Repeal of The Glass Steagall Act Has Produced The Highly Leveraged Investment Imbroglio That Is Just Now Starting To Unwind
The repeal of the Glass Steagall Act led by Robert Rubin and others of the CFR, has produced our current investment dilemma of the breakdown of the residential mortgage investment sector and created financialization -- a relatively new term used to discuss the emergence of a new form of capitalism in which financial markets dominate over the traditional industrial economy.
Greta Krippner of the University of California - Los Angeles has written that “financialization” refers to a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”
More popularly, however, financialization is understood to mean the vastly expanded role of financial motives, financial markets, financial actors and financial institutions in the operation of domestic and international economies.
In his 2006 book, American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, American writer and commentator Kevin Phillips presented financialization on page 268 as “a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.”
And Charles Harman reports that the Marxist economist Robert Brenner has used official US statistics to produce figures that show manufacturing profit rates in 2000-5 at levels lower than in either the early 1970s or the 1990s (although higher than in the late 1970s and 1980s). His calculations for all non-financial corporations show them as about a third lower in 2000-6 than in the 1950s and 1960s, and about 18 percent lower than in the early 1970s.
The CFR is The Sovereign in North America's commerce, investment and governmental activity and endeavors.
The CFR, through its agents, primarily Sanford Weill, Bill Clinton and Robert Rubin repealed the Glass Steagall Act.
The repeal was the foundation, that is the keystone, that provided for non transparent financial manipulation and use of leverage to revolutionize the activities of investment beginning in 1999, to amass huge fortunes for the investment bankers who designed, marketed and oversaw the use of leveraged investments, and to generate awesomely speculative endeavors at hedge funds, which have gone unregulated by government oversight.
The repeal has produced an oligarchy of power and elite, in intertwined media, retail banking, investment banking, home mortgage sectors, via interwoven board of director memberships of the Federal Reserve, corporations and government administration, extending into the the White House, via secretary of the Treasury Paulson, former executive of Goldman Sachs.
And the repeal enabled leverage, to be conceived, deployed and expand, not only in the residential mortgage sector, but a host of other sectors as well, such as, municipal bonds, and derivatives such as credit default swaps.
Investment leverage snapped this last week with the $20 Billion Carlyle bond fund experiencing margin calls, where risk was multiplied by 33 to 1, that is, the underlying assets represented only 3% of the portfolio value; and those assets were illiquid, thinly traded issues: it was reasonable that this fund would be the first of many countless to break causing a sharp sell off in the finance, real estate and banking sectors as investments were sold at fire sale prices to meet the margin calls.
And now, to the aid of illiquid banks (and most likely insolvent banks) comes a rescue by the Federal Reserve in expanded TAF
in the near future, as there is a greater unraveling of investments, there is likely coming a 'continental response', to provide security and prosperity, under the provisions of the SPP, which has its origins in the activity of CFR's Robert A. Pastor, instructor at American University.
So likely soon, the CFR will be providing the remedy for a crisis it created.
The result of implementation of the SPP's provisions will be a state corporate combine of elite stakeholders actively ruling in principles of security and prosperity over the resources and people of the North American Continent.
III. The Facts (snips from various authors)
A. Redpillguy writes in The Media Moguls, the Bankers, and the CFR that Robert Edward Rubin (born August 29, 1938) is an American banker who served as the 70th United States Secretary of the Treasury during both the first and second Clinton Administrations. During his time in the private sector, Rubin has served on the board of directors of the New York Stock Exchange, the Ford Motor Company, the Harvard Corporation, the New York Futures Exchange, the New York City Partnership and the Center for National Policy. He has also served on the board of trustees of the Carnegie Corporation of New York, Mt. Sinai Hospital and Medical School, the President's Advisory Committee for Trade Negotiations, the U.S. Securities and Exchange Commission Market Oversight and Financial Services Advisory Committee, the Mayor of New York's Council of Economic Advisors and the Governor's Council on Fiscal and Economic Priorities for the State of New York. He is currently the co-chairman of the board of directors of the Council on Foreign Relations.
