Can Congress Pass Banking Reform?

Robert Reich says that since Wall Street is still out of control, that it would be a politically and economically smart move for President Obama to resurrect the Glass-Steagall Act and thereby break up the big banks.

Next week President Obama travels to Wall Street where he’ll demand – in light of the Street’s continuing antics since the bailout, as well as its role in watering-down the Volcker rule – that the Glass-Steagall Act be resurrected and big banks be broken up.

I’m kidding. But it would be a smart move — politically and economically.

Politically smart because Mitt Romney is almost sure to be the Republican nominee, and Romney is the poster child for the pump-and-dump mentality that’s infected the financial industry and continues to jeopardize the American economy.

Romney was CEO of Bain & Company – a private-equity fund that bought up companies, fired employees to save money and boost performance, and then resold the firms at a nice markups.

Romney also epitomizes the pump-and-dump culture of America’s super rich. To take one example, he recently purchased a $3 million mansion in La Jolla, California (in addition to his other homes) that he’s razing in order build a brand new one.

What better way for Obama to distinguish himself from Romney than to condemn Wall Street’s antics since the bailout, and call for real reform?

Economically it would be smart for Obama to go after the Street right now because the Street’s lobbying muscle has reduced the Dodd-Frank financial reform law to a pale reflection of its former self. Dodd-Frank is rife with so many loopholes and exemptions that the largest Wall Street banks – larger by far than they were before the bailout – are back to many of their old tricks.

It’s impossible to know, for example, the exposure of the Street to European banks in danger of going under. To stay afloat, Europe’s banks will be forced to sell mountains of assets – among them, derivatives originating on the Street – and may have to reneg on or delay some repayments on loans from Wall Street banks.

The Street says it’s not worried because these assets are insured. But remember AIG? The fact Morgan Stanley and other big U.S. banks are taking a beating in the market suggests investors don’t believe the Street. This itself proves financial reform hasn’t gone far enough.

If you want more evidence, consider the fancy footwork by Bank of America in recent days. Hit by a credit downgrade last month, BofA just moved its riskiest derivatives from its Merrill Lynch unit to a retail subsidiary flush with insured deposits. That unit has a higher credit rating because the Federal Deposit Insurance Corporation (that is, you and me and other taxpayers) are backing the deposits. Result: BofA improves its bottom line at the expense of American taxpayers.

Wasn’t this supposed to be illegal? Keeping risky assets away from insured deposits had been a key principle of U.S. regulation for decades before the repeal of Glass-Steagall.

The so-called “Volcker rule” was supposed to remedy that. But under pressure of Wall Street’s lobbyists, the rule – as officially proposed last week – has morphed into almost 300 pages of regulatory mumbo-jumbo, riddled with exemptions and loopholes.

It would have been far simpler simply to ban proprietary trading from the jump. Why should banks ever be permitted to use peoples’ bank deposits – insured by the federal government – to place risky bets on the banks’ own behalf? Bring back Glass-Steagall.

True, Glass-Steagall wouldn’t have prevented the fall of Lehman Brothers or the squeeze on other investment banks in 2007 and 2008. That’s why it’s also necessary to break up the big banks.

In the wake of the bailout, the biggest banks are bigger than ever. Twenty years ago the ten largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent. And the biggest four have a larger market share than ever – so large, in fact, they’ve almost surely been colluding. How else to explain their apparent coordination on charging debit card fees?

The banks aren’t even fulfilling their fiduciary duties to investors. Last summer, after Groupon selected Goldman Sachs, Morgan Stanley, and Credit Suisse to underwrite its initial public offering, the trio valued it at a generous $30 billion. Subsequent accounting and disclosure problems showed this estimate to be absurdly high. Did the banks care? Not a wit. The higher the valuation, the fatter their fees.

Just last week Citigroup settled charges (without admitting or denying guilt) that it defrauded investors by selling them a package of mortgage-backed securities rife with mortgages it knew were likely to default, but didn’t disclose the hazard. It then bet against the package for its own benefit – earning fees of $34 million and net profits of at least $126 million. So what’s Citi paying to settle this outrage? A mere $285 million. Its CEO at time (Charles Prince) doesn’t pay a dime.

I doubt the President will be condemning the Street’s antics, or calling for a resurrection of Glass-Steagall and a breakup of the biggest banks. Democrats are still too dependent on the Street’s campaign money.

