Wednesday, September 24, 2008

ITSSD - Congressional Democrat Opposition to 2003 & 2005 Fannie Mae & Freddie Mac Reforms Contributed Greatly to Current US Financial Crisis!!




Date: Wed, 24 Sep 2008


From: Barack Obama

Subject: Greed and irresponsibility


The era of greed and irresponsibility on Wall Street and in Washington has created a financial crisis as profound as any we have faced since the Great Depression. Congress and the President are debating a bailout of our financial institutions with a price tag of $700 billion or more in taxpayer dollars. We cannot underestimate our responsibility in taking such an enormous step. Whatever shape our recovery plan takes, it must be guided by core principles of fairness, balance, and responsibility to one another.

Please sign on to show your support for an economic recovery plan based on the following:

No Golden Parachutes -- Taxpayer dollars should not be used to reward the irresponsible Wall Street executives who helmed this disaster.

Main Street, Not Just Wall Street -- Any bailout plan must include a payback strategy for taxpayers who are footing the bill and aid to innocent homeowners who are facing foreclosure.

Bipartisan Oversight -- The staggering amount of taxpayer money involved > demands a bipartisan board to ensure accountability and oversight. Show your support and encourage your friends and family to join you:>

The failed economic policies and the same corrupt culture that led us into this mess will not help get us out of it. We need to get to work immediately on reforming the broken government -- and the broken politics -- that allowed this crisis to happen in the first place. And we have to understand that a recovery package is just the beginning. We have a plan that will guarantee our long-term prosperity -- including tax cuts for 95 percent of families, an economic stimulus package that creates millions of new jobs and leads us towards energy independence, and health care that is affordable to every American. It won't be easy. The kind of change we're looking for never is. But if we work together and stand by these principles, we can get through this crisis and emerge a stronger nation. Thank you, Barack Paid for by Obama for America




Government-Sponsored Enterprises (GSEs): Regulatory Reform Legislation

CRS Report for Congress # RL32795

By Mark Jickling

Updated October 27, 2005

Government-sponsored enterprises (GSEs) are privately owned, congressionally chartered financial institutions created for specific public policy purposes. They benefit from certain exemptions and privileges, including an implied federal guarantee,1 intended to enhance their ability to borrow money. Two of the largest GSEs are Fannie Mae and Freddie Mac (herein referred to as the enterprises or GSEs).2 These institutions were created by Congress to establish and maintain a secondary mortgage market, increasing liquidity and improving the distribution of capital available for home mortgage financing.3 To help these institutions accomplish this mission, Congress has provided them with several benefits not available to other financial institutions.4 These statutory benefits provide the enterprises with lower funding costs, the ability to operate with less capital, and lower direct costs.5 The advantages of GSE status have enabled the enterprises to grow rapidly and become dominant players in the secondary mortgage market.

Congress has always been concerned that the safety and soundness of the enterprises be maintained so that they can meet their public policy mission and not pose risks to taxpayers. Prior to 1992, oversight was the responsibility of the Department of Housing and Urban Development (HUD) and the Federal Home Loan Bank Board. In 1992, Congress established the Office of Federal Housing Enterprise Oversight (OFHEO), an independent agency within HUD, to oversee the financial safety and soundness of the enterprises. The office is authorized to set capital requirements, conduct annual risk-based examinations, and generally enforce compliance with safety and soundness standards.

Since the creation of OFHEO, total assets at the GSEs have grown by more than 820% to $1.9 trillion.6 The GSEs have become two of the largest private debt issuers in the world. At the end of 2003, outstanding debt securities of the enterprises totaled $1.7 trillion — an amount equal to nearly half of all publicly held U.S. Treasury debt. In addition to enterprise debt, investors hold about $1.7 trillion in mortgage-backed securities issued by Fannie Mae and Freddie Mac.7 As a result of the rapid growth of these institutions and their implied federal backing, there has been an increasing concern that the enterprises may pose a problem of systemic risk to the financial system.8 Many financial institutions around the world hold large quantities of GSE debt and default by either GSE could have widespread, unpredictable, and potentially serious repercussions. Accordingly, questions have been raised about the effectiveness of the current regulatory environment.

Events of the past two years have brought a new urgency to the GSE reform issue. In 2003, Freddie Mac admitted that it had used improper accounting policies to create the appearance of steady earnings growth and issued a restatement of financial results, revising net income for 2000-2002 upwards by $5 billion.9 OFHEO imposed a $125 million fine and is pursuing civil actions against several former Freddie executives.

Following the special examination of Freddie Mac, OFHEO began to review the accounting policies and practices at Fannie Mae, and published its preliminary findings in September 2004.10 OFHEO charged that Fannie Mae did not follow generally accepted accounting practices in two critical areas: (1) amortization of discounts, premiums, and fees involved in the purchase of home mortgages and (2) accounting for financial derivatives contracts. According to OFHEO, these deviations from standard accounting rules allowed Fannie Mae to reduce volatility in reported earnings, present investors with an artificial picture of steadily growing profits, and, in at least one case, to meet financial performance targets that triggered the payment of bonuses to company executives.11 On December 15, 2004, the Securities and Exchange Commission (SEC) essentially endorsed OFHEO’s report and directed Fannie Mae to restate its accounting results since 2001 after finding inadequacies in Fannie’s accounting policies and methodologies. Fannie Mae’s CEO and CFO stepped down soon thereafter.

While problems at Fannie Mae and Freddie Mac have provided the main impetus for reform, the regulation of the Federal Home Loan Banks (FHLBs) may also be affected by the GSE. The 12 FHLBs comprise one collective governmentsponsored enterprise. Originally chartered by Congress to provide liquidity to the nation’s predominant lenders for home mortgage loans — savings and loan associations and savings banks — the FHLBs have undergone a series of changes over the years as financial institutions have changed. Still a lender to lenders primarily for housing, the FHLBs can now lend for many other purposes as well, and have special responsibilities for low- and moderate-income housing, for debts incurred by the federal government in handling deposit insurance crises of the 1970s and 1980s, and for some community development projects.

Several bills were considered in the 108th Congress that would have restructured OFHEO. While the proposals took somewhat different approaches to regulatory reform, all appeared to:

1) abolish OFHEO and reconstitute the GSE regulator within the Department of the Treasury, or as an independent agency;12

2) increase the budget autonomy of the new office by exempting its assessments from the annual appropriations process; and

3) enhance the safety and soundness and enforcement tools available to the new regulator.

Legislative proposals in the 109th Congress incorporate most of the features of the 108th Congress bills, but also include significant new provisions...

The Bush Administration has generally supported GSE regulatory reform. Treasury Secretary John Snow issued a statement following the mark up of S. 190, praising the legislation, though noting that certain elements the Administration wanted were not present in the bill:

The legislation ... creates significantly enhanced market discipline and capital requirements for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. The legislation strikes a proper and prudent balance in ensuring that the activities undertaken by these entities do not engender systemic risk while providing broad access to housing finance.13

Major Differences Between House and Senate Bills

The House and Senate bills take a common approach in the restructuring of the GSE regulator. There is a general consensus that OFHEO needs to be strengthened — given the importance of the GSEs to the financial system and the potential risks they pose, there is very little support for keeping the GSE regulator inside HUD.

Both H.R. 1461 and S. 190 give the new agency tools and authorities that resemble those of federal bank regulators. Where the bills differ most significantly is in their approaches to the business operations of the GSEs, particularly Fannie and Freddie.

...The House bill seeks to increase GSE support for low-income housing and would permit Fannie and Freddie to buy larger mortgages than current law permits, while the Senate bill seeks to shrink the companies’ portfolios by restricting the kinds of assets they can purchase.

Affordable Housing Fund

Section 128 of H.R. 1461 (as passed the House) requires Fannie and Freddie to establish affordable housing funds to increase homeownership among very low and extremely low income families, to increase investment in housing in low income and economically distressed areas, and to increase and preserve the supply of rental and owner-occupied housing for very low and extremely low income families.

...Proponents of the affordable housing funds recognize that Fannie and Freddie receive a valuable subsidy in the form of their GSE status, which permits them to borrow at lower rates than other private financial firms. The affordable housing fund proposal can be viewed as a means of capturing some of the value of this subsidy and applying it to a worthy policy objective.

Opponents argue that Fannie and Freddie would likely use the funds to reward political allies. During floor consideration of H.R. 1461, an amendment was adopted that prohibited the use of money disbursed by the affordable housing funds for political, lobbying, or advocacy purposes. Other amendments included a five-year sunset for the fund (with the Director of the new regulator to recommend to Congress whether the fund should be extended) and established a priority for activities in areas affected by Hurricanes Katrina and Rita, and in other areas designated by the President as major disaster areas.

Conforming Loan Limits

Current law sets a limit on the size of mortgages that Fannie and Freddie can buy. Mortgages above the limit, called jumbo loans, are less likely to be securitized than the conforming mortgages that Fannie and Freddie are allowed to purchase. Partly as a result, mortgage rates for nonconforming loans are slightly higher than conforming loan rates.14 Critics of the conforming loan limit argue that the limit has a disparate geographical effect: in some areas of the country the current limit, which is $359,650 for single-family homes, covers all but the high end of the market, while in other areas, such as San Francisco or New York City, virtually all real estate transactions take place over the limit.

H.R. 1461 would raise the conforming loan limit in metropolitan areas where the median home price exceeds the current limit. In those areas, the limit would be set at the median home price, up to a ceiling of 150% of the current limit. For more information on this proposal, see CRS Report RS22172, Proposed Changes to the Conforming Loan Limit.

...The Senate bill has no comparable provision.

Portfolio Limits

While the two House bill provisions discussed above seek to redistribute the fruits of the GSE subsidy, the Senate bill contains a provision that could dramatically reduce the value of that subsidy.

Both Fannie and Freddie hold large portfolios of mortgages and mortgage-backed securities, which generate interest income. They pay for those mortgage assets by issuing debt securities at rates below what the mortgages and mortgage-backed bonds pay. The difference between the yield on mortgage-related assets and the GSEs’ cost of funds is profit. Thus, the GSEs have a strong incentive to pursue portfolio growth: the two firms together have over $1.5 trillion in portfolio assets, leading some observers to describe them as the world’s largest savings and loan institutions. The size of their portfolios represents a concentration of mortgage market risk that has led Federal Reserve Board Chairman Alan Greenspan and others to urge Congress to consider ways to shrink the size of the GSEs’ asset portfolios.15

Section 109 of S. 190 as reported enumerates the types of “permissible assets” that Fannie and Freddie would be permitted to purchase. They would only be allowed to acquire mortgages and mortgage-backed securities for purposes of securitization, and for certain other limited purposes. Under this proposal, Fannie and Freddie’s business models would be considerably altered: instead of very large investment funds, they would be transformed into conduits, buying mortgages from the original lenders, pooling them, packaging them into mortgage-backed securities, and selling them to bond investors. This would greatly reduce their portfolio earnings, currently one of the chief sources of their profits.

Proponents of portfolio limits argue that this step is necessary to reduce the cost of the GSE subsidy to taxpayers, which takes the form not of annual appropriations, but of the assumption of risk — the potential cost to the Treasury of having to bail out either Fannie or Freddie to avoid the possibility of a systemic catastrophe in the financial markets, should either firm encounter serious difficulties. Opponents argue that reducing the GSE’s interest earnings would mean less support for low- and moderate-income housing goals. The House bill contains no similar provision.


Limiting Fannie Mae’s and Freddie Mac’s Portfolio Size

By Eric Weiss

CRS Report for Congress # RS22307

October 25, 2005

Federal Reserve Chairman Alan Greenspan and Treasury Secretary John W. Snow recently have urged the 109th Congress to pass legislation to limit the size of Fannie Mae’s and Freddie Mac’s portfolio to reduce the risk to the federal government and the economy. In 2003, these government-sponsored enterprises (GSEs) combined retained portfolio had risen to $1.6 trillion from $136 billion in 1990.

