Keep consumers safe by bringing back Glass-Steagall Act

[babylonsister]

http://seattletimes.nwsource.com/html/editorials/2010171846_edit02wamu3.html

Keep consumers safe by bringing back Glass-Steagall Act

The Seattle Times editorial page calls for the breaking up of large bank companies and the re-enactment of the Glass-Steagall Act.


A year ago the U.S. Treasury was pumping billions of borrowed dollars into banks judged to be "too big to fail." This cannot be allowed to happen again.

This page has already suggested one solution. It is a radical one: Make the big banks small enough to fail. Break them up.

Nearly a century ago, the government broke up Standard Oil into the companies that became Exxon, Mobil, Sohio and Chevron. It worked fine. It didn't retard the American economy at all. Former Fed Chairman Paul Volcker has proposed doing the same to J.P. Morgan Chase and Bank of America. It should be done.

There is an obvious way to begin. Bring back the Glass-Steagall Act. That was the original law, passed in the Roosevelt administration, that created deposit insurance. To limit the risk to the Treasury, it forbade a bank holding company from owning other financial companies. The law was repealed during the Clinton administration in order to let Citibank buy an insurance company.

This law should be re-enacted. Bank of America, Chase and Citibank should be split from their insurance and investment banking operations.

Another thing: equity capital.

Consider a homeowner. The more equity in his house, the more reverses he can take before he loses it. His equity is his cushion. It is the same with a bank. The more capital it has, the more losses it can absorb.

Capital is costly. It limits profit, and so banks have skimped on it. But they need more of it.

Alan Hess, professor of finance at the Foster School at the University of Washington, suggests that the bigger the bank, the higher the minimum percentage of capital should be required.

The big banks will object. They will say they are being penalized for size. That's right. Size has been too attractive. The pursuit of size led Washington Mutual off a cliff.

In banking, size is dangerous. Let's limit it, and make ourselves safer.

[geckosfeet]

1. Local credit unions can serve the banking needs for 90% of all consumers.

I don't know how it is in other areas of the country but there are many options here. We also have one through work. I have my mortgage with one. There are several others that are available locally as well. No shortage of them. They offer free checking, online banking, no ATM fees, home improvement and car loans and mortgages.

These days, when you can get cash at the grocery store when you use a debit/credit card to pay there are very few reasons not to switch. For daily banking needs a credit union is all you need.

(Full disclosure - I pulled the 90% number out of my backside - but I am sure that credit unions will satisfy most peoples routine day to day banking needs.)

[babylonsister]

2. I also use a credit union and swear by them! nt

[AndyA]

3. I can't really think of any merger in any field that benefited consumers.

Whether it be banking, telecommunications, Sirius/XM, whatever. None of the big mergers in the end benefit consumers in any way.

Perhaps it's just too early and I'm not completely awake yet. :shrug:

[dtotire]

4. CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS (NY Times Article From 1999) Mon Mar 30th 2009,

This may be of interest
Cannot access original article


CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS (NY Times Article From 1999)

Mon Mar 30th 2009, 02:52 PM
CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS
By STEPHEN LABATON
Published: Friday, November 5, 1999

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.
Today's action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930's, the globalization of banking and the future of the nation's economy.

Administration officials and many Republicans and Democrats said the measure would save consumers billions of dollars and was necessary to keep up with trends in both domestic and international banking. Some institutions, like Citigroup, already have banking, insurance and securities arms but could have been forced to divest their insurance underwriting under existing law. Many foreign banks already enjoy the ability to enter the securities and insurance industries.

''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''
In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift.''

But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation's biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.
''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,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''
Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.
Others said the legislation was essential for the future leadership of the American banking system.
''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world,'' said Senator Charles E. Schumer, Democrat of New York. ''There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.''

But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was ''mean-spirited in the way it had tried to undermine the Community Reinvestment Act.'' And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.

Many experts predict that, even though the legislation has been trailing market trends that have begun to see the cross-ownership of banks, securities firms and insurers, the new law is certain to lead to a wave of large financial mergers.
The White House has estimated the legislation could save consumers as much as $18 billion a year as new financial conglomerates gain economies of scale and cut costs.
Other experts have disputed those estimates as overly optimistic, and said that the bulk of any profits seen from the deregulation of financial services would be returned not to customers but to shareholders.

These are some of the key provisions of the legislation:
*Banks will be able to affiliate with insurance companies and securities concerns with far fewer restrictions than in the past.
*The legislation preserves the regulatory structure in Washington and gives the Federal Reserve and the Office of Comptroller of the Currency roles in regulating new financial conglomerates. The Securities and Exchange Commission will oversee securities operations at any bank, and the states will continue to regulate insurance.
*It will be more difficult for industrial companies to control a bank. The measure closes a loophole that had permitted a number of commercial enterprises to open savings associations known as unitary thrifts.

One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.