That’s too bad. You don’t have to be an occupier of Wall Street to conclude the Street is still out of control. And that’s dangerous for all of us.

Congress would be smart to repeal the 1999 Gramm–Leach–Bliley Act and then resurrect the banking reforms found in the 1933 Glass-Steagall Act. Those reforms, which were in place for over sixty years, worked to control speculation. They also prohibited a bank holding company from owning other financial companies and as well separated commercial banking from investment banking. And for that, President Obama needs to demand the change!

No to Socialsm, Yes to Corporatocracy!

The Tea Bag Movement, the Republican Party and the right-wing pundits are all claiming that Obama and the Democrats are socialists. Let's call these groups the 'anti-socialists.' They believe that Obama wants government ownership of everything. They claim that people should be able to control their own destinies, their own economic choices and their own health care. They are against government regulation and against social assistance. But, what history has shown is that without sufficient regulation, society becomes very unbalanced.

For example, in the 19th century the Robber Barons took advantage of an unregulated banking and commercial system. They amassed enormous personal wealth. In response to the Great Depression of 1929, Congress enacted banking regulations in 1933 known as the Glass–Steagall Act which introduced banking reforms. It wasn't until 1999, that certain provisions that prohibited a bank holding company from owning other financial companies were repealed by the Gramm–Leach–Bliley Act.

It was the Glass-Steagall Act that prohibited any one institution from consolidating an investment bank, a commercial bank, and an insurance company into one entity. The Gramm-Leach-Bliley Act then allowed commercial banks, investment banks, securities firms, and insurance companies to consolidate. A bi-partisan congress passed the Gramm–Leach–Bliley Act and President Clinton signed it into law.

Recently, President Bill Clinton said that even before the repeal of Glass-Steagall the principles of the legislation had been breached. "Clinton said he regretted not trying to regulate derivatives."

“On derivatives, yeah I think they were wrong and I think I was wrong to take [their advice] because the argument on derivatives was that these things are expensive and sophisticated and only a handful of investors will buy them and they don’t need any extra protection, and any extra transparency. The money they’re putting up guarantees them transparency.” [...]

Clinton said he regretted not trying to regulate derivatives, but that Republicans would have stood in the way. “Now, I think if I had tried to regulate them because the Republicans were the majority in the Congress, they would have stopped it. But I wish I should have been caught trying. I mean, that was a mistake I made.”

That brings us to today.

During a recent interview on Bill Moyers Journal with economists James Kwak and Simon Johnson, Bill Moyers discussed with his guests the devastating financial crisis of '08. The discussion focused on "whether the financial powers are more profitable, and more resistant to regulation than ever."

Bill Moyers: Let me get to the blunt conclusion you reach in your book. You say that two years after the devastating financial crisis of '08 our country is still at the mercy of an oligarchy that is bigger, more profitable, and more resistant to regulation than ever. Correct?

Simon Johnson: Absolutely correct, Bill. The big banks became stronger as a result of the bailout. That may seem extraordinary, but it's really true. They're turning that increased economic clout into more political power. And they're using that political power to go out and take the same sort of risks that got us into disaster in September 2008.

Bill Moyers: And your definition of oligarchy is?

Simon Johnson: Oligarchy is just- it's a very simple, straightforward idea from Aristotle. It's political power based on economic power. And it's the rise of the banks in economic terms, which we document at length, that it'd turn into political power. And they then feed that back into more deregulation, more opportunities to go out and take reckless risks and-- and capture huge amounts of money.

Bill Moyers: And you say that these this oligarchy consists of six megabanks. What are the six banks?

James Kwak: They are Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo.

Bill Moyers: And you write that they control 60 percent of our gross national product?

James Kwak: They have assets equivalent to 60 percent of our gross national product. And to put this in perspective, in the mid-1990s, these six banks or their predecessors, since there have been a lot of mergers, had less than 20 percent. Their assets were less than 20 percent of the gross national product.

Bill Moyers: And what's the threat from an oligarchy of this size and scale?

Simon Johnson: They can distort the system, Bill. They can change the rules of the game to favor themselves. And unfortunately, the way it works in modern finance is when the rules favor you, you go out and you take a lot of risk. And you blow up from time to time, because it's not your problem. When it blows up, it's the taxpayer and it's the government that has to sort it out.

Bill Moyers: So, you're not kidding when you say it's an oligarchy?

