From Irish Political Review: March 2009
We've Been Here Before
In the dying days of Bill Clinton's presidential term, two acts of financial deregulation legislation were placed on the statute books. On the 12th November 1999 President Bill Clinton signed the Gramm-Leach-Bliley Act (GLBA has become known for the key sponsors of the bill as the Gramm-Leach-Bliley Act, for Republican Senate Banking Committee Chair Phil Gramm, House Banking Committee chair James Leach, and Virginia Representative Thomas Bliley), and then on December 21st 2000, the Commodity Futures Modernisation Act was signed, within the space of just over a year the last remnants of the Glass-Steagall Act (Banking Act 1933) was consigned to history and with it the last piece of the regulatory framework enacted by Franklin D. Roosevelt.
Almost certainly watching was Lawrence Summers. Summers is currently head of the White House's National Economic Council under Barack Obama and as such is one of his key economic advisors responsible for ensuring that the bailout of the US economy works. He said recently that the Obama administration would "move quickly to reform a weak and outdated regulatory system to better protect consumers, investors and businesses". If the regulatory framework was weak then Summers should know, for he was one of its architects.
As Bill Clinton's Treasury Secretary he pushed the deregulation legislation through Congress. Summers is an acolyte of Robert Rubin (one time partner at Goldman Sachs), who only a few weeks ago resigned as a director of Citigroup, the huge US financial conglomerate. Rubin, as Bill Clinton's first treasury secretary, initiated much of the deregulation mania that Summers finished (Rubin has apparently been paid more than $115 million plus stock options at Citigroup and is a close Obama advisor). In a 1995 speech and testimony to congress, Rubin said, "The banking industry is fundamentally different from what it was two decades ago, let alone in 1933." He said the industry has been transformed into a global business of facilitating capital formation through diverse new products, services and markets. "U.S. banks generally engage in a broader range of securities activities abroad than is permitted domestically", said the Treasury secretary. "Even domestically, the separation of investment banking and commercial banking envisioned by Glass-Steagall has eroded significantly."
Three years later Rubin and Summers had a deadline. In 1998, Citicorp Inc bought Traveller's Insurance Group. Under the then existing law, Citigroup had two years to divest itself of either its banking or insurance arm. Instead it went to work in Washington. Citicorp as it was then had a plan. Instead of offering a particular type of service to a group of clients, such as brokerage or stocks, why not be a one stop shop, as was the model in other parts of the world, most notably here in the UK.
With the passing of the Gramm-Leach-Bliley and the Futures Modernisation Acts, the way was now open for Citicorp Inc to become Citigroup. It could now provide its customers with allsorts of financial products and investment vehicles and risk management away from the prying eyes of Federal regulators. With the demise of the regulatory framework most of the large Wall Street institutions went on a merger binge so they to could provide their customers with the same kind of financial products and services.
We are now living through the consequences of these actions with billions being spent on bailing out these failed institutions. Obama gave a major economic address way back on March 27th 2008, he couldn't have been clearer in attacking the kind of deregulation that Rubin and Summers had engineered.
"Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one-aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight. In doing so, we encouraged a winner-take-all, anything goes environment that helped foster devastating dislocations in our economy".
Obama was referring to the deregulation legislation that on the day Clinton signed it into law, Summers hailed it as "a major step forward into the 21st century".
There can be very little doubt that the deregulators in the US took some of their inspiration from Britain where the model being pursued was that of self regulation. In the UK the government and the Financial Services Authority (FSA) simply provided a light touch tiller by which the great juggernaut of finance capitalism sailed into ever more choppy waters, essentially, the banks were left alone to regulate themselves.
Time and again in the US the international dimension was sited as been one of the major concerns of the big New York financial institutions. If these major financial institutions were to compete in a global marketplace they would need to be relieved of the shackles of regulation. At the heart of the US regulatory framework was the Glass-Steagall Act, which had passed the U.S. Congress by overwhelming margins: In June 1933, the U.S. House of Representatives passed the Act by a vote of 262-19; the Senate, which had been highly contentious on votes on other measures, passed the Act by acclamation. President Franklin D. Roosevelt, who, along with many others had pushed for the Act, signed it into law on June 16, 1933. The act was a direct response to the Wall Street crash of 1929 and the subsequent depression.
In Roosevelt's inaugural speech he criticised those who he thought responsible: "The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit."