One of the more controversial aspects of GSE reform is this proposal to limit the size of the investment portfolios, which consist of mortgages and mortgage-backed securities (MBSs) that are subject to several types of financial risk. If these risks are not managed properly, or if market movements turn dramatically against the GSEs, the government may face two unsatisfactory alternatives: either let the GSE go into default and hope that the financial repercussions can be controlled, or step in and assume payments on the GSE debt at a significant cost to taxpayers. Proponents of portfolio limits argue that shrinking portfolio size reduces the likelihood and cost if this choice will ever have to be made. The GSEs and their supporters argue, on the other hand, that the profits generated by the investment portfolios enhance the GSEs’ ability to support affordable housing programs and reduce mortgage interest rates.

This report analyzes the types of risk that the GSEs pose to the economy, and the advantages and disadvantages of proposals to limit portfolio size.

...Recently Federal Reserve Chairman Alan Greenspan1 and Treasury Secretary John
Snow2 have warned that the mortgage portfolios of Fannie Mae and Freddie Mac (the housing government-sponsored enterprises, or GSEs for short) present a risk to the
nation’s financial system and federal government
... Letter from Alan Greenspan, Chairman of the Federal Reserve, to the Honorable Robert F. Bennett, U.S. Senate, Sept. 2, 2005, at [].

...Fannie Mae and Freddie Mac buy mortgages from the original lenders and package them into mortgage-backed securities (MBSs), which are either sold to investors or held in portfolio by the GSEs themselves.3 These portfolios are large and have grown rapidly, both in dollar terms and as a percentage of all MBSs outstanding. According to the most current complete information (the end of 2003),4 Fannie Mae’s retained mortgage portfolio was $902 billion5 and Freddie Mac’s was $661 billion.6 At the end of 2003, their combined portfolios were more than 11 times their size in 1990.

...GSE Risks

The GSEs share many risks with all business. These risks can affect the companies, stockholders, employees, bondholders, and business partners. The GSEs’ risks can also affect the nation’s financial system and the economy.

...Credit Risk. Credit risk is the risk that the borrowers (mortgagors) will not repay
their loan on time — in other words, the risk of delinquency and default. When Fannie
and Freddie buy mortgages and combine them into MBSs, they add their guarantee that
the loans will be repaid on risk is not a serious problem.10

Prepayment Risk. Prepayment risk is potentially more serious. This is the risk
to an investor that a 30-year mortgage will be paid before the full 30 years is concluded...
As the cost of refinancing has declined over the last 10 years, the decline in interest rates
necessary to justify refinancing (with or without cash out or financing improvements to
the home) has been reduced. In recent years, the decline in mortgage rates has caused
prepayment rates to increase. This results in uncertainty for lenders and the holders of

...Interest Rate Risk. Interest rate risk comes from financing the MBS portfolios by borrowing money (issuing bonds), and is related to prepayment risk. In 2003, Fannie had $962 billion of debt outstanding; Freddie had $740 increase or decrease in market rates can cause the GSEs’ unhedged portfolios to lose value.12...

...Interest rate risk can be very serious. Many savings and loan associations became insolvent in the early 1980s because of it. During that time, Fannie Mae’s portfolio was poorly hedged. According to Secretary Snow, “Fannie Mae became insolvent on a markto-market basis. Only a combination of legislative tax relief, regulatory forbearance, and a decline in interest rates allowed Fannie Mae to grow out of its problem.”13 Despite state-of-the-art hedging today, the GSEs’ portfolios have significant interest rate risk.

Operational Risk. Operational risk is the risk of loss due to inadequate or failed internal procedures and systems. It is addressed by the various reforms in the House and Senate bills that increase regulatory powers, and in S. 190 reducing the size of the GSEs’ portfolios...Fannie Mae’s current accounting problems, and those of Freddie Mac in 2003, raise questions about internal controls. Accounting systems provide the basis for portfolio adjustment decisions. If the accounting system is providing inaccurate information, the resulting portfolio adjustment decisions are likely to be incorrect.

...At a summary level, risk has two dimensions: the probability that the event will occur and the cost if it does...Reducing the size of the portfolios would reduce both dimensions.

...the implied guarantee allows the GSEs to grow without the usual market forces that would raise their costs as their risks rose. As a result, Fannie and Freddie represent significant systemic risk to the nation’s financial system, both because they can make mistakes and because their size and concentration raise the likelihood of high costs for the economy when they do. Reducing the seriousness of the systemic risk requires reducing the size of the implied guarantee.


S. 190 [109th]: Federal Housing Enterprise Regulatory Reform Act of 2005

This bill never became law. This bill was proposed in a previous session of Congress. Sessions of Congress last two years, and at the end of each session all proposed bills and resolutions that haven't passed are cleared from the books.

Last Action:
Jul 28, 2005: Committee on Banking, Housing, and Urban Affairs. Ordered to be reported with an amendment in the nature of a substitute favorably.

The following summary was written by the Congressional Research Service, a well-respected nonpartisan arm of the Library of Congress. GovTrack did not write and has no control over these summaries.

Sen. Charles Hagel [R-NE]

Cosponsors [as of 2007-01-08]
Sen. Elizabeth Dole [R-NC]
Sen. John McCain [R-AZ]
Sen. John Sununu [R-NH]


Federal Housing Enterprise Regulatory Reform Act of 2005 - Amends the Federal Housing Enterprises Financial Safety and Soundness Act of 1992 to establish:

(1) in lieu of the Office of Federal Housing Enterprise Oversight of the Department of Housing and Urban Development (HUD), an independent Federal Housing Enterprise Regulatory Agency which shall have authority over the Federal Home Loan Bank Finance Corporation, the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (Freddie Mac); and

(2) the Federal Housing Enterprise Board.

Sets forth operating, administrative, and regulatory provisions of the Agency, including provisions respecting:

(1) assessment authority;

(2) authority to limit nonmission-related assets;

(3) minimum and critical capital levels;

(4) risk-based capital test;

(5) capital classifications and undercapitalized enterprises;

(6) enforcement actions and penalties;

(7) golden parachutes; and

(8) reporting.

Amends the Federal Home Loan Bank Act to establish the Federal Home Loan Bank Finance Corporation. Transfers the functions of the Office of Finance of the Federal Home Loan Banks to such Corporation.

Excludes the Federal Home Loan Banks from certain securities reporting requirements.
Abolishes the Federal Housing Finance Board. S. 190--109th Congress (2005): Federal Housing Enterprise Regulatory Reform Act of 2005, (database of federal legislation) (accessed Sep 24, 2008)


H.R. 1461 [109th]: Federal Housing Finance Reform Act of 2005

This bill never became law. This bill was proposed in a previous session of Congress. Sessions of Congress last two years, and at the end of each session all proposed bills and resolutions that haven't passed are cleared from the books.

Last Action:

Oct 31, 2005: Received in the Senate and Read twice and referred to the Committee on Banking, Housing, and Urban Affairs.

The following summary was written by the Congressional Research Service, a well-respected nonpartisan arm of the Library of Congress. GovTrack did not write and has no control over these summaries.

10/26/2005--Passed House amended.

Federal Housing Finance Reform Act of 2005 -

Title I - Reform of Regulation of Enterprises and Federal Home Loan Banks

Subtitle A - Improvement of Safety and Soundness

Section 101 -

Amends the Housing and Community Development Act of 1992 (Act) to establish the Federal Housing Finance Agency (FHFA), which shall have supervisory and regulatory authority over the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) (both hereinafter referred to as the "enterprises") and the Federal Home Loan Banks.

Section 102 -

Sets forth duties and authorities of the Director of FHFA, which include regulating and overseeing the operations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (all three of which referred to as "regulated entities").

Section 103 -

Establishes the Housing Finance Oversight Board to advise the Director.

Section 104 -

States that the Director, with respect to regulated entities: (1) may require regular reports on condition, management, activities, or operations, and any special reports; (2) shall require reports of fraudulent financial transactions; (3) shall require annual reports of charitable contributions; (4) shall collect annual assessments; and (5) shall establish risk-based capital requirements for the regulated entities.

Section 112 -

Authorizes the Director to: (1) raise minimum capital levels to ensure that regulated entities operate in a safe and sound manner; (2) establish temporary minimum capital increases; and (3) establish additional capital and reserve requirements for a particular program.
Requires the Director to periodically review, and adjust as necessary, the capital levels of regulated entities.

Section 113 -

Requires the Director to periodically review enterprise assets and liabilities. Authorizes the Director to require the disposition or acquisition of certain assets and liabilities as appropriate.

Section 114 -

Sets forth enterprise governing provisions.

Section 115 -

Requires each regulated entity to register at least one class of stock with the Securities and Exchange Commission (SEC).

Section 116 -

Amends the Federal Financial Institutions Examination Council Act of 1978 to include the Director on the Federal Financial Institutions Examination Council (FFIEC).

Section 117 -

Directs the Government Accountability Office (GAO) to study regulated entity pricing, transparency, and reporting of guarantee fees.
Subtitle B - Improvement of Mission Supervision

Section 121 -

Amends the Act to transfer authority to approve programs and to oversee the mission requirements of the enterprises from the Department of Housing and Urban Development (HUD) to FHFA.

Section 122 -

Requires Director review and approval of an enterprise's new programs and activities, including pilot programs. Sets forth review and approval provisions.

Section 123 -

Sets forth enterprise conforming loan limits for single-, two-family, three-family, and four-family residences.

Provides for: (1) annual loan limit increases or decreases; and (2) loan limit increases in areas where the median home price is greater than the conforming loan limit.

Requires the Director to: (1) develop a Housing Price Index, which shall be subject to a GAO audit on Index methodology and timing; and (2) conduct a study of issues related to loan limits in high cost areas.

Section 124 -

Requires the Director to report annually to the appropriate congressional committees respecting each regulated entity's activities.

Section 125 -

Replaces current housing goals with three single-family housing goals and a multifamily special affordable housing goal, to be established annually.

Requires: (1) an enterprise to disclose information to allow the Director to assess if there are interest rate disparities between minorities and non-minorities of similar creditworthiness; and (2) that if interest rate disparities exist, those findings must be reported to Congress and the Director must instruct the enterprise to take appropriate remedial action.

Requires the Director to establish (and authorizes increases of) an annual purchase goal for each enterprise for conventional, conforming, single-family, owner-occupied, and purchase money mortgages financing housing for: (1) low-income families; (2) families residing in low-income areas; and (3) very low-income families.

Requires the Director to establish a Multifamily Special Affordable Goal for mortgages that finance dwelling units: (1) for low-income families; (2) for very low-income families; and (3) assisted by the low-income housing tax credit. Requires the Director to establish additional requirements within the Multifamily Special Affordable Goal for small loans measured by either mortgage amounts or number of dwelling units in the project or both.

Authorizes an enterprise to petition the Director for a housing goal reduction.

Section 126 -

States that each enterprise shall: (1) undertake activities relating to mortgages on housing for very low-, low-, and moderate-income families involving a reasonable economic return that may be less than the return earned on other activities; and (2) have the duty to increase the liquidity of mortgage investments and improve the distribution of investment capital available for mortgage financing for underserved markets.

Section 127 -

Sets forth housing goal monitoring and enforcement provisions.

Section 128 -

Requires each enterprise to establish an affordable housing fund to: (1) increase homeownership for extremely low- and very low-income families, (2) increase investment in housing in low-income areas and areas designated as qualified census tracts or an area of chronic economic distress; (3) increase and preserve the supply of rental and owner-occupied housing for extremely low- and very low-income families; and (4) increase investment in economic and community development in economically underserved areas.

Sets forth fund allocation provisions. Sunsets such required funding five years after the sixth month after enactment of this Act.

Sets forth recipient (for-profit, governmental, and other than for-profit entities) and activity (including leveraged grants and homeownership) eligibility provisions.

Requires each enterprise to submit quarterly reports to the Director and the affordable housing board.

Requires the Director to appoint an affordable housing board.

Section 130 -

Authorizes the Director to issue cease and desist orders and impose civil money penalties on an enterprise that has failed to: (1) meet a housing goal; (2) submit certain reports; (3) submit an acceptable housing plan; or (4) comply with a housing plan.

Subtitle C - Prompt Corrective Action

Section 141 -

Amends the Act to require the Director to establish capital classifications for regulated entities.
Revises capital classification provisions. Prohibits, with a specified exception, a regulated entity from making a capital distribution that would result in such entity's undercapitalization.