James Kwak: Exactly. I think that in particular, we can see how the oligarchy has actually become more powerful in the last since the financial crisis. If we look at the way they've behaved in Washington. For example, they've been spending more than $1 million per day lobbying Congress and fighting financial reform. I think that's for some time, the financial sector got its way in Washington through the power of ideology, through the power of persuasion. And in the last year and a half, we've seen the gloves come off. They are fighting as hard as they can to stop reform.

Simon Johnson: I know people react a little negatively when you use this term for the United States. But it means political power derived from economic power. That's what we're looking at here. It's disproportionate, it's unfair, it is very unproductive, by the way. Undermines business in this society. And it's an oligarchy like we see in other countries.

Today, six banks control 60% of the Gross National Product (GNP) which according to Simon Johnson and James Kwak is considered an oligarchy.

This brings us back to the 'anti-socialists.' They are extremely fearful. They rant and rave that President Obama wants the federal government to own all means of production. Although they accept their medicare payments and social security checks, they have railed against the recent health care legislation even though it is an insurance company for-profit health care plan.

What is the anti-socialist position on the issue of economics and banking regulation? Are the anti-socialists content with an oligarchy of our banking industry? Are they ranting and raving, yelling and screaming, demonstrating against the corporate oligarchy (corporatocracy) of banking? Are they outraged that only 6 banks own 60% of GNP?

Sarah Palin:

Palin apparently thinks that the solution to our economic mess in the United States is less government regulation rather than more to rein the bankers and Wall Street in for their bad behavior.

Tea Party:

This movement is against stronger regulation. As Republicans softened their stance against the financial regulation bill, tea partyers reacted by lashing out against the GOP.

GOP Conservatives:

For conservatives the best bank regulation is no regulation. Conservatives, of course, think we need less regulation, not more.

Judging from the rallies on Wall Street yesterday, the capitalists haven't bought into the GOP talking points about socialism quite to the extent of the Glenn Beck/Rush Limbaugh crowd of modern day Know Nothings. But if you think the conservatives dig in on healthcare reform, just watch them on financial reform-- the real line in the sand for the representatives of institutionalized Greed and Selfishness.

After foot (and knuckle) dragging all year, the GOP was left out of the final legislation entirely-- although far, far too many of their reactionary demands were met as Dodd and the Democrats compromised with good sense for no reason, unless currying favor with the banksters is considered reasonable in Inside the Beltway Democratic circles. Yesterday the Senate Banking Committee approved Dodd's financial overhaul legislation 13-10, without a single Republican vote.

The 10 crooked, bribe-taking handmaidens of the Wall Street banks who have vowed to throw themselves under the bus of progress are Richard Shelby (R-AL- $5,213,130), Robert Bennett (R-UT- $2,354,767), Jim Bunning (R-KY- $2,580,305), Mike Crapo (R-ID- $1,728,513), Bob Corker (R-TN- $3,058,330), Jim DeMint (R-SC- $2,463,860), David Diapers Vitter (R-LA- $2,083,149), Mike Johanns (R-NE- $687,621), Kay Bailey Hutchison (R-TX- $4,702,438) and Judd Gregg (R-NH- $1,077,149).

Dodd says his bill will end taxpayer-funded bailouts of companies supposedly "too big to fail," regulate-- for the first time-- the multitrillion-dollar derivatives market, and bring long-overdue consumer protection to financial products. The Republicans have watered down the most important aspects of real reform and are expected to filibuster the eventual bill, no matter how weak and crappy the Democrats make it to please them. Sound familiar?

WATCH Fox News explain the Republican position.

Are you confused yet? Totally. The Fox News guy says that there are already enough laws on the books to handle every economic situation. Both he and Professor Bill Black seem to be blaming the economic situation on both Obama, Geithner and the Democrats. But on April 3, 2009, Bill Black was interviewed by Bill Moyers. Here is what he had to say. Click HERE to watch the program.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me? WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.

The anti-socialists want small government, individual liberty, and free markets. They don't want any banking regulation. They don't want government control. Yet, what we now have is a corporate oligarchy which controls our economic system and inhibits individual freedoms and free markets.

The right-wing motto has now become: No to Socialism, Yes to Corporatocracy!

FINALLY...Some Change to Believe In!!!!