He went on
"Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people's money, and there must be provision for an adequate but sound currency."
The Glass-Steagall Act was designed to fulfil these commitments.
Brother, Can You Spare Me A Dime.
With the election of President Roosevelt in 1933 the Great Depression was already three years old. A quarter of the working population was out of work. In the big urban centres thousands were living in cardboard encampments called "Hoovervilles". Americas banking was in a state of chaos. Over a five year period some 11,000 banks had failed or had to merge, reducing the number by 40% from 25,000 to 14,000. Most of these it has to said were the small rural independent "unit" banks. Governors in several states had to close the states' banks. The wall street crash had brought an abrupt end to the roaring twenties and people wanted answers.
With the landslide victory of Roosevelt and the slaughter of the Republican incumbents in November of 1932 Roosevelt knew something had to be done, before some of the largest crowds in American political history he spoke of "the ruthless manipulation of professional gamblers and the corporate system". In late February the Banking and Currency committee began a series of hearings on the crash, its chief prosecutor was Ferdinand Pecora, a hard nosed New York prosecutor. The "Pecora hearings" called before it the leading men of Wall Street and uncovered much of the inner workings of Wall Street.
Pecora had done his homework, he knew what to ask. In the first few days Charles Mitchell, President and Chairman of the Board of the National City Bank (today Citicorp) admitted to not having paid tax in 1929,1930 and 1931. The same was asked of JP Morgan Jr, "I cannot remember" came the answer. They were not alone. Pecora ascertained that many of the wealthy financiers on Wall Street had paid no tax, or at least very little, for a good many years.
They also uncovered stories of dodgy practices and share deals. One such scam was the Anaconda Copper Company. Three board members of the National City Bank Mitchel, John D Ryan and Percy Rockefeller set up a "joint account" in nearly a million and a half shares in Anaconda Copper. The stock was then repackaged through a National City affiliate and its salesman. At all time the "joint account" was being manipulated by Ryan and Mitchell who ran the stock up from $28 in 1928 to $128 in 1929. The trio then dumped the stock and watched it crash in value. The hearings concluded that this one deal alone had cost the public $150 million alone.
The Pecora hearings added to the already great pressure on Roosevelt to act, the Banking Act of 1933 was his answer to the shambles of the US economy. The primary force behind the Act was Carter Glass, a 75 year old senator, a former treasury secretary and father of the Federal Reserve System. He had for many years been pointing out the inherent weaknesses in the US financial system. In his view banks should have nothing to do with dealing in the inherently risky business of investing in stocks and should stick to looking after their customer's money. Essentially institutions that rely on taking deposits should not subject this money to risk.
As Roosevelt took office he closed all banks for one week, those that were not solvent were closed. With the signing into law of the Glass-Steagall Act banks were given a year to decide whether they would specialise in commercial or investment banking. Glass-Steagall erected a wall between banking and the securities business. Those banks that elected to hold deposits were prevented by law from "issuing, underwriting, selling or distributing, at wholesaler or retail, or through a syndicate participation, stocks, bonds or debentures, notes or other securities". Not only did the act provide for the splitting of the banking sector it also forbade interlocking directorships.
Roosevelt's objective was to ensure that peoples hard earned cash was never subject to the risks associated with the Wall Street traders, if people wanted to speculate they would have to participate directly, knowingly.
This was essentially the framework that existed until Clinton, Summers et al, decided to bring it all crashing down. Within ten years Glass-Steagalls repeal the same companies have brought the financial system crashing to its knees. Not only are the same companies in the frame but they were using much the same methods.
While researching this article I came across a quote from JK Galbraith which in many ways sums up what many are now, belatedly, finding out.
"One of the things you must understand about 1929 and the antecedent years, as about any speculative episode, is the danger….in attributing intelligence to the simple fact that people are associated with large sums of money or large financial institutions. We don't ask whether they're intelligent. We say, they're associated with all this money, so they must be intelligent. We attribute intelligence to association with financial operations. And only afterwards do we discover that error and that people involved can be extremely successful in gulling themselves.That they can in effect, and I use the word advisedly, be marvelously stupid. "
This article first appeared in February Labour & Trade Union Review, which also reproduced President Roosevelt's important inauguration speech, which resonates at this time of financial crisis. It is intended to carry this speech on the Athol Books website, www.atholbooks.org
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