Section 142 -

Sets forth supervisory action applicable to undercapitalized regulated entities, including restrictions on asset growth.

Section 143 -

Sets forth supervisory actions applicable to significantly undercapitalized regulated entities, including: (1) making current discretionary actions mandatory; and (2) limiting executive officer compensation or bonuses.

Section 144 -

Authorizes the Director to establish a conservatorship or receivership over a critically undercapitalized regulated entity in order to reorganize, rehabilitate, or terminate the entity's affairs. Requires that FHFA be appointed as conservator or receiver.

Sets forth provisions respecting: (1) grounds for conservator or receiver appointment; (2) FHFA duties and powers as conservator or receiver; and (3) judicial review.

Subtitle D - Enforcement Actions

Section 161 -

Authorizes the Director to: (1) issue a cease and desist order if a regulated entity or affiliated party is engaged in an unsafe or an unsound practice or is violating a rule or condition; and (2) deem a regulated entity to be engaged in unsafe and unsound practices if such entity receives a less than satisfactory rating for asset quality, management, earnings, or liquidity in its most recent exam.

Section 162 -

Authorizes the Director to: (1) issue a temporary cease and desist order if the violation or threatened violation or unsafe or unsound practice specified in the notice of charges is likely to cause insolvency or a significant dissipation of assets or earnings or is likely to weaken the condition of the regulated entity prior to completion of the proceedings for issuance of a permanent cease-and-desist order; and (2) enforce such orders by a court injunction.

Section 163 -

Authorizes the Director to seek prejudgment attachment.

Section 164 -

Authorizes the Director to seek judicial enforcement of this title in U.S. district court.

Section 165 -

Sets forth civil money penalties.

Section 166 -

Authorizes the Director to issue removal and prohibition orders against a party for the protection of the regulated entity, including suspension or removal of a party charged with a felony.

Section 167 -

Provides that a person who is subject to a removal or prohibition order and who knowingly participated in the conduct of the affairs of any regulated entity shall be fined not more than $1 million, imprisoned for up to five years, or both.

Section 168 -

Grants the Director subpoena authority.

Subtitle E - General Provisions

Section 181 -

States that the boards of directors of Fannie Mae and Freddie Mac, respectively, shall have between 7 and 15 members. (Current law requires 18 members.)

Section 182 -

Requires the Director to report to Congress respecting: (1) the portfolio holdings of Fannie Mae and Freddie Mac; and (2) alternative secondary market systems.

Title II - Federal Home Loan Banks

Section 201 -

Amends the Federal Home Loan Bank Act to define "Director" and "Agency" (FHFA) for purposes of such Act.

Section 202 -

Revises Federal Home Loan Bank board of director provisions, including the number of directors for each bank and their qualifications and terms of office.

Section 203 -

Replaces the Federal Housing Finance Board with FHFA.

Section 204 -

Authorizes two or more Federal Home Loan Banks to establish a joint office in order to perform functions for, or providing services to, the Banks on a common or collective basis.

Section 205 -

Requires the Director to prescribe rules to ensure that each Federal Home Loan Bank has access to information to determine the nature and extent of its joint and several liability.

Section 206 -

Authorizes Bank mergers.

Section 207 -

Exempts Federal Home Loan Banks from certain disclosure requirements respecting: (1) capital stock; (2) tender requirements; and (3) reporting requirements.

Section 208 -

Redefines "community financial institution" to raise the maximum asset level to $1 billion. Permits such institutions to use advances for community development lending.

Section 210 -

Directs that GAO study the use of the Federal Home Loan Banks' affordable housing program to fund long-term care facilities for low- and moderate-income individuals.

Title III - Transfer of Functions, Personnel, and Property of Office of Federal Housing Enterprise Oversight, Federal Housing Finance Board, and Department of Housing and Urban Development

Subtitle A - Office of Federal Housing Enterprise Oversight

Section 301 -

Abolishes the Office of Federal Housing Enterprise Oversight (OFHEO) of HUD and the positions of the Director and Deputy Director six months after enactment of this Act.

Section 302 -

Sets forth provisions respecting: (1) continuation and coordination of operations; and (2) transfer (and rights) of OFHEO employees, property, and facilities to FHFA.

Subtitle B - Federal Housing Finance Board

Section 321 -

Abolishes the Federal Housing Finance Board six months after enactment of this Act.

Section 322 -

Sets forth provisions respecting: (1) continuation and coordination of operations; and (2) transfer (and rights) of Board employees, property, and facilities to FHFA.

Subtitle C - Department of Housing and Urban Development

Section 341 -

Directs the Secretary of HUD to determine and transfer the enterprise-related functions and employees of HUD to FHFA within six months of enactment of this Act. Provides that during the six-month period after enactment of this Act HUD will continue to oversee the affordable housing goals, new programs, and mission of the enterprises.

Section 342 -

Sets forth provisions respecting: (1) continuation and coordination of operations; and (2) transfer (and rights) of employees, property, and facilities.


New Agency Proposed to Oversee Freddie Mac and Fannie Mae


New York Times

September 11, 2003

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac -- which together have issued more than $1.5 trillion in outstanding debt -- is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.

''There is a general recognition that the supervisory system for housing-related government-sponsored enterprises neither has the tools, nor the stature, to deal effectively with the current size, complexity and importance of these enterprises,'' Treasury Secretary John W. Snow told the House Financial Services Committee in an appearance with Housing Secretary Mel Martinez, who also backed the plan.

Mr. Snow said that Congress should eliminate the power of the president to appoint directors to the companies, a sign that the administration is less concerned about the perks of patronage than it is about the potential political problems associated with any new difficulties arising at the companies.

The administration's proposal, which was endorsed in large part today by Fannie Mae and Freddie Mac, would not repeal the significant government subsidies granted to the two companies. And it does not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enables them to issue debt at significantly lower rates than their competitors. Nor would it remove the companies' exemptions from taxes and antifraud provisions of federal securities laws.

The proposal is the opening act in one of the biggest and most significant lobbying battles of the Congressional session.

After the hearing, Representative Michael G. Oxley, chairman of the Financial Services Committee, and Senator Richard Shelby, chairman of the Senate Banking Committee, announced their intention to draft legislation based on the administration's proposal. Industry executives said Congress could complete action on legislation before leaving for recess in the fall.

''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.

''These irregularities, which have been going on for several years, should have been detected earlier by the regulator,'' he added.

The Office of Federal Housing Enterprise Oversight, which is part of the Department of Housing and Urban Development, was created by Congress in 1992 after the bailout of the savings and loan industry and concerns about regulation of Fannie Mae and Freddie Mac, which buy mortgages from lenders and repackage them as securities or hold them in their own portfolios.

At the time, the companies and their allies beat back efforts for tougher oversight by the Treasury Department, the Federal Deposit Insurance Corporation or the Federal Reserve.

Supporters of the companies said efforts to regulate the lenders tightly under those agencies might diminish their ability to finance loans for lower-income families. This year, however, the chances of passing legislation to tighten the oversight are better than in the past.

Reflecting the changing political climate, both Fannie Mae and its leading rivals applauded the administration's package. The support from Fannie Mae came after a round of discussions between it and the administration and assurances from the Treasury that it would not seek to change the company's mission.

After those assurances, Franklin D. Raines, Fannie Mae's chief executive, endorsed the shift of regulatory oversight to the Treasury Department, as well as other elements of the plan.

''We welcome the administration's approach outlined today,'' Mr. Raines said. The company opposes some smaller elements of the package, like one that eliminates the authority of the president to appoint 5 of the company's 18 board members.

Company executives said that the company preferred having the president select some directors. The company is also likely to lobby against the efforts that give regulators too much authority to approve its products.

Freddie Mac, whose accounting is under investigation by the Securities and Exchange Commission and a United States attorney in Virginia, issued a statement calling the administration plan a ''responsible proposal.''

The stocks of Freddie Mac and Fannie Mae fell while the prices of their bonds generally rose. Shares of Freddie Mac fell $2.04, or 3.7 percent, to $53.40, while Fannie Mae was down $1.62, or 2.4 percent, to $66.74. The price of a Fannie Mae bond due in March 2013 rose to 97.337 from 96.525.Its yield fell to 4.726 percent from 4.835 percent on Tuesday.

Fannie Mae, which was previously known as the Federal National Mortgage Association, and Freddie Mac, which was the Federal Home Loan Mortgage Corporation, have been criticized by rivals for exerting too much influence over their regulators.

''The regulator has not only been outmanned, it has been outlobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''

Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''

Representative Melvin L. Watt, Democrat of North Carolina, agreed.

''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said.


Fannie Mae Eases Credit To Aid Mortgage Lending


New York Times

September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Sunday, September 21, 2008

Obama Tries to Deceive Americans About Cause of the Current US Financial Crisis: But, History Shows that Banking Deregulation Was a Bipartisan Effort

Although the Republicans and Democrats have blamed each other for precipitating the current financial crisis on Wall Street by enacting laws that deregulated the various arms of the U.S. financial services sector, the evidence shows that BOTH POLITICAL PARTIES IN CONGRESS and the CLINTON ADMINISTRATION TREASURY DEPARTMENT had previously agreed, (along with the financial services industry), that financial deregulation was in the best interests of the country. Apparently, they had the global competitiveness of U.S. financial institutions in mind.

The following information provides access to the legislation, legislative history and congressional voting that led to the overwhelming bipartisan passage of S.900, which repealed the Glass-Steagall Act of 1933, during November 1999. There are also articles which describe the bipartisan effort to deregulate the U.S. financial services regulations in order to increase U.S. global competitiveness against foreign
government-championed private and national banks.


H.R.10 Title: To enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes.


Financial Services Act of 1999

ATM Fee Reform Act of 1999

Federal Home Loan Bank System Modernization Act of 1999

Sponsor: Rep Leach, James A. [IA-1] (introduced 1/6/1999) Cosponsors (12) Related Bills: H.RES.235, S.900 Latest Major Action: 7/12/1999 Received in the Senate. Read twice. Placed on Senate Legislative Calendar under General Orders. Calendar No. 204. House Reports: 106-74 Part 1, 106-74 Part 2, 106-74 Part 3 Note: For further action, see S. 900, which became Public Law 106-102.

(Republicans in roman; Democrats in italic; Independents underlined)

H R 10 RECORDED VOTE 1-Jul-1999 11:32 PM

QUESTION: On Passage

BILL TITLE: Financial Services Act










(Republicans in roman; Democrats in italic; Independents underlined)
Notable Democrats who voted in favor of the Financial Services Act of 1999 [H.R. 10]: (* Currently holds seat in House Committee on Financial Services) See:

Ackerman (NY) *
Baldacci (ME) (**Now 2nd term Governor of Maine)
Carson (IN) *

Gutierrez (IL) *
Hastings (FL)
Hinojosa (TX) *
Holt (NJ)

Kennedy (RI)
Levin (MI) (*** Currently holds seat in Committee on Ways and Means)
Maloney (NY) *

Meek (FL) ***
(Meeks (NY) *
Menendez (NJ) (** Now U.S. Senator for NJ)

McNulty (NY) ***Moore (KS) *Moore (WI) *Neal (MA) ***

Rangel (NY) (**** Chairman of the House Committee on Ways and Means)
Scott (GA) *
Velazquez (NY) * Watt (NC) *

Notable Democrats who did NOT vote on H.R. 10:
Green (TX) *
Pelosi (CA) (***** Currently, Speaker of the U.S. House of Representatives)


S.900 Title: An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes.


Gramm-Leach-Bliley Act

ATM Fee Reform Act of 1999

Federal Home Loan Bank System Modernization Act of 1999

Prime Act Program for Investment in Microentrepreneurs Act of 1999

Sponsor: Sen Gramm, Phil [TX] (introduced 4/28/1999) Cosponsors (None) Related Bills: H.RES.355, H.R.10 Latest Major Action: Became Public Law No: 106-102 [GPO: Text, PDF] Senate Reports: 106-44; Latest Conference Report: 106-434 (in Congressional Record H11255-11292)

(Republicans in roman; Democrats in italic; Independents underlined)

S 900 YEA-AND-NAY 4-Nov-1999 11:17 PM

QUESTION: On Agreeing to the Conference Report

BILL TITLE: Financial Services Modernization Act










U.S. Senate Roll Call Votes 106th Congress - 1st Session
as compiled through Senate LIS by the Senate Bill Clerk under the direction of the Secretary of the Senate

Vote Summary

Question: On Passage of the Bill (S.900 as amended BEFORE CONFERENCE)

Vote Number: 105

Vote Date: May 6, 1999, 08:14 PM

Required For Majority: 1/2

Vote Result: Bill Passed

Measure Number: S. 900

Measure Title: An Act to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, and other financial service providers, and for other purposes.

