“No man can serve two masters: for either he will hate the one, and love the other; or else he will hold to the one, and despise the other. You cannot serve God and mammon.”
—Jesus
t’s time to face some uncomfortable facts about America, as yet more banking malfeasance makes the news:
WASHINGTON — Shareholders of JPMorgan Chase filed two lawsuits Wednesday against the biggest U.S. bank, accusing it and its leaders of taking excessive risk and causing the recently disclosed $2 billion trading loss.
The provision in the Banking Act of 1933 (Glass-Steagall) that prohibited commercial banks from gambling investing gambling using depositors’ money (and vice versa) had been gradually weakened over time, apparently starting in the 1970s, through permissive interpretations of the law by federal banking regulators and the courts.
As the Congressional Research Service put it:
Facing lower profits and stiffer competition from securities firms, banks began seeking approval from regulators to engage in a greater universe of securities activities.
“Facing lower profits,” you see, can justify nearly anything in an increasingly corporatized America. And if there is enough campaign money spread around (this, before Citizens United), well, things can get fixed and profits can rise again like Jesus on Easter!
Seeking to stick a fork into and finish off Glass-Steagall, in 1999 a Republican-controlled Congress (you know, the same one that impeached and tried Bill Clinton), with a shameful assist from, uh, Bill Clinton (and too many Democrats to contemplate), passed the Financial Services Modernization Act, which finally allowed commercial and investment banks and securities and insurance companies to stop slyly shacking up with each other and unite in unholy but legal matrimony.
Now, to be fair to Clinton and his conservative-minded pals, they argue that their legislative efforts to finally kill Glass-Steagall actually “softened” the Great Recession. Gulp.
I have really thought about this a lot. I don’t see that signing that bill had anything to do with the current crisis…On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence. But I can’t blame [the Republicans]. This wasn’t something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.
It’s nice to know that Mr. Clinton hasn’t lost his unparalleled ability to rationalize.
Fortunately, around at the time of the repeal of Glass-Steagall was Democratic Senator Byron Dorgan. Unfortunately, not many listened to him.
Dorgan was one of only seven—seven!—Democrats in the Senate who voted against finishing off Glass-Steagall (Missouri’s two senators at the time, Messrs. Ashcroft and Bond were Ya-Ya sisters). He warned us in 1999:
I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010…We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.
Fortunately, once again Dorgan the Prophet is here to present a way to fix things. Unfortunately, once again not enough people are listening to him. But you can for half a minute:
Vodpod videos no longer available.
Get that? Restore Glass-Steagall, prohibit naked credit default swaps, and break up too-big-to-fail companies. By the way, here is the way the Financial Times described naked default swaps:
A naked CDS purchase means that you take out insurance on bonds without actually owning them. It is a purely speculative gamble. There is not one social or economic benefit. Even hardened speculators agree on this point. Especially because naked CDSs constitute a large part of all CDS transactions, the case for banning them is about as a strong as that for banning bank robberies.
Pretty simple, no? So why won’t any of it happen? Oh, that’s pretty simple, too. Senator Bernie Sanders blurted it out Wednesday night in a beatified bit of truth-telling:
Let me tell you what many others might not tell you. Some people think, well, gee, the Congress regulates Wall Street. I think the truth is that Wall Street regulates the Congress.
Yikes. He restated the truth a little bit later:
Let me just say again what many people will not be happy to hear. Wall Street is extraordinarily powerful. Congress doesn’t regulate them, the big banks regulate what Congress does.
Another Senator, Dick Durbin, said three years ago:
…hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place.
Well, at least we still get free checking! What? Oh my God.
________________________
Here is the entire 7-minute segment from The Ed Show, featuring Sanders:
Vodpod videos no longer available.
The Erstwhile Conservative: A Blog of Repentance 
ansonburlingame
/ May 17, 2012To all,
My “gut” tells me that Duane is correct, at least to a degree in the matter of the role of “banks”.
