetite of
June 9: In Wall Street Journal interview, risk have taken place numerous
former Fed governor Edward Gramlich times...We are in the process of another
accuses Greenspan of blocking a 2000 such reappraisal."
proposal to increase scrutiny of subprime
lenders. Greenspan responds there are "a Sept 30: UBS announces 3rd‐quarter
very large number of small institutions, losses of $690 million.
some on the margin of scrupulousness
and very hard to detect when they are
doing something wrong."
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18.
March 16: Bear Stearns announces takeover by
JPMorgan Chase in Fed‐engineered bailout;
measure approved by Fed Board of Governors with
fewer votes than required by law, under a post‐
9/11 "national security emergency" exception.
Jan 2008: Number of homes facing
foreclosure up 57% compared to same March 25: In speech on housing market,
month of previous year. US Sen. McCain calls for easing crisis by
unemployment rises sharply. "removing regulatory, accounting, and tax
impediments to raising capital."
Jan 10: Cleveland files lawsuit against
numerous financial institutions alleging April 18: Jerry Bowyer, chief economist
that their activities in connection with for financial services firm Benchmark,
securitization of subprime mortgages says in New York Sun op‐ed that fault for
created a "public nuisance." (Litigation subprime crisis "lies with the small army
still pending.) of hard‐left political hustlers who spent
the early 1990s pushing risky mortgages
Jan 15: Citigroup reports $9.8 billion loss on home lenders. And the fault lies
for 4th quarter and writes down $18 especially with the legislators that gave
billion in subprime losses. them the power to do it."
Jan 22 & 30: Fed makes biggest rate cut April 29: Foreclosure activity reported
in 25 years—1.25 percentage points, to up 112% from first quarter of 2007.
3%.
May 6: Bush announces he will veto
Feb 6: Longest period of decline in legislation directing $15 billion to
nationwide house prices since 1990. neighborhoods ransacked by
foreclosures. Also threatens to veto
March 7: Former bosses of Merrill Lynch, legislation to provide $300 billion for
Countrywide, and Citigroup questioned struggling homeowners (and force
by a congressional panel about the $460 lenders to renegotiate some mortgages)
million in compensation they received because it would be a "burdensome
between them during 5 years of subprime bailout" that "opens taxpayers to too
boom. much risk."
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19. We couldn’t agree more, Mr. Kostigen:
THOMAS KOSTIGEN'S ETHICS MONITOR
Reinstate the Glass­Steagall Act
Commentary: Ending ban on bank­brokerage
marriages was misguided
By Thomas Kostigen, MarketWatch
Last update: 11:45 p.m. EDT Sept. 18, 2008
Comments: 50
SANTA MONICA, Calif. (MarketWatch) ­­ Exactly a year ago when the credit crisis was
beginning to unfold I wrote a column asking whether the Glass­Steagall Act ­­ the law
banning brokerages and banks from marrying one another, which was lifted in 1999 ­­
would have thwarted an oncoming crisis.
We have the answer now.
"Time was when banks and brokerages were separate entities, banned from uniting for fear of
conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things," I wrote.
We should go back to that time and reenact the Glass‐Steagall Act, or a something similar to it.
The nebulous and vague talk of "fixing'" the problems on Wall Street by taking caring of "greed"
or by better defining "fundamental strengths" sidestep specific plans on how to solve the crisis at
hand. The new financial services authority and regulations that will merge functions of the
Treasury Department, the Securities and Exchange Commission and banking regulators also will
fail in correcting the underlying problems that we are seeing in the credit and equity markets
today.
Troubled banks and securities firms are being snatched up by any taker; this isn't sound
economics. It's a version of "a drowning man will grab a sharp sword." More thought ought to be
put into which entity can buy what troubled investment business. We need to straighten things
out cogently with a plan, a steady hand and leadership. Yet, President Bush is apparently planning
to nap through this crisis as well.
So in the absence of any strategy at all, here's what I think needs to be done: We need to separate
the securities business from the savings and loan business. The economies of scale and "vertical"
business models designed around the lending, packaging and trading of debt instruments for
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20. greater profit are big moneymakers for companies in good times, but we now see what happens
when things turn bad.
