Wall Street Regulation

Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren… The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Part 4 of the Special “Off The Reservation” Election Series in the Long Island Press.

The Banking Act of 1933, commonly known as Glass-Steagall, was established to tame the harmful speculative behavior of an industry run amok in the early part of the 20th century; behavior many observers at the time credited for the market crash that precipitated the Great Depression. For some, the repeal of Glass-Steagall, by the Gramm-Leach-Bliley Act of 1999, was the deathblow to financial prudence on Wall Street.

 In reality it was simply the formal recognition of careless financial practices that were largely in place already. Since the near-collapse of the banking industry in 2008, Glass-Steagall has made somewhat of a comeback with help from the Occupy movement and rising political stars like Elizabeth Warren, the former federal consumer protection advocate now running for Senate in Massachusetts. The only two political insiders you won’t catch talking about reinstating Glass-Steagall both happen to be running for president.

Wall Street reform is as important as it was in 2008 but both President Obama and Gov. Mitt Romney have taken great pains to avoid talking about it too much. For his part, President Obama seems content to rest on the laurels of the Dodd-Frank Act, Congress’s attempt to rein in Wall Street excess, which had enough support to pass but not enough to be properly funded or enforced. According to Romney’s platform, he would “Repeal Dodd-Frank and replace with streamlined, modern regulatory framework.” That’s the extent of his vision for the future of Wall Street according his platform. Ten words.

So while the rest of the country is suddenly talking about a law enacted almost 80 years ago, these guys aren’t going anywhere near it. The truth is, Wall Street reform and, more specifically Glass-Steagall, is more complicated, making it easy for Obama and Romney to be evasive.

So let’s answer two questions. What would actual Wall Street reform look like and what exactly was Glass-Steagall?

The purpose of the original act was to establish a barrier between traditional banks and the risk-taking investment firms, denying investment banks access to consumer deposits and secure, interest-bearing loans. The unwritten effect of Glass-Steagall, however, was to establish a culture of prudency in the consumer and business banking realm, leaving sophisticated professional investments to more savvy financiers who had the ability to calculate the inherent risk of a financial instrument. For decades to follow, the merits of Glass-Steagall would continue to be debated, but it nevertheless drew a marked distinction between the function of a consumer bank and an investment bank.

Today reinstating Glass-Steagall is a common rallying cry among those who decry the bad behavior of Wall Street. Its repeal has become the fulcrum of nearly every debate surrounding deregulation. Actually accomplishing this, of course, is easier said than done.

The best way to reconcile the debate over whether to reinstate Glass-Steagall is to appreciate that the culture of Glass-Steagall was more important than the act itself. Over time the restrictions placed on bankers under the act were chipped away, but the culture that governed the banking industry endured beyond its measures. Eventually, savvy bankers and politicians found ways to loosen its screws and interpret the act to their own benefit.

Don’t Just Blame Republicans

In 1978, President Jimmy Carter oversaw the passage of the International Banking Act, a bill that should probably receive as much, if not more attention than Gramm-Leach-Bliley. Essentially, the act allowed foreign banks or entities that engaged in “banking-like activities” to participate in domestic financial markets. For the first time, foreign investment firms were able to make competitive loans so long as they didn’t compete for consumer deposits; initially individual states could determine whether their regulatory structure could support this new activity. The government would go on to loosen restrictions governing the competition for consumer deposits and allowing bank holding companies to treat money markets like checking accounts.

In his book “End This Depression Now,” economist Paul Krugman argues that perhaps the most influential step with respect to the banking sector came with Carter’s passage of the “Monetary Control Act of 1980, which ended regulations that had prevented banks from paying interest on many kinds of deposits. Unfortunately, banking is not like trucking, and the effect of deregulation was not so much to encourage efficiency as to encourage risk taking.”

 By 1987 the bank holding companies, including foreign companies allowed to operate within the U.S. banking system, were granted access to mortgages to create a package of investments called mortgage-backed securities; the threshold for the amount of investing activity in instruments such as these was also increased, paving the way for the growth of investments backed by the strength (or weakness) of the consumer market.

During that same year, members of the Federal Reserve began calling for the repeal of Glass-Steagall as then-chairman Paul Volcker was providing the tie-breaking resistance. But this was a mere formality because by this time, Glass-Steagall was effectively over.

