Subscribe to Common Dreams News Updates
Most Popular This Week
Popular content
Today's Top News
A Taste of the Glass-Steagall Lash for Lehman
A reformed Wall Streeter on unreformed Washington.
Now that Lehman Brothers, formerly the fourth largest investment bank in the United States, is first largest in American bankruptcies, it's time to again ask: When will Washington get it? It should never have been the Fed's responsibility, or the government's, to back investment bank speculation. Instilling stability in the financial system should have been goal enough. Unfortunately, neither the Federal Reserve, nor the government, nor the presidential candidates (nor, not that it matters, the president) know how to meet that goal, and piecemeal fixes won't do the trick. Only a bout of sweeping and decisive regulation could work.
There's precedent: The last time the banking system stood at the brink of implosion was in 1932, three years after the 1929 stock market crash. Franklin Delano Roosevelt zoomed past Herbert Hoover into the White House, and FDR stood up to the unrestrained power of Wall Street and contained it. The resultant New Deal included a stoplight at the heavy intersection of financial capital and unregulated greed, called the Glass-Steagall Act of 1933.
Decisively, the Act forced institutions within the banking community to pick a side. You want to deal with the population at large, take their deposits, give them a safe place for their savings, and make reasonable loans for which you are as responsible as the borrowers? Terrific. As a commercial bank in 1933, the newly established Federal Deposit Insurance Corporation (FDIC) backed your depositors and the federal government regulated you.
Alternately, as an investment bank at the time you could raise capital through speculative investors at home or overseas. But you wouldn't get federal backing, and you couldn't use the citizenry's capital to fund your trading activities.
That simple Glass-Steagall separation not only kept consumer and speculative capital from intertwining within the same institution, it made it possible to understand the activities of all financial organizations. Transparency was not perfect, but it was more easily accomplished.
Lehman Brothers got a taste of the intent of Glass-Steagall Sunday night. Their demise is ugly, not just because of their 156-year history, the 25,000 employees who are suddenly without jobs, or the long list of institutions to which Lehman owed money that will be slugging it out in bankruptcy court.
It is ugly because Washington still doesn't appear to get it. While Federal Reserve Chairman Ben Bernanke is desperately trying to figure out how to save the banking industry from itself, and Treasury Secretary Hank Paulson can't wait until the election saves him from himself, malignant inertia reigns.
The catalyst for this current crisis may be the housing market, but the larger culprit is the killing of Glass-Steagall, which paved the way for this recklessness.
Yet, rather than considering the massive risks of merging commercial and speculative banking interests, federal officials actually pushed for Bank of America's $50 billion all-stock takeover of Merrill Lynch. That knee-jerk move follows the same dangerous pattern that began when Citigroup took over Salomon Brothers in 1999.
The Fed wants to avoid another huge failure in Merrill Lynch by pushing it under the rug of Bank of America, but B of A can't possibly know the extent of Merrill's potential losses. That a commercial bank is taking over a speculative giant is much more dangerous than Lehman Brothers tanking. The Fed was well within its rights to say 'no' to Lehman's plea for a bailout. But unlike Lehman or Bear, B of A is responsible for the accounts of millions of customers-real people with real money on the line. If Bank of America gets in real trouble, the Fed's hand may be forced.
The speculative nature of the current banking industry, in which commercial and investment banks can borrow beyond their abilities to repay, is a threat to national economic security. Lehman's demise means the dumping of more worthless real estate investments into an already oversaturated market. (If Lehman could have sold its assets for enough capital infusion, it would have done so.) Lehman's bankruptcy will only damage the market further, as other players find even less appetite for their real estate waste.
In all of this turmoil, citizens will see their ability to get loans, even if they are qualified, cut further. Bank of America, as one of the nation's leading lenders, would be wise to figure out what their risk is in taking over the behemoth that is Merrill, and quantify just how much capital it is on the hook for before extending any more.
- Posted in
29 Comments so far
Show AllIf free trade (unregulated capatalism) is imploding it must be affecting Republicans as well. Some got out, but many should be seeing their portfolios crash. Hopefully all Americans will demand the reforms we need.
A banker has a dollar in his pocket.
He loans fifty dollars to a questionable borrower.
He borrows the forty nine dollar spread.
The only way this scheme could have survived was compound interest (usury)
Islam is the only religion that still bans compound interest.
Some believe bankers are behind the US vs Iran conflict.
