Irony: Fed Decisions To Undermine U.S. Banking System?
Stock-Markets / Market Regulation Sep 22, 2008 - 04:54 AMBy: David_Haas
Let's start with an important quote gleaned from an excellent article in today's Washington Post which describes the Fed's massive and unprecedented bailout plans that are intended to rescue the entire financial system from further implosion:
“The program announced this morning runs the risk in the long run of profoundly changing the nature of our financial system and, specifically, undermining the nation's banking system,” wrote American Banker's Association President Edward Yingling.
The article is available at the following link and should be read by anyone who would like to see a concise report on what's about to be proposed and, likely, enacted in Washington, DC: Historic Market Bailout Set in Motion
According to the Post article, “The American Bankers Association released a letter to Bernanke and Paulson that said the government had acted in ‘great haste' and should reconsider.” Coming from a blue-blooded group like the ABA, that's a very serious accusation.
I could almost stop right there and let you use your own imagination about what's going on but I'd prefer to offer a little of my own analysis based upon many years' experience in and around Wall Street and the financial industry in general.
The financial industry is dominated by three individual groups who would love to “own” the turf that's held by each of the others. The three groups are; the Wall Street investment bankers and brokers, the large commercial “deposit” or retail banks (Bank of America, Wachovia, etc.), and lastly, the insurance industry, which is broadly comprised of property and casualty insurers, life insurers, and major pension managers.
One would think that, at the highest echelons, all of these interests would converge. But that doesn't really appear to be the case. Each segment seems to pursue its own interests and, through the “investment” of some well-placed lobbying and generous political contributions, each seeks to continually force new legislation that could enlarge and enhance its slice of the tasty financial pie with the stroke of a pen. In recent years, the most assertive and dominant group appears to have been Wall Street.
Need proof? The Glass-Steagall Act, which was passed in 1933 as a result of the Great Depression, was intended to enforce, by law, some of the divisions outlined above to protect our country's financial system against the kinds of abuses we see bringing it to its knees right now. As decades passed and a collective amnesia set in, major financial interests on Wall Street began feeling too confined by the “old-fashioned and restrictive protections” of Glass-Steagall and eventually convinced legislators in Washington, DC to overturn it. This formally happened in November, 1999 when president Clinton signed the Gramm-Leach-Bliley Act into law.
The Gramm-Leach-Bliley Financial Services Modernization Act
An excerpt from Wikipedia explains it with brevity:
The Gramm-Leach-Bliley Act, also known as the Gramm-Leach-Bliley Financial Services Modernization Act, Pub. L. No. 106-102, 113 Stat. 1338 (November 12, 1999), is an Act of the United States Congress which repealed part of the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.
The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. Other major mergers in the financial sector had already taken place such as the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination in the mid-1990s. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Acts by combining insurance and securities companies, if not for a temporary waiver process [1]. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.
New isn't always better and, as they say, the proof is in the pudding. It's almost uncanny how this act was passed by Congress at the literal peak of the 1999 stock market bubble. It took a few more years for the act to make its full presence and impact known in the larger marketplace, but Gramm-Leach-Bliley is, without doubt, the root cause of the financial storm ripping today's financial markets from their moorings.
What do I think will have happened as a result of all of this? Well, I think in year or two we will look back to this time and see that Wall Street greed and control over Washington has continually driven every government decision made since, at least, the mid-1990's, including those being made right now.
Wall Street created the 1990's stock market bubble. Wall Street then (by carrying out newly-revised Fed and administration policy) created the housing bubble - itself, a governmental response to the 2000-2002 stock market collapse and recession - by manufacturing a new breed of housing-based “credit investment scheme”. This scheme appears to resemble a massive “pump and dump operation” on our nation's real estate.
As we now clearly see, this scheme was infinitely far-reaching and, through leverage layered upon leverage, enriched Wall Street as it ominously penetrated deep into nearly every nook and cranny of the globalized capital markets. On its very face, IT WAS A MONSTROUS CONFIDENCE GAME built upon institutionalized obfuscation and misrepresentations of fact. Like a lethal electronic fungus, the scheme traveled at the speed of light by the transmission of little, infectious financial spores that quickly took root in otherwise healthy tissue. Once the spores were set loose, there was no stopping them and they voraciously encircled the globe, devouring capital and the systems of commerce that depend upon it. Who would want to identify them or, God forbid, try to stop them when they generated such fat profits and commissions along the way?
The financial “lab technicians” and Wall Street product manufacturers who are the criminal perpetrators of this entire mess are seldom mentioned for their culpability. They are now - with the Fed's help - out of harm's way, free to take their bonus money and run. Their reward was extracted right up front through the fat commissions, profits, and bonuses they pocketed for themselves in their global criminal venture. They keep their money, their social position, their respect, and, apparently, their political influence intact - as it was merely “the markets” that turned afoul and mandated the current taxpayer bailout. No “personal responsibility” to be found here.
The final irony may be that the Wall Street perpetrators who appear to be falling like flies may have ingeniously mapped a course that ultimately destroys one of their main competitors - the commercial banking system . The insurance industry is, no doubt, also wounded by their irresponsible acts and defective “products”, though apparently much less so than the banks.
The current proposed action in Washington appears, at least in my view, to be handing control of the entire financial pie over to Wall Street to “manage” once more. This time, by placing the entire army of U.S. taxpayers behind them to “take the bullets” for their gross malfeasance, misjudgments, and mistakes, they are being let off the hook and, despite their unconscionable behavior, rewarded with the largest bailout in world history. They pay nothing. They will never really feel the personal pain of their former acts because the damage and the pain has been transferred directly onto the backs of future taxpayers. The karmic law has been derailed. Or has it? Only time will tell.
By stepping in to put Federal guarantees behind money market funds, the Fed and the U.S. Treasury may be directly rewarding those who caused this whole mess and handing them free entry into the business that used to be, by law, the secure domain of the commercial depository banks. Wall Street may be pulling off the greatest bank heist in history - as we all watch it unfold - under the guise of protecting us and our money. Isn't that the way it always goes? Another day, another coup. This new twist on an old crime - robbing banks - offers proof, once more, that the pen is mightier than the sword. Is there any wonder why people are flocking to buy gold?
By David Haas
Consultant
In my consulting practice, I work with individuals, business owners, and professionals. I assist business owners and professionals in several critical areas ranging from business start-up, marketing, operational challenges, employee retention, and strategic planning to personal asset protection, financial, and retirement income planning. Often, these areas relate and need to be integrated to work most effectively. I also assist business owners in developing exit-strategies that enable them to maximize the value of their business interests and preserve their lifestyle in retirement. For individuals, I primarily focus on tax reduction, financial, and retirement income planning.
© 2008 David Haas, Consultant
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