Yet even though most of the threads of regulation had been pulled from the overcoat that protected consumers from risky banking practices, the culture of prudent banking still existed to an extent; maintaining the Glass-Steagall Act on the books was an indication of this sentiment. Throughout the decades when regulations were steadily eroding, powerful national figures such as Paul Volcker under Carter and Reagan, and Treasury Secretary Nicholas Brady under George H.W. Bush managed to temper the enthusiasm of the movement.

That George Bush Senior heeded their admonitions was an admission that the public’s appetite for deregulation was actually beginning to wane in the post-Reagan hangover. Richard Berke’s New York Times article of Dec. 11, 1988, on the eve of the Bush presidency, encapsulated this feeling. Berke wrote, “Lawmakers and analysts say the pressure is fed by a heightened public uneasiness about deregulatory shortcomings that touch the daily lives of millions of Americans: from delays at airports and strains on the air traffic control system to the presence of hazardous chemicals in the workplace to worries about the safety of money deposited in savings institutions.” Alas, these four years would prove to be a momentary hiccup in the deregulation movement.

During the Clinton years, the nation’s leadership was largely comprised of proponents of deregulation. In fact, by his second term, Clinton was almost entirely surrounded by rabid free market enthusiasts. A former chairman at Goldman Sachs, Robert Rubin, was Secretary of the Treasury, Alan Greenspan was still at the helm of the Federal Reserve and Phil Gramm was the head of the powerful Senate Banking Committee. All of these men had close ties to Wall Street and made no secret of their intention to release bankers from the burdensome shackles of regulation and oversight.

Reforming Reform

In 2008, economist Joseph Stiglitz warned of the enduring negative consequences of deregulation. At a hearing held in front of the House Committee on Financial Services, Stiglitz invoked Adam Smith saying, “Even he recognized that unregulated markets will try to restrict competition, and without strong competition markets will not be efficient.” One of Stiglitz’s solutions was to restore transparency to investments and the markets themselves by restricting “banks’ dealing with criminals, unregulated and non-transparent hedge funds, and off-shore banks that do not conform to regulatory and accounting standards of our highly regulated financial entities.”

For emphasis he noted, “We have shown that we can do this when we want, when terrorism is the issue.”

Still, the nagging question remains as to what reform might look like. After all, not all deregulation is irresponsible. Most of the discussion in the media surrounding deregulation revolves around the concept that our banking institutions are “too big to fail.” Thus the rallying cry for reinstating Glass-Steagall and separating banks from investment banks. I’m in tepid agreement with the underlying principle, but the reality of the situation is far more complicated. The fact is banking has gone global and the deregulation genie is out of the bottle.

As I said earlier, Glass-Steagall was as much about instilling a culture of prudency to the banking world as it was about erecting a barrier between commercial banks and investment banks. Advocates like Elizabeth Warren like to say that prior to 1999 and the repeal of Glass-Steagall, the economy functioned through periods of both prosperity and recession since 1934 without the banking sector once collapsing. It’s a fair, but oversimplified assertion that overlooks the fact that Glass-Steagall was on a ventilator in 1978 and dead by 1980. A 30-year run of prosperity from 1978 to 2008, with a few brief recessions in between, is nothing to sneeze at.

Restoring balance to the banking sector does not necessarily require separating the banks. Not yet at least. It begins with transparency and reestablishing the culture of prudency that has been conspicuously absent over the past decade. After all, you cannot value what you cannot see; nor can you mitigate risk unless you first manage reward.

What this really boils down to is accountability, which is ultimately a behavioral issue. Allowing investors to actually see how a bank behaves by viewing the size and scope of their transactions would theoretically assuage their appetite for risk. Given these conclusions, it’s easier to make the case that our current president would provide more accountability and inspire behavioral changes on Wall Street, particularly given Romney’s intransigence when it comes to considering financial reform. But tough talk against Wall Street has all but disappeared from Obama’s rhetoric leaving little hope that a second term will elicit any further positive change. So this week, while neither man seems serious about financial reform, the status quo is better than further deregulation and letting bankers rule the roost.

Tie goes to the incumbent.

