Posted on 12/18/2009 11:04:51 PM PST by CutePuppy
US Senators John McCain (R-Ariz.) and Maria Cantwell (D-Wash.) proposed reinstating the Depression-era Glass-Steagall Act that split commercial and investment banking to rein in Wall Street firms in response to the financial crisis.
McCain and Cantwell join other lawmakers in Congress proposing to reinstate the 1933 law, repealed a decade ago by the Gramm-Leach-Bliley Act that led to a rise in conglomerates including Citigroup, JPMorgan Chase and Bank of America active in retail banking, insurance and proprietary trading. Legislation to reinstate the ban was introduced yesterday in the House.
Under the Senate legislation, financial firms operating commercial banks and investment houses will have to decide whether to focus on commercial banking or investment banking. It would ban commercial banks from engaging in insurance activities. Cantwell said the companies would get a year from enactment to comply with the law.
(Excerpt) Read more at m.nypost.com ...
Glass-Steagall did not prevent LTCM Trillion dollar crisis in 1998, nor earlier S&L crisis, nor previous housing or investment bubbles. It's just a red herring, a straw man that Democrats are using and McCain wants to put his name on as yet another legislative "achievement".
And the companies that either went belly up or were about to collapse in 2008 financial were mostly not the largest integrated banks (BoA, JPM, Wells Fargo, US Bank etc.) but mostly pure commercial lending banks or pure investment banks (Countrywide, Bear Stearns, Lehman Bros., Merrill Lynch, Morgan Stanley, Goldman Sachs etc.) and, of course, insurance companies AIG (London's Financial Products Division) and LLoyds of London. The integrated banks were the ones that were called upon by government to buy these out.
G-S repeal was not the cause or even the contributing factor to financial liquidity crisis, and reinstating it is going to make things worse, not better for Wall Street and even more so for Main Street.
J.D., can you help explain to the good people in Arizona that reinstatement of G-S is only going to drain capital from commercial banks and is going to make whatever lending they can afford now even more difficult and at higher rates, and that real beneficiaries of capital outflow will be investment / hedge funds and large non-US international banks. It's too late for McCain to understand anything, but in the primaries people should be able to figure this out easily.
Big Government John strikes again!
McCain is taking the wrong approach, what should happen is either a Bank is an investment concern, or traditional banking firm, one or the other for FDIC insurance purposes.
If a bank wishes to also deal with investment vehicles the taxpayers should not be on the hook by way of insuring their losses.
Problem is mortgages can be securitized and sold to investors within 6 months and the banks no longer wanted to make money from the loan, but rather from the points and fees. Subprime loans from the GSE and CRA are distinctly delineated in the portfolio, thus the investor can take note of it before he buys the portfolio. The biggest killer was the so call good conventional loans that were suppose to be vetted by the banks, where the the loan applicant lied about his income and qualification at the encouragement of the mortgage bank whose main goal was collect fees from the largest number of loans originated and selling it off to investors (after Moody is threaten by the bank for asking for the loan data for analysis and relent giving high risk portfolio a AAA rating to preserve future business from the banks) and leaving them holding the bag when the bad loans manifest. This is the chokepoint of the fraud and malfeasance by the banks. We do not need more regulations, we need more investigations and prosecution of mortgage orginators, loan applicants, mortgage managers and management as well as Moody and the rating agencies.
And your proposal to clean up the mess that is Citibank is...?
Remember for McCain it can't be just a legislative "achievement", it has to be a bipartisan legislative "achievement".
In any case, I don't see how Citigroup would not be a mess without repeal of G-S (which Citi's Sandy Weill pretty much "imposed" or "forced" upon Congress and his friend Bill Clinton, by merging Citibank, Travelers and Smith Barney in late '90s, ostensibly to compete with much larger foreign financial groups which didn't have nor needed the restrictions) - under the tutelage of Weill and Bob Rubin, and spurning Jamie Dimon (who went on to merge several banks into powerhouse JPM) in favor of Weill's crony (Weill's daughter Jessica Bibliowicz) it might have been two or three individually smaller messes, but not in toto lesser ones.
I don't think that the idea of government denying the banks capital to "save them from themselves" - which is what G-S is, in essence - ever made any sense. It didn't prevent what it was ostensibly supposed to prevent in 1930s and since, and its repeal wasn't the cause or contributing factor in the latest of many financial and liquidity crises.
In the mean time... does McCain or anyone pay attention to the real culprits - government-sponsored and government-run entities which are getting bigger still? - Fannie quest for billionsFannie quest for billions - NYP, 2009 December 16
Federal officials are also debating whether to lower dividend payments on their Treasury borrowings, according to these people. The pair have used $111.6 billion of their $400 billion in backup financing in less than a year...Fannie Mae and Freddie Mac's regulator is renegotiating their financing plan with the Treasury Department and may seek an increase to their $400 billion federal lifeline before Dec. 31, according to people familiar with the talks.
Good point. I stand corrected.
Putting Glass-Steagall back into play is one of the several changes that are required in order to fix this mess. Increasing the capital reserve requirements for banks is another. Requiring people actually be able to repay the mortgages is another. Along with significant reversal of the community reinvestment act.
However, you are correct in that in the short term, it can work against an economic recovery as banks adjust to the legislation. However, if there is a period of time spanning several years, and changes are made in incremental steps, then the finance industry can be restructured to the way things were in the 80’s with less risk taking in the whole market place.
Of course, none of this will do any good if the government keeps spending us into a pauper state.
