It was almost 15 years ago that the government in it’s infinite wisdom chose to dismantle a key firewall between commercial and investment banks. Commercial banks used to be more conservative and focused on deposits and loans, while investment banks underwrote securities which is far riskier but also offered higher potential returns.
“Today, Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” then-Treasury Secretary Lawrence H. Summers said at the time back in 1999.“This historic legislation will better enable American companies to compete in the new economy.”
Boy was he ever wrong.
The rationale for the repeal of the Glass-Steagall Act of 1933 was seen at the time as a way to help American banks grow larger and better compete on the world stage against foreign rivals. They feared American banks would not be able to compete and would be swallowed up by much larger rivals from overseas. At least that is what certain American investment bank CEO’s told Congress and used as an excuse to repeal their last obstacle to throwing a party like the ones back in the 1920’s. Surely they were more clever than those bankers back then they thought.
Glass-steagall actually had a number of provisions that had been whittled down over the decades. Wall Street had tried to repeal it 12 times unsuccessfully before it was finally repealed once and for all. Most people simply understood it to mean the separation between commercial and investment banking and the creation of the FDIC but it included many less famous provisions as well.
Glass-Steagall was repealed and replaced by the Financial Services Modernization Act also known as the Gramm-Leach Act. It was passed with a bipartisan majority in the House and Senate and signed into law by Bill Clinton. This along with his signing of the DOMA act were perhaps the two most egregious errors of his presidency. Much of the bill had been whittled down beginning with the Reagan administration years earlier. This is what allowed megabanks like Citigroup, Bank of America, and J.P. Morgan Chase to form and grow into behemoths several years later.
The Rise Of The Vampire Squid Banks
The term vampire squid was a term coined by a financial journalist named Matt Taibbi. His July 2009 Rolling Stone article “The Great American Bubble Machine” described Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The expression “Vampire Squids” has come to represent in financial and political media the perception of the financial and investment sector as entities that “sabotage production” and “sink the economy as they suck the life out of it in the form of rent.”
Many believe that the repeal of Glass-Steagall released the chains on this beast and allowed it to go free and ultimately contributed to the financial disaster in 2008. Matt Taibbi did an outstanding article called The Mega Banks Most Devious Scams Yet. I found this to be a very illuminating article and would encourage you all to read it.
Back in the 1990’s and even today, you hear the buzzword deregulation thrown around a lot. Humans naturally tend to be against rules and fewer rules sounds great in theory, but is not always a great idea when you are talking about Wall Street. With billions in play every day and a lot of very greedy type-A personalities around, it makes sense to have some clear rules in place to keep their greed and egos in check.
Everyone told us deregulation was essential and that we had too many regulations. Descriptive and visceral terms like “strangling” our economy were bandied around. But what congress failed to consider is the ones pushing for deregulation were only doing so because of good old fashioned greed. It would be like parents listening to advice columns written by teenagers to try and come up with a plan to control their own unruly kids. The teenagers would likely recommend a free iPad and a bottle of J&B when they are especially naughty. Or to use an even more stark phrase, it was like turning the keys of the asylum over to the inmates.Sometimes parents know best and so should Congress.
Wall Street convinced a very gullible Congress that their hands were tied with onerous regulations that Asian and European banks lacked. They said it was an uneven playing field and our entire economy was at risk unless we untied the chains that bound them and let them fight back against this foreign bank invasion. They were simply our heroes and wanted to come to our rescue if only their hands weren’t tied.
They did a great job convincing the country as a whole that Japanese and German banks would swallow up the world. Their only hope to survive and compete was to rid ourselves of those evil “regulations” and allowed American banks grow into behemoths as well simply to fight back. This is what Financial Services Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act was supposed to fix.
Well it certainly made them into behemoths but instead of fighting invisible foes, the friendly giants turned around and bit the hand that fed them and ultimately brought the entire economy crashing down with them.
Unintended or Intended Consequences?
