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25th Nov, 2007

Foreclosed: Blame Bill Clinton’s Repeal of Glass-Steagall

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fdrsignsglasssteagall

FDR Signs the Glass-Steagall Act (Carter Glass on left)

Many Democrats wish Bill Clinton still occupied the White House. However, before you put him in Mt. Rushmore, you might want to investigate his role in the mortgage foreclosure crisis.

The chief aim of what I have termed the Republican Counterrevolution has always been to roll back the New Deal. Anti-gov’ment rhetoric hides this as surely as states’ rights hid racist segregation. Of all the New Deal legislation the GOP has sought to overturn, one that has always been at or near the top of the list is the Glass-Steagall Act. Ironically, a Democratic president repealed this for them.

Glass-Steagall

An unreconstructed Southerner from Virginia, Carter Glass shepherded the creation of the Federal Reserve System through Congress, which has caused some to call him the “founding father of the Federal Reserve System.” Later Glass would serve as Wilson’s Treasury Secretary, recommending aid to Europe after World War I. Just before leaving Treasury to become senator, Glass warned about banks getting involved in stocks.

In his economic history of the Great Depression, John Kenneth Galbraith pointed out one of the causes was:

The large-scale corporate thimblerigging that was going on. This took a variety of forms, of which by far the most common was the organization of corporations to hold stock in yet other corporations, which in turn held stock in yet other corporations.

Galbraith would note:

During 1929 one investment house, Goldman, Sachs & Company, organized and sold nearly a billion dollars’ worth of securities in three interconnected investment trusts—Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. All eventually depreciated virtually to nothing.

It is hard to imagine today what it felt like to walk through the door of a bank in those days and learn that the dollars you had earned had vanished. Every day spent working and saving had been for nothing. A great many farmers, brick layers, carpenters, factory workers believed the bankers had stolen their lives.

When Franklin Roosevelt took office, both the President and Congress knew the banking crisis demanded immediate action. The result was one of the crown jewels of the New Deal: the Glass-Steagall Act, officially known as the Banking Act of 1933. Glass made sure the bill forbid banks from getting into the investment business. In addition, the bill established the Federal Deposit Insurance Company, which protects our bank deposits.

In 1971, in Investment Company Institute v. Camp, no less than the United States Supreme Court would write what stands as the most cogent summary of the reasons for Glass-Steagall:

Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities.

The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments.

Many arguments the Supreme Court advanced in support of Glass-Steagall, would prove prophetic three decades later.

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 campaign advisor 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.In his famous First Inaugural Roosevelt pointedly asserted:

Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.

Now Clinton had not only repealed the act Roosevelt had put in place to curb those practices, but presented one of the pens used to sign it to one of those “money changers.”

What Hath Clinton Wrought?

What can be said in Clinton’s favor is that no one in 1999 anticipated the huge growth of the hedge fund industry and the subprime mortgage market. The New York Times described the new financial world created by the repeal of Glass-Steagall 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.

Curiously, Goldman Sachs head Lloyd Blankfein paints the perfect big picture of what has happened:

We’ve come full circle, because this is exactly what the Rothschilds or J. P. Morgan, the banker were doing in their heyday. What caused an aberration was the Glass Steagall Act.

Blankfein testifies to the full impact of Bill Clinton’s actions, for like many members of the Counterrevolution he sees the New Deal as an aberration and longs for a return to the days J. P. Morgan and other tycoons gave the Gilded Age its nickname. His “aberration” was eliminated not because of the actions of some radical Republican, but because of Bill Clinton. No wonder Goldman Sachs is also a prime contributor to you-know-who.

As is often the case, the story of the repeal of Glass-Steagall and the growth of the subprime mortgage market that is now crumbling around us like a financial house of cards can be best be told by a graph:

subprimemortgagegraph

If you think of this graph as the level playing field, notice how flat it was before Bill Clinton repealed Glass-Steagall, then notice how steep it has become. Those subprime loans amount to nothing more than an organized ripoff of millions of innocent Americans, with the steepness of the graph illustrating the how far the playing field has tilted.

The result is that all of a sudden people are thinking Glass-Steagall wasn’t such a bad idea after all. Robert Kuttner testified before Barney Frank’s Committee on Banking and Financial Services in October, evoking the dreaded specter of the Great Depression:

Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending 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 by computers and automated formulas.

Then there is Dow Jones MarketWatch’s Thomas Kostigen :

I’m not saying that Glass-Steagall would have made a difference to the evolution of the collateralized debt obligations. But it might have helped identify and isolated the damage.

As Congress continues to investigate the mortgage crisis, more people are wondering whether the repeal of Glass-Steagall was a mistake.

The Future of Your Mortgage

In testimony before Congress on November 8, Federal Reserve Chair Ben Bernanke painted a grim picture of the current crisis and even grimmer picture of the future:

On average from now until the end of next year, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first interest rate reset. [My emphasis]

According to a December 2006 study by the Center for Responsible Lending, a nonpartisan research and policy organization:

More than 2 million people with subprime loans are facing foreclosure this year and nearly 20 percent of subprime mortgages issued between 2005 and 2006 are projected to fail.

But numbers and testimony and even history mean little to those who suddenly find themselves up against the wall. In every city and town across this country “For Sale” signs are popping up on lawns. Behind each of those signs lies a personal story, a family tragedy, which like the tragedies of the Great Depression, tells of innocent Americans felled by an affliction they never saw coming. Walk any street in this country today–even in affluent neighborhoods–and each time you see one of those signs the hairs on the back of your own neck stand up, because those signs instill the same fear people felt when they walked into a bank in 1932 and found their money gone.

Two million people have found themselves one step away from figuratively being tossed out onto the street, the way millions were in the 1930s. Meanwhile, there are young people starting new lives for whom home ownership is rapidly receding, middle-aged people who finally had scraped together enough for a down payment only to find they can’t get a mortgage and older people for whom their home was their retirement and now find its value dropping like George Bush’s poll numbers. Finally there are even millions more for whom the collateral damage from the crises promises to cast its shadow over their American Dream.

The International Monetary Fund recently drew the following lessons from various financial crisis:

It is difficult to tell at the time whether a financial crisis will have broader economic consequences. Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis.

Both have characterized what happened after the repeal of Glass-Steagall. It’s too bad Bill Clinton did not have their wisdom when he made his decision, but then when you make decisions by triangulating, how much weight do you give such studies?

And the current crop of politicians? Look again at the donor lists detailed in this site’s “Follow the Money” series. Then wonder why no moderator or other candidate has asked Hillary Clinton if she supports her husband’s repeal of Glass-Steagall? Ask the other candidates if they support Bill Clinton’s move.

Meanwhile the signs keep sprouting and the playing field keeps tilting and soon the snow will start to fall, drifting against the signs. How many more people will have lost their homes when the snow melts?

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