In April 1998 Travelers Group announced an agreement to undertake the $76 billion merger between Travelers and Citicorp, and the merger was completed on October 8, 1998. The possibility remained that the merger would run into problems connected with federal law. Ever since the Glass-Steagall Act banking and insurance businesses had been kept separate. Weill and Reed bet that Congress would soon pass legislation overturning those regulations, which Weill and Reed and many other businesspeople considered obsolete. To speed up the process, they recruited ex-President Gerald Ford (Republican) to the Board of Directors and Robert Rubin (Secretary of Treasury during Democratic Clinton Administration) whom Weill was close to. With both Democrats and Republican on their side, the law was taken down in less than 2 years. (Many European countries, for instance, had already torn down the firewall between banking and insurance.) During a two-to-five-year grace period allowed by law, Citigroup could conduct business in its merged form; should that period have elapsed without a change in the law, Citigroup would have had to spin off its insurance businesses.
In November 1998 Jamie Dimon was forced to resign from Citigroup.
In 2001, Sanford A. Weill became a Class A Director of the Federal Reserve Bank of New York. Class A Directors are Board Members who are elected by Member Banks (of the Federal Reserve System) to represent the interests of Member Banks. (See article on Federal Reserve Bank Board Membership).
In 2002 the company was hit by the wave of "scandals" that followed the stock market downturn of 2002. Chuck Prince replaced Mr. Weill as the CEO of Citigroup on October 1, 2003.
B. Judith Moriarty writes in Foreclosures - The Untold Story that the chief aim of the money men (assisted by both Republicans and Democrats) for decades was to roll back FDR's New Deal. Anti-government rhetoric ( distracting labeling) has hidden this from public view. The 'Banking Act' of the New Deal was a priority by vested interests in being repealed. The undoing of this Act took decades and approximately $200 million in lobbying funds to accomplish.
"Billionaire Sanford Weill made 'Citigroup' into the most powerful financial institutions since the House of Morgan a century ago. A major trophy of Sanford's is the pen Bill Clinton used to sign the REPEAL of FDR's Banking Act - a move which allowed Weill to create Citigroup. " Sanford Weill called President Clinton to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup LOBBYIST Roger Levy that Weill has to get the White House moving on the bill or he would shut down the House-Senate Conference. A deal was announced at 2:45 a.m. Just days after the Clinton administration (including the Treasury Department) agrees to support the REPEAL, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government." Progressive Historian
With the stroke of a pen, Bill Clinton ended the long saga of Republicans and Democrats, working in concert, for their puppet masters (the bankers) with his signing of the 'Financial Modernization Bill' (Nov 12, 1991). Clinton ended an era that stretched back to William Jennings Bryan and Woodrow Wilson and reached fruition with FDR and Harry Truman. As he signed his name, William Jefferson Clinton symbolically signed the death warrant of a level playing field that had guided the Democratic Party. Clinton (both parties) knew better than FDR and our Supreme Court. Nov 12-1999, President Clinton stated, " Glass- Stegal (FDR Banking Bill) is no longer appropriate for our economy. This was good for the industrial age. The (1999) Financial Modernization Bill is the key to rising paycheck and great security for ordinary Americans". Tell this to Michigan - NH - California - Georgia etc. The public was distracted from one of the most important pieces of legislation in this nation's history being signed by Bill Clinton, with round the clock coverage, of the Monica debacle. Seeing how Clinton came out of this shameful episode lauded as heroic - super stud - and a multi-millionaire, why one one would almost think that the whole sordid affair was contrived? Most especially with Lieberman acting as the holier than thou apologist ! Missed was Clinton's reason for the undoing of FDR's landmark bill Press release: http://Treas.gov/press/releases/ls241.htm
What does this repeal mean? The hedge fund industry and subprime mortgage market is out of control. The New York Times in a June 2007 profile of Goldman Sachs: "While Wall Street still mints money advising companies on mergers and taking them public, real money - staggering money - is made trading and investing capital through a global array of mind bending products and strategies unimaginable a decade ago."
Goldman Sachs head Lloyd Blankfein paints the perfect picture of what has happened: "We've come full circle, because this is exactly what the Rothschild's or J.P. Morgan the banker were doing in their heyday. What caused an aberration was the Glass-Steagall Act (FDRs - Banking Act)." Blankfein, like his cohorts in corporate greed, sees the New Deal as an aberration and longs for a return to the Gilded Age.
Level playing field? Notice how flat it was before the REPEAL of FDR's Banking Act. Those subprime loans amount to nothing more than an organized ripoff of millions of Americans with the steepness of the graph illustrates how far the playing field has titled. Robert Kutter (Stanford University) testified before Barney Frank's Committee on Banking and Financial Services in Oct 2007 " Since repeal of Glass Stegall (FDR Banking Act) in 1999, after more than a decade of de facto inroads, super banks have been able to re-enact the same kinds of structual conflicts of interest that were endemic in the 1920s - tending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged and automated formulas."