I have never put money in a traditional bank to make more money. I did so as a matter of safety, primarily, and ease of financial transactions. I didn’t have to go home to take money out of my mattress to buy bread.
When I had excess funds, funds unneeded to live on day to day, I took that money out of a bank and “invested it” in property, stocks or other things that I anticipated would “grow” in their worth over time. And most of those profits from such growth did not go back into a traditional bank, I reinvested them within the “market”.
Buying and selling homes provided the funds needed to educate my kids in college, just as an example. The “market” provided the growth, not the traditional bank
After the GR “ate” my 401K I no longer use the “market”. Personally, if the DOW plunged today but Bank of America stayed strong enough to pay my bills and receive my deposits, then I am fine, personally. In other words, I now do not have the financial wherewithall to take “risks” with my money and I don’t expect my “bank” to do so either.
Melding the risks of the market with a tradition institution started to ensure safety is not a very good idea in my view.
No doubt at all in my view BOTH traditional banks AND institutions to provide access to the riskier market are necessary in a capitalistic society. No one can expect to “grow” financially to any significant degree simply relying on wages. Wages sustain a standard of living but rarely do people “leap” from one social .economic level to another simply through wages. “Rich” people get that way through the market, not wages alone.
As for CDS, they are simply “gimmicks” in my view for INVESTORS to attempt to mitigate risk associated with investments, not bank accounts of the traditional sort. If I was still in the “market” I would not touch a CDS with a ten foot pole and would fire any broker that tried to get me to do so. If I wanted to take such risks with my investment money I would buy stock in a good insurance company, which AIG certainly was NOT.
Finally, an axiom I always used during my investment years, was to consider such money as gambling. Never gamble with money that you cannot afford to lose, at the tables in Vegas on in the “market”, in my view. In that sense, it is a buyer beware approach to investing in a risky market. But take the risk out of the market and watch the lack of growth as well.
Anson
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Jim Wheeler
/ May 18, 2012Clearly, gambling and investing are two different things and the more they are mixed the greater the danger to the economy. Naked CDS’s confuse me but I am able to get my mind around the housing crisis, which I assume is similar. Because of Congress’ self-indulgent insurance and regulatory laws the mortgage industry was able to cut corners and allow unqualified people to purchase mortgages. In other words, the government removed the risk element, not only by underwriting the insurance risk but by allowing the bundling of mortgages into tradable securities, securities that appeared to be safe because of the underlying government backing. The big banks were so carried away that many of them completely lost track of the original paperwork on many of the mortgages. I can relate to this because our own mortgage was sold twice before we paid it off and at one point I had to work hard to find out where to send the next payment!
Senator Sanders, a valuable species of Independent politician about to go extinct, is absolutely right here, but I am not sanguine about his chances. Gambling is as addictive to the group as to the individual, and perhaps more so. Group behavior is less subject to introspection (forget any moral analysis!) than individual behavior. That’s psychology 101. That also likely accounts for the fact that the cream of the crop, the brain power, of each year’s college graduates has for decades been going not to engineering, nor to the sciences, but to finance. The public perception, and the reality, is that’s where the easiest money is. Think Bain Capital for example.
I haven’t heard what Clair McCaskell thinks about all this, but knowing her background I like to think she would be sympathetic to Sanders’ cause. But two out of a hundred won’t be able to do much, and she is on the endangered list too this year.
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ansonburlingame
/ May 18, 2012I disagree that in essence, gambling and investing are entirely different things. In both cases you “bet money” that certain outcomes will be in your favor and you thus will make money.
I lived in Vegas for two years and NEVER gambled. I am simply too tight fisted to take the risks involved in the “roll of the dice”, etc. I also look at all the wealth in a casino and know full well that all the “amenities” are there because people gamble and lose all the time.
Very few say “there outta be a law” regulating casino odds at the tables. Your chances of “rolling a seven” are determined strictly by math.
But people scream very loud to regulate the odds in a market. The vast majority of all trades in a financial market are legal trades. The chances of someone using “loaded dice” are about the same as the use of real loaded dice in a big casino, in my view.