Proposal Set to Curb Bank Giants

Obama Seeks To Return to the Spirit Of Glass-Steagall

WSJ: President Obama meets with Paul Volcker and proposes new banking firewalls in the "spirit of Glass-Steagall."

Mr. Obama's proposal is expected to include new scale restrictions on the size of the country's largest financial institutions. The goal would be to deter banks from becoming so large they put the broader economy at risk and to also prevent banks from becoming so large they distort normal competitive forces. It couldn't be learned what precise limits the White House will endorse, or whether Mr. Obama will spell out the exact limits on Thursday.

Mr. Obama is also expected to endorse, for the first time publicly, measures pushed by former Federal Reserve Chairman Paul Volcker, which would place restrictions on the proprietary trading done by commercial banks, essentially limiting the way banks bet with their own capital. Administration officials say they want to place 'firewalls' between different divisions of financial companies to ensure banks don't indirectly subsidize 'speculative' trading through other subsidiaries that hold federally insured deposits.

The White House's proposal, one aide said, wouldn't resurrect the exact limits put in place by the Depression-era Glass Steagall Act, which essentially walled off commercial banks from investment banks and was repealed in 1999. Instead, the White House proposal would seek to return the "spirit of Glass Steagall," meant to limit large banks from becoming too big and complex that create enormous risk.

This is the path for change that will truly help regulate the billionaire banks. Self-regulation never works.

Reinstate Glass-Seagall

Don't you think?

This week marks the tenth year anniversary of the repeal of the Glass-Steagall Act of 1933, by the Gramm-Leach-Bliley or Financial Services Modernization Act, marking the moment when we were royally screwed by the banking system. Thank you to all those involved.

It's amazing how downright ebullient, President Bill Clinton was at that signing ceremony on November 12, 1999. an event introduced by then Treasury Secretary (now Obama advisor) Larry Summers, successor to Robert Rubin. Those restricting, anti-competitive Depression era, laws were finally behind us. Awesome.

Fast-forward to now and most of us know how devastatingly expensive that signature was for the American public. Yet, despite our government having deployed or made available over $14.1 trillion worth of federal subsidies to fix Wall Street, the banking landscape is less stable than it was before last year's crisis. And, despite national unemployment approaching double digits, and another record quarter of foreclosures, we stand farther away from the intent of Glass Steagall than ever.

Banks weren't handled with kid gloves then. They were treated like the spoiled, reckless, destructive beings they were. After the stock market crash in 1929, the country sunk into the throes of the Great Depression, characterized by 25% unemployment, bread lines, rampant foreclosures, and general despair. In 1932, the Pecora commission examined the shady banking practices that contributed to the devastation, all of which hinged on one thing - banks had used depositor capital and loans to speculate with. Exactly like the practices going on before and since last fall's financial calamity. The result of that speculation gone wrong tanked the economy. Glass-Steagall logically sought to ensure this wouldn't happen again. It divided up the banking landscape into two parts, commercial banks and investment banks. The federal government would back commercial banks and consumer deposits through establishing the Federal Deposit Insurance Corporation (FDIC). But, it wouldn't be Wall Street's investment bank bookie and bitch.

Over the decades, the financial sector, armed with cunning lobbyists and overpaid lawyers, took many swipes at Glass-Steagall, but none as devastating as the Gramm-Leach-Bliley Act. Since then, the banking sector's powerful ate its weak, amidst a wave of massive consolidation. Nearly half of the nation's biggest bank mergers took place just before or since that Act was passed. All these mega banks can thus churn deposits and loans into debt or capital to fund speculation, risk, and create a roller coaster of an economy that is defined simply on whether those bets, or asset creations, work or not, at any given moment. Heads they win, tails we lose.

What can we do?

Thus, whether we merge all regulators into one ginormous one, or have a council of them to deal with the hard issues of mega-collapse and crisis, or even place one inside the office of every top bank CEO, shadowing him like a probation officer (no that's not in one of the bills, it would just be fun to watch unfold), the beast remains out of the cage.

That's why we need to reinstate Glass-Steagall. Now. We need to dissect the speculative from the boring within our country's financial institutions. And yes, it's possible to achieve. Banks split off pieces of companies and move them around every day. Plus, the Glass Steagall Act didn't wave a magic wand that divided up bank divisions, it ingeniously used banks' own competitive desires against them, by giving banks a one-year period to dramatically reduce the portion of profit they made from investment banking activities to 10% of total profits. Banks were free to choose how to do this, knowing commercial banking got government backing, and investment backing didn't. Betting behaviors are more conservative when it's your own money, and not someone else's on the line. Stability follows.

