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The seven reports and fact sheets on the nation’s financial crisis issued by the Congressional Financial Crisis Inquiry Commission are notable for one thing: there is not a single mention of the repeal of the Glass-Steagall Act in any of them. Nada. Nothing.
Now I am not asking that they have to buy the theory that Glass-Steagall’s repeal played a role in the crisis, but you would think given the amount of discussion on this topic that the Commission would at least feel some obligation to deal with the theory one way or another. But they did not.
There is a reason for this, which anyone familiar with the repeal knows: the repeal of Glass-Steagall was bipartisan so neither party can very well admit they were wrong. Unlike the Great Depression when Franklin Roosevelt and others could question the policies of Herbert Hoover or even the Reagan recession where there was spirited discussion of Reaganomics and tax cuts, the repeal of Glass-Steagall was accomplished over little objection by the major players in either party.
I won’t go into the details of the repeal yet another time. However, since I keep getting emails from stupid Democrats and Clinton apologists that Bill Clinton had nothing to do with it, that it was all a Republican plot passed by a veto-proof majority over Mr. Clinton’s objections, maybe we need to let Mr. Clinton speak for himself.
In a 2008 interview with Business Week here is the exchange between Clinton and interviewer Maria Bartiromo:
Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?
Not on this bill I don’t think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can’t possibly be wrong about everything. 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. [My underline]
So please no more comments about how Bill Clinton had nothing to do with the repeal of Glass-Steagall. What he has had an impact on is the machinations of the supposed commission. Now, hold your keyboards, I don’t mean that Mr. Clinton is exercising some kind of Machiavellian maneuvering to influence the Commission. He doesn’t have to.
The Elephant
Like it or not the repeal of Glass-Steagall is the elephant in the room for the Commission. Too many people have written about it, many of them far more knowledgeable and prestigious then I am. We will start with Robert Kuttner who testified before Barney Frank’s Committee on Banking and Financial Services, 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.
In his new book Freefall (review forthcoming–but put it on your must read list), Nobel Laureate Joseph Stiglitz states that the repeal of Glass-Steagall created “ever larger banks that were too big to be allowed to fail. (p.15)” In an article for the Telegraph (UK) Stiglitz wrote:
The promised benefits of the repeal of Glass-Steagall proved illusory and the costs proved greater than even critics of the repeal imagined…
It is clear that the federal government should reinstitute some revised version of the Glass-Steagall Act. There is no choice: any institution that has the benefits of a commercial bank – including the government’s safety nets – has to be severely restricted in its ability to take on risk.
Neither Stiglitz nor Kuttner are on the list of witnesses for the committee, nor is any of their work cited.
Behind the Scenes
As I have mentioned before, unfortunately the Obama Administration is full of former Clinton and Rubin people who continue to believe in the repeal of Glass-Steagall, but more important accept the paradigm of deregulation that has become the mantra of both parties. If you wonder why there is a Tea Party movement you need look no further for the reasons.
Obama economic advisor Lawrence Summers served under Clinton and Rubin and took part in the repeal of Glass-Steagall. He is also a bitter foe of Stiglitz.
The Players
Perhaps we might learn why the committee has an embarrassing blind spot when it comes to Glass-Steagall if we look at the members. The bipartisan Commission set up by President Barack Obama has nine members: Phil Angelides, Bill Thomas, Brooksley Born, Byron S. Georgiou, Senator Bob Graham, Keith Hennessey, Douglas Holtz-Eakin, Heather H. Murren, CFA, John W. Thompson, Peter J. Wallison. The links for each of these connect to the Commission website which maintains glowing biographies of each of the members. You have to look else where to find out more.
Angelides is well-known to Californians, but not to the rest of America. He ran for governor (and lost) and served as state treasurer. I am not sure serving as treasurer of a state that is in serious financial difficulty should recommend anyone for higher office let alone head of the Financial Crisis Inquiry Commission. Yet in that office Angelides did strive to steer the state’s investments in a socially responsible direction and took a few well-aimed shots at Wall Street.
Angelides has already made a name for himself when he roasted Goldman Sachs CEO Lloyd Blankfein by comparing him to a used car salesman selling faulty merchandise. Angelides is fairly easy to track through campaign contributions, most of which come from lawyers and unions. His largest individual contributor is Michael Jaharis of Kos Pharmaceuticals. Based on his contributions, he appears to have few ties to the big players like Goldman. My guess is that he is where he is as a favor to Nancy Pelosi.
