Leave it to Rachel Maddow to finally have a discussion regarding the Gramm-Leach-Bliley Act (GLBA) aka the Gramm-Leach-Bliley Financial Services Modernization Act. Mainstream media is too focused on finger-pointing and punditry to discuss the details. Oh and if the Gramm sounds familiar to you, the “Gramm” is Phil Gramm, former Texas senator, John McCain’s campaign advisor during the 2008 presidential campaign and yes, the same man who called us American’s feeling the effects of the recession “whiners” (ah hem). In short Gramm’s legislation, the GLBA, allowed for commercial banks to branch out and get into the investment banking business. GLBA also enabled the financial behemoths we now know as Citigroup, Bank of American, Wells Fargo and JP MorganChase, to name a few. But apparently as Rachel points out in the video some senators saw problems down the road but the GOP choose to ignore.
To be fair, it wasn’t just the GLBA that caused this massive meltdown but the legislation certainly was a recipe for disaster. Add in some greed, some deregulated aspects of the banking industry that was previously regulated, throw in some credit default swaps and some OTC’s, fast forward to the present day and “voila”, meltdown central. Well, its really not that simple but like you I’m looking for answers. Here are a couple of issues of interest, consider GLBA’s legislative history for starters, the legislation passed along party lines:
The banking industry had been seeking the repeal of the 1933 Glass-Steagall Act (which estabvlished the FDIC) since the 1980s, if not earlier. In 1987 the Congressional Research Service prepared a report which explored the case for preserving Glass-Steagall and the case against preserving the act.
The bills were introduced in the U.S. Senate by Phil Gramm(R-Texas) (Enron crony,UBS adviser) and in the U.S. House of Representatives by Jim Leach (R-Iowa). The third lawmaker associated with the bill was Rep. Thomas J. Bliley, Jr. (R-Virginia), Chairman of the House Commerce Committee from 1995 to 2001. On May 6, 1999, the Senate passed the bills by a 54-44 vote along party lines (53 Republicans and one Democrat in favor; 44 Democrats opposed). On July 20, the House passed a different version of the bill on an uncontested and uncounted voice vote. When the two chambers could not agree on a joint version of the bill, the House voted on July 30 by a vote of 241-132 (R 58-131; D 182-1) to instruct its negotiators to work for a law which ensured that consumers enjoyed medical and financial privacy as well as “robust competition and equal and non-discriminatory access to financial services and economic opportunities in their communities” (i.e., protection against exclusionary redlining) The bill then moved to a joint conference committee to work out the differences between the Senate and House versions. Democrats agreed to support the bill after Republicans agreed to strengthen provisions of the anti-redlining Community Reinvestment Act and address certain privacy concerns; the conference committee then finished its work by the beginning of November. On November 4, the final bill resolving the differences was passed by the Senate 90-8 and by the House 362-57. This legislation was signed into law by Democratic President Bill Clinton on November 12, 1999.
Now mix in some derivatives which by definition means to “finance a tradable financial product whose value depends on the value of some other asset (subprime loans) or combination of assets (more subprime loans) or derived from something else” (hedgefunds). For the purposes of this post I am focusing on the credit default swaps market (CDS) specifically because of the recent outrage directed at AIG. The CDS market is the main reason we have had to throw $180 million to AIG, which hasn’t gotten us anywhere closer to an economic solution for the meltdown and there is a reason for that. Consider the following from F. William Engdahl in his recent article, AIG, Larry Summers and the politics of deflection. Warning: If the following doesn’t boil your blood you are officially dead.
Credit default swaps purported, in theory, to let banks remove loan risk from their balance sheet onto others such as AIG, an insurer. It was based on a colossal fraud using flawed mathematical risk models.
AIG went big into the selling of credit default swaps with banks around the world, from its London ‘Financial Practices’ unit. AIG, in effect, issued pseudo ‘insurance’ for the hundreds of billions of dollars in new asset backed securities (ABS) that Wall Street firms and banks like Citigroup, Goldman Sachs, Deutsche Bank, Barclays were issuing, including subprime mortgage backed securities.
It was a huge Ponzi scheme built by AIG that depended on the fact the world’s largest insurance company held a rare AAA credit rating from Moody’s and S&P rating agencies. That meant AIG could borrow more cheaply than other companies with lower ratings.
AIG’s issuing of CDS contracts acted as a form of insurance for the various exotic asset backed securities (ABS) securities being issued by Wall Street and London banks. AIG was saying ‘if, by some remote chance’ those mortgage-backed securities suffered losses, AIG would pay the loss, not the banks.
Then it got really wild. Because credit default swaps were not regulated, not even classed as a traditional insurance product, AIG didn’t have to set aside loss reserves! And it didn’t. So when housing prices started falling, and losses started piling up, it had no way to pay off.
AIG then issued of hundreds of billions of dollars worth of CDS instruments to allow banks to make their balance sheets look safer than they really were. Banks were able to get their loan risk lower not by owning safer assets. They simply bought AIG’s credit default swaps. The swaps meant that the risk of loss was transferred to AIG, making the bank portfolios look absolutely risk free. That gave banks the legal illusion of BIS minimum capital requirements, so they could increase their leverage and buy yet more ‘risk free’ assets.
How could that be allowed? The level of venal corruption in the Clinton and then Bush administration rivals that of the last days of Rome before its fall from the internal rot of corruption. Banks invested billions in lobbying Washington politicians to get their way.
Banks invested billions in lobbying Washington politicians? Gramm and the Republicans of the 106th United States Congress didn’t let their investors down. The Commodity Futures Modernization Act of 2000, another bill championed by Gramm gave Wall Street a derivatives market, including the credit default swaps that was completely free of government regulation. Between 1995 and 2000, Gramm was the chairman of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the majority of the banking industry’s deregulation happened on his watch. But Gramm doesn’t see a problem, his recent advise to Americans during this current meltdown;
“All that you have to do is wake up, Come on, wake up, you babies. It’s all in your imagination”
Well for the record, Gramm can kiss this baby’s ass behind. The bottomline for me is this, if we do not make some changes on Wall Street, we will be right back where we are now in the coming years. We should continue to clean house starting with politicials like Gramm and work our way through the pile. While our politicians are pointing fingers at each other lets try to remember, somebody saw this meltdown coming and if Byron Dorgen is right we owe it to ourselves from now on to listen.