In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.
Tucked away in the legislation is a provision that some experts today warned could cost insurance policyholders as much as $50 billion. The provision would allow mutual insurance companies to move to other states to avoid payments they would otherwise owe policyholders as they reorganize their corporate structure. Many states, including New York and New Jersey, do not allow such relocations without the consent of the insurer's domicile state. But the legislation before Congress would pre-empt the states.

Both the Metropolitan Life Insurance Company and the Prudential Life Insurance Company are in the midst of reorganizing into stock-based corporations that are requiring them to pay billions of dollars to policyholders from years of accumulated surplus. In exchange, the policyholders give up their ownership in the mutual insurance company.
The legislation would permit any mutual insurance company to avoid making surplus payments to policyholders by simply moving to states with more permissive laws and setting up a hybrid corporate structure known as a mutual holding company.

The provision was inserted by Representative Bliley at the urging of a trade association. It attracted little opposition because it was attached to a provision that forbids insurers from discriminating against domestic-violence victims.

In a letter sent to Congress this week, Mr. Summers said that the provision ''could allow insurance companies to avoid state law protecting policyholders, enriching insiders at the expense of consumers.''


http://journals.democraticunderground.com/dtotire

[madrchsod]

5. do`t wait for obama`s crew to do anything about reform.

they can not afford to admit they were wrong about everything they have done. i have my doubts that obama will admit he made a mistake by listening to their advice.

[mod mom]

6. History of the Repeal of Glass Steagall:

Bill Clinton and the Wall of Me

Billionaire Sanford I. Weill, who according to Louis Uchitelle made "Citigroup into the most powerful financial institution since the House of Morgan a century ago," has what I call the Wall of Me leading to his office, which he has decorated with tributes to him, including a dozen framed magazine covers. A major trophy is the pen Bill Clinton used to sign the repeal of the Glass-Steagall Act, a move which allowed Weill to create Citigroup. Fittingly, Citigroup is a major contributor to guess which current Democratic Presidential candidate?

A Frontline report on the repeal of Glass-Steagall shows how those with money end up with pens from the President of the United States on their walls.

Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House-Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

Just days after the 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 Secretary 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?"
When Bill Clinton gave that pen to Sanford Weill, it symbolized the ending of the twentieth century Democratic Party that had created the New Deal. Although the 1999 law did not repeal all of the banking Act of 1933, retaining the FDIC, it did once again allow banks to enter the securities business, becoming what some term "whole banks."

The repeal of one of the most important pieces of legislation in this nation's history came about as a result of another Clinton "triangulation," the wobbling attempt to find the middle of the road that has somehow managed to pass for a philosophy with many Democrats for over two decades. As former Clinton former campaign Richard Morris once described it, you move a little to the left, a little to the right. I'd love to hear Clinton give that explanation to a foreclosed home owner today.

With the stroke of a pen, Bill 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, in the whorls and dots of his pen strokes William Jefferson Clinton was also symbolically signing the death warrant of Liberal America and its core belief in the level playing field that had guided the Democratic Party. But it was the gift of the pen to Sanford Weill and its assuming an honored place on the Wall of Me that rubbed salt in the wound.

-snip
http://www.progressivehistorians.com/2007/11/bill-clintons-role-in-mortgage-crisis.html

:mad: Signed off by a member of the Democratic Party, no less.

[JohnWxy]

7. It's worth noting that Canada passed similar legislation and had NO PROBLEM in Deregulation disaster

Why? Because they still regulated the banks ... the regulators, unlike during Bush regime actually regulated their banks.

Clinton was for modernizing banking in U.S. as everyone at that time was worried about competition to Wall Street coming from big banks in Japan and rapidly proceeding modernization (particularly in terms of electronic trading) of the London financial markets. Many people, in and out of government in the 90's were concerned about Wall Street losing it's competitive advantage to these competitors. Clinton was for allowing INvestment banks and Commercial banks to combine but he expected that they would be regulated. He was naive in this beleif. But we now know, while intellectually very bright, Clinton was particulaly clueless when it came to what can be called 'Street smarts'.

Also, and this is a biggie, the banks in Canada were sensible enought to NOT GET INVOLVED WITH DERIVATIVES. The attitude of Canadian banks managers was, if they didn't understand them (Derivatives) they weren't going to risk money on them.

What U.S. could learn from Canada's banks (ranked the safest in the world) - REGULATE.


That notwithstanding, we should still put back in place the wall separating Commercial banks from investtment banking. We cannot be sure Republicans will get into power again to impair or stop regulators (by putting anti-regulation True-believers in control of regulating agencies) from doing their jobs.

Commercial banking should be done by sober individuals with a long term view and an in interest in banking - not gambling to make a quick buck. Keep those idiots out of the major economic function of providing cash to people and businesses with practical, productive economic objectives in mind when they are borrowing money. Bankers should be averse to risk, not seeking to make a 'killing' by taking on huge risks and pyramiding that risk by using excessive leverage on a throw of the dice. Anybody seduced by get rich quick schemes or by using massive leverage is NOT A BANKER. He's a confidence man. (basically different only in degree from Bernie Madoff).

[Fire1]

8. Ditto to the Seattle Times! n/t