Here's some info on the relationship of interest, usury, and religion. There's a good reason usury gets a notable mention in the holy texts, and remains an issue.
http://theformofmoney.blogharbor.com/blog/_archives/2007/6/19/3015845.html
History of Interest Rates by Sidney Homer, Rutgers University Press, 1963
Credit is sometimes considered a modern device or even a modern vice. It is true that a few new credit forms have been developed in our century and statistics reflecting the growth of the volume of credit during recent decades are impressive. But a glance through the pages of financial history will dispel the notion of novelty. Credit was in general use in ancient and medieval times. Credit long antedated industry, banking and even coinage; it probably antedated primitive forms of money.
Interesting - thank you.
This article perfectly illustrates how the Neocon Republicans (with the able help of Neocon Democrat Bill Clinton and his DLC and blue dog colleagues in the Democratic party including Al Gore) have gone about systematically wrecking America. Nomi Prins for those who don't know is a former investment banker with Bear Stearns so her knowledge and point of view is quite professionally informed.
Poet
I hate to say this but this country is too dysfunctional to realize the need for the Glass-Steagall bill, be it a blue collared worker on a pickup truck or the CEO of Lehman Brothers. In fact, back in the days of FDR, even with all the factors on his side, the monied elites were still very powerful and even tried to assassinate FDR ! We must unite and diminish the power of the monied elites first before we can attain the leadership that truly represents the public interests and will indeed push for fundamental reforms.
It was either Marx or Lenin who said that capitalism will fashion the rope with which it hangs itself. In this country that rope is woven of equal parts Greed and Stupidity (which is also the name of every lobbying firm on K Street, every investment bank on Wall Street and political consulting firms everywhere).
Nancy Pelosi supported the repeal of Glass-Steagall in 1999, my platform calls for the repeal of Gramm-Leach-Bliley Act which repealed Glass-Steagall.
it is a sordid tale of Citicorp morphing into Citigroup and how this was all done in a Pelosi-Clinton collaboration to screw We the People.
GWB didn't invent crony-capitalism; his administration has just elevated it to an art.
Cindy
www.CindyforCongress.org
For surrealistic reading, here's the link to the transcript of the love fest between Bill Clinton and Phil Gramm back when Bill Clinton signed the Gramm-Leach-Bliley Act that repealed Glass Steagel.
http://www.ustreas.gov/press/releases/archives/1999.html
"And today what we are doing is modernizing the financial services industry, tearing down these antiquated laws and granting banks significant new authority. This will, first of all, save consumers billions of dollars a year through enhanced competition. It will also protect the rights of consumers."
And of course, Joe Biden, as befitting his role of Senator from America's corporate headquarters (Delaware) was a big proponent of this act. Along with lots of other prominent Dems.
----------------------------
"To know, and not to do, is not to know"
www.samsonsworld.blogspot.com
Note: If you read the transcript from the link, you'll find a classic case of Democratic mis-direction. Bill Clinton is signing a bill that eliminates key depression era reforms and protections. But, he rarely talks about it during this ceremony. Instead, he's prattling on and on about 'privacy protections' and 'the community reinvestment act'.
So, now, 9 years later as we watch our financial system implode, what seems more important?
-- The repeal of the depression era reforms
-- How do you feel about your 'privacy protections' today? Ever read the privacy statements that financial institutions send you. Basically it says they can give your data to any 'partners' they want to give it to. Do you think you've seen any massive improvements about privacy protections since the passage of this act?
-- How do you feel about 'community reinvestment'? Have we seen a massive surge in money going to inner cities and minority communities since this act was passed?
Typical Democrat. They prattle away about inconsequential BS that they attached to the bill while signing the bill that turned our financial system over to con-artists and thieves.
Now we are seeing those chickens coming home to roost.
----------------------------
"To know, and not to do, is not to know"
www.samsonsworld.blogspot.com
Thanks Cindy, Samson, and Little Brother for your comments.
The promotional photo on the Treasury link that Samson gave does not do justice to the ecstatic greed that was in the room when Clinton signed the bill repealing Glass-Steagall.
Check this link for the photo that ran on the front page of the New York Times the next day - the epitome of a room full of strutting white male power suits: Clinton and the gangsters repealing Glass-Steagall:
www.ratical.org/corporations/DErulesUD.html
And here’s a link to a photo of FDR, signing Glass-Steagall:
http://www.progressivehistorians.com/2007/11/bill-clintons-role-in-mortgage-crisis.html
Both the linked sites have more info on what it all means…
and don't you think that there is a small chance that this group of politicians with the same goal, find it useful to convince the people that they are for their side, one side or the other, and in the creation of 'sides' they can play on emotions until all logic is cast aside for sides, in the fervor to vote the person in that you imagine is on your side?