Vote Counts:











Not Voting



Notable ADDITIONAL Democrats who voted in favor of THE CONFERENCE BILL S.900 - The GRAMM–LEACH–BLILEY ACT, enacted into law as PUBLIC LAW 106–102—NOV. 12, 1999 - See:

Pelosi (CA) (***** Currently Speaker of the U.S. House of Representatives)
Sherman (CA) *



Obama: Wallstreet Crisis Caused by McCain-GOP Policies



Obama blames Wall St. crisis on Republican policy

Sep 15 07:26 AM US/Eastern


CHICAGO (AP) - Democratic presidential nominee Barack Obama said Monday the upheaval on Wall Street was "the most serious financial crisis since the Great Depression" and blamed it on policies that he said Republican rival John McCain supports.

"This country can't afford another four years of this failed philosophy," Obama said after the shock-wave announcements that financial giant Lehman Brothers was filing for Chapter 11 bankruptcy while titan Merrill Lynch was being bought by Bank of America for about $50 billion.

Obama's statement, issued as he prepared to fly to Colorado to begin a swing through contested Western states, was intended to serve two purposes: to link McCain with the unpopular presidency of George W. Bush and to express sympathy with the anxiety of most Americans who say the economy is issue No. 1 in the election.

"The challenges facing our financial system today are more evidence that too many folks in Washington and on Wall Street weren't minding the store," Obama said in a statement. "Eight years of policies that have shredded consumer protections, loosened oversight and regulation, and encouraged outsized bonuses to CEOs while ignoring middle-class Americans have brought us to the most serious financial crisis since the Great Depression."

"I certainly don't fault Sen. McCain for these problems," Obama said, "but I do fault the economic philosophy he subscribes to."

In a presidential race turning increasingly negative, Obama also drew on editorial comments from U.S. newspapers and magazines to accuse McCain of running a dishonest campaign with some of the "sleaziest ads" ever seen.

Obama's running mate, Sen. Joe Biden, said McCain was "launching a low blow a day" and went on to say the Republican candidate stands "with George Bush firmly in the corner of the wealthy and well-connected."

Obama's campaign launched a new television commercial that aggressively pushes back against charges by McCain, the GOP presidential nominee. Obama has been under increasing pressure from Democrats to strike back harder at McCain, who has taken a slight lead in national polls. Some leading Republicans faulted both presidential campaigns Sunday for the increasingly negative tone of their advertising.

Former Bush political adviser Karl Rove said McCain and Obama had both shaded the truth in campaign advertising.

"McCain has gone, in some of his ads, similarly gone one step too far in sort of attributing to Obama things that are, you know, beyond the 100-percent truth test," Rove told "Fox News Sunday."

The Obama campaign has complained especially about an ad that declares Obama supports sex education for kindergartners. He supported legislation that would teach age-appropriate sex education to kindergartners, including information on rejecting advances by sexual predators.

"Both campaigns are making a mistake, and that is they are taking whatever their attacks are and going one step too far," Rove said. "They don't need to attack each other in this way."

Obama's new commercial opens with a picture of McCain saying, "I will not take the low road to the highest office in this land." The announcer then asks, "What happened to John McCain?"

The ad uses brief phrases from editorials and commentators from The Washington Post, Time magazine, the Chicago Tribune, CBS and The New Republic: "one of the sleaziest ads ever seen," "truly vile," "dishonest smears," "exposed as a lie," "a disgraceful, dishonest campaign." It concludes, "It seems `deception' is all he's got left."

The McCain campaign also has put out an Internet ad accusing Obama of calling Republican vice presidential nominee Sarah Palin a pig when he used the phrase putting "lipstick on a pig" to criticize the GOP ticket as trying to make a bad situation look better. McCain supporters said Obama was slyly alluding to Palin's description of herself as a pit bull in lipstick, but there was nothing in his remarks to support the claim.

Biden, in an appearance planned Monday in St. Clair Shores, Mich., tried to link McCain with President Bush.

"If you're ready for four more years of George Bush, John McCain is your man," Biden said in prepared remarks. "Just as George Herbert Walker Bush was nicknamed `Bush 41' and his son is known as `Bush 43,' John McCain could easily become known as `Bush 44.'"

Excerpts of Biden's speech were released in advance by the Obama-Biden campaign.

With a passing reference to McCain's sacrifices as a Vietnam prisoner of war, Biden said: "America needs more than a great solider, America needs a wise leader. Take a hard look at the positions John has taken for the past 26 years, on the economy, on health care, on foreign policy, and you'll see why I say that John McCain is just four more years of George Bush."


John McCain's record on Wall Street oversight gets some misleading spin from Barack Obama.

Washington Post Editorial

Friday, September 19, 2008; Page A18

TO LISTEN to Sen. Barack Obama, Sen. John McCain is a Johnny-come-lately to the cause of regulating financial markets. "He has consistently opposed the sorts of common-sense regulations that might have lessened the current crisis," Mr. Obama said in New Mexico yesterday. "When I was warning about the danger ahead on Wall Street months ago because of the lack of oversight, Senator McCain was telling the Wall Street Journal -- and I quote -- 'I'm always for less regulation.' "

But the full quotation from Mr. McCain's March interview with the Journal's editorial board belies Mr. Obama's one-sided rendition. The Republican candidate went on to say, "But I am aware of the view that there is a need for government oversight. I think we found this in the subprime lending crisis -- that there are people that game the system and if not outright broke the law, they certainly engaged in unethical conduct which made this problem worse. So I do believe that there is role for oversight."

It's fair to say that Mr. McCain has dramatically ramped up the regulatory rhetoric in the wake of the meltdown on Wall Street. Mr. Obama made the argument about the need for increased oversight much earlier. And Mr. McCain has generally taken an anti-regulatory stance, although not in all cases -- his support for federal regulation of tobacco and boxing being prominent counter-examples. Mr. McCain backed a moratorium on all new federal regulation in 1995, saying that excessive regulations were "destroying the American family, the American dream." On the campaign trail in 2000, he touted his record of voting "for smaller government, for less regulation."

However, when it comes to regulating financial institutions and corporate misconduct, Mr. McCain's record is more in keeping with his current rhetoric. In the aftermath of the Enron collapse and other accounting scandals, he was a leader, with Sen. Carl M. Levin (D-Mich.), in pushing to require that companies treat stock options granted to employees as expenses on their balance sheets. "I have long opposed unnecessary regulation of business activity, mindful that the heavy hand of government can discourage innovation," he wrote in a July 2002 op-ed in the New York Times. "But in the current climate only a restoration of the system of checks and balances that once protected the American investor -- and that has seriously deteriorated over the past 10 years -- can restore the confidence that makes financial markets work."

Mr. McCain was an early voice calling for the resignation of Securities and Exchange Commission Chairman Harvey Pitt, charging that he "seems to prefer industry self-policing to necessary lawmaking. Government's demands for corporate accountability are only credible if government executives are held accountable as well."

In 2006, he pushed for stronger regulation of Fannie Mae and Freddie Mac -- while Mr. Obama was notably silent. "If Congress does not act, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system, and the economy as a whole," Mr. McCain warned at the time.

One element of the Obama campaign's brief against Mr. McCain is that he supported repeal of the law separating commercial banks from investment banks. "He's spent decades in Washington supporting financial institutions instead of their customers," Mr. Obama said yesterday. "Phil Gramm, one of the architects of the deregulation in Washington that led directly to this mess on Wall Street, is also the architect of John McCain's economic plan." Would it be churlish to point out that another author of the Gramm-Leach-Bliley law is former congressman Jim Leach, a founder of Republicans for Obama? Or that Obama advisers Lawrence H. Summers and Robert E. Rubin supported the repeal -- which was signed by President Bill Clinton?

It's a reasonable question which candidate has been more attentive to the brewing problems on Wall Street and which has a better prescription for them. But Mr. Obama's attack does not give a fair reading of the McCain record.
Obama meets economic advisers to offer new plans
Associated Press

September 19, 2008

MIAMI -- Barack Obama turned to a team of advisers that shaped America's economy in happier days to fashion fresh ideas for calming the stomach-churning financial crisis that has thundered from Wall Street to Main Street.

Some of the most respected names in the business world were pitching in Friday, including billionaire investor Warren Buffett, former Federal Reserve Chairman Paul Volcker, former Treasury secretaries Robert Rubin, Lawrence Summers and Paul O'Neill and Laura Tyson, former head of the Council of Economic Advisers under President Clinton.

Obama, the Democratic presidential nominee, was to meet with advisers in Coral Gables, Fla., on the campus of the University of Miami and then announce his new proposals. Buffett and O'Neill and perhaps others were to participate by way of a telephone conference call.

Less than seven weeks before Election Day, the high-profile consultations appeared designed to portray Obama in a presidential-like setting, grappling with the nation's gravest problems and making decisions with the help of a big-name team of experts.
Republican rival John McCain has charged that Obama is too inexperienced to sit in the Oval Office. Friday's meeting was tailored to show that McCain is wrong. But at the end of the day, Obama's proposals will be campaign fodder as opposed to the real bailout plan taking shape in Washington to rescue banks from bad debt.

''This is not a time for fear, it's not a time for panic,'' Obama said Thursday in New Mexico. ''This is a time for resolve and it is a time for leadership.''

The anxious focus on the economy is an advantage for Obama because McCain-ally President Bush has set the nation's economic priorities for the last eight years with tax cuts, global trade deals and a veto-pen threat over Democratic initiatives. On the campaign trail, Obama relentlessly tries to tie McCain with the unpopular Bush.

Briefly outlining his proposals, Obama said he would call for a Homeowner and Financial Support Act ''that would establish a more stable and permanent solution than the daily improvisations that have characterized policy-making over the past year.''

He said his measures would provide capital to the financial system, insure liquidity to allow the financial markets to function and ''get serious about helping struggling families to restructure their mortgages on affordable terms so they can stay in their homes.''

Obama also mocked McCain's promise to fire the head of the Securities and Exchange Commission if elected.

''I think that's all fine and good but here's what I think,'' Obama said. ''In the next 47 days you can fire the whole trickle-down, on-your-own, look-the-other way crowd in Washington who has led us down this disastrous path.

''Don't just get rid of one guy. Get rid of this administration,'' he said. ''Get rid of this philosophy. Get rid of the do-nothing approach to our economic problem and put somebody in there who's going to fight for you.''
Obama came up with yet another way to poke fun at McCain for his comment Monday that the fundamentals of the economy were strong. ''This comment was so out of touch that even George Bush's White House couldn't agree with it when they were asked about it. They had to distance themselves from John McCain.''
Bush has used the same language many times but his press secretary would not repeat the line Wednesday in the face of historic financial turbulence.
Obama had telephone discussions Thursday about the financial markets with Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, New York Mayor Michael Bloomberg, former Fed chief Paul Volcker and former Treasury Secretary Lawrence Summers.
Saying that McCain strongly advocated deregulation and then changed his mind, Obama said, ''We can't afford to lurch back and forth between positions depending on the latest news of the day when dealing with an economic crisis.

''We need some clear and steady leadership and that's why I was ahead of the curve in calling for regulation,'' he said. ''And that's why I'm calling on the Treasury and the Federal Reserve to use their emergency authorities to maintain the flow of credit, to support the availability of mortgages and to ensure that our financial system is well capitalized.''
In response, McCain campaign spokesman Tucker Bounds said, ''When Barack Obama came to Washington, he chose to strengthen his ties to spiraling lenders like Fannie Mae, Freddie Mac and their jet-set CEOs, not make change. The American people cannot afford leadership that puts a higher premium on campaign contributions than protecting hardworking Americans.''