To the Victor goes the spoils - burp! It's lonely at the top, but you eat better!
2008 - Citigroup. The repeal (Clinton's Financial Modernization Bill) of FDR's Banking Act - was responsible for the creation of Citigroup as an all-purpose financial supermarket and too - big- to fail banking marvel..(much like the unsinkable Titanic?). Investment bankers lobbied for thirty years to repeal the Glass-Steagall Act, which separated commercial banking from its investment house cousins. Wall Street hated the law but failed year after year to win repeal. The problem was always the Democrats (since Republicans were supporters).
In enters a reincarnation of our old carnival snake oil salesman. Bill Clinton delivered his 'New Democrat Party' with a lot of the usual scripted rhetoric. Meaningless made up words. The combination of insurance, investment banking, and old-line commercial banks, have multiplied the conflicts of interest within banks, despite so-called 'firewalls'. Much like Enron, placing some deals in off-balance sheet entries did not insulate Citigroup from losses in its swollen subprime housing lending. The bank (Citigroup) has so far written off something like $15 billion and there's more to come. Ah - but meantime we're going to see these presidential canidates argue over who loves Blacks the most - or the miracle of Hillary's tears ! It's interesting that in the Neveda debates (Nov 15), when Hillary was asked about Citigroup and the subprime debacle she responded, that that she was concerned over these huge pools of money, and that Congress and the Federal Reserve need to ask questions. She went on to remark on how mortgages (subprime and conventional) were being bundled and sold to foreign investors. THE 64,000 QUESTION (yet to be addressed in these debates) was not asked: 'Senator Clinton, its a known fact, that Citigroup would not exist, except for President Clinton's repeal of FDR's 'Banking Act'. Would you (other canidates) not agree with the 1971 Supreme Court ruling, Goldman Sachs, and testimony by economists, that we have re-enacted the same conflicts of interest that were in place before the Great Depression and thus are doing the very same things that the Rothschild's and J.P Morgan were guilty of?' This is the question that has yet to be asked in any of these 'debates' (Republican or Democrat). The media and canidates blame the victims or wander off into some escoteric meaningless gibberish.
"Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. They have no vision and where there is no vision the people perish". FDR First Inaugural Address
Rest assured we'll hear the same sorry blame game - with each party (both complicit in this debacle) them) blaming the other. Hillary is worried about repairing the image of America. Nobody is asking these candidates about the disasterous REPEAL of the Banking Act of 1933, which is leaving millions (not them) foreclosed on and losing jobs, investments, and pensions etc! When people are losing their jobs, homes, and children's futures; like their grandparents or great grandparents of old, they don't give a damn about 'image'. They are focused on having a roof over their heads and food to eat. The attention to the export of jobs in the U.S. did not develop until white - collar jobs began to evaporate along with manufacturing jobs with no replacement jobs. A U.S. company can hire a software developer in India for $6.00 an hour according to the McKinsey Global Institute. A data - entry clerk earns $2.00 an hour in India.
The repeal of FDR's Banking Act in 1999, with the promise of "increased wages and security for workers" sees auctions such as the one above (California) taking place from coast to coast. These folks (speculators) are benefiting from the hardships of others. The Penny Auction to help one's neighbor against the greed of banks and lenders, has been replaced with the thought of getting a 'real deal'.
Now in 2008, the promise of Bill Clinton (repeal of Banking Act) of rising wages and security for Americans is being realized with millions of layoffs and foreclosures. Not reported on the major news stations were the 10,000 + people showing up to apply for a job at Wal-Mart in Atlanta Georgia. Besides homeowners - renters are being put out in the cold with landlords being foreclosed on. "Remember you are just an extra in everyone else's play". FDR
Detroit (no debates held here) has been in a free fall for the past seven years. Hundreds of thousands in Michigan are without work. The drop out rate in schools is 70%. With foreclosures the highest in the nation (there's great competition) funds needed for local programs, schools, etc, are unavailable. No tax revenue. Per usual, you'll hear the victims being blamed, not disreputable bankers. If only they hadn't asked for a living wage (to keep up with inflation). If only they (auto workers) would work for Third World wages they wouldn't be out of work. Meantime the CEOs (corporate) of these echoing plants make 400X that of the ordinary worker. Their pensions aren't stolen. The golden parachutes they receive are in the multi - millions (even if they have brought their company to ruination). Hotels, office buildings, and thousands of homes are boarded up in Detroit. Meantime hundreds of thousands are homeless or forgotten in noxious formaldehyde FEMA trailers. Go figure?
