Last Friday the following letter was sent to me, and million others, by President Obama on the need for Wall Street reform. The new battle on Capitol Hill is pitting American's vs. Wall Street. Perhaps Obama jumped the shark as a recent Pew Institute, http://pewresearch.org/pubs/1569/trust-in-government-distrust-discontent-anger-partisan-rancor; poll resulted in the trust in government hitting all-time low. What one will not see in the letter below is the slush fund and unchecked power attempting to be passed by the Obama administration. "Too big to fail" is a misnomer and should never be uttered again. The repeal of the Glass-Steagall Act under President Clinton kicked off the derivative fiasco that caused the "financial meltdown". Combine the repeal and artificially low interest rates led by Alan Greenspan, we have meltdown that all of us experienced.
Had our government left the Glass-Steagall Act alone and not felt that every American had the right to own a home despite being unable to pay for them, we would not have experienced the "meltdown". Government is not the answer to all of our ills. We do need to regulate the industry but it needs to be done judiciously and not without a check-n-balance or slush fund system which is being proposed by Democrats. Ask yourself why did the SEC file a civil suit against Goldman Sachs on the very day that Obama sends out this email?
Chris --
It has now been well over a year since the near collapse of our entire financial system that cost the nation more than 8 million jobs. To this day, hard-working families struggle to make ends meet.
We've made strides -- businesses are starting to hire, Americans are finding jobs, and neighbors who had given up looking are returning to the job market with new hope. But the flaws in our financial system that led to this crisis remain unresolved.
Wall Street titans still recklessly speculate with borrowed money. Big banks and credit card companies stack the deck to earn millions while far too many middle-class families, who have done everything right, can barely pay their bills or save for a better future.
We cannot delay action any longer. It is time to hold the big banks accountable to the people they serve, establish the strongest consumer protections in our nation's history -- and ensure that taxpayers will never again be forced to bail out big banks because they are "too big to fail."
That is what Wall Street reform will achieve, why I am so committed to making it happen, and why I'm asking for your help today.
We know that without enforceable, commonsense rules to check abuse and protect families, markets are not truly free. Wall Street reform will foster a strong and vibrant financial sector so that businesses can get loans; families can afford mortgages; entrepreneurs can find the capital to start a new company, sell a new product, or offer a new service.
Consumer financial protections are currently spread across seven different government agencies. Wall Street reform will create one single Consumer Financial Protection Agency -- tasked with preventing predatory practices and making sure you get the clear information, not fine print, needed to avoid ballooning mortgage payments or credit card rate hikes.
Reform will provide crucial new oversight, give shareholders a say on salaries and bonuses, and create new tools to break up failing financial firms so that taxpayers aren't forced into another unfair bailout. And reform will keep our economy secure by ensuring that no single firm can bring down the whole financial system.
With so much at stake, it is not surprising that allies of the big banks and Wall Street lenders have already launched a multi-million-dollar ad campaign to fight these changes. Arm-twisting lobbyists are already storming Capitol Hill, seeking to undermine the strong bipartisan foundation of reform with loopholes and exemptions for the most egregious abusers of consumers.
I won't accept anything short of the full protection that our citizens deserve and our economy needs. It's a fight worth having, and it is a fight we can win -- if we stand up and speak out together.
So I'm asking you to join me, starting today, by adding your name as a strong supporter of Wall Street reform:
http://my.barackobama.com/StandForWallStreetReform
Thank you,
President Barack Obama
I know that you don't really follow party politics (or so you say...) however, the Glass-Steagal act repeal was drawn up primarily by Republicans (Phil Gramm R-TX, primarily) there was a lot of cajoling in both houses and Clinton signed as one of his last acts (signed in 1999).
ReplyDeleteHere was what the Congressional Research Service prepared in 1987
The argument for preserving Glass–Steagall (as written in 1987):
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):
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.[8]
It's amazing reading the arguments for keeping the act, that all four came to fruition.
Thanks for the link. I am now standing up for Wall Street reform.
ReplyDeleteNormally I'd be vehemently against regulations on an industry for the sake of regulations, but Wall Street has proven that the moral hazzard that they create by merely existing is too great for society to leave unchecked.
ReplyDeleteWall Street banks have no incentives to to "good" business, they only have incentives to do profitable business and the difference in those is HUGE. Typically a company, any company, generates some social value by their existance within that society. Wall Street however, exists in a vacuum. This creates a moral hazzard that is unacceptable.
Put Glass-Steagal back in place, ban naked derivatives, require that all derivative trading be above the table and visible to the SEC, and if that derivative is acting as an "insurance" hedge regulate it as the insurance that it is.