Our Prime Yearning Years

The only true and good thing about Ayn Rand and objectivism (a fancy word for “that which screws the masses”) is that they’re both dead. Rand may have been a wonderful writer but objectivism is the Scientology of economic theory.

Part II of The Season of Our Disconnect (PART I)

Alan Greenspan
"Deregulation is fundamen... what's that dear? Oh yes, I would like some more pudding."

The haul from Hempstead Harbor was so big the first week it had reopened after being closed for more than 40 years of remediation that the axle on my friend Jimmy’s truck was bending slightly at the end of each day. He said the mood of the other diggers on the water was ebullient. Their boats were tightly locked together, with guys shouting to one another in celebration; it was a strange scene for men who typically toil in solitude to put food on their table by harvesting the ocean floor for food to put on our tables.

I caught up with Jimmy at the end of the first week, and he said, although he was physically exhausted, he wouldn’t trade the week for anything. According to him, the only disappointment was the complaints registered by local residents on the hill overlooking the water who were unhappy to discover their formerly too-toxic-to-fish harbor suddenly filled with small commercial vessels.

It seems the boats’ presence was less of an environmental and commercial triumph and more of a case of urban blight. Jimmy shrugged it off but his words stuck with me. He characterized the irate citizens’ reaction as both funny and sad, saying, “It’s amazing how people with millions of dollars are complaining about watching me scrape hundreds of dollars from the ocean floor.” Though nothing came of their complaints, it is another example highlighting our Season of Disconnect when class warfare seems to be erupting in every corner of our nation.

While politicians argue about the debt ceiling and preserving tax cuts, the big, slogging, hairy middle-class squeeze continues. Across the country people are either accepting the “new normal” or, worse, turning their pitchforks and torches on one another instead of storming the castle. Somehow we’ve lost sight of what brought us here and who is to blame for all of this—and there are some very real people and institutions to condemn.

Those who dare to protect “entitlements” are vilified by the free market despots in this nation who have taken hold of the seminal piece of misinformation that has infiltrated every meaningful discussion regarding the economy: that government is somehow corrupting the markets by attempting to inject any level of consumer protection into the financial system. Rays of common sense such as Vermont Sen. Bernie Sanders’ impassioned plea to restore sanity to the markets and protect America’s working class shone brightly for a moment only to be snuffed by the likes of Michele Bachmann and her quixotic presidential campaign kickoff.

This is a woman who mistakenly believed discussions about pegging global markets to Chinese currency instead of the dollar meant that the Treasury was actually contemplating using Yuan as America’s official money. Beyond the usual mash-up of libertarian, conservative, objectivism ideals that comprise the Tea Party, Bachmann (of course) believes that climate change is a hoax, that anyone who supports healthcare is unpatriotic, and that the best way to protect Americans and the U.S. economy is to dismantle the agencies designed to protect Americans and the U.S. economy.

It’s this last point that is so troubling because it’s what people like Bachmann are gaining traction with. Even the former Fed Chairman Alan Greenspan, the most famous and powerful disciple of free market guru Ayn Rand, testified before Congress that his extreme laissez faire policy and “markets-will-cure-all” attitude were devastatingly wrong because they fail to recognize the most natural  fundamental force that comprises the capitalist economy: Greed. Don’t get me wrong. Greed is indeed an important component of capitalism as it is simply another name for competition. But it cannot go unchecked, as it will feed on itself and everything around it when unfettered by logical behavioral constraints.

To put it bluntly, Alan Greenspan was wrong and admitted as much. So were Treasury Secretary Robert Rubin, Senate Banking Committee Chairman Phil Gramm, Securities and Exchange Commission Chairman Arthur Levitt and Treasury Secretary and White House economic advisor Larry Summers. So too were the men they served who facilitated their beliefs. Presidents Reagan, H.W. Bush, Clinton, W. Bush and now, Barack Obama, all of whom surrounded themselves with these free market hucksters and relied on the dearth of financial wherewithal in Congress while counting on the masses’ inability to understand the destructive potential of unregulated markets.

 

The only thing that is honest and true about Ayn Rand and her theory of objectivism is that they’re both dead. Ayn Rand was a wonderful writer. But in terms of her being considered a prophet of sorts, Rand’s theory of objectivism (a fancy word for “that which screws the masses”) is the Scientology of economic theory. And yet, one of history’s silliest figures is now gathering momentum with copies of Atlas Shrugged flying off Amazon’s virtual shelves and middle America wondering aloud, “Who is John Galt?!”