Banking expertise we don't need
by Robert Scheer

July 30, 2008

This is a time to condemn the bankers, not to embrace them. They are the scoundrels who got us into the biggest economic mess since the Great Depression, lining their own pockets while destroying the life savings of those who trusted them. Yet both of our leading presidential candidates are scrambling to enlist not only the big-dollar contributions but, more frighteningly, the "expertise" of the very folks who advocated the financial industry deregulations at the heart of this meltdown.
Republican candidate John McCain even appointed as his campaign co-chairman Phil Gramm, who went from being chairman of the Senate Banking Committee, where he sponsored disastrous legislation that empowered the banking bandits, to becoming one of them at UBS Warburg. Gramm was forced to resign from McCain's campaign only after he went public with his contempt for the financial concerns of ordinary Americans, calling them "whiners" and perpetrators of a so-called "mental recession."
But Gramm and the Republicans couldn't have done it without the support of leading Democrats. The most egregious of Gramm's legislative favors to the financiers took the form of legislation named in part after him - the Gramm-Leach-Bliley Act, which only became law when Treasury Secretary Robert Rubin prevailed upon President Clinton to sign the bill. The bill's immediate major effect was to legitimatize the long-sought merger between Citibank and insurance giant Travelers. Rubin's critical support for the bill was rewarded with an appointment, within days of its passage, to a top job at Citibank (later Citigroup) paying more than $15 million a year.
That is the same Rubin with whom Democratic candidate Barack Obama met, along with other influential advisers, on Tuesday to figure out what to do about the sorry state of our economy.

But what in the world did he expect to learn from Rubin? And why did he appoint Rubin's protege, Jason Furman, who ran the Rubin-funded Hamilton Project, to be the Obama campaign's economic director? Hopefully, during their encounter Tuesday, Rubin offered himself as a contrite model of everything that the candidate of change needs to change.
After all, Goldman Sachs, where Rubin spent 25 years of his business career before entering the Clinton administration, has been one of the prime corporate villains in the financial shenanigans that led to the sub-prime mortgage scandal. As co-chairman of the firm, surely he had knowledge of the financial hanky-panky that would prove so disastrous down the road. Indeed, as Treasury secretary, he favored an extension of the deregulation that enabled this explosion of banking avarice. Not surprisingly, the current Treasury secretary, Henry Paulson, also previously headed Goldman.
When Rubin assumed a top position at Citibank after his stint at the Treasury, he was not above influencing his former employees in the government. In one notorious instance during the fall of 2001, when Enron was going down the tubes, Rubin telephoned a Treasury undersecretary and asked him to consider intervening with credit-rating agencies to hold off downgrading Enron's ratings. Some media accounts noted the possibility of a conflict of interest when the story was leaked, because Enron owed Citibank $750 million, which it could not pay if bankrupt.
Despite his skills and his vaunted position as Citibank's chairman, Rubin was not spared the disastrous consequences of Citibank's own wild financial manipulations that, if anything, even exceeded those of Enron. Tens of billions in bad mortgage and credit card debt placed the bank at the forefront of the current economic crisis, and so it is weird that Obama would now turn to Rubin for advice.

It's even weirder that the presumptive Democratic nominee would pick Rubin's man Furman as his campaign economic director at a time when cleaning up the mess left by the bankers is the highest priority. Furman hardly distinguished himself in that role in John Kerry's failed presidential campaign four years ago, with its muffled economic message that could not be blamed on the candidate's stiff style alone.

The bigger problem is that folks such as Rubin and Furman, perhaps best known as an economist for his bold but woefully misguided defense of the Wal-Mart business model, clearly do not feel the pain of the voters who are losing their homes.

But then again, why should Rubin, or Gramm on the Republican side, be expected to care when they have made so many millions off of the suffering of those voters? Not good at a time when we need a presidential candidate who sticks it to the bankers instead of sucking up to them.

Robert Scheer is author of a new book, "The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America."
Republican National Committee: Questionable Advice? Obama Meets With Advisers That Back Deregulation and Have Ties to Financial Crisis

Fri Sep 19, 10:12 AM ET


Contact: Republican National Committee, +1-202-863-8614

Obama At Odds With Advisers Over Deregulation

WASHINGTON, Sept. 19 /PRNewswire-USNewswire/ -- The following release was issued today by the Republican National Committee:

(Logo: )

Today, Obama Is Meeting With Economic Advisers Who Supported The Deregulation He's Railed Against:

Obama Is Meeting With A Team Of Economic Advisers, Including Warren Buffett, Former Federal Reserve Chairman Paul Volcker, Former Treasury Secretaries Robert Rubin, Lawrence Summers And Paul O'Neill And Former Chair Of The Council Of Economic Advisers, Laura Tyson.

"Barack Obama turned to a team of advisers that shaped America's economy in happier days to fashion fresh ideas for calming the stomach-churning financial crisis that has thundered from Wall Street to Main Street. Some of the most respected names in the business world were pitching in Friday, including billionaire investor Warren Buffett, former Federal Reserve Chairman Paul Volcker, former Treasury secretaries Robert Rubin, Lawrence Summers and Paul O'Neill and Laura Tyson, former head of the Council of Economic Advisers under President Clinton."(Terence Hunt, "Obama Meets Economic Advisers To Offer New Plans," The Associated Press, 9/18/08)

Obama Has Criticized The Gramm-Leach-Bliley Financial Modernization Act Of 1999, Which Deregulated The Financial Services Industry:

Obama Has Attacked The Gramm-Leach-Bliley Act As A Lobbyist Driven Deregulation. Obama: "By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework. ... The regulatory environment failed to keep pace."(Cheyenne Hopkins, "Regulatory Revamp Newest Plank In Obama's Platform," American Banker, 3/28/08)

But Obama's Economic Advisers Robert Rubin And Larry Summers Were Central To The Passage Of Gramm-Leach-Bliley:

Gramm-Leach-Bliley Act Only Became Law Because Then-Treasury Secretary Robert Rubin Urged President Clinton To Sign The Legislation. "[T]he Gramm-Leach-Bliley Act ... only became law when Treasury Secretary Robert Rubin prevailed upon President Clinton to sign the bill." (Robert Scheer, Op-Ed, "Candidates Seek Banking 'Expertise' We Don't Need," San Gabriel Valley[CA] Tribune, 8/3/08)

-- "The Bill's Immediate Major Effect Was To Legitimatize The long-Sought Merger Between Citibank And Insurance Giant Travelers."(Robert Scheer, Op-Ed, "Candidates Seek Banking
'Expertise' We Don't Need," San Gabriel Valley[CA] Tribune, 8/3/08)

-- "Rubin's Critical Support For The Bill Was Rewarded With An Appointment, Within Days Of Its Passage, To A Top Job At Citibank (Later Citigroup) Paying More Than $15 Million A
Year." (Robert Scheer, Op-Ed, "Candidates Seek Banking 'Expertise' We Don't Need," San Gabriel Valley[CA] Tribune, 8/3/08)

Obama Adviser Larry Summers Was Involved In Negotiating The Gramm-Leach-Bliley Act, And Called It A "Major Step Forward Toward The 21st Century." "Mr. Summers, the Obama adviser, was among those who negotiated the [1999 Gramm-Leach-Bliley] measure on behalf of the Clinton administration, and he praised it as a 'major step forward toward the 21st Century.'" (Michael M. Phillips, Elizabeth Holmes and Amy Chozick, "Candidates Call Upon Big Names For Advice," The Wall Street Journal, 9/18/08)

President Bill Clinton Signed The Gramm-Leach-Bliley Act Into Law On November 12, 1999 As Public Law No. 106-102. (P.L. No. 106-102)

Obama Has Attacked Irresponsible Wall Street Firms, But In The Past Rubin Looked To Help Enron:

In 2002, Rubin's "Star Was Tarnished" By His Phone Call To Treasury To Discuss Helping Enron. "Rubin's star was tarnished a little when it was revealed that he called a Treasury official to discuss the possibility of helping Enron -- Citigroup was one of Enron's lead bankers -- but his public comments can still send ripples through markets." (Lori Calabro and Alix Nyberg, Op-Ed, "The Global 100: The Kingmakers, Deal Breakers, And Power Brokers That Shape Finance," CFO, 6/02)

Rubin Called Credit Rating Agencies On Behalf Of Enron. "Officials of Wall Street credit-rating agencies told Congress Wednesday that Enron executives misled them about partnerships used to conceal massive debt. Senators criticized the agencies for not more closely questioning Enron's finances. Two of the officials said Enron's former chairman, Kenneth Lay, called them when the energy trading company was seeking a higher credit rating. One reported calls to his agency from former Treasury Secretary Robert Rubin, a top executive of Citigroup, one of the banks that lent hundreds of millions of dollars to Enron, and from Richard Grasso, chairman of the New York Stock Exchange. Nothing came of the calls, said John Diaz, a managing director of Moody's Investors Service, during testimony before the Senate Governmental Affairs Committee." (Marcy Gordon, "Officials Of Credit-Rating Agencies Say Enron Misled Them," The Associated Press, 3/20/02)

Citigroup's Responsibility Questioned In Enron Affair. "Something is wrong with commercial banks that become 'owned' by the plungers to whom they lend vast sums. Doesn't Citigroup, which supposedly never sleeps, have a responsibility to its stockholders to look closely at the books of a company borrowing $600 million? Must nervousness about that uninformed loan force its top man, Robert Rubin, to call a former associate at Treasury to help shore up his debtor's credit rating?" (William Safire, Op-Ed, "You Wuz Robbed!" The New York Times, 2/11/02)


Obama Economic Adviser Austan Goolsbee Defended Subprime Lending In 2007 And Warned Against Tightening Regulations:

In March 2007, Goolsbee Wrote "An Economic Defense ... Of The Sub-Prime Loans" That Spurred The Housing Crisis. "He's written extensively ... He even penned an economic defense in March 2007 of the sub-prime loans that have helped trigger the nationwide housing crisis." (Kevin G. Hall, "Obama Relies On Untested Advisors," McClatchy Newspapers, 4/3/08)

Goolsbee Highlighted New Housing Research That Indicated Congress Should Be Careful Not To Tighten Regulations Too Much On "The New Forms Of Lending." "Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much." (Austan Goolsbee, Op-Ed, "'Irresponsible' Mortgages Have Opened Doors To Many Of The Excluded," The New York Times, 3/29/07)

-- Goolsbee Said "This Study Shows ... The Mortgage Market Has Become More Perfect, Not More Irresponsible." "These economists [Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton] followed
thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. ... And this study shows that measured this way, the mortgage market has become more perfect, not more irresponsible. People tend to make good decisions about their own economic prospects."(Austan Goolsbee, Op-Ed, "'Irresponsible' Mortgages Have Opened Doors To Many Of The
Excluded," The New York Times, 3/29/07)

-- Goolsbee Said Cracking Down On Subprime Mortgages Could Hurt "Exactly The Wrong People" -- Those Who Previously Would Have Been Denied Loans."Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. ... It has allowed them access to mortgages whereas lenders would have once just turned them away."(Austan Goolsbee, Op-Ed, "'Irresponsible' Mortgages Have Opened Doors To Many Of The Excluded," The New York Times, 3/29/07)

Former CEO Of Fannie Mae And Former Obama Advisor Jim Johnson Resigned Under Criticism:

Jim Johnson Is The Former CEO Of Fannie Mae. (David A. Vise, "Fannie Mae Lobbies Hard To Protect Its Tax Break," The Washington Post, 1/16/95)

"Jim Johnson, The Former Chairman Of Fannie Mae Who Was One Of Three Advisors Tapped By Democrat Barack Obama To Vet Vice Presidential Candidates, Resigned Today After Questions Were Raised About Favoritism He May Have Received From Countrywide Financial Corp."(Johanna Neuman, "Barack Obama Advisor Jim Johnson Quits Under Fire," Los Angeles Times, 6/12/08)

Johnson Remains A Bundler For Obama's Presidential Campaign And Has Committed To Raising $100,000 To $200,000. (Obama For America Website,, Accessed 9/19/08)
Johnson Earned Large Bonuses At Fannie Mae Due To An Accounting Manipulation:

In 1998, Fannie Mae's Earnings Were Manipulated, Which Resulted In "Maximum Payouts" To Executives Including CEO Jim Johnson. "As CEO of Fannie Mae, Johnson, a former chief of staff to Vice President Walter F. Mondale and chairman of the board of the Kennedy Center, was the beneficiary of accounting in which Fannie Mae's earnings were manipulated so that executives could earn larger bonuses. The accounting manipulation for 1998 resulted in the maximum payouts to Fannie Mae's senior executives -- $1.9 million in Johnson's case -- when the company's performance that year would have otherwise resulted in no bonuses at all, according to reports in 2004 and 2006 by the Office of Federal Housing Enterprise Oversight." (Jonathan Weisman and David S. Hilzenrath, "Obama's Choice Of Insider Draws Fire," The Washington Post, 6/11/08)

Johnson Engineered An Effort To Lobby Politicians So That Fannie Mae Would Not Have To Pay Local Taxes To Washington, D.C.:
While Johnson Was CEO, Fannie Mae Did Not Have To Pay Washington D.C. Taxes Which Cost The City Hundreds Of Millions Per Year. "While Wall Street benefits from Fannie Mae's prosperity, the District government does not. Fannie Mae, the biggest, most profitable company in Washington, is exempt from local income taxes. That exemption costs the cash-strapped D.C. government hundreds of millions of dollars a year."(David A. Vise, "The Financial Giant That's In Our Midst," The Washington Post, 1/15/95)

-- "If Fannie Mae Were Required To Pay Taxes, It Would Wipe Out he District's Budget Deficit." (David A. Vise, "The Financial Giant That's In Our Midst," The Washington Post, 1/15/95)

Before Heading Fannie Mae, Johnson Was A Registered Foreign Agent For Lehman Brothers:
In The 1980s, Johnson Worked For Shearson Lehman Brothers. "In the early 1980s Johnson had already started his own Washington consulting company, Public Strategies, with his Carter administration colleague Richard Holbrooke. And now he followed Holbrooke to Wall Street as an investment banker at Shearson Lehman Brothers." (Lloyd Grove, "The Big Chair," The Washington Post, 3/27/98)

Obama Solicits Advice From Former Fannie Mae CEO Franklin Raines Who Was "Under The Shadow Of A $6.3 Billion Accounting Scandal":

The Obama Campaign Has Solicited Franklin Raines, Who "Stepped Down As Fannie Mae's Chief Executive Under The Shadow Of A $6.3 Billion Accounting Scandal," For Advice On Mortgage And Housing Policy. "In the four years since he stepped down as Fannie Mae's chief executive under the shadow of a $6.3 billion accounting scandal, Franklin D. Raines has been quietly constructing a new life for himself. He has shaved eight points off his golf handicap, taken a corner office in Steve Case's D.C. conglomeration of finance, entertainment and health-care companies and more recently, taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters." (Anita Huslin, "On The Outside Now, Watching Fannie Falter," The Washington Post, 7/16/08)

Like Jim Johnson, Raines Received Low-Rate Home Loans From Countrywide, A Major Seller To Fannie Mae. "Fannie Mae's former CEO, Jim Johnson, resigned Wednesday as the leader of likely Democratic presidential nominee Barack Obama's search for a running mate after The Wall Street Journal reported that he and another former CEO, Franklin Raines, received low-rate home loans from troubled mortgage lender Countrywide Financial Corp. a major seller of home loans to Fannie Mae." (Alan Zibel, "Fannie Mae CEO Says Ethics Policy Bans Discounts," The Associated Press, 6/12/08)

Former Fannie Mae Chairman Frank Raines Was Accused Of Manipulating The Company's Earnings. "Former Fannie Mae chairman and chief executive Franklin D. Raines, accused of manipulating the housing finance company's earnings, is challenging regulators to make their case against him beginning Feb. 16 instead of waiting until the end of the year." (David S. Hilzenrath, "Fannie Mae's Former Chief Wants Earlier Hearing Date," The Washington Post, 2/6/07)

Under Raines' Leadership, Fannie Mae Committed "Extensive Financial Fraud" And Was Forced To Pay A $400 Million Civil Penalty. "In a May report, the Securities and Exchange Commission and the Office of Federal Housing Enterprise Oversight found that Fannie Mae under Raines perpetrated 'extensive financial fraud' so that executives could collect big bonuses. There have been no criminal charges, but the conduct of Raines and other senior Fannie executives 'was inconsistent with the values of responsibility, accountability, and integrity,' the agencies said. Fannie paid a $400 million civil penalty this year to the SEC and OFHEO." (Jay Hancock, Op-Ed, "Raines Claiming Accountability Isn't Enough," The [Baltimore] Sun, 12/10/06)

Paid for by the Republican National Committee.

Not authorized by any candidate or candidate's committee.

SOURCE Republican National Committee



It's The Deregulation, Stupid

by James Ridgeway
Mother Jones
March 29, 2008

Speaking at Cooper Union in New York City on Thursday, Barack Obama went where few Democrats have dared to go in the past quarter-century: He made a case for more regulation. As part of a speech on his economic platform, Obama depicted the current economic crisis as a consequences of deregulation in the financial sector. "Our free market was never meant to be a free license to take whatever you can get, however you can get it," he said. "Unfortunately, instead of establishing a 21st century regulatory framework, we simply dismantled the old one-aided by a legal but corrupt bargain in which campaign money all too often shaped policy and watered down oversight."

This is quite a statement from a candidate who's received $6 million in campaign contributions from securities and investment firms, just slightly less than rival Hillary Clinton, who cashes in at $6.3 million. Obama's criticism was sharp, but his six-point plan for rebuilding a regulatory structure was short on both details and teeth, and relies on the Federal Reserve, which is like having the fox guard, well, the other foxes. Still, his use of the r-word signals what is at least a rhetorical departure for a party that has been running from regulation for decades.

Obama isn't the only one. Last week at the Greater Boston Chamber of Commerce, Massachusetts Democrat Barney Frank, chair of the powerful House Financial Services Committee, also argued that years of banking deregulation were in part responsible for creating the subprime mortgage crisis and the larger economic downturn, which he didn't hesitate to call a recession. He talked about the need to impose more "discipline" on investment banks, requiring a higher level of capitalization and transparency. Frank called on Congress to consider establishing a "Financial Services Risk Regulator" that would have "the capacity and power to assess risk across financial markets" and "to intervene when appropriate."

Such a proposal may seem like too little too late in a month when the likes of Bear Stearns crumbled to dust, yet, like Obama's speech, it suggests a small shift in what has long been the dominant position of the Democratic Party. Without entirely eschewing the sacred myth that the free market always knows best, some congressional Democrats are envisioning a more direct role for the federal government in carrying out economic policy and imposing rules and restrictions on banks and brokerages. Calls for increased oversight of financial markets come at a time when the Federal Reserve System, the quasi-public institution that is seen as the fulcrum for managing the economy, is losing credibility, what with its failure to predict or head off the current crisis and its ineffective and controversial responses once it arrived. Americans are beginning to look elsewhere for leadership on these issues. As the economy continues to decline, some voters may finally start asking their government to rein in Wall Street. And some Democrats may finally be willing to veer out of lockstep in the party's long march toward deregulation.

Deregulation has been the mantra on both sides of the aisle since the late 1960s. Long gone are Democrats like Michigan's Phil Hart who, as chair of the Senate Antitrust Subcommittee, held hearings on the concentration of economic power in the United States, and proposed expanded government regulation of everything from the oil and auto industries to pharmaceuticals to professional sports. Hart believed that because wealth and power were concentrated in the hands of such a small number of corporations, the market economy had become no more than a facade. In this context, what would bring about lower prices and greater productivity and innovation was more government intervention and regulation, not less.

Hart got a Senate building named after him, but his warnings about the threat of unbridled corporate power and consolidation went unheeded. Instead, the rush to deregulation began, first in the transportation sector. Efforts begun under Richard Nixon and Gerald Ford came to fruition under Jimmy Carter, who hired deregulation guru Alfred E. Kahn to head the Civil Aeronautics Board, the widely loathed agency responsible for regulating the airline industry. Senator Ted Kennedy and his then aide, future Supreme Court Justice Stephen Breyer, embraced deregulation as a consumer issue, and with their support, Kahn quickly worked his way out of a job: The 1978 Airline Deregulation Act dissolved the CAB and removed most regulation of commercial airlines. Carter also signed into law bills deregulating the railroads and the trucking industry.

You could argue that transportation deregulation has been a wash-replacing a system of bureaucratic incompetence with one of profit-seeking negligence, and exchanging safety for lower prices. The same cannot be said for the deregulation of the energy sector, notably the natural gas and oil industries under Ronald Reagan, and the electric utilities under George H.W. Bush and Bill Clinton. Left to its own devices, a deregulated energy industry has given us Enron and Exxon-California brownouts and $100 barrels of oil. Deregulation of the telecommunications industry, also under Clinton, reduced the number of major phone service providers to just a handful of multimerged giants.

Even more damaging, in light of today's economic crisis, was the sweeping deregulation of the banking and financial services industries that took place in the 1990s. What makes this enterprise particularly confounding is not only the fact that it took place under a Democratic president with support from a majority of Democrats in Congress, but that it followed so closely on the heels of the savings and loan crisis, which ought to have served as a cautionary tale on the dangers of deregulation in the banking sector. The Depository Institutions Act of 1982, another Reagan initiative, was supposed to "revitalize" the housing industry by freeing up the S&Ls to make more loans. Instead, the regulation rollback led to what economist John Kenneth Galbraith called "the largest and costliest venture in public misfeasance, malfeasance and larceny of all time" as they engaged in a fury of high-risk lending. The collapse that followed cost taxpayers an estimated $150 billion in government bailouts, and contributed to the recession of the early 1990s.

Yet Bill Clinton, elected in large part because of that recession (a la James Carville's "It's the economy, stupid"), was talking about deregulation before he was even inaugurated. The National Review reported that "Bill Clinton embraced at least one Reaganesque idea at the Little Rock economic summit" he held in December 1992: "banking deregulation."

The banking industry objected to regulations put in place in 1989 after the S&L debacle, as well as others dating back to FDR. The heads of the six major U.S. banking associations, according to the National Review, had written "a long letter to the President-elect in December advocating nine substantive reforms." The conservative magazine concluded that the new president seemed more than willing to oblige, but bank deregulation was being held back by such powerful congressmen as "House Banking Chairman Henry Gonzalez (D., Tex.), a populist throwback to the Thirties who believes bankers are by definition out to exploit the 'little guy'" and "House Energy and Commerce Chairman John Dingell (D., Mich.), who holds a quasi-religious belief that banks caused the Great Depression and must be tightly regulated. (Dingell's father was a principal author of the Glass-Steagall Act of 1933.)"

The Glass-Steagall Act was, in fact, a primary target of the Clinton-era deregulation effort. An early piece of New Deal-era legislation, the act was passed in response to speculation and manipulation of the markets by huge banking firms, which most liberal economists believed had brought on the crash of 1929. Glass-Steagall imposed firewalls between commercial banking and investment banking, and between the banking, brokerage, and insurance industries. According to the Center for Responsive Politics, which tracks lobbying and campaign contributions, "Eager to create financial supermarkets that peddle everything from checking accounts to auto insurance, the three industries for years have lobbied Congress to streamline regulatory hurdles that bar such operations."

Despite Bill Clinton's announcement that "the era of big government is over," it took the better part of his administration for him to push these initiatives through Congress. In 1999, Treasury Secretary Robert Rubin, always a good friend to Wall Street, finally brokered a deal between the administration and Congress that allowed banking deregulation to move forward. Shortly after the compromise was reached, Rubin took a top position at Citigroup, which went on to embark upon mergers that would have been rendered illegal under Glass-Steagall. As the New York Times put it, Rubin would be leading "what has become the first true American financial conglomerate since the Depression"-a conglomerate that could exist only because of legislation he had just shepherded through Congress.