Unfortunately for the American people, one consequence of this new law was a new form of monopoly. Most everyone is now familiar with the term “Too Big to Fail” well, this is where that comes from. These new Mega Banks now had almost no constraints. Nothing at all in place to stop them from taking huge risk. The bill allowed commercial banks to merge with investment banks but it doesn’t stop there. They could then turn around and merge or buy heavy industries. A small but very important provision of this new bill said “complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.” And since everything is pretty much considered complementary to financial activity of a bank, that essentially allowed banks to buy and control sectors that had previously been off-limits to them since the days of the original J.P. Morgan that died in 1913.
I bolded that phrase since it has become the most important provisions of this Wall Street velvet revolution. No one knows who or how it got included. Rather, no one will admit to knowing though almost certainly a banker made sure it was included. This means that MegaBanks can now influence if not outright control sectors like oil, gas, coal, nuclear power, farm produce, electric power, metals like tin, copper, zinc, aluminum, airports, seaports, rail, you name it. If there is a profit to be made they will be there. The term vampire squid now is starting to make a lot more sense.
A Velvet Revolution by “Banksters” That Drastically Altered Our Economy
It is sad that Republicans and Democrats are too busy calling each other names and bickering about relatively minor problems while Wall Street essentially managed to effect a revolutionary change to the American economy with hardly a whisper. These radical changes were never debated openly, understood, and certainly never asked for. Both Republicans and Democrats in congress were outplayed, outwitted, and outsmarted. If this were Survivor with two tribes, the Wall Street crew eliminated the Democrat and Republican Tribes before they knew what hit them. They managed to more drastically change and shape the very fabric of our economy with this quiet revolution than anything Congress is likely to do in the next twenty years especially with gridlock ruling capitol hill.
Behemoth banks that caused the financial crisis, that we then bailed out, are now in control of practically every sector of the economy thanks to the loss of the Glass-Steagall firewall. What few boundaries and limitations they had before are gone. They kept repeating the mantra that deregulation was essential and needed but failed to mention it was the only thing that kept monopolies and their irrational and insatiable greed at bay.
It should also come as no surprise that Wall Street was largely responsible for writing the actual bill itself and especially the provision added for “complementary activity” that ensured they could spread their tentacles to far more sectors of the economy. It is hard for non-banking corporations to compete with guys that have access to virtually free and unlimited money supply with no interest. If a corporation wants to buy a smaller competitor they have to usually go to the banks to finance the deal which take a big cut. If a bank wants to buy an electric company they only need get some free money from the Federal Reserve, turn around and loan that money back to the U.S. government and make a killing. Then use those profits to buy any company they want. Nice racket. Even the Cosa Nostra is jealous of that deal. Too big to fail also means too big for trial unfortunately. Tony Soprano showed more integrity than some of these banks. At least he feared getting whacked or incarcerated, these banksters have nothing at all to fear and certainly not fear itself.
The Dodd-Frank Wall Street Reform and Consumer Protection Bill
This bill was signed into law in 2010 by President Obama. The intent of the bill was to try and restore some sanity and transparency to the financial system and end the idea of “too big to fail”. It also placed restrictions on derivatives, limits on debit-card fees, and allowed the government authority to liquidate these mega banks worth over $50 billion in the future if they decide to gamble and lose again. It certainly was a baby step in the right direction but hardly sufficient to really do very much to limit the scope and power of the vampire squid banks. Of course to the gullible people that get their news from Fox and chain emails you would have thought it was an attempt at a communist coup d’état.
You will often hear people demonize and vilify this bill even though few have the slightest grasp of what it contains. I agree that it should be harshly criticized, but because it didn’t go nearly far enough to put the brakes and controls back on Wall Street. Not because it went too far as some critics wrongly argued.
People that lack knowledge will complain about “too many regulations” which seems to be a brainwashed mantra pseudo-intellectuals mindlessly chant to appear smart. More often than not they are quoting chain emails as fact. It amazes me how many urban legends are taken as fact when they are so obviously erroneous. People are so desperate for proof of their beliefs that they ignore facts and reputable sources and instead rely on pure propaganda.