We need to specifically reinstate section 16 of the Glass-Steagall Act that had restricted national commercial banks from engaging in most investment banking activities, up to a certain small percentage, coming from client directives, not their own proprietary trading. And, on the flip side, we need to reinstate section 21 that restricted investment banks from engaging in any commercial banking up to a certain percentage limit.

Doing these two things, would reduce the more systemically risky competitive desires between these two types of banks that spurs them to merge into institutions that are too big to exist without our help, or take the kinds of leveraged risks that drive short-term profits and bonuses, at the expense of long term financial system stability.

It's time to put the beast back in its cage, while taming it, by re-instating Glass Steagall, and keep it from inflicting even more danger on the rest of us. Meanwhile, we need to support all those in Washington that get this, and keep pressuring those who don't.

The right-wing wants less government control. But they are willing to sit by and allow the banks and investment companies to controll their money. They are also willing to sit by and allow the insurance companies to control the issue of coverage or payment. The right-wing really needs a good dose of reality. Go figure!

The 10th Anniversary of the Gramm-Leach-Bliley Act

If you want to know the relationship between our economic crisis, the Glass-Steagall Act and the Gramm, Leach, Bliley Act...then watch MSNBC's Dylan Ratigan with his tongue-in-cheek but reality driven synopsis:

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Bust Them and Regulate Them!!!

From Brave New Films and Senator Sanders Unfiltered:

More than a year has gone by since Congress passed the $700 billion bailout of Wall Street.

Greedy, reckless bankers are responsible for the biggest economic collapse since the Great Depression. They want taxpayers to be on the hook if they screw us again.

This is why, Senator Sanders is announcing exclusively through Senator Sanders Unfiltered new legislation that would effectively break up the banks so it never happens again.

If a bank is too big to fail, shouldn't it also be too big to exist?

WATCH:

Senator Bernie Sanders (D-VT) believes that in order to prevent another massive bailout the banks that are "too large to fail" must be broken up which would break apart the concentration of ownership and ultimately lead to more competition.

Robert Reich agrees with the Senator that the large banks should be broken up.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Stagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

The Glass-Steagall Act was passed by Congress in 1933. It was enacted during the Depression and prohibited commercial banks from collaborating with full-service brokerage firms or participating in investment banking activities. In 1999, the act was repealed by the Gramm-Leach-Bliley Act and signed into law by President Bill Clinton.

The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. And we should all now know that this consolidation and lack of regulation led to the problems we have today with banks getting "too big to fail."

If a lesson is too be learned from all this, then Congress would enact a new Glass-Steagall-Act.

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

According to Reich, the Obama Administration has other ideas.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

What is the solution?

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.

The Kings of Deregulation

Did anyone see it coming? The economic crisis that we all face. Remember, one day money was freely flowing and then the next day we were told that the sky was falling.

It seems that Sen. Byron Dorgan (D-N.D.) saw it coming back in 1999. That's when he voted against the Gramm-Leach-Bliley Act, named after Sen Phil Gramm. Back then, not only did Republicans support deregulation but Democrats did too. This bill had the full support of President Clinton, Bob Rubin and Larry Summers.

Let's not forget about the Glass-Steagall Act. It was the Gramm-Leach-Bliley Act that repealed the Glass-Steagall Act and many of the protections put in place after the Great Depression. This was all under the watch of Republican Democratic President Bill Clinton.

Many believe that the major cause of the current banking meltdown was the 1999 repeal of the Glass-Steagall Act.

The Glass-Steagall Act, passed in 1933, mandated the separation of commercial and investment banking in order to protect depositors from the hazards of risky investment and speculation. It worked fine for fifty years until the banking industry began lobbying for its repeal during the 1980s, the go-go years of Reaganesque market fundamentalism, an outlook embraced wholeheartedly by mainstream Democrats under the rubric "neoliberalism."

This disgraceful bow to the banking industry, eagerly signed into law by Bill Clinton in 1999, bears a major share of responsibility for the current banking crisis.

Sen. Byron Dorgan was recently on The "Rachel Maddow Show" and spoke about those who got deregulation terribly wrong -- and the small handful who saw the disastrous consequences coming a decade ago. Dorgan also spoke of the need for regulation. Watch:

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