Thursday, December 17, 2009

Restore Glass-Stegall Act... Repeal part of Gramm-Leach Bliley Act

It's time to rethink bank "modernization" and reinstate some controls to avoid systemic risk posed by financial institutions that get to a size where they can be considered "to big to fail" and then get bailed out at taxpayer's expense. Bailouts are just hidden and deferred taxes on working Americans.

SUMMARY OF THE REGULATORY HISTORY (EXCERPTED FROM WIKIPEDIA):

The Banking Act of 1933 was a law that established the Federal Deposit Insurance Corporation (FDIC) in the United States and introduced banking reforms, some of which were designed to control speculation.(http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html) It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Carter Glass and Henry B. Steagall. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and/or an insurance company.

Some provisions of the Act, such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act.

The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance, and banking, if not for a temporary waiver process. (http://www.symtrex.com/pdfdocs/glb_paper.pdf)



FROM YAHOO NEWS DEC 16 2009:
Two bills in U.S. Congress to restore Glass-Steagall

* Senator John McCain backs bill introduced in Senate
* Handful of House lawmakers offer similar measure
* Glass-Steagall restoration not in major reform bills (Adds Seiberg comments)

By Kevin Drawbaugh

WASHINGTON, Dec 16 (Reuters) - Financial giants such as Goldman Sachs Group (GS.N) could be broken up under two bills introduced in the U.S. Congress on Wednesday, one with the backing of former Republican presidential nominee John McCain.

Both would reinstate the 1930s-era Glass-Steagall laws that barred large banks from affiliating with securities firms and engaging in the insurance business. Those limits were largely repealed in 1999, a high-water mark for deregulation.

"It is time to put a stop to the taxpayer financed excesses of Wall Street ... This country would be better served if we limit the activities of these financial institutions," McCain said in a statement with Democratic Senator Maria Cantwell.

Passage of the Cantwell-McCain bill would force firms at the center of last year's financial crisis -- such as Goldman, Morgan Stanley (MS.N), Citigroup (C.N), JPMorgan Chase (JPM.N) and Wells Fargo (WFC.N) -- to spin off investment and insurance operations, said Demos, a progressive think tank in New York.

A similar measure was offered on Wednesday by six House of Representatives Democrats, including Representatives Maurice Hinchey, Peter DeFazio, Jay Inslee and John Tierney.

The bills come as Congress debates a sweeping overhaul of financial regulation more than a year after a severe banking and capital markets crisis rocked economies worldwide.

"Restoring Glass-Steagall may have populist appeal, but it is hard to see how one finds 60 votes for it" to win passage in the Senate, said financial services policy analyst Jaret Seiberg, at investment firm Concept Capital.

"This will be painted as a jobs killer, especially for New York. Plus, conservatives in both parties will balk at having the government forcibly break up private companies," he said.

The House approved a regulatory reform bill last Friday that would empower a new systemic risk regulator to order the break-up of risky financial firms in extreme circumstances.

Neither the House reform bill, nor legislation being debated in the Senate, would reinstate Glass-Steagall.

But House Democratic Leader Steny Hoyer told reporters on Tuesday at his weekly news conference that such a move was "certainly under discussion ... As someone who voted to repeal Glass-Steagall, maybe that was a mistake."

The 1933 Glass-Steagall laws were adopted at the same time the Federal Deposit Insurance Corp was set up. Both reforms came in the Great Depression, when thousands of banks collapsed, wiping out the savings of millions of Americans.

Glass-Steagall was largely repealed in 1999 under the Gramm-Leach-Bliley Act during the Clinton administration amid lobbying pressure from bankers, including those keen to merge the financial firms that later came to comprise Citigroup.

Today, supporters of stronger regulation of Wall Street and the banks say it is no coincidence that America has suffered a series of financial crises since deregulators gained the upper hand politically in Washington in the 1980s.

"The repeal of Glass-Steagall has exposed the U.S. economy to a level of risk that is simply unacceptable," Hinchey said

"Congress ignored history in 1999 when it repealed the Glass-Steagall Act and the American people have been forced to pay the price while bailing out these mega-banks, which should have never existed in the first place," he said.

Opponents dispute this and say restoring Glass-Steagall might not have prevented last year's crisis or others.

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