Republican Bill Thomas is another Californian, a retired Congressman and former Ways and Means chair who represented a slice just north of Los Angeles that included Bakersfield (lots of raisin growers in his campaign finance report). He now has followed a lot of retired GOP legislators through the revolving door of the American Enterprise Institute. For those few who have read the book Strange Death of Liberal America, it was Thomas who evicted Democrats from a conference room back in 2003. After that incident CNN termed him “the most talented and difficult” member of Congress.
According to Federal Election Committee Documents Thomas’ major donors include health care and financial companies. Prominent on the list is a veritable who’s who of financial behemoths: Lehman Brothers, the American Bankers Association, Bank of America, the now defunct Bear Stearns, Citigroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase and Wells Fargo. The grand total of these contributions is $1.8 million. In one report Thomas is quoted as saying he wants to take a look at the repeal of Glass-Steagall which should be interesting since he voted in favor of it.
Perhaps the two most interesting members of the Commission are Brooksley Born and Byron Georgiou. Born is no friend of Lawrence Summers having tangled with him in her battle to regulate the derivatives industry. She is former chairwoman of the Commodity Futures Trading Commission. Lawyer Byron Georgiou of Nevada represents Coughlin Stoia Geller Rudman & Robbins LLP, which has filed suit on behalf of shareholders against subsidiaries of several Wall Street firms, including Bear Stearns, J.P. Morgan Chase & Co. and Morgan Stanley.
On the GOP side two names stand out: Keith Hennessey and Douglas Holtz-Eakin. Hennessey is the former economic adviser to President George W. Bush. You can find out all you want about him at his blog. His most interesting post is on what caused the crisis:
Many banks and other financial institutions, and especially big ones, lost a lot of money on bad mortgage-related investments. This caused them to lose a lot of their capital, and in many cases some of their assets are illiquid and pose additional downside risk to their balance sheets. This hurts those banks’ ability to lend, it hurts their ability to remain liquid and borrow short-term cash from other banks, and in extreme cases it can lead to a run on the bank (of depositors, lenders, or both) and insolvency.
He acknowledges two members of George W. Bush’s Council of Economic Advisors for their help in putting the post together. You have to read the post several times to realize that it really says nothing–at least nothing we did not already know–and is noticeably shallow in both its analysis and its reluctance to point fingers at the banks. BTW I did a search fort Glass-Steagall on his blog and turned up empty. That in itself is pretty telling.
Holtz-Eakin served as a financial advisor to the McCain campaign whose senior financial advisor was none other than Phil Gramm whose name is on the bill that repealed Glass-Steagall. It is doubtful Holtz-Eakin will want to go there.
The Pecora Commission
There is much reference in the press to the Commission as a modern version of the famous Pecora Commission. So let us do a little history. People have forgotten that Glass-Steagall was only made possible by a series of Congressional investigations spearheaded by Ferdinand Pecora between 1933 and 1935. Without the evidence gathered in the Pecora hearings it is doubtful Glass-Steagall would have been as far-reaching, for the corruption Pecora uncovered resulted in a huge public outcry against the abuses of the banks.
In testimony before the Housed Committee on Financial Services economist Robert Kuttner suggested:
I would urge every member of the committee to spend some time reading the Pecora hearings, and you will be startled by the sense of déjà vu.
Pecora was the former Assistant District Attorney of New York County when he was appointed as special counsel to the subcommittee investigating the financial industry. One of the biggest scandals Pecora uncovered is the famous Insull stock manipulation reminiscent of the Enron scandal in which Insull Utility Investments, Inc., head Samuel Insull Jr. testified how his family manipulated investments so that in one case they made over $25 million on an $11 million scheme.
In a 1933 speech before the New York Elks Club Pecora stated that his investigations had shown:
How men of might–not because of principle but because of economic power and wealth–have by the waving of a hand and the adoption of a resolution have taken millions and millions of the hard-earned pennies of the people and turned them into gold for themselves.