As part of the Dodd-Frank Act, Congress adopted a ban on proprietary trading and restricted investment in hedge funds and private equity by commercial banks and their affiliates, the so-called “Volcker Rule.” Paul Volcker actually stated that he would have written a far simpler four page bill. “I’d write a much simpler bill. I’d love to see a four-page bill that bans proprietary trading and makes the board and chief executive responsible for compliance. And I’d have strong regulators. If the banks didn’t comply with the spirit of the bill, they’d go after them.” As of January 14, 2014.
Guess why the bill was much longer, far more complex and convoluted, and written in such a way that only bankers could understand what it contained. You guessed it, the Wall Street Bankers managed to write the bill that was meant to control them. Congress let the teenagers write the rules once again. We shouldn’t be surprised, pharmaceutical companies largely write any bills deal with prescription medication and healthcare. Defense contractors manage to convince the public and Congress we need to spend between $640 Billion to around $1 Trillion a year even though that is more than the next eight countries combined. Six of those eight are also our allies. Look at any bill that gets passed, which is arguably a rare thing these days, and you will likely see industry lobbyists who are often former politicians writing the bills or at the minimum having a major influence.
What an absolutely sickening thought to know that politicians have become so reliant on these PACS, lobbyists, corporations, and other outside money to get re-elected that they no longer do much beyond trying to get re-elected. Their main job duty is getting re-elected not governing. Thanks SCOTUS for Citizens United, the gift that keeps on giving or rather taking. Bought and paid for career politicians, crony capitalism, and allowing lobbyists to largely write bills is the perfect storm.
Why We Need a New and improved Glass-Steagall for the 21st Century
Sandy Weill the banker and creator or the Citigroup in an interview on CNBC’s SquawkBox called for splitting up the commercial banks from the investment banks. In effect, he says: bring back the Glass-Steagall Act of 1933 which led to half a century, free of financial crises. I wish he had realized this before the financial crisis of 2008 but better late than never. Weill helped engineer the 1998 merger of Travelers Group Inc. and Citigroup, a deal that led Congress to repeal the law. The New York-based company became the biggest lender in the world before taking a $45 billion taxpayer bailout in 2008 to avoid collapse.
“It will take a lot of tools to get rid of too-big-to-fail, but one of them ought to be that if you want to do high-stakes gambling, good on you, but you do not get access to people’s checking accounts and savings accounts,” Senator Elizabeth Warren.
“Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” McCain said in the statement. McCain in 1999 voted for the Gramm-Leach-Bliley Act, which overturned Glass-Steagall.
Remember Eric Cantor?
The former House majority leader. You know, the guy that lost his re-election bid recently? Well he has a new job. His Republican opponent Dave Brat attacked Cantor for crony capitalism. Cantor joined an investment bank as a vice-chairman with a seat on the board of directors as well. Keep in mind Cantor was a lawyer so what could he bring on board to an investment bank given that degree of very specialized knowledge. Their rationale for hiring Cantor was “to help them navigate the difficult terrain around Washington for investment bankers”.
Cantor will receive a pay package of around $3.5 million annually to help guide them around the difficult terrain. “Cantor made himself the top congressional ally of private equity firms by forming the Coalition for the Freedom of American Investors and Retirees to battle any tax legislation aimed at the industry.” He formed this group back in 2007 which successfully managed to block efforts to raise the carried interest tax rate. In 2009 he also convinced all Republicans to vote against the Dodd-Frank reform Act. In 2012 he blocked attempts by stripping out Grassley’s provision that would require so-called “political-intelligence consultants” who collect and sell information for hedge fund to disclose their activities. This was essentially congressional insider information being sold to Wall Street.
He also happened to be the forth largest recipient of political donations from Wall Street to any Congress member. Jon Stewart astutely asked viewers not to begrudge Cantor his new $3.5 million salary as it’s not so much a salary as compensation for services already rendered. If Wall Street thinks they have a tough terrain in D.C. with all the millions they put into PACS, lobbyists, and hiring former House Majority leaders I wonder what term they would use to describe the terrain the middle class American faces with no influence at all.