It used to be that these companies cared about their customers and about the society they operated in. Now all they care about is profits and while there's nothing wrong with profits - profits at the expense of society is unacceptable. This is the opposite of socialist wealth distribution because it's nothing more than stealing from the masses to line the pockets of a few insiders.
Anon...Thanks for the research. It is a bit odd that the arguments to keep the Glass-Steagall intact have all lead to our demise and the push for "Too Big to Fail" legislation. The repeal was done by The Financial Modernization Act of 1999 aka The Gramm-Leach Biley Act.
ReplyDeleteThe Senate passed the original version narrowly 54-44 then House passed it by 343-86 vote. In Conference Committee Sen. Gramm(R-TX), Rep Leach (R-IA) and Rep Biley (R-VA) drafted the final bill that passed the House voted it by 241-132, which oddly enough 131 Republicans voted against, the Senate passed it 90-8, http://banking.senate.gov/conf/.
I do agree with Kevin that the financial industry does need more regulation than other industries because of the tricky nature and potential affects corruption, greed and abuse can have on the economy. I am not one, like Kevin, that looks for government to intervene but some regulation is required.
Now we do not need to go off the deep end in regards to regulation like Obama is looking for us to do. We do not need to create a "slush fund" and give regulatory agencies unchecked power to determine if a company is "Too big to fail". While several financial companies took full advantage of the changes signed into law by President Clinton, it was just one element into the combustible reaction that we witnessed. That being said, the Glass-Steagall Act needs to be put back in place. The "slush fund" idea or develop "too big to fail" legislation.
If a bank or investment company fails there will be another one ready to step in and will not have an adverse affect on our economy.
Viper, what exactly do you mean by "slush fund"?
ReplyDeleteHere is the highlight of the "Too Big to Fail" area from the banking committee:
Ends the possibility that taxpayers will be asked to write a check to bail out financial firms that threaten the economy by: creating a safe way to liquidate failed financial firms; imposing tough new capital and leverage requirements that make it undesirable to get too big; updating the Fed’s authority to allow system-wide support but no longer prop up individual firms; and establishing rigorous standards and supervision to protect the economy and American consumers, investors and businesses.
I'm not sure what you are arguing against.
Repubs actually like most of the bill. What they absolutely hate is the consumer protection watchdog in the fed itself.
Anon...the "slush fund" is the pool of money that financial institutions will contribute to so if a company needs to be liquidated or deemed "too big to fail" it can be saved. The decision of which bank or institution fits this mold will be up to the Fed.
ReplyDeleteUntil the Fed is audited and required to report out their activities we cannot afford to make them any more powerful than they already are. There is talk that the slush fund may be taken out as well. I do not understand why we need to recreate the wheel when the Glass-Steagall Act was working so well before it was repealed. Just reinstate it. Doesn't that seem logical?
Forgot, if a company is insolvent because of their actions then let them use bankruptcy court to resolve the issue and not the Fed.
ReplyDeleteHere is what I don't like about the bill (and I consider myself a progressive):
ReplyDeleteIt doesn't end subprime mortgages or adjustable-rate mortgages.
It doesn't end derivatives.
It doesn't break up institutions that are "too big to fail."
It doesn't regulate Fannie Mae/Freddie Mac.
It doesn't stop the massive bundling and securitizing of mortgage loans.
Now it would seem to me that ending these things would prevent further catastrophes like what we just saw. In the end, we will be depending on more government bureaucrats and more government oversight agencies to prevent the next financial crisis. These will be the same government bureaucrats and government oversight agencies who were asleep at the switch while the current financial crisis exploded into a near nuclear financial armaggedon.
I don't think the "slush fund" you fret is the problem. The problem is curbing the derivative market. Which, by the way, is what Obama requires in any bill.
This bill shouldn't end derivatives. They have a purpose in the marketplace, BUT they should be regulated and above the table. And they should have assets attached to them. You should not be able to create derivatives that are naked of assets.
ReplyDeleteAnd it shouldn't end securitization. Securitization is what got you and 99% of american's their homes. Without it, banks DO NOT have the capital to lend.
I find it frustrating that people think these tools are the issue. Just like a hammer, a tool can be used for building things or for breaking them. The problem is that these tools weren't regulated and they were used to break things....in this case the economy.
Oh, and I'm curious how the slush fund is an issue when the FDIC manages an identical fund for dissolving S&L's and has for decades without any issues. This bill is modelled on the FDIC powers. I DO NOT agree with giving those powers to the Fed Reserve which is not a governmental agency but a private orgaization. That's like handing regulatory power for software anti-trust enforcement to Microsoft. It is just bad news.