Now go watch the human behavior around a dice table in Vegas and compare it to some investors watching the “ticker tape” showing daily market transactions. Everyone of those people are trying very hard to make money and the greed is reflected in their behavior.
I was in Dallas, TX earlier this week. The TexasTeachers Pension Fund “invested” $100 million in a Vegas startup gambling firm recently, a perfectly legal trade. The firm then went bankrupt and the Pension Fund lost $99 Million, flat outl
That Pension Fund would have lost much less money (but still would have lost money) had it simply put down legal bets at a crap table, in Vegas.
Anson
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Moe
/ May 18, 2012Duane – another home run. While I’m posting oldies, you do the heavy lifting here! I may pick up some of thiis – properly credited to this post.
I’m also fond of a quote from David Frum in 2011 (I’m sure today’s GOP thinks he’s gone off hte reservation):
“Imagine, if you will, someone who read only the Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause.”
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Sedate Me
/ May 18, 2012I just finished watching a very good PBS Frontline documentary on the topic. If you have 4 hours to kill, I think it’s a good primer on how this all came to be.
http://www.pbs.org/wgbh/pages/frontline/money-power-wall-street/
It was rather surprising to see how some of the very people who invented this nonsense say stuff like “This isn’t what we had in mind” and “We decided to pull back from this craziness” etc. Others said things on camera that made it pretty clear the sociopathic nature of Wall Street. There were about half a dozen “I can’t believe he said that on tape” moments.
Not that it wasn’t before, but it became incredibly obvious that these people, by their very nature, will take things as far as they possibly can no matter what the risk. They do not care about endangering their customers, the global economy, each other, or even themselves. Even something like the credit swaps, which started out from a mildly reasonably premise, quickly got bastardized and totally lost what little logic or useful function they ever had. They were invented to REDUCE RISK. But once Wall Street’s hive mind co-opted the idea and smelt a profit, it quickly became the basis of an outright gambling casino where they made fast, but unsustainable & downright fictitious, money. Combined with Sub-prime mortgages, this Credit Default Swap market was undeniably destined to bring the world economy and dozens of nations to their knees. But these people live in a world of denial, unmitigated ego and short term thinking.
It’s also clear that few of these people actually know what it is they do for a living. First, they don’t understand the very products they sell or how they work. Second, they don’t understand that they exist to serve customers. Customers are not rubes to be conned. The Free Market is supposed to be about a mutually beneficial exchange. Both parties are supposed to get something out of every deal. All Wall Street cares about is what THEY get out of the deal.
Banks and insurance companies have no place in Wall Street’s gambling parlours. They offer a useful financial service to customers. Wall Street is a rigged casino run by con-men. They shouldn’t be allowed to exhale without their breath being examined by regulators.
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Moe
/ May 18, 2012Sedate: I saw it too – terrific Frontline, as always.
You note that many of these guys “don’t undersand the very products they sell or how they work.” I think htat’s the scariest part of all. I heard a financial reporter the other day say that the ignorance doesn’t apply only to salemen or traders – it goes right to the top and the likes even of Jamie Dimon could not satisfactorily explain how some of this stuff works.
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Sedate Me
/ May 20, 2012Absolutely. Most of the higher-ups didn’t have a clue how these things worked. They just knew they needed to sell them because everyone else was making a fortune off them.
When the self-proclaimed “experts” don’t know how a product operates, it’s probably a product that shouldn’t be sold.
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sekanblogger
/ May 20, 2012Bill Moyers has covered this superbly on PBS. If you missed any of the episodes, check it out on his blog.
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L’Enfant de la Haute Mer
/ July 20, 2012a small complementary info:
To be exact, on November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal is it allowed commercial and investment banks to consolidate.
http://mortgageblues.us/news/398
and
http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Repeal
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L’Enfant de la Haute Mer
/ July 20, 2012Clinton had already started dismantling the Glass-Steagall Act..
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