Outlook For the Future
It is said that history always repeats itself. Surely this happens because we forget our own history and the lessons. It is not so much we forget history it is simply that new generations always think they are smarter and can change it.
Glass-Steagall was enacted during the Great Depression to act as a firewall to prevent another Great Depression from ever happening again. Congress unfortunately bought into the hype about the evils of deregulation and allowed Wall Street to write their own rules. It is not surprising that they chose to create an atmosphere where they could become bigger and richer and did not really care about the consequences to the economy as a whole or to the middle class taxpayer. The Gramm-Leach-Bliley Act was an epic failure, so what next?
The Dodd-Frank bill is a very watered down and somewhat toothless attempt to try and put some constraints back on banks. It was intended to correct the errors of the Gramm-Leach-Bliley Act.
All Americans should have the security of knowing their checking, savings, and IRA accounts are in safe hands and not at risk from some derivatives gambling scheme. Dodd-Frank was not a replacement for the Glass-Steagall bill which saw us through massive expansion and strong middle class growth for decades.
When debates started there were hopes that it would have some teeth but people like Eric Cantor made sure to surgically remove “onerous” (read as smart) regulations before it was passed. Even Democrats who did not understand the complexity of banking laws deferred to the “expertise” of Wall Street and relented and passed a bill that did very little to bring any sanity back to our finical markets. The inmates were still very much in charge of the asylum.
If people on Wall Street want to continue to gamble let them do so with their own money and take their own risks. The 21st Century Glass-Steagall Act seems like something very much needed again. “Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” said Senator Elizabeth Warren. “The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk. The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more stable and secure, and protect American families.”
Senator Angus King said. “While the 21st Century Glass-Steagall Act is not the silver bullet to end ‘too big to fail,’ the legislation’s re-establishment of clear separations between retail and investment banking, as well as its restrictions on banking activities, will limit government guarantees to insured depository institutions and provide strong protections against the spillover effects should a financial institution fail.”
As much as I would love to think the bipartisan supported 21st Century Glass-Steagall bill has a shot to pass, I very much doubt that it does. Wall Street is simply too powerful, too entrenched, with too many politicians in their pockets to see any real progress or meaningful reform. The great depression became a footnote in history books and we are already treating the 2008 meltdown like it is ancient history. Congress seems to think too big too fail also means too complicated to split up. Perhaps if they actually wrote the bills themselves with a lot less complexity than allowing Wall Street to write it for them we wouldn’t be in this mess.
Bankers wield far too much influence and power to ever let something like this ever pass. Wolf Richter wrote on the blog Zero Hedge, “It would be the biggest threat to bankers, their industry, their bonuses, their source of free money, their way of life, their egos, their religion even.”
In the 15 years since Glass-Steagall was repealed, functions within the banking system have become exponentially more complicated and interdependent. This complexity acts as a firewall against ever considering a replacement bill. Bankers are masters at creating complex schemes that no one understands but fellow bankers. And that is just the way they like it.
I don’t pretend to understand all the complexities involved that led to the financial meltdown nor the events that have happened in the ensuing six years. But I am not alone, no one seems to understand what has happened and what still remains to be done to prevent a repeat. But the one thing I am sure of is we need a national conversation to try and put the pieces of this puzzle together. I am also sure that we can no longer afford to let outside lobbyists, bankers, and other vested interest groups hand us the pieces to the puzzle anymore. It is time we had more discerning eyes and not believe everything Wall Street tells us when it impacts their personal fortunes. It is some we solved the puzzle without them in the room for a change.
We also have to put an end to the culture of the revolving door between politicians that then become regulators or lobbyists as soon as they lose an election or retire. They are not hired because they bring expertise to the jobs but simply because they are selling their “access” to their friends and former colleagues. This simply infects everything they are doing. It creates a “too cozy” type of relationship between our regulators, wall Street, and Washington. Washington only seems to work for companies able to hire and army of lobbyists and PACS but doesn’t work for Main Street that has no such paid influence by hiring armies of lawyers and lobbyists.
