Monday, April 11, 2011

Glass-Steagall: Dead for 2 Decades and Counting

Where the Wealthy Meet to Engineer Crises
Clinton's 1999 repeal of Glass-Steagall was hardly a repeal at all. In fact, it was just the dying breath of legislation that had been steadily eroded for decades. Following Alan Greenspan's pivotal moves for deregulation, the Gramm-Leach-Bliley Act merely confirmed in official canon what had been increasingly evident for the past 2 decades.

In 1996, Greenspan gave the Federal Reserve Board the green light to change the practices governing commercial bank holding companies. Under Glass-Steagall, they could only invest up to 5% in investment banks (due to the added risk). Greenspan quickly doubled this limit twice: first to 10%, and then to 25%. 8 months later, another decision opened the doors to insurance underwriting, allowing Traver's (under the management of Sandy Weill, who had already unsuccessfully tried to acquire JP Morgan) to acquire Solomon Brothers. Less than a year later, Traveler's merged with Citicorp.1

Enter the beast: a bank which merged securities underwriting, insurance underwriting and commercial banking - precisely the amalgamation which ushered in the banking instability of the early 1900s - only this time, the publicians had a new motto: too big to fail. Perhaps more ominous is the name itself though: Citicorp, now Citigroup Inc., was once known as National City Bank, variously administered by James Stillman (who managed the bank in his retirement via discrete courier), Charles E Mitchell (touted in 1933: "Mitchell more than any 50 men is responsible for this stock crash" -Carter Glass).2 Mitchell was also on the board of directors for American IG Farben3 (a pharmaceuticals combine which produced Zyclon B for the Nazis), which cartelized with Standard Oil New Jersey with the help of a 30 Million bond from National City Bank.2,4

Back in 1929, National City bank was one such organization. The mixture of speculation and consumer banking proved just as fatal back then, too. Perhaps it was fitting, then, that Mitchell himself spearheaded the public relations of major banking firms in the wake of this crash - while at the same time buying up the severely undervalued assets. Mitchell was forced to step down in 1933, in part due to "speculating on his own bank's securities," one of many speculative tactics which led to the 1929 crash (and subsequent preventative legislation). Notably, capital loans were above 100% of net monetary value, a problem which mirrors a similar GDP ratio discussed at VoxEU. National City Bank's own director, Gerard Swope, would go on to design the National Recovery Administration, the flagship program of the New Deal.4

In 1998 Glass-Steagall was gasping its dying breath - nearly all of the major regulatory provisions had been scrapped, and its complete repeal was in the works, the result of a lobbying effort paid for in part by Travelers.5 The finance, insurance and real estate industries had spent 200 million in political donations and 150 million on lobbying efforts during the 1997-98 election cycle. Alan Greenspan and Sandy Weill together spearheaded the public-relations effort to delegitimize Glass-Steagall.

The LA Times  reports on the lobbying effort to repeal Glass-Steagall:
"Only last week, as the bill was being pushed through a congressional conference committee, Treasury Secretary Lawrence H. Summers rushed back from a trip to China to huddle with lobbyists representing Citigroup, Goldman Sachs, Merrill Lynch and other financial giants. The meeting was closed to the media and public, but one participant told the New York Times that Summers lectured the lobbyists on how to spin this bill so it appears to be in the public interest. "He said it would be very unfortunate if any financial institution were to suggest that they do not see the broad public purpose of this legislation," the lobbyist reported." LATimes: We Sleep as Mammoths Gambol

Weill called Robert Rubin, then Treasury Secretary, to inform him of his plans to merge Salomon-Smith Barney and Citicorp - a deal being held up by stubborn Glass-Steagall provisions. Rubin Quipped to Weill, "you're buying the government." A year later, the last clauses of Glass-Steagall were finally repealed under Gramm-Leach-Bliley. 2 days later, perhaps as a show of confidence in the new "owners of the government," Robert Rubin left the Treasury to take an executive position under Weill.

Even Obama sees to be aware of the true inspiration behind the legislation:
"By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework," Mr. Obama said in a speech on the economy at Cooper Union in New York in March 2008. "Instead of establishing a 21st century regulatory framework, we simply dismantled the old one," thereby encouraging "a winner take all, anything goes environment that helped foster devastating dislocations in our economy."6
For his part (and like so many defunct crooks), Robert Rubin now has shame for what he once pushed for:
"My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces today. Clearly, there is a great deal of work that needs to go into understanding exactly what led to this situation and what changes, regulatory and otherwise, must now be implemented to reduce systemic risk and protect consumers."
Clinton, on Larry Summers and Robert Rubin's influence:
"On derivatives, yeah, I think they were wrong and I think I was wrong to take it."
 A lot of good that does us now, though.

1Frontline: Mr. Weill Goes to Washington
2 Ferguson, Thomas: Golden Rule: The Investment Theory of Party Competition pp.17-20; 144-146
3Also notably on the board of IG Farben were Edsel Ford of Ford Company and Walter Teagle of Standard Oil. Borkin, Joseph: The crime and punishment of I. G. Farben pp.184
4Sutton, Anthony C.: Wall Street and the Rise of Hitler pp. 34, 57
5KleinKnecht, William: The man who sold the world: Ronald Reagan and the betrayal of Main Street pp. 121-123 
6Huffington Post: McCain, Cantwell Battle The Monolith To Reinstate Glass-Steagall
Paul Kiesel: The Subprime Mess and Phil Gramm: An Experiment in Deregulation

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