Passage of the Financial Services Modernization Act of 1999 was celebrated in a Wall Street Journal editorial as an end to "unfair" restrictions imposed on banks during the Great Depression, under the headline "Finally, 1929 Begins to Fade." But Russell Mokhiber and Robert Weissman, writing in Mother Jones, warned that the legislation, which amounted to the "finance industry's deregulatory wish list," would "pave the way for a new round of record-shattering financial industry mergers, dangerously concentrating political and economic power." Mokhiber and Weissman also predicted that such mergers would eventually "create too-big-to-fail institutions that are someday likely to drain the public treasury as taxpayers bail out imperiled financial giants to protect the stability of the nation's banking system."

Enter Bear Stearns. In addition, the merging of commercial and investment banking helped enable high-risk mortgage lending to make its way into the mutual funds and 401Ks of millions of Americans in the form of mortgage-backed securities. "Diversifying bad debt just spreads the poison," as Frank said in his Boston speech. It also makes a falling housing market reverberate throughout the economy far more than it did even during the S&L collapse. Enter the subprime crisis. And welcome back, 1929.

As these new financial giants go into freefall, a little regulation once again sounds like a good idea, just as it did in 1933. But increased regulation will never come willingly from the Federal Reserve, an "independent entity" that is answerable to no one, and has always operated largely in the interests of the big banks that make up its membership and provide its funding. Under two decades of leadership by the notorious anti-regulator Alan Greenspan, the Fed took a hands-off approach, preferring to set "guidelines" for the financial industry rather than enforce rules. In December 2007, the New York Times compiled a rundown of the multiple warnings and pleas made to Greenspan, over a period of at least seven years, to address the dangers posed by subprime lending-all of them, of course, rebuffed by the man who still claims he couldn't have predicted that the housing bubble would someday burst. The Fed's approach is unlikely to change much now-at least, not without a fight.

The Federal Reserve is set up in such a way that Congress cannot force its hand. But it can apply pressure, by way of threatening to pass legislation to accomplish what the Fed refuses to do. That's what Barney Frank did last summer, when he thought Fed chair Ben Bernanke wasn't doing enough about predatory lending practices. "The Fed has the authority to spell out rules about what is unfair and deceptive," Frank said in an interview with Bloomberg News. "If by default the Fed is not in the process of doing it, we, I think, should pass a law giving the authority" to other government agencies.

Now, in addition to outlining a plan to deal with the epidemic of foreclosures, Democrats on the Financial Services Committee are looking at legislation that could force financial firms to sing for their supper-a few bars, at least. The Financial Services Risk Regulator proposed by Frank last week would have the power to demand "timely market information from market players, inspect institutions, report to Congress on the health of the entire financial sector, and act when necessary to limit risky practices or protect the integrity of the financial system." In return, he said, financial institutions would have "potential access to the discount window for nondepository institutions."

Frank was referring to the lending program for brokers started by the Fed on March 17, which extends the same lending rules previously employed by commercial banks to securities firms. Two days after it opened, Financial Week reported, under the headline "Investment bank CFOs Not Proud," that Morgan Stanley and Goldman Sachs had already overcome concerns that borrowing from the Fed might "make them appear financially weak," and had taken advantage of the discount window, at the new rock-bottom interest rate of 2.5 percent. So Barney Frank's modest proposal simply says that if the government is going to back loans to billionaire investment firms at rates that middle-class credit card holders can only dream about, the companies are going to have to submit to a little oversight in return.

Critics outside the government have taken things a step further, advancing the view that if the taxpayers are going to be responsible for bailing out greedy financial giants like Bear Stearns, they ought to get a piece of them in return, as well as some say in how they are run. Conceivably, the federal government could either take over and run the affected enterprises, or at the very least take a share of the stock in order to exercise control. "I think it makes the most sense to take it [Bear Stearns] over outright," Dean Baker, codirector of the Center for Economic and Policy Research, said in an email last week. "The key point is that we don't want Bear Stearns taking big risks with the public's money. I suppose it's better that we at least share in the gains if they do this sort of gambling, but it would be better to have the government directly step in and not allow the gamble."

Such measures are highly unlikely. But Baker argues that a bailout without some kind of consequences will have no impact at all on the kind of unrestrained, irresponsible behavior on the part of financial firms that got us into this mess in the first place. "The issue here is essentially the moral hazard problem that you had with the S&Ls," he said. "If you have the option of making a bet where the government covers your losses, you might as well make it a risky one."

Senate Finance Committee chair Max Baucus (D-Mont.) also says he wants to "pin down just how the government decided to front $30 billion in taxpayer dollars" to back the sale of Bear Stearns to JPMorgan Chase. He and Senate Banking Committee chair Chris Dodd (D-Conn.) have both said they will hold hearings on the matter. But according to the Center for Responsive Politics, Baucus and Dodd are among the top recipients of donations from the securities and investment industry.

In the end, the real question is what kind of regulation of these industries can come from a Democratic Party that now relies on them to fund its campaigns. A few reform-minded Democrats in Congress won't get far without support from the White House. And while financial industry campaign contributions to Democrats have climbed ever since Bill Clinton shifted the party's rhetoric and policymaking away from "big government," donations in this election cycle dwarf those of the past.

With his speech in New York, Obama is clearly trying to show himself to be a man who isn't afraid to bite the hand that's feeding him. He is also putting space, on this issue, between himself and Hillary Clinton, in part by reminding voters of the outcomes of Bill Clinton's policies. He denounced both "Republican and Democratic administrations" for regulatory failures leading to the current crisis, and, as the New York Times reported, "handouts supporting the speech" noted that "the banking and insurance industries spent more than $300 million on a successful campaign to repeal the 1933 Glass-Steagall Act in 1999." Any effort Hillary Clinton might make to separate herself from her husband's positions will be undermined by the fact that Robert Rubin, promoter of bank deregulation and still a top official at Citigroup, is an advisor to her campaign. On Monday in Philadelphia, in her own speech on economic issues, Hillary Clinton urged President Bush to immediately form an "Emergency Working Group on Foreclosures," which "could be headed by eminent leaders like Alan Greenspan, Paul Volcker, and Bob Rubin."

For the moment, at least, Obama has staked out the higher ground on this issue. In the end, though, says Sheila Krumholz, executive director of the Center for Responsive Politics, "No matter who becomes our next president, Wall Street will have an indebted friend in the White House." Once the campaign rhetoric fades, the only thing that might bring change on Wall Street is a revolt on Main Street, from Americans who finally cast blame for their lost homes and depleted retirement accounts on its rightful source.

James Ridgeway is Mother Jones' senior Washington correspondent.
© 2008 Mother Jones

Teflon Bob and Banking Deregulation

Subject: Teflon Bob and Banking Deregulation
From: Robert Weissman
Date: Sat, 6 Nov 1999 13:25:03 -0500 (EST)

Teflon Bob and Banking Deregulation
By Russell Mokhiber and Robert Weissman

Few top government officials, whether elected or appointed, have managed to emerge as unscathed from a half dozen years in the Washington, D.C. spotlight as former Treasury Secretary Robert Rubin. And Rubin did better than escape without scratches -- he ended his term of office with his image enhanced.

Wall Street and the financial press practically beatified him for his role in overseeing the global economy through difficult times and working in tandem with Federal Reserve Chair Alan Greenspan to keep the U.S. economy working smoothly.

Rubin helped precipitate the Asian financial crisis which has inflicted untold suffering on tens of millions, orchestrated the bailout of foreign bankers and investors in connection with the Mexican and Asian financial disasters, and crafted or helped implement domestic policies that ensured the overwhelming portion of benefits from economic growth would go to the rich -- but none of this managed to sully the reputation of the Secretary Rubin.

Now Teflon Bob appears on the verge of demonstrating that his immunity to criticism makes Ronald Reagan look like he was coated with bubble gum.

When he stepped down from his Treasury post this past summer, Rubin left unfinished a legislative effort to re-write the nation's banking laws. Misnamed "financial modernization" legislation was really a deregulatory initiative -- reminiscent of the S&L deregulation that led to a corporate crime spree, the collapse of the industry and the subsequent taxpayer bailout of epic proportions.

The centerpiece of the deregulatory bill, which different fragments of the finance industry have pushed for a decade and a half, is the repeal of the revered Glass-Steagall Act, which bars the common ownership of banks on the one hand, and insurance companies and securities firms on the other.

Although powerful interests have long backed the legislation, it has repeatedly failed to make it through Congress because of a maze of intra-industry disputes, turf fights between different parts of the federal regulatory structure, and the concerted efforts of consumer and community development advocates.

Another failure seemed possible or likely this fall, especially as Senate Banking Chair Phil Gramm, R-Texas, refused to compromise on privacy and community development issues.

Another failure, however, was not acceptable to one company above all -- Citigroup. The product of the merger between Citibank and Travelers, Citigroup is operating in apparent violation of the bar on common ownership of banking, and insurance and securities, thanks to a loophole that provides for a two-year transition period.

Enter Robert Rubin. According to a report in the New York Times, Rubin helped broker the final compromise language on financial deregulation. And while he was brokering a deal between Congress and the White House, he was also, according to the New York Times account, negotiating his own deal with Citigroup. A few days after the banking deal was finalized, Citigroup announced it was hiring Rubin as a de facto co-chair of the corporation.

This chronology and these arrangements raise serious issues about whether federal ethics statutes and informal Clinton administration rules have been violated.

Rubin told the New York Times that he was proud of his work in preserving the Community Reinvestment Act (CRA -- an important law that requires banks to make loans in minority and lower-income communities in which they do business). In fact, the final version of the bill significantly weakens CRA: there will be no ongoing sanctions against holding company banks that fail to meet CRA standards, it will lessen the number of CRA examinations, and provisions of the bill will discourage community groups from challenging banks' CRA records.
And the weakening of the CRA is only one element of the finance industry's deregulatory wish list which is included in the compromise legislation.

The bill will:

* Pave the way for a new round of record-shattering financial industry mergers, dangerously concentrating political and economic power;

* Create too-big-to-fail institutions that are someday likely to drain the public treasury as taxpayers bail out imperiled financial giants to protect the stability of the nation's banking system;

* Leave financial regulatory authority spread among a half dozen federal and 50 state agencies, all uncoordinated, that will be overmatched by the soon-to-be financial goliaths;

* Facilitate the rip-off of mutual fund insurance policy holders by permitting mutual insurance funds to switch domicile states – thereby enabling them to locate in states where they can convert to for-profit, stockholder companies without properly reimbursing mutual policyholders (a conversion of tens of billions of dollars);

* Aggressively intrude on consumer privacy (and promote a still-greater intensification of direct marketing), thanks to provisions permitting the new financial giants to share finance, health, consumer and other personal information among affiliates; and

* Allow banks to continue to deny services to the poor (Congress rejected an amendment requiring banks to provide "lifeline accounts" to the poor, so they would have refuge from check-cashing operations and the
underground economy).

Robert Rubin helped deliver this ticking time bomb of a bill to Wall Street, first while in Treasury and then while in negotiations to land a top spot at the finance industry's largest and highest-profile company. He may well escape unscathed yet again, but it is sure to blow up on the rest of us.

Russell Mokhiber is editor of the Washington, D.C.-based Corporate Crime Reporter. Robert Weissman is editor of the Washington, D.C.-based Multinational Monitor. They are co-authors of Corporate Predators: The Hunt for MegaProfits and the Attack on Democracy (Monroe, Maine: Common Courage Press, 1999;

(c) Russell Mokhiber and Robert Weissman
Clinton, Republicans agree to deregulation of US financial system

By Martin McLaughlin

World Socialist Website

1 November 1999

An agreement between the Clinton administration and congressional Republicans, reached during all-night negotiations which concluded in the early hours of October 22, sets the stage for passage of the most sweeping banking deregulation bill in American history, lifting virtually all restraints on the operation of the giant monopolies which dominate the financial system.

The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933, one of the central pillars of Roosevelt's New Deal. Under the old law, banks, brokerages and insurance companies were effectively barred from entering each others' industries, and investment banking and commercial banking were separated.

The certain result of repeal of Glass-Steagall will be a wave of mergers surpassing even the colossal combinations of the past several years. The Wall Street Journal wrote, "With the stroke of the president's pen, investment firms like Merrill Lynch & Co. and banks like Bank of America Corp., are expected to be on the prowl for acquisitions." The financial press predicted that the most likely mergers would come from big banks acquiring insurance companies, with John Hancock, Prudential and The Hartford all expected to be targeted.