The lawmakers who passed Glass‐Steagall in 1933 were determined to prohibit investment
businesses from receiving deposits. And they were wise to insist upon such prohibitions. They
had seen the fallout from the stock market collapse just a few years earlier and were facing the
Great Depression. They sought safety.
We now may be seeing the oncoming of our own version of the Great Depression. We aren't
seeing it closer than it may appear in the rearview mirror. We are seeing it splattered on our
windshield.
The government needs to put up protections in the form of regulation. Such regulation was
bashed for years by free‐market capitalists until they finally got their way in 1999 and the Glass‐
Steagall Act was repealed.
What say you today?
The government is providing capital to AIG and other financial services companies that need
assistance. This is welfare, no different than a government check to a person (or family) in need.
Except welfare for rich people and corporations is more benignly called a "bailout." That's kinda
like an "oopsie" don't you think?
As the poet Donald Trump once said (or something like it): "You owe the bank a million dollars,
and the bank owns you. You owe it a billion, and you own the bank."
Because the Treasury now owns banks, we as taxpayers own the banks. We need regulation to get
it off our hands. Lawmakers should reinstate Glass‐Steagall.
Unfortunately, Mr. Kostigen, the train has already left the station, and is going
down a steep hill. People ask why Mr. Bush, when he took office he didn’t
work on the reversal of the 1999 Clinton mistake. Well, that would (and will)
be easier said than done. As you can see by the above timeline, politicians
across both sides were involved in developing this disaster, and pretending it
wasn’t going to happen.
Think about what has occurred since Clinton opened the Pandora’s box in
1999???
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21. Since 1999, the derivatives have grown on a parabolic curve. There are now over $516
trillion in derivatives outstanding.
In a short eight years, the rapid proliferation of derivative contracts has become the Trojan
horse that is likely to undermine the entire modern banking system. The collapse of Bear
Stearns should act as a warning for the entire financial market. It is time for regulators to
step in and properly unwind the most troubled instruments, while providing concrete
oversight to the entire derivatives industry. Obviously the lunatics have been found
unfit to run the derivative financial asylum. Deregulation has run amok, and financial
checks and balances must be restored to protect the economies of major nations.
Investment banks’ culture of risk is diametrically opposed to the purpose of commercial
savings banks which is the preservation of customers’ assets. The introduction of
derivatives as the primary under‐pinning for the mortgage industry with little regulatory
oversight was an event that was obviously going to end in a calamity; similar to giving
liquor and a car to a chronic drunk.
The continuous reduction of the protections of Glass­Steagall, by politicians in
Washington driven by banking PAC money, is the root cause of the current painful
credit crunch which is undermining the entire U.S. economy. In order to fix the core
problems, the protections created by Glass­Steagall after the harsh lessons of the
Great Depression must be restored by Congress. A clear separation of commercial
and investment banking must be reestablished.
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22.
Of Mice and Men – of late:
Newsweek:
MONEY CULTURE
Daniel Gross
Shattering Glass­Steagall
Lehman's failure marks the end of an era.
Sep 15, 2008 | Updated: 3:45 p.m. ET Sep 15, 2008
“Aside from signaling the end of an era for Lehman Brothers and Merrill
Lynch, this weekend's activity definitively drew a line at the end of another
historical era: the Age of Glass‐Steagall.
The Glass‐Steagall Act is the Depression‐era law that separated commercial
and investment banking. It was functionally repealed in 1998, when
Travelers (the parent company of Salomon Smith Barney) acquired Citicorp.
And it was officially repealed in 1999. But recent events on Wall Street‐the
failure or sale of three of the five largest independent investment banks‐have
effectively turned back the clock to the 1920s, when investment banks and
commercial banks cohabited under the same corporate umbrella.
Glass‐Steagall was one of the many necessary measures taken by Franklin
Delano Roosevelt and the Democratic Congress to deal with the Great
Depression. Crudely speaking, in the 1920s commercial banks (the types that
took deposits, made construction loans, etc.) recklessly plunged into the bull
market, making margin loans, underwriting new issues and investment
pools, and trading stocks. When the bubble popped in 1929, exposure to Wall
Street helped drag down the commercial banks. In the absence of deposit
insurance and other backstops, the results were devastating. Wall Street's
failure helped destroy Main Street.