Wall Street Hates Elizabeth Warren
Once Elizabeth Warren, the only Senator to really try and regulate Wall Street, began her crusade to try and explain what was happening the Wall Street lobbyist began their attacks on her. They tried to portray her as a socialist, a communist, anti-American, and many other choice words. They literally hate her. Her new book A Fighting Chance is simply a Must Read for anyone that wants to understand why the middle class is under assault. Elizabeth Warren is the best thing to happen to American politics in decades. She’s not only a sharp and indefatigable warrior for American middle class families, but she’s also a forceful, persistent and effective critic of excessive financial deregulation and big business welfare.
Her critics started chain mails and other conspiracy theories to drum up opposition to her and managed to stop her nomination to head the new Consumer Financial Protection Bureau which she came up with ironically. She then decided to run for Senate and Wall Street invested huge money in attack ads and with donations to her opponents. Wall Street lost that bet and now Warren sits on a committee responsible for Wall Street regulations and oversight. She lost the battle but won the war. Let;s hope she become the chairperson on that committee soon.
In point of fact Elizabeth Warren seems to be one of the very few people that is trying to have a conversation to save American capitalism. Without a vibrant and productive middle class, the pyramid will eventually collapse. Warren’s appointment to the committee angered top Republican Senators who hate her relentless push for more oversight and have crusaded against her consumer protection bureau as an example of oppressive liberal governance. Indeed, some Republican Senators even joined Wall Street in lobbying against her appointment to head that bureau. But she might be America’s last great hope and only remaining stalwart given many Democrats in Congress also now routinely defer to Wall Street’s “expertise” given the sheer complexity of the rules which of course Wall Street help write into bills expressly for that purpose. As a former contract law professor from Harvard, Elizabeth Warren is not intimidated by that complexity which is why Wall Street hates her.
Knowledge is Power So Educate Yourselves and Get Informed
“The death of democracy is not likely to be an assassinations from ambush. It will be a slow extinction from apathy, indifference, and undernourishment.” Robert Maynard Hutchins (1899–1977) From Great Books.
Robert Reich, the former Secretary of Labor has also written a fantastic book called Beyond Outrage: Expanded Edition: What has gone wrong with our economy and our democracy, and how to fix it
Another excellent book that helps makes sense out of this mess and offers some practical solutions is The Price of Inequality by Joseph Stiglitz which examines the dangers we face as the middle class continues to dwindle.
Capital in the Twenty-First Century by Toma Piketi. is also an excellent choice. I have read all three of these books myself and highly recommend them if you want to become informed and engaged. Each offers alternative views on how we reached this crisis but have a similar prognosis. I have not read Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance yet but it is next on my list and got great reviews.
Bankers have done their absolute best to try and pretend they are entities unable to be prosecuted instead of human beings that can serve time behind bars. Perhaps if a few of these thieves responsible for billions in damage to the economy exchanged their tailored Armani suits for prison orange and fine them personally we wouldn’t need any new laws at all.They have had no reason to be fearful of prosecution. But if a few hundred of them directly responsible for the crash of 2008 been sent to a federal penitentiary I bet the others might have been a little more reluctant to play so footloose with our money again. There are 25 people with life sentences in prisons whose only crime was being caught with marijuana. There are also Wall Street bankers that were directly responsible for costing taxpayers billions who are still working on Wall Street when they are not on their yachts. Anyone else see something wrong with that picture? I will close this article with a quote that I think summarizes everything quite well.
“As important, banks do not commit crimes; bankers do. Until those individuals, including executives, are held personally and meaningfully accountable, everyone should expect more crime from Wall Street. DOJ allowing banks to use shareholders’ money that is tax deductible while concealing illegal conduct and individual involvement is not punishing or deterring crime. In fact, it rewards past crime and incentivizes future crimes. Trying to trick the American people into thinking they are tough on crime while Wall Street laughs all the way to the bank is not justice. It creates an indefensible double standard of justice: one for Wall Street and one for everyone else,” Dennis Kelleher, the President and CEO of Better Markets