ReplyDeleteThe goal of this legislation is increase the size and power of government. I agree that regulation, not over regulation, is required and it can be mostly accomplished by bringing back the Glass-Steagall Act. Evidence of that is the arguements that Anonymous poster pointed out above as to why to keep it.
ReplyDeleteLet's be honest here. The Obama administration wants to keep Americans co-dependant on Government. The FDIC should be used for insurance and not to bailout anyone. Allow institutions to fail because of the decisions that are made. In a Free Market, which I think can still exist here, will pick up the slack. If Goldman Sachs were to go out of business there will be others that will organize to replace Goldman Sachs.
Plus, I agree that the bill does not regulate Fannie Mae/Freddie Mac but once again both programs prove that Politicians and Government cannot run entitlement programs. Yes, I consider Fannie Mae/Freddie Mac an entitlement program as they give loans out like candy without regard to the ability of repayment.
"The goal of this legislation is increase the size and power of government."
ReplyDeleteReally? Where is the evidence of that?
"The Obama administration wants to keep Americans co-dependant on Government."
Chris, I am tired of Tea Partiers assuming they "know" what is on the minds of politicians. Please, cite a source that shows unequivocally that the Obama administrations agenda is to make american's dependent (not co-dependent I might add) on the Government? If you were being honest here you'd say "In my opinion, the Obama Administration is..."
I don't see them as trying to do that at all, but then I'm not listening to fearmongers and demagogues either which might explain my rational approach to it. Just because Democrats (and secretly republicans) believe that government can fix problems doesn't mean they want to make you dependent on it. Your statement makes it sound like there's a grand conspiracy to make slaves of the american people by congress and the president - and that's absurd.
Also, the FDIC doesn't bail out banks, it liquidates them and guarantees a portion of their holdings. The purpose of the 50B "slush fund" is to have the capital to liquidate banks that take too big of risk and fail. (Lehman) Liquidating an asset costs money and in the case of these banks, probably billions. They should fund that rather than the taxpayers.
As to Fannie/Freddie - they don't give loans out to anyone so to say that they do so "without regard to the ability of repayment" is blatantly false. They make funds available to banks by buying up previously underwritten loans and bundling them into securitization packages and then selling those on the markets. They have no say in the underwriting of the original loan although they are sometimes ordered by congress to purchase debt packages that might be below their threshhold for risk.
Please please please get your facts straight. This thread is rife with mis-information and errors. And a conversation full of falsehoods is as worthless as arguing with a tree.
*sigh*
ReplyDeleteThe level of mis-information and outright falsehoods in this thread are disappointing to say the least.
Fannie/Freddie DO NOT give loans to anyone. They buy loans that were underwritten by banks and then package them into securitized bundles and sell those bundles. They have NO oversight of the underwriting practices of the banks that wrote the loan. And worse, they are sometimes ordered by congress to buy loans that might otherwise fall outside their risk parameters. Again, their purpose is to generate capital for banks by removing mortgages from their balance sheets which will then allow the banks to make more loans.
Second, the FDIC does not bail out banks, it liquidates them - specifically S&L's. This fund is designed to do the same thing - liquidate investment banks that took too large of risks and require liquidation of assets as part of a collapse. That costs money, and if this fund doesn't exist, taxpayers will end up footing the bill.
And again, derivatives are not in and of themselves evil. They are a tool to mitigate risk for an asset held. The issue here was that the people "mitigating" the risk, didn't hold the assets but instead made naked bets on the markets future positions. That's no different than going to Vegas and betting on black.
As to your political points, please cite your source for the statement "The Obama administration wants to keep Americans co-dependant on Government."
My issue here isn't a defense of Obama but that you state this as if it's fact without any evidence to buttress your point. You do this all the time Chris and it's dishonest. An honest statement would be "In my opinion, The Obama Administration....."
It gets old reading mis-information, falsehoods and opinions stated as fact.
Oh for f*ck sake. 20 minutes later it's not showing my post still so I repost and then when I publish the second one it shows the first one.
ReplyDeleteStupid internet!
The bill calls for more government control and decision making on which financial companies are "Too Big To Fail". And yes, Obama does want to keep Americans co-dependant on Government and here is why:
ReplyDelete1. The Stimulus Package is set to grow government work force by 600,000.