Thus securing at least enough of mainstream America to their bondage that they, who have no real side at all, but the side of profit unto self at the expense of the commoner, can continue to rape democracy through the veil of sides?
Christ spoke of just such a kind of person......and who they served.
I suppose that the author wanted to stick to economics and not bring "personalities" into it.
But it's not as if Glass-Steagall put its aged self to bed one night and quietly passed away of natural causes.
The bipartisan, neo-liberal majority in thrall to, and in partnership with, Wall Street, corporations (fka Big Business), and moneyed interests euthanized it-- and Bill Clinton happily signed the death certificate.
So once again we agree, Cindy! ♥
Hope the campaign is going well!
Good post... good comments. Thanks Nomi.
"Fundamentals"
http://www.wilypython.net/Fundamentals%20.asp
Few US voters understand or acknowledge that FDR's New Deal created things we take for granted such as weekends for the working class and retirement for non-millionaires. Even fewer realize that W's grandfather attempted to assassinate FDR in order to preserve corporate control that assured that the working class would continue to owe their souls to the company store.
Until the US electorate reverses the neocon myth that Government is the root of problems and corporations are the solution to problems, there will not be sufficient momentum to reverse the trend that started when Reagan moved to DC and started deregulating the financial industry. The current paradigm calls for more financial industry deregulation every time there is a financial crisis that resulted from previous deregulation. If that pardigm continues much longer we will witness the US taking an irreversable plunge into the third world.
Off topic...
But I just read that Kerry defeated Ed O'Reilly for Senate.
I hadn't even heard of Ed O'Reilly. He was completely off my radar.
Wouldn't it be great if Common Dreams introduced a section informing us about progressives running for public office?
Especially Cindy Sheehan. If there was ever a race that Common Dreams needs to wholeheartedly support it's Sheehan vs. Pelosi.
www.CindyforCongress.org
As a long-time supporter - i mean with dollars - of Common Dreams, i hate to say this but...
Pretty obviously, CD has determined NOT to offer space to insurgent alternative candidates.
Come on, CD, just as basic reporting - you should provide space for articles that cover insurgent candidates.
you don't see how your support is enabling the loss of the thing you are for?
This discussion touches but does not grasp the underlying operator for these incessant economic and social upheavals/injustices.When a person and a society equate elites with money that society is doomed. If status, power, attention and illusory well being is tied to how "big" your pile of gold is in relation to other people's pile some form of theft will be institutionalized.The selfish,cowardly and antisocial behavior of the dollar elite must be downgraded to "grudgingly tolerated". Public recognition, reverence and reward for communal,neighborly actions that enhance everyone must be elevated to the forefront. The sad truth is that that downgrade is still not on the table.
The most ironic examples of this social toxin are the cheered and followed Christian minister elites. They are measured and honored as wealthy CEO's of mega congregations, not humble pastors of an intimate group of spiritual pilgrims. In the private enterprise world examples are CEOs privately bagging tens of millions while their public corporate charge is bleeding to death.In the days of honor, captains went down with their ship. In politics it is the ruthless and relentless grubbing for "funds". This embarrassing and endless solicitation is cheered by a media which measure political astuteness and success with an aspirant's pile of "gold". A palladium is available. TAXES!
Gandhi smote an empire by embracing poverty. Bush and company sunk an empire with their lust for gold. "But Satan now is wiser than of yore, and tempts by making rich,not making poor." Quote from Alexander Pope
Actually the pile of gold era is over. There is no longer a gold standard. There seems to be a promissory note standard in it's place, or a promisorry? standard? Heh.
Remember that these so called Christians are only nominal Christian. In the bible they would be considered agents of Satan, the dark side.
This was not done by accident. I read years ago a number of astute economists warning that this very thing would happen and using the past and sound methodology in order to make their case.
They (Government and Industry) had to have known this would happen. Those people making loans to person who did not even have jobs KNEW for a fact that they could not afford those mortgages. It could hardly have been a surprise.
Government agencies were well aware such loans were being made, yet nothing was down to curtail the practice.
It was all very deliberate and calculated. All this talk of "Cleaning up The banking Industry" is merely hot air, so as to give the impression something is to be done.