Forget John Galt. We need to start asking the question, “Who are we?” America is stuck in the largest identity crisis we have faced since the Civil War. The unmitigated and unwarranted assault on the middle class, the working poor and, yes, the poverty-stricken in this nation, must end. We begin by restoring authority to the regulatory agencies in our nation instead of simply requiring more bureaucratic paperwork for businesses already playing by the rules. Business owners know the difference between prudent regulation and the appearance of it.

On a level playing field it’s possible to get ahead while looking down on everyone else. It might even change the perspective of a person jaded enough to be offended by the view of men scraping shellfish from the ocean, no matter how far up the hill they live.

$4 Per Gallon: Beating The Oil Drum

America and oil. Perfect together.

Americans are being warned about $4 gasoline at the pumps as an impending and potentially persistent reality. In actuality we’re really being sold on this proposition by the same people who are obfuscating the facts behind what is essentially a looming consumer economic crisis. The triumvirate of the federal government, oil companies and major financial institutions are at the core of disseminating information about, and controlling the pricing of, oil and the varying distillates it produces. I use the term “triumvirate” loosely as it presupposes a separation among the three entities when it has become increasingly apparent they are fused into a singular, inseparable juggernaut where players move freely through revolving doors interconnected through a labyrinth of commissions and exchanges that empty into the special bureau of greed and codependence.

Listen closely to what it is we’re being sold. We’re being fed a barrage of reports about two major drivers of oil prices: demand and unrest. The latter refers to the remarkable and unrelenting spread of democratic uprisings in the Middle East and Northern Africa. While the situations in Egypt and Tunisia had little immediate impact on oil prices because they are marginal players in the energy field, Libya and Bahrain have had a dramatic effect on oil prices because they are fundamentally oil-based economies. (Bahrain, by the way, is half the length and width of Long Island.)

Yet not only does the United States maintain a military base in Bahrain where demonstrations have been organized and peaceful after a shock of initial bloodshed, but Libya produces surprisingly little oil considering the ripple effect the burgeoning civil war is causing. Moreover, the war is being funded by the continuance of oil production operations, which neither side can afford to sabotage to the point of paralysis. The upshot there is that of the 2 percent of global oil production Libya claims, most of it will continue to flow. That being said, suppose for a minute it is halted completely. How could losing temporary access to 2 percent of global production account for a 33 percent increase in pricing? It doesn’t, which leads us to the demand question.

The purported rise in global demand is being attributed to the growth in demand from developing economies and the global economic recovery. Yet in real GDP terms and with respect to indicators such as manufacturing, shipping, job creation – in short, anything that isn’t the Dow Jones Industrial Average – the global economy is still limping toward pre-recession, pre-housing bubble crash levels when oil hovered around $70 per barrel. And even at this level, several commodities experts and economists theorized that as much as 40 percent of the $70/barrel figure was pegged to speculation in the financial markets and not market forces such as supply and demand.

In regards to new demand from developing nations, new areas of production in Canada and Africa as well as deep-sea, offshore drilling are keeping pace with demand as evidenced by the sustained levels of reserves around the globe. Even the Obama administration, which has stated that tapping our own strategic oil reserves is a viable option to increase supply and suppress oil prices, admits in the same breath that supply isn’t the issue. This is hocus-pocus to distract us all from what the actual issue is. For clarity on the real reason behind the spike in oil prices, one need look no further than the mini-oil crisis in the summer of 2008 and the federal government’s response in the months, and now years, that followed.

CLICK HERE TO READ THE LONG ISLAND PRESS COVER STORY ABOUT THE OIL SCANDAL OF 2008

When the price of a barrel of crude oil topped $145 in 2008, rampant speculation was ultimately blamed for the anomaly but only after the major banks and trading institutions could no longer blame increasing demand with a straight face. They simply pushed that line too hard to keep up the ruse. If ever there was even a question about the role of speculation and the government’s willingness to cover for the big banks, all was answered in my mind by the U.S. government response, or lack thereof.

