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Tuesday, December 8, 2009

WHAT ABOUT GLASS-STEAGALL?

I belong to LinkedIn, which is a great place for discussions and ideas, and recently joined a group called “WHITE HOUSE” which is a place to discuss current events and brainstorm ideas for solutions to social problems. It’s a REALLY lively group, and I highly recommend it. Lately, one of the most interesting topics has been on the “CREATING JOBS IN A HURRY” discussion group. One of the things that hasn’t been discussed is just exactly how we got to where we are today, so I did a little research on the subject, and found out about something called the The GlassSteagall Act of 1932, (which among other things) established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation. That was Glass-Steagall I; Glass-Steagall II was passed in 1933 in reaction to the collapse of a large portion of the American commercial banking system in early 1933.

ANY of this sounding familiar?

Back then, the speculation was in stocks; today, it’s sub-prime mortgages, mark-to-market accounting practices (like the IRS uses. So, this is important, why? Well, Glass-Steagall II had provisions that prohibited BY LAW any bank holding company from owning other financial companies. These provisions were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act – and from this, all of our troubles have flowed.

The banking industry had been trying to get Glass–Steagall repealed since at least the 1980s. In 1987, the Congressional Research Service prepared a report which explored the case for preserving Glass–Steagall as well as the case against preserving the act.

The argument for preserving Glass–Steagall (as written in 1987):
(CITATION: http://en.wikipedia.org/wiki/Glass-Steagall_Act)

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):
(CITATION: http://en.wikipedia.org/wiki/Glass-Steagall_Act)

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.

Now, stop and think about this: Up until the Act was repealed, the sub-prime mortgage market was 5% of most of the banks’ total portfolio. That’s NOT just a lot of equity, is it? AFTER the Act was repealed, up to 30 – 35% of the banks’ portfolios were in the sub-prime market. That’s a VERY big jump, wouldn’t you all agree? This wasn’t the only reason for the banks to get themselves into some fairly deep and uncharted waters, no; there were other causative factors like the mark-to-market or fair value accounting system, which assigns value on the prevailing market and NOT the book value of things like real estate and securities. That’s analogous to a margin trader’s strategies according to my research – SPECULATION! Throw in the Basel Accords (CITATION: http://en.wikipedia.org/wiki/Basel_Accords), then factor in the adjustable-rate mortgage plans, and BINGO! There go the financial markets and their institutions when the crash inevitably comes.

Look at Enron, for a prime example of what this sort of financial legerdemain can do. From where I’m sitting, this is fraud, pure and simple. The repeal also 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. I won’t even try to go into the credit-card businesses by which we all are enslaved; my stomach is NOT that strong.

So, how to fix this mess? HOW do we re-create the conditions that are beneficial to us all, re-create the middle-class that is disappearing at a really alarming rate, and get ourselves OUT of this hellish mess?

Simple, really: REINVEST in the communities that need help. ALL of the communities without exception. Revive the CCC, the NRA and the WPA, and take at least 1/3 of the TARP monies out to fund them in every state without exception. Make SURE that all three of these organizations also make further education and job training for other fields available to the people that are signed up to work there. Make funding for start-ups, early stage companies and small businesses available on the same program that TARP is using, with a 5 year payback at 1 – 3% interest, to be repaid every year, and relax some of the insane credit requirements to be able to receive that funding. Use some common sense in guaranteeing the loans as well, and do it through the SBA, by using some of the companies that are already IN the business of finding funding for these sorts of companies.

Better yet, GIVE these businesses the money as grants, and attach a proviso that any of the businesses receiving the grants HAVE to hire interns that are studying that business and partner with whatever university is teaching them to begin with to offer at least 6 hours of college credit for whatever they’re being taught to begin with. Go green – and reap THOSE rewards.

There are all sorts of resources out there that are supposed to HELP people, and these resources are NOT easy to find, on purpose. That’s an obscenity. We are paying this administration, as we have paid all the OTHER administrations, to help us make our lives easier. This is NOT happening, and it needs to start. Tonight, the President is going to talk at us about his new programs. Let’s hope that he can come up with some fast and simple solutions to the problems that are facing us all.

YES, WE CAN – great campaign slogan. YES, WE MUST – ongoing work. Let’s hope that the MUST part of the equation gets addressed.

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