The policy response was to erect a wall between investment banking and
commercial banking. It outlasted the Berlin Wall by a few decades. In the
1990s, as another bull market took hold, momentum built to overturn Glass‐
Steagall. Commercial banks were eager to get into high‐margin businesses
like underwriting hot tech stocks. Brokerage firms saw commercial banks,
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23. with their massive customer bases, as great distribution channels for stocks,
mutual funds, and other financial products that they created. Generally
speaking, the investment banks were the aggressors. In April 1998, Sandy
Weill's Travelers, which owned Salomon Smith Barney, merged with Citicorp.
The following year, Congress passed and President Clinton signed the
Financial Services Modernization Act of 1999, known as the Gramm‐Leach‐
Bliley Act. This law effectively deleted the prohibition on commercial banks
owning investment banks and vice versa.
Since then, the two industries have come together to a degree. And generally,
the investment banks, which weren't subject to regulation by the Federal
Reserve and didn't have to adhere to stodgy capital requirements, have been
the alpha dogs. In 2000, the investment banking firm J.P. Morgan bought
commercial bank Chase. Commercial banks like Bank of America and
Wachovia have tried to build up their own investment‐banking operations,
but they haven't had much success in eating into the core franchises of the
five big independent investment banks: Merrill Lynch, Goldman Sachs,
Morgan Stanley, Lehman Brothers, and Bear Stearns.
Up until the summer of 2007, the debt‐powered independent broker‐dealers
who minted money with stock brokering, proprietary trading, and advising
on mergers and acquisitions looked set to leave boring commercial‐banks in
their dust. But 2008 has been another story. In March, a faltering Bear
Stearns was swallowed by JPMorgan Chase. Lehman has gone bankrupt. Now
the investment bank with the largest brokerage force, Merrill Lynch, is being
bought by Bank of America. The historic democratizer of stock ownership
will henceforth be owned by the historic democratizer of credit.
And then there were two: Goldman Sachs (Wall Street's last great
partnership until it went public a few years ago), and Morgan Stanley (a
portion of the House of Morgan that was set up as an independent entity
after Glass‐Steagall). But there are now doubts as to whether even these
titans can survive as independents. The reason: In the wake of the global
credit crunch, the investments banks' 2006 source of relative strength has
become a major 2008 weakness. Investment banks are creatures of the
global capital markets. They can borrow seemingly unlimited amounts of
funds from investors around the world and deploy them as they see fit. By
contrast, fuddy‐duddy commercial banks, which borrow money from their
depositors; from the Federal Reserve; and from outfits like the Federal Home
Loan Banks; accept greater restrictions on the amount of leverage they coan
use. Between 2001 and 2006, that meant investment banks were better
businesses to own than commercial banks. In today's climate, that means
highly leveraged independent investment banks now face continuing
struggles to finance their operations while less‐leveraged commercial banks
enjoy relatively stable sources of capital. The alpha dogs have essentially
turned tail and are now scared of their own shadows. After today's press
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24. conference announcing the sale of once‐proud Merrill Lynch to Bank of
America, Merrill CEO John Thain, one of the biggest shots on Wall Street in
the last decade, practically scurried‐scurried!‐away as a reporter called out to
bid him farewell and wish him luck. “.
The FBI is investigating those that took advantage of the trap set by Congress &
President Clinton:
In Judaism, there is a concept of the potential responsibility of a victim. The idea
works something like this. If you place your billfold our purse out in plain sight
where it might be a temptation for someone (who otherwise might not even think of
stealing) and a person comes along, responds to the temptation, and steals your
money – you the “victim” have some part of the responsibility for the crime having
been committed. Keep that in mind as you read the following news report from the
AP:
“AP
FBI investigating companies at heart of meltdown
Tuesday September 23, 10:07 pm ET
By Lara Jakes Jordan, Associated Press Writer
Sources: FBI investigating possible fraud by Fannie, Freddie, Lehman,
AIG and their executives
WASHINGTON (AP) ‐‐ The FBI is investigating four major U.S. financial institutions whose
collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated
Press has learned.