When this nation again comes to days of plenty and prosperity, let us seek to make it impossible for water and hot air to be sold to men and women of America for gold taken from their savings. [New York Times, February 19, 1933]
The headlines of misdeeds uncovered by Pecora poured from the press in 1933. There are pages of them in the New York Times index for the first few months of 1933 alone. The Pecora hearings were just what Franklin Roosevelt needed to prod Congress into enacting the sweeping banking legislation that he advocated to resolve the crisis and prevent another. In effect, Pecora became the main driver for change in the system.
Coverup #1
It should be pretty apparent by now that Inquiry Commission is no Pecora Commission. The Committee’s omission of Glass-Steagall is not merely an oversight it is a crime against the American people. It is almost as though no one wants to mention the words. Angelides received a “doing well” comment from Zach Carter of AlterNet, live blogging the chair’s questioning of Comptroller of the Currency John Dugan, a former bank lobbyist. Carter even points out that the line of questioning leads directly to Glass-Steagall, but Angelides does not have the guts to pull the trigger, so Glass-Steagall goes unnoticed. Pecora would not have done that.
Things get curiouser and curiouser because Angelides did specifically mention Glass-Steagall in an interview on PBS:
And, for example, one thing I would say about Glass-Steagall which was the separation of commercial investment banking, people forget one of its real purposes was to protect consumers. They didn’t want bankers peddling speculative products to people.
But thus far the Commission has done a great job of dancing around the issue which is hard to do when the issue is the elephant in the room.
When you ignore an issue that might prove embarrassing to powerful people it can only be described as a coverup. Because the repeal of Glass-Steagall was bipartisan, involved a former President whose wife is in the cabinet and is a possible future Presidential candidate, involved current members of the Obama Administration and, of course, current members of Congress from both parties (Nancy Pelosi voted “yes”) nobody wants to talk about it.
Coverup #2
There is another coverup that I have not seen mentioned by anyone in the mainstream media or other blogs. That is that three banks: Wells Fargo, J.P. Morgan and Bank of America are breaking the law even as we speak.
The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act which states:
The Board may not approve an application pursuant to paragraph (1)(A) if the applicant (including all insured depository institutions which are affiliates of the applicant)controls, or upon consummation of the acquisition for which such application is filed would control, more than 10 percent of the total amount of deposits of insured depository institutions in the United States.
In plain English this means the Federal Reserve Board may not approve a merger application if the merging bank currently controls or after the merger would control more than ten percent of the total amount of deposits of insured depository institutions in the United States. The Board also may not approve the application if the applicant would control thirty percent or more of the insured deposits in any state.
Currently the three banks control close to 40% 0f the money in this country. According to the New York Times, In 1995, the assets of the six largest banks totaled 17 percent of the nation’s gross domestic product. Now they have assets amounting to 63 percent of G.D.P.
In testimony last year before the House Judiciary Committee, Robert Weissman of Public Citizen reported that Wells Fargo and Bank of America originated 44% of all mortgages in the second quarter of 2009. Even more frightening, Weissman noted that the top five banks control 96% of the derivatives market.
This conjures up visions of J.P. Morgan, the banker who actually bailed out the Unites States Treasury, and Jay Gould, who almost succeeded in cornering the gold market during the Gilded Age. Only the current situation is worse because evidence suggests these financial institutions broke the law using bailout funds provided by a Republican President and a Democratic Congress.
If Glass-Steagall is out of bounds for the Commission the issue of market control is way off in left field somewhere. No one wants to deal with that one, even though it may be as important–or more so–than Glass-Steagall. If three banks control almost half the market, they control almost half of us.
That is a very scary thought.
The Wimp Out
One of the appeals of Barack Obama’s candidacy was that he had no ties to the past. As was mentioned, John McCain’s financial advisor was none other than Phil Gramm whose name is on the bill that repealed Glass-Steagall. Obama had no such baggage. Then he went and appointed Timothy Geithner and Lawrence Summers, both of whom are apologists for the repeal of Glass-Steagall. So now Barack Obama has his own hands stuck to the fly paper.
Instead of a coverup we need to have a frank and open discussions of the repeal of Glass-Steagall and of bank concentration, discussions that are not overseen by a wimpy committee.
Barack Obama held out the promise that government in Washington would be different. The Committee is more of the same.
Stiglitz comments:
In Britain there is a more open discussion of these issues.
Print Posted by: liberalamerican