McCain has told those out of work - "The jobs are never coming back". John, whose wife's trust, recently purchased them a $5 million exclusive condo in Phoenix, hasn't got a clue of the suffering and fear of these folks. His advice, "Go back to school and get that college degree - get some job retraining". John, busy trying to catch the brass ring, neglected to tell folks that President Bush has cut funding for job re-training by one billion dollars (amongst many other domestic programs). Bush Budget - AFL-CIO, Mike Hall. Thankfully for John, after divorcing his first wife, when his salary was a mere $45,000, he married an heiress. No job retraining for him. What John is oblivious to, is the fact that thousands of college graduates (with several degrees) are looking for work. Duh - like Wall Street. How one secures a college degree living in a shelter -tent - car or FEMA trailer, miles from nowhere (in cornfields) beats me?
C. Robert Kuttner writes in Friendly Takeover that Goldman Sachs, which Rubin left to join Clinton, was a prime underwriter of Mexican bonds both before and immediately after the passage of NAFTA, as Jef Faux points out in his book, The Global Class War.
Goldman was also the investment bank that underwrote the privatization of the Mexican national phone company, Telmex, in the late 80s.
After NAFTA created a gold rush of foreign money into Mexico, enriching Goldman Sachs and its clients and triggering an unsustainable speculative boom followed by a crash, Rubin promoted the bailout of Mexico that made foreign bondholders whole.
A little-noticed provision of NAFTA permitted foreign banks to acquire Mexican ones. In 2001, Rubin, back in the private sector, negotiated Citigroup's $12.5 billion acquisition of Mexico's leading bank, Banamex.
Rubin's crowning achievement was the repeal of the 1933 Glass-Steagall Act, which had separated largely unregulated and more speculative investment banks like Goldman Sachs from government-supervised and insured commercial banks like Citi, which play a key role in the nation's monetary policy.
Glass-Steagall was designed to prevent the kinds of speculative conflicts of interests that pervaded Wall Street in the 1920s and helped bring about the Great Depression (and reappeared in the 1990s).
Glass-Steagall was steadily weakened by regulatory exceptions under three administrations going back to George Bush Senior. The premise was that tearing down the regulatory walls would promote competition. But the effect was to create greater concentration and renewed opportunities for insider enrichment.
Financier Sanford Weill gradually assembled the empire of insurance, commercial-banking, and investment-banking pieces that ultimately became Citigroup, helped by indulgent regulatory policies promoted by Federal Reserve Chairman Alan Greenspan and Rubin. When Congress formally repealed Glass-Steagall, in November 1999, the act was termed in some circles the "Citigroup Authorization Act." Rubin had stepped down as treasury secretary that July. His new job, announced in late October, was chairman of Citi's executive committee. Rubin's initial annual compensation was around $40 million.
As a top Citigroup executive, Rubin uses his unequaled Democratic contacts to resist reregulation. In a recent interview, I asked Rubin whether he saw any need for tighter regulation of hedge funds, the massive, nominally private investment funds that enjoy a wholesale exemption from the system of financial disclosure that has kept financial markets tolerably transparent since the New Deal.
"I don't know why you would single out hedge funds," Rubin replied, in a sincere tone that suggested genuine puzzlement at the question.
Why, indeed? Citigroup has hedge-fund and private-equity subsidiaries, lends to hedge funds, places trades for hedge funds through its brokerage affiliates, and works with hedge funds through its investment-banking arms.
"There is an immense [regulatory] cumbersomeness that we've created in corporate America," Rubin added. "It's not just that it's costly; it's the deterrent effect that it's created on people's willingness to take risks."
So how are Bob Rubin and Rubinomics positioned for 2008? All too powerfully, one suspects.
The Hamilton Project will continue to turn out centrist policy papers trying to signal boldness with scant resources. Rubin will continue promoting his grand bargain to cap social insurance, raise taxes, offer token benefits, and further liberate global private capital.
He will continue to have unparalleled influence with Democrats, and to receive an adoring press.