There might be changes put in for a time which will soon erode, and the whole thing will happen again and again. The Government is aiding and abetting this behaviour. It makes a tremendous amount of money for those pulling the strings.
>>"Capital must protect itself in every way... Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principle men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd."
>>JP Morgan.
PK
ON AIG from CNN
(CNN) -- The Federal Reserve Board announced an $85 billion plan Tuesday to bail out troubled insurance giant American International Group Inc.
Suze Orman says it's a good thing the federal government bailed out troubled national insurer AIG.
The federal government decided to intervene after determining a failure of the company, whose financial dealings stretch around the world, could hurt the already delicate markets and the economy...
HELLO DUMB-DOWNED AMERICANS! ANNOUNCEMENT: THE 'FEDERAL RESERVE' IS NOT 'FEDERAL', NOT UNDER THE JURISDICTION OF, OR FORMALLY PART OF, THE US GOVERNMENT. IT IS A PRIVATE BANK IN CHARGE OF OUR MONEY SUPPLY. LEARN ABOUT THE FEDERAL RESERVE.
This was a very good link. But because there has been so much voluntary compliance, and consent to how things are, even as most Americans know in their hearts that something is terribly wrong with our country and it's health, that consent seems to create a sort of legal precedence unprecedented in our time.
This large overlaying pattern that we are all comfortable with, will not change until we get too uncomfortable to consent to it.
Or until it just fails as may be happening right now, because no such overriding corruption or imbalance to nature and natures laws has ever been sustained in history and it never will.
I think it's just wonderful that our enlightened government provides lavish social services in the form of safety nets for those who fall on hard times, or even brave hazards and risks to reach for extraordinary, spectacular short-term success and rewards!
"Those" meaning corporations and wealthy high-finance institutions and investors, of course!
I wonder if they've ever considered that sort of thing for ordinary struggling citizens? I know... that's crazy talk.
Cut to the chase: the U.S. government is bailing out the crooks and liars that caused the problem in the first place.
Things are about to get very interesting.
America's infrastructure in fast approaching Third World status, it's economy is tanking, and it's embroiled in endless, pointless wars of it's own making, employing greater and greater numbers of mercenaries, and turning on it's own citizenry with feral savagery, all while running through critical resources and trying to maintain the illusion that everything will be OK.
Ever wonder what Rome looked like as it crumbled?
Now you know.
Walk in peace.
OK, folks, now that we know that Glass-Steagall was passed to prevent what is happening now, that both "major" parties conspired to dismantle it, and that neither "major" party candidate is proposing a re-instatement of it, why do we continue to support either one of them? TINA is a myth, perhaps the most destructive one of our time in that it effectively emasculates and neutralizes any support for those who would do things such as reinstate Glass-Steagall.
C'mon, folks, continued repetition of current bipartisan high crimes and misdemeanors is like bringing coals to Newcastle. We know what the problems are, we know that both major parties are not only complicit but active players, we know that both are on a short lease held by financial interests, we know that there ARE alternative candidates who, in fact, WILL be available on the ballot in Nov. who ARE committed to making the changes needed who are NOT on that leash. Why will so many not commit to pulling those levers?
In line with webwalk's (correction, Z's) suggestion, which is an excellent one, I submit the name of Howie Hawkins, running on a Green/Populist line for the NY 25 CD seat which is open this year for the first time in over a decade. The Dem. party mounted a bogus challenge to his nominating petition, which challenge has been invalidated by the NY Board of Elections. He will be participating in some debates though one, sponsored by the Maxwell School (of Journalism, of all things!) at Syr. Univ. is, reportedly, denying him access, because "he can't win"! His site is http://www.howiehawkins.com.
Perhaps if all of us submitted the names of candidates that we knew were running, and a connection to their sites, we could all contribute a few bucks here and there and actually give the lie to TINA. We don't need CD to formally "sponsor" such a list, all we need is for them to permit us to do it here!
I will periodically return to this thread to see who else is out there!
Correction- Actually it's the Maxwell School of Citizenship! that wants to keep Hawkins out of its debate. That explains a lot about this country, now, don't it!
Informative article, so thanks Nomi. (It must have been hell when you were working for these guys and then gradually realized what you were part of. I would love to hear that story.)
You have clarified the necessity of having a wall between risky investment activities and more secure and normal banking and loans. We know we wuz robbed, but do not know the extent yet. Funny how the government rushes in to pour my money and yours down this black hole without understanding how deep it is.
I hope someone is working on a plain language, name-naming summary explanation of these collapses.
Joe