Federal regulators made a big fuss over the creation of more stringent regulation on the commodities exchanges by moving oil trading from opaque over the counter (OTC) exchanges to more “legitimate” exchanges with greater transparency. Or so we were told. The big winner in this move: The Intercontinental Exchange, or the ICE. The ICE is aptly named because any attempt to investigate this exchange ends up cold. Here’s where it gets interesting and perfectly illustrates the symbiotic relationship between the federal government and big banking.

The most helpful context I can place this explanation in is to stress the point that the ICE is a business. It was established for the purpose of providing an efficient electronic trading infrastructure for energy commodities. Trading energy futures before the Atlanta-based ICE was established was confusing, inefficient and antiquated. But the ICE was a small operation until then-President George W. Bush granted it status as a foreign exchange because it purchased a trading desk in London even though the entire trading infrastructure was based in Atlanta. Foreign exchanges aren’t subject to the same oversight as domestic ones. So even though the Commodities Futures Trading Commission (CFTC) interacts with and governs some of the procedures at the ICE, no one can actually see who is doing the trading. This one small regulatory change put the ICE on the map and set the groundwork for one of the greatest, yet most obscure, con jobs ever pulled on the American people.

I call it a con job because the ICE falsely professes to be a bastion of transparency, going so far as to describe itself as “an alternative to the previously fragmented and opaque markets.” So let’s be transparent about this supposed transparency the ICE purportedly affords. It has nothing to do with the ability to witness transactions or those who are doing them, but to simplify the transaction process. It’s the equivalent of your bank offering online banking for your checking account. It’s fast and easy but doesn’t mean your neighbor can see you doing it.

Now consider who is doing the trading. Are you? My guess is no.

The only ones with the financial strength to risk betting on oil futures that would also benefit from anonymity are financial institutions and oil companies themselves. And that’s precisely what they’re doing. Now that you’re armed with an understanding of the fundamentals behind the commodities market, take a gander at the incestuous family tree of oil trading. Once you follow the money you’ll never again question why prices at the pump are so high.

• The ICE is a public, for-profit business traded on the New York Stock Exchange that takes in almost one billion dollars in transaction fees from commodities trading and has performed better than all other major exchanges in recent years.

• The founders of the ICE are Morgan Stanley, Goldman Sachs and British Petroleum (now BP)

• Morgan Stanley is not only a financial institution. If you add up their direct holdings in the oil business, they would be one of the world’s biggest oil companies.

• Gary Gensler, chairman of the CFTC, is a former Goldman Sachs partner

• Jeffrey Sprecher, chairman and CEO of the ICE, is on the CFTC Energy and Environmental Markets Advisory Committee alongside representatives from JP Morgan, Morgan Stanley, Goldman Sachs and Merrill Lynch

The takeaway: The government has cleared the way for banks and oil companies (sometimes one in the same) to determine the price of oil by investing large sums of money no one can see on a trading exchange they own and direct.

If you follow this logic, dig this scenario. (Or “digg” it if you’re reading this online – thanks in advance for the plug). Instead of cracking down on this legalized price-fixing and collusion scheme, the government rewarded everyone involved. In 2009 it granted the ICE the ability to trade credit default swaps (remember those?) in order to provide “more transparency” to these troubled investment vehicles by moving them from OTC exchanges. Sound familiar? The ICE got this part of their exchange up and running in 2010 ahead of schedule.

With the regulatory wind of the White House at their backs and a gullible public duped by propaganda about unrest in the Middle East being responsible for the spike in oil prices, Wall Street is having its way with us all.

In case you were wondering what their take on this sorry state of affairs is, Morgan Stanley analysts David Greenlaw and Ted Wieseman offer the following sentiment: “Of course, the increase in oil prices transfers income (and wealth) to oil producers, and the effect on global growth will depend on how the producers spend their windfall.” A rhetorical question if ever there was one; after all, when’s the last time ExxonMobil cut you a check? 

So the next time you’re gritting your teeth at the pump and cursing the day you walked into the SUV dealership, you’ll know who’s really taking your money. Unfortunately, you’ll also realize that there’s not a damn thing you can do about it. 

CLICK HERE TO READ JED MOREY’S RESPONSE TO THE BP OIL SPILL AND OUR OIL ADDICTION