Kenneth Guenther, executive vice president of Independent Community Bankers of America, an association of small rural banks which opposed the bill, warned, "This is going to begin a wave of major mergers and acquisitions in the financial-services industry. We're moving to an oligopolistic situation."

One such merger was already carried out well before the passage of the legislation, the $72 billion deal which brought together Citibank, the biggest New York bank, and Travelers Group Inc., the huge insurance and financial services conglomerate, which owns Salomon Smith Barney, a major brokerage. That merger was negotiated despite the fact that the merged company, Citigroup, was in violation of the Glass-Steagall Act, because billionaire Travelers boss Sanford Weill and Citibank CEO John Reed were confident of bipartisan support for repeal of the 60-year-old law.

Campaign of influence-buying

They had good reason, to be sure. The banking, insurance and brokerage industry lobbyists have combined their forces over the last five years to mount the best-financed campaign of influence-buying ever seen in Washington. In 1997 and 1998 alone, the three industries spent over $300 million on the effort: $58 million in campaign contributions to Democratic and Republican candidates, $87 million in "soft money" contributions to the Democratic and Republican parties, and $163 million on lobbying of elected officials.

The chairman of the Senate Banking Committee, Texas Republican Phil Gramm, himself collected more than $1.5 million in cash from the three industries during the last five years: $496,610 from the insurance industry, $760,404 from the securities industry and $407,956 from banks.

During the final hours of negotiations between the House-Senate conference committee and White House and Treasury officials, dozens of well-heeled lobbyists crowded the corridors outside the room where the final deal-making was going on. Edward Yingling, chief lobbyist for the American Bankers Association, told the New York Times, "If I had to guess, I would say it's probably the most heavily lobbied, most expensive issue" in a generation.

While Democratic and Republican congressmen and industry lobbyists claimed that deregulation would spark competition and improve services to consumers, the same claims have proven bogus in the case of telecommunications, airlines and other industries freed from federal regulations. Consumer groups noted that since the passage of a 1994 banking deregulation bill which permitted bank holding companies to operate in more than one state, both checking fees and ATM fees have risen sharply.

Differing versions of financial services deregulation passed the House and Senate earlier this year, and the conference committee was called to work out a consensus bill and avert a White House veto. The principal bone of contention in the last few days before the agreement had nothing to do with the central thrust of the bill, on which there was near-unanimous bipartisan support.

The sticking point was the effort by Gramm to gut the Community Reinvestment Act, a 1977 anti-redlining law which requires that banks make a certain proportion of their loans in minority and poor neighborhoods. Gramm blocked passage of a similar deregulation bill last year over demands to cripple the CRA, and bank lobbyists were in a panic, during the week before the deal was made, that the dispute would once again prevent any bill from being adopted.

Gramm and other extreme-right Republicans saw the opportunity to damage their political opponents among minority businessmen and community groups, who generally support the Democratic Party. Gramm succeeded in inserting two provisions to weaken the CRA, one reducing the frequency of examinations for CRA compliance to once every five years for smaller banks, the other compelling public disclosure of loans made under the program.

The latter provision was particularly offensive to black and other minority business and community groups, who have used the CRA provisions as a lever by threatening to challenge mergers and other bank operations which require government approval. In most such cases, the banks have offered loans to businessmen or outright grants to community groups in return for dropping their legal actions. These petty-bourgeois elements have been able to posture as defenders of the black or Hispanic community, while pocketing what are essentially payoffs from finance capital and concealing from the public the details of this relationship.

The banks and other financial institutions did not themselves oppose continuation of the CRA, which they have treated as nothing more than a cost of doing a highly profitable business in minority areas. Loans tied to the CRA average a 20 percent rate of return. Financial industry lobbyists complained that they were being caught in a crossfire between the Republicans and Democrats which was unrelated to the main purpose of the bill.

The Clinton White House threatened to veto the bill if CRA provisions were substantially weakened, in response to heavy pressure from the Congressional Black Caucus and the Reverend Jesse Jackson, whose Operation PUSH has made extensive use of CRA in its campaigns to pressure corporations and banks for more opportunities for black businessmen. But eventually the White House caved in to Gramm, accepting his amendments so long as the program remained formally in place.

The White House similarly retreated on pledges that consumer privacy would be protected in the legislation. Consumer groups pointed to the potential for abuse of financial information once giant conglomerates were created which would handle loans, investments and insurance at the same time. For example: a bank could refuse to give a 30-year mortgage to a customer whose medical records, filed with the bank's insurance subsidiary, revealed a fatal disease.

The final draft of the bill contains a consumer privacy protection clause, but it is extremely weak, applying only to the transfer of information outside of a financial conglomerate, not within it. Thus Citigroup will be able to pass on financial information about its bank depositors to Travelers Insurance, but not to an outside company like Prudential. Even that limitation would be breached if there was a contractual relationship with the outside company, as in the case of a telemarketer which did work for Citigroup and was given private information about Citigroup depositors to aid in its telephone solicitations.

Threat to financial stability

The proposed deregulation will increase the degree of monopolization in finance and worsen the position of consumers in relation to creditors. Even more significant is its impact on the overall stability of US and world capitalism. The bill ties the banking system and the insurance industry even more directly to the volatile US stock market, virtually guaranteeing that any significant plunge on Wall Street will have an immediate and catastrophic impact throughout the US financial system.

The Glass-Steagall Act of 1933, which the deregulation bill would repeal, was not adopted to protect consumers, although one of its most celebrated provisions was the establishment of the Federal Deposit Insurance Corporation, which guarantees bank deposits of up to $100,000.

The law was enacted during the first 100 days of the Roosevelt administration to rescue a banking system which had collapsed, wiping out the life savings of millions of working people, and threatening to bring the profit system to a complete standstill.

As a recent history of that era notes: "The more than five thousand bank failures between the Crash and the New Deal's rescue operation in March 1933 wiped out some $7 billion in depositors' money. Accelerating foreclosures on defaulted home mortgages—150,000 homeowners lost their property in 1930, 200,000 in 1931, 250,000 in 1932—stripped millions of people of both shelter and life savings at a single stroke and menaced the balance sheets of thousands of surviving banks" (David Kennedy, Freedom from Fear, Oxford University Press, 1999, pp. 162-63).

The separation of banking and the stock exchange was ordered in response to revelations of the gross corruption and manipulation of the market by giant banking houses, above all the House of Morgan, which organized huge corporate mergers for its own profit and awarded preferential access to share issues to favored politicians and businessmen. Such insider trading played a major role in the speculative boom which preceded the 1929 crash.

Over the past 20 years the restrictions imposed by Glass-Steagall have been gradually relaxed under pressure from the banks, which sought more profitable outlets for their capital, especially in the booming stock market, and which complained that foreign competitors suffered no such limitations to their financial operations. In 1990 the Federal Reserve Board first permitted a bank (J.P. Morgan) to sell stock through a subsidiary, although stock market operations were limited to 10 percent of the company's total revenue. In 1996 this ceiling was lifted to 25 percent. Now it will be abolished.

The Wall Street Journal celebrated the agreement to end such restrictions with an editorial declaring that the banks had been unfairly scapegoated for the Great Depression. The headline of one Journal article detailing the impact of the proposed law declared, "Finally, 1929 Begins to Fade."

This comment underscores the greatest irony in the banking deregulation bill. Legislation first adopted to save American capitalism from the consequences of the 1929 Wall Street Crash is being abolished just at the point where the conditions are emerging for an even greater speculative financial collapse. The enormous volatility in the stock exchange in recent months has been accompanied by repeated warnings that stocks are grossly overvalued, with some computer and Internet stocks selling at prices 100 times earnings or even greater.

And there is a much more recent experience than 1929 to serve as a cautionary tale. A financial deregulation bill was passed in the early 1980s under the Reagan administration, lifting many restrictions on the activities of savings and loan associations, which had previously been limited primarily to the home-loan market. The result was an orgy of speculation, profiteering and outright plundering of assets, culminating in collapse and the biggest financial bailout in US history, costing the federal government more than $500 billion. The repetition of such events in the much larger banking and securities markets would be beyond the scope of any federal bailout.


Deregulation to Unleash New Competition : Giant Banks Prepare For a U.S. Onslaught
By John Schmid and Philip Segal

OCTOBER 25, 1999

International Herald Tribune

The global financial industry, fresh from a round of megamergers, now must brace for another jolt of competition in the wake of a historic change in U.S. banking laws, executives said over the weekend.

"It means more competition globally for everybody in the field, and it will lead to bigger American banking institutions, no doubt," said Detlev Rahmsdorf, a spokesman for Deutsche Bank AG, which currently ranks as the world's biggest bank in terms of assets.

U.S. lawmakers broke a decades-old gridlock Friday and agreed to repeal a Depression-era law that kept banks from merging with securities and insurance firms.

Although the biggest financial institutions had long found ways around it, the 1933 Glass-Steagall Act was nonetheless an impediment to the efforts of U.S. banks to match the financial sweep and power of their rivals abroad.

All but one of the world's eight largest banks are European or Asian institutions. Banks in those regions face significantly fewer restrictions about the creation of "financial supermarkets" with banks, insurers and brokers under one roof.

Yesterday's giants look ever smaller with each new merger. The trend took on new dimensions two months ago when a triad of Japanese banks announced plans to forge the world's only bank with more than $1 trillion in assets. When Fuji Bank Ltd., Dai-Ichi Kangyo Bank. Ltd. and Industrial Bank of Japan Ltd. complete their merger, they will outstrip Deutsche Bank's $756 billion balance sheet and take the No. 1 spot.

The U.S. overhaul still requires congressional approval and has yet to be signed into law, but American financiers immediately celebrated the prospect of fresh international possibilities.

"By liberating our financial companies from an antiquated regulatory structure, this legislation will unleash the creativity of our industry and ensure our global competitiveness," Sandy Weill and John Reed, the co-chairmen of Citigroup Inc., said in a statement.

With about $670 billion in assets, Citigroup ranks as the biggest financial institution in the world except for Deutsche Bank. But as the sole U.S. bank on the list of the world's biggest banks, Citigroup is an anomaly.

But, as foreign competitors pointed out, that may not always be the case. "American banks, which are not the biggest in the global view, can merge and become bigger," Mr. Rahmsdorf at Deutsche Bank said.

For Asia's financial sector, the prospect of bigger and possibly stronger U.S. financial institutions only strengthens the urgency of reforms already under way, at varying speeds and with varying degrees of success.

In fact, Japan is home to what could be the biggest prize of all in international finance after its "Big Bang" deregulation measures: access to the trillions of dollars of Japanese household savings that can now be managed overseas or by foreigners within Japan.

With Congress's action Friday, larger and comparatively dynamic U.S. institutions may gain even more of an advantage in fund management over Japan's banks, even though the country's banks are enormous in terms of raw assets.

Japan's bank mergers are creating institutions that are large but still under-capitalized. They face immense challenges from nimbler foreign competitors that spend far more on technology.

In the major markets of Asia's healthiest banks, the international financial centers of Hong Kong and Singapore, institutions and regulators have already decided that staying within small home markets is not the path to long-term viability.

HSBC Holdings Ltd., the London-based banking group that grew out of Hongkong & Shanghai Banking Corp., is perhaps the best placed to take on international giants. Too big for its small home market, the bank began an expansion drive in the early 1990s, snapping up large banks in Britain and the United States and moving its headquarters to London. HSBC's appetite for acquisitions continued as it bought banks in Latin America after financial deregulation in that region.

A deal to acquire SeoulBank of South Korea has foundered, but HSBC is now in the midst of a $10.3 billion bid to take over Republic New York Corp. It also has been beefing up its equities research arm in Hong Kong, which has consistently been outperformed by the leading U.S. investment banks.

In Singapore, the government has already decided that the country's major banks need more vigorous international competition. Last week, Singapore awarded four expanded banking licenses to foreign banks; but it shunned HSBC, the largest bank operating in Hong Kong, which is battling with Singapore to attract an international banking, brokerage and fund-management presence.