In presidential politics, Rubin is personally close to Hillary Clinton, but this trader covers his bets. His son, Jamie Rubin, is a major Wall Street fund-raiser for Barack Obama. His former deputy chief of staff, Karen Kornbluh, is Obama's chief domestic policy adviser, and Rubin is also close to Obama's chief of staff, Steve Hildebrand, who used to hold the same position for former Senate Democratic Leader Tom Daschle, another Rubin ally.
D. William Engdahl writes in The Financial Tsunami and the Evolving Economic Crisis: Greenspan’s Grand Design that Goldman Sachs was a prime contributor to the Clinton campaign and even sent Clinton its chairman Robert Rubin in 1993, first as “economic czar” then in 1995 as Treasury Secretary. Today, another former Goldman Sachs chairman, Henry Paulson is again US Treasury Secretary under Republican Bush. Money power knows no party.
Dow Jones Market Watch commentator Thomas Kostigen, writing in the early weeks of the unraveling sub-prime crisis, remarked about the role of Glass-Steagall repeal in opening the floodgates to fraud, manipulation and the excesses of credit leverage in the expanding world of securitization:
“Time was when banks and brokerages were separate entities, banned from uniting for fear of conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things.
“In 1999, the law banning brokerages and banks from marrying one another — the Glass-Steagall Act of 1933 — was lifted, and voila, the financial supermarket has grown to be the places we know as Citigroup, UBS, Deutsche Bank, et al. But now that banks seemingly have stumbled over their bad mortgages, it’s worth asking whether the fallout would be wreaking so much havoc on the rest of the financial markets had Glass-Steagall been kept in place.
“Diversity has always been the pathway to lowering risk. And Glass-Steagall kept diversity in place by separating the financial powers that be: banks and brokerages. Glass-Steagall was passed by Congress to prohibit banks from owning full-service brokerage firms and vice versa so investment banking activities, such as underwriting corporate or municipal securities, couldn’t be called into question and also to insulate bank depositors from the risks of a stock market collapse such as the one that precipitated the Great Depression.
E. Bertrand Benoit and James Wilson write in Financial Times on May 15, 2008: "Global financial markets have become 'a monster' that 'must be put back in its place', the German president has said, comparing bankers with alchemists who were responsible for 'massive destruction of assets'. In some of the toughest comments by a leading European politician since the start of the subprime crisis, Horst Köhler - a former head of the International Monetary Fund - called for tougher regulations and the reconstruction of a 'continental European banking culture'... 'The complexity of financial products and the possibility to carry out huge leveraged trades with little own capital have allowed the monster to grow . . . also responsible [is] the grotesquely high compensation of individual finance managers...' Bankers 'have made huge mistakes', Mr Köhler told Stern magazine... 'I am still waiting for a clear, audible mea culpa. The only good thing about this crisis is that it has made clear to any thinking, responsible person in the sector that international financial markets have developed into a monster that must be put back in its place,' Mr Köhler said... The German president's spectacular attack reflects the broader feeling of contempt among German politicians towards bankers since the start of the subprime crisis..."
F. PBS Frontline Research Staff provides A chronology tracing the life of the Glass-Steagall Act
Here is a complete history of The Act, from its passage in 1933, to its death throes in the 1990s, and how Citigroup's Sandy Weill dealt the coup de grâce.
IV. The Future
Chris Harman relates the George Soros quote that “credit expansion must now be followed by a period of contraction because some of the new credit instruments and practices are unsound and unsustainable”.
And Chirs Harman relates that Nouriel Roubini of New York University’s Stern School of Business sees “a rising probability of a ‘catastrophic’ financial and economic outcome” with “a vicious circle where a deep recession makes the financial losses more severe and where, in turn, large and growing financial losses and a financial meltdown make the recession even more severe”.
I believe that soon the governmnet will provide a 'continental response' via the security and prosperity provisions of the SPP, where a state corporate combine of stakeholders appointed by the North American Competitiveness Council, the NACC, to respond to a disaster of its own making -- some type of 'financial emergency' steming from insolvent banks, KBE, Level-3 leveraged investment bankers, KCE, a failed commerical credit sector, COF, as well as the disaster of a depreciating dollar, $USD, and falling US Treasury Bonds, $USB, that has come via continually lower interest rates charged by the Fed to the banks and the facilities of TAF, TSLF, and PDCF.
V. Additional Reading
Central Banks, the Amero, and Bush's New Fed Proposals