I propose that all legislatures be required to take a course in economics, with refresher courses each term in office. If they fail to take such courses, there will be withheld 2/3rds of their salary.
FDIC Approves Giving Banks Reprieve From Capital Requirements - BL, 2009 December 15, by Ian Katz Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board (FASB). The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books. “We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” ..... The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.
Requiring people actually be able to repay the mortgages is another. - That would be nice, but it was clearly against the government's "Home ownership in every pot" policies.
Not Losing Is New Winning as Bankers Dilute Overhaul - BL, 2009 December 14, by Alison Vekshin and Michael J. Moore The backlash against bailouts and bonuses is making it harder for Wall Street to get its way as lawmakers redesign the framework for financial oversight. The biggest banks may be forced to submit to a new regulator for mortgages, credit cards and other consumer products; put $150 billion into a fund the government will use if they collapse; and pay more to insure deposits. Still, the firms that helped precipitate the worst financial crisis in 70 years have so far sidestepped proposals that would have split investment and commercial banking, capped pay or seriously hurt their ability to make money. “The industry is not losing as badly as it thought it might,” said Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster LLP in Washington. “The fact that someone had a worse proposal on the table and it doesn’t happen -- it’s hard to view that as a win. It’s not as big a loss.” ..... The meeting between fiscally conservative House Democrats and lobbyists for the largest U.S. financial firms turned tense, with a lot of finger-pointing, recalled one attendee. The message delivered over breakfast: We bailed you out last year with taxpayer dollars. Now help us address the needs of constituents by aiding struggling homeowners and lending more.
Along with significant reversal of the community reinvestment act. - That would be nice, but that actually was (and still is) the policy in effect.
FDIC’s Bair Is ‘Concerned’ Banks Only Making ‘Safest Loans’ - BL, 2009 December 14, by Steve Geimann Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending. .....
Enough said about where they stand on that?
Putting Glass-Steagall back into play is one of the several changes that are required in order to fix this mess.
- What exactly would that do?... except shrinking domestic financial industry? It's like stopping drilling domestically because "we no longer like oil" and want to move to "green" fuels. We'll just have to pay more for the services and products provided by both shrinking domestic and growing foreign companies, and investments will flow where they will find a better rate of return. We may adapt to that - people usually do - but how would that mean as anything getting better?
We have lost / sold through FDIC barely 140 banks so far, after a horrendous liquidity crisis and real estate equity bubble caused in great part by government policies, overregulations and underwriting -- with S-G having been repealed. With S-G in effect, in late '80s / early '90s S&L crisis (also rooted in real-estate bubble) we have lost more than a 1,000 banks. The risk was the same, because it didn't depend on the spread, the conditions for failure were outside of what G-S was supposedly designed for.
If something ain't the problem, there ain't no point in fixing it. We should not make "white swan" policies because we have encountered an entirely predictable "black swan" event.
Returning to Glass-Steagall would prohibit banks from doing EXACTLY what they did and that is
1) commoditize mortgages
2) bundle mortgages
3) play loose and fancy free with the designations of credit risk on those bundled mortgages
All three of those steps were primary enablers to the current crisis. Glass-Steagall would return banks to a position where they are risk takers on a small scale instead of being risk takers on a grand scale. Stability of the banks is on of the corner stones of a sound financial system.
In addition to a blind spot, McCain apparently has a knee-jerk reflex that Dems continue to stimulate by periodically striking his tendon beneath the patella while whispering "McCain-fill in Democratic Senator name here bill"
Countrywide (and others) did all three, before and after G-S repeal.
“The names may have changed, but the game stays the same.”
Lets be specific. Prior to the repeal of Glass-Steagall, banks were not permitted to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations.
Bingo!! While this was one of the practices that Glass-Steagall was supposed to prevent, the problem was we had a Fed looking the other way via an 'easy money policy' in the interest of keeping on kicking the housing bubble down the road (among other things.)
we need more investigations and prosecution of mortgage orginators, loan applicants, mortgage managers and management as well as Moody and the rating agencies.
Here's where I disagree. The mortgage originators, applicants etc.. were simply taking advantage of the "rules" set forth by liberals in the U.S. Congress who blocked every attempt at regulating Fannie Mae/Freddie Mac and created the conditions under which the housing bubble for example was allowed to exist. My solution is rather than clog the courts with mortgage originators, loan applicants etc.. we the voters in this country take charge of the situation and vote out the very members of Congress who not only allowed, but encouraged this situation to happen, they're the root cause of this mess.
This is GREAT news.
Sorry guys, I disagree with you. A big part of the financial crisis has been caused the “derivatives” or bets against America, especially the mortgage sector, made by the financiers, especially AIG, and others that followed their lead. One of the reasons the banks can’t/won’t lend is that they have these “bets” still hanging over their heads that could be called due. We can’t call this “insurance” because insurance is a highly regulated industry, for good reason. But insurance it was, with nothing required to make sure you could make good on what your were insuring. Financiers bought the bad loans on purpose, knowing they were bad, and immediately put this now legal “insurance” on them. Banks gave the insurance for the premiums, but didn’t have the money to really insure them. This never should have been made legal.
This was made legal when Glass-Steagall was repealed by Bill Clinton. Ayn Rand be d***ed. This was a good law and needs to be reinstated. Or, shall we “deregulate” insurance too? You might not like the results when your home burns down.
Oh, wait! Our house did burn down, didn’t it.
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