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legislative history and congressional voting that led to the overwhelming bipartisan passage of S.900, which repealed the Glass-Steagall Act of 1933, during November 1999.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.
SHORT TITLE(S) AS PASSED HOUSE:
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)
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: http://financialservices.house.gov/who.html
Ackerman (NY) *
Baldacci (ME) (**Now 2nd term Governor of Maine)
Carson (IN) *
Gutierrez (IL) *
Hinojosa (TX) *
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.
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)
FINAL VOTE RESULTS FOR ROLL CALL 570
S 900 YEA-AND-NAY 4-Nov-1999 11:17 PM
QUESTION: On Agreeing to the Conference Report
BILL TITLE: Financial Services Modernization Act
as compiled through Senate LIS by the Senate Bill Clerk under the direction of the Secretary of the Senate
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: http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105
Pelosi (CA) (***** Currently Speaker of the U.S. House of Representatives)
Obama: Wallstreet Crisis Caused by McCain-GOP Policies
Obama blames Wall St. crisis on Republican policy
Sep 15 07:26 AM US/Eastern
By TERENCE HUNT
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."
'Always for Less Regulation'?
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."
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.
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.
''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.''
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.''
Obama also mocked McCain's promise to fire the head of the Securities and Exchange Commission if elected.
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.''
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.
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
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: http://www.newscom.com/cgi-bin/prnh/20080519/RNCLOGO )
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.
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)
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)
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, www.barackobama.com, Accessed 9/19/08)
Johnson Engineered An Effort To Lobby Politicians So That Fannie Mae Would Not Have To Pay Local Taxes To Washington, D.C.:
Before Heading Fannie Mae, Johnson Was A Registered Foreign Agent For Lehman Brothers:
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
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
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.
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
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; http://www.corporatepredators.org)
(c) Russell Mokhiber and Robert Weissman
By Martin McLaughlin
World Socialist Website
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.
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
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.
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.