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Sy Harding's free daily blog
Those Congressional investigations every day this week are looking dumb and dumber every day. With both hands Congress, the Fed, and Treasury poured in $trillions to help provide confidence to consumers and investors. And then they choose now, at the height of the panic and worry, to hold televised hearings to dig into all the ugliness and frauds that created the situations, so anxious to place blame and look statesmanlike before the elections. Wasn't it helpful for consumer confidence (consumer spending is 65% of the economy), and investor confidence, to have former Fed Chairman Greenspan at yesterday's hearings, and his testimony all over the TV news and in the newspapers last night and this morning, telling the world he is in a "state of shocked disbelief", that the banking and housing chaos is a "once in a century tsunami.", that things will get worse before they get better, with no stabilization for many months.
After the 1929-32 crash they had the sense to wait until 1933, when the panic was over and the market was recovering, to open hearings, and until 1934 to come up with the regulations to prevent a recurrence. There was then the 1933 Truth in Securities Act, the 1934 Securities & Exchange Act. And the 1934 Glass-Stegal Act (separating investment banks, commercial banks, savings banks, brokerage firms, insurance companies, etc.) which was repealed by Congress in 1999. .......
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(A republican controlled congress repealed the Act) - Malyla's 2cents
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http://en.wikipedia.org/wiki/Glass-Steagall_Act
The bill that ultimately repealed the Act was introduced in the Senate by
Phil Gramm (R-TX) and in the House of Representatives by
James Leach (R-IA) in 1999. The bills were passed by a 54-44 vote along party lines with Republican support in the Senate
[8] and by a 343-86 vote in the House of Representatives
[9]. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bipartisan bill resolving the differences was passed in the Senate 90-8-1 and in the House: 362-57-15. Without forcing a veto vote, this bipartisan,
veto proof legislation was signed into law by President
Bill Clinton on November 12, 1999.
[10]
The banking industry had been seeking the repeal of Glass-Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.
[11]
The argument for preserving Glass-Steagall (as written in 1987):
1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act
2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of
real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.
[12]
The repeal enabled commercial lenders such as
Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as
mortgage-backed securities and
collateralized debt obligations and establish so-called
structured investment vehicles, or SIVs, that bought those securities.
[13]