Two law enforcement officials said Tuesday the FBI is looking at potential fraud by
mortgage finance giants Fannie Mae and Freddie Mac, and insurer American
International Group Inc. Additionally, a senior law enforcement official said Lehman
Brothers Holdings Inc. also is under investigation.
The inquiries will focus on the financial institutions and the individuals that ran them, the senior
law enforcement official said.
The law enforcement officials spoke on condition of anonymity because the investigations are
ongoing and are in the very early stages.
Officials said the new inquiries bring to 26 the number of corporate lenders under investigation
over the past year.
Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment
Tuesday evening. A Lehman spokesman did not have an immediate comment.
Just last week, FBI Director Robert Mueller put the number of large financial firms under
investigation at 24. He did not name any of the companies under investigation but said the FBI
also was looking at whether any of them have misrepresented their assets.
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25. Over the past year as the housing market cratered, the FBI has opened a wide‐ranging probe of
companies across the financial services industry, from mortgage lenders to investment banks that
bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for
culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading,
and failure to disclose the value of mortgage‐related securities and other investments.
The investigations revealed Tuesday come as lawmakers began considering whether to approve
emergency legislation that would give the government broad power to buy up devalued assets
from troubled financial firms.
The bailout proposed by the Bush administration is aimed at helping unlock credit and stabilize
badly shaken markets in the United States and around the globe.
In the past two weeks, the government has taken over Fannie Mae and Freddie Mac, the country's
two biggest mortgage companies, with a bailout plan that could require the Treasury Department
to put up as much as $100 billion for each of them over time if needed to keep them afloat as
mortgage losses mount.
Last week, the Federal Reserve provided an emergency $85 billion loan to AIG, which teetered on
the brink of bankruptcy. Lehman Brothers was forced to file for bankruptcy after attempts to
engineer a private rescue fell apart. All the companies were laid low from bad bets on complex
mortgage‐related securities.
Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke made the joint
decision last week that the only way to stop the carnage was to deal with the root cause of all the
troubles, billions of dollars of bad mortgage debt sitting on the books of major financial
companies. This debt has triggered the worst credit crisis in decades, causing credit markets to
essentially freeze up despite the fact that the Fed joined with major central banks around the
world to pump billions of dollars of reserves into the financial system.
Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud.
Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by
Bank of America Corp., is also under scrutiny.”
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26. Impact on OFGI Clients & Associates
– or – Even a Dark Cloud has a Silver Lining
What impact will this decade of decay spawned by greed and Government
duplicity have on project funding?
1. The current standard in the commercial lending industry is 60% of
the REMAINING “all in costs” for a loan. That means, if a project has
already spent say, $20M, and needs an additional $100M, the project
better have AT LEAST $40M in hand on cash ready to commit to the
project, or can’t even be submitted for consideration to most lenders.
2. Private investment based loans will become all the more important.
3. Lenders willing to provide financing above the 60% of remaining “all
in costs” will become all the more important.
4. Think about your Freshman High School Economics class. What
market blossoms when there is economic uncertainty – especially on
Wall Street? The answer: BONDS. As OFGI utilizes well constructed
bond issues, as provided by our Merchants Banking relationship as a
“back stop” or “takeout” strategy for initial loans (and to fund
projects outright for that matter) this feature of our business model
will become all the more important – notwithstanding that the
mechanism is SELF‐LIQUIDATING – as BOTH to PRINCIPAL and
INTEREST.
5. Basically, we are sad to say because of the overall effects on the U.S.
and the World – this situation actually makes OFGI’s resources more
valuable in our industry than ever before.
We do hope that clear heads in Washington will be able to figure out how to
get the World out of the mess that they themselves have created. It’s rather
like wishing that the fox will guard the hen‐house, but it is the only hope we
have.
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27.
Ovadya Funding Group International, Inc. does NOT sell insurance, is NOT
licensed to buy or sell insurance, or to buy or sell securities, etc.
Furthermore, OFGI is not a professional investment advisor and does NOT
give investment advice. Nor, does OFGI give tax or legal advice of any
kind. This information is presented for EDUCATIONAL PURPOSES ONLY.
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