2. The health care mandate
3. Increasing our debt to heights unheard of thus creating a class warfare.
4.Bringing the student loan process in house
5. Not curbing or phasing out entitlements
6.Health Care reform creating over 50 new government agencies and increased the size and scope of the IRS
As I think we agree on the entitlement mentality has gotten out of control and Obama only seems to be pressing the accelator rather than taking pause to ensure the programs make sense for the future of the United States.
I know that Fredde Mac/Fannie Mae did not outright give loans but they encouraged banks to make risky loans by buying them when they became toxic. Another reason people have become co-dependant on the Government.
I understand the role of the FDIC as liquidator and insurer of financial institutions. And you are correct if FDIC is not there the potential for taxpayers to pick up the bill exist only because people are co-dependant on the government for a solution.
As you say there is mis-information and errors, well that is why we are discussing the topics so we can root them out and get to the heart of the matter. Wouldn't you agree?
As for the stupid internet part..does Al Gore take credit for that too..lol
BTW...when did demanding small government, less taxes, and more accountability become a four letter word?
ReplyDelete"The bill calls for more government control and decision making on which financial companies are "Too Big To Fail"."
ReplyDeleteChris, that isn't government control, it's government regulation - the difference is as big as night and day.
All of your evidence you put forth requires that I follow the supposition that because A is similar to B it must be true even though the two are not necessarily corollary. I may not disagree that your points about government growth, but the evidence of growth is not implicit or explicit evidence of the Obama administrations desire to keep us "dependent". That is an allegation on your part, not fact. Therefore, it is opinion and again, should be stated as such.
And some of your evidence is absurd. Because my wife hasn't cheated on me, that's proof that she desires to do so? That is what you're putting forth above with the "entitlement programs not being cut" statement. Lack of action in one direction is not proof of intent in the opposite direction.
And again, Fannie/Freddie DO NOT influence or in any other fashion manage the risks associated with lending underwriting. They only buy loans and repackage them into securitization packages. Only when Congress ordered them to lower their own risk parameters did they start buying sub-prime mortgages and this was done at the behest of the banking lobby so they could create higher profit lending vehicles. Until they were ordered by congress, they had not lowered their own risk parameters in decades.
And I've been for smaller government for decades. The problem I have is that people are wanting smaller government for the wrong reasons. And in some cases, smaller government is NOT the answer.
ReplyDeleteGovernment has a responsibility to protect the citizens from all hazzards, foreign and domestic. When an entity such as banks becomes a hazzard to our wellbeing, the government has a responsibility to regulate them.
That is a foundational tenet of libertarianism. If the industry would behave morally and ethically this would not be necessary but since they don't, it is because of the moral hazzard they create.
The relaxing of guidelines by Congress is allowing Fannie/Freddie to become "a lender of last resort" thus not holding an accountability to the process. If I am a mortgage broker, without care mind you,and I know that I can write mortgages of any size and scope without worry of repayment because Fannie/Freddie will buy them then yes F/F is putting influence into the mortgage market.
ReplyDeleteI do agree that we need to strike a balance between small and big government as our government does play a role in safeguarding our property without which it would be difficult to go to work everyday as one would never know if their belongings would still be there when they returned.
But F/F is not the cause but the effect, since the cause is Congress forcing them to purchase the bad debt. I don't blame F/F for the failures, I blame congress for thinking everyone deserves a house. We don't deserve any more than we earn.
ReplyDeleteAs to the balance, I think the best rule for government balance is if we can trust corporations to be morally/ethically responsible then we release them from regulations and simply monitor them to make sure they continue this trend. The problem is that history has proven we can't do this with certain industries because profit is too big an incentive for the risks that are created. Thus the creation of the FDA, FDIC, etc.
This is definitely true of the proprietary investing industry.
I am okay with the monitoring just not the micromanaging of corporations. Government needs to retract to the point where it provides for safe, secure borders, states, and city streets. Regulate commerce btwn states and foreign nations. Maintain our infrastructure.
ReplyDeleteThat is it. Government does not need to tell me if I own a bar that I cannot offer a smoking area inside my building. Government does not need to tell me that I must purchase health insurance or any other product. Government does not need to provide me with health care when I am older or social security or any other entitlement program.
Allow Charities to assist the meek, downtroden or disenfranchised. To create a more charitable country we need to allow Americans to keep more of their hard earned money. No more taxing the rich to give to the poor. There is a reason the United States used to be the envy of the world. Opportunity, prosperity and freedom...we are only watching all that slide away....I do not mean this to sound like its all Obama but he does have his feet on the accelator.
Oh yeah, break up the Fed and loose the mantra "Too Big To Fail"!!!