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President Barack Obama and British Prime Minister David Cameron, left, trade bottles of beer to settle a bet on the US-UK World Cup Soccer game during a bilateral meeting before the start of the G20 Summit in Toronto June 26, 2010.
US Financial Reform: Half a loaf is better than no bread and the almost
2,000-page Dodd-Frank financial reform bill, agreed on Friday by a conference of
the US Senate and House of Representatives and now set to be voted on by the US
Congress, will trigger changes much less radical than the Depression-era 34-page
For decades, until Congress did away with it 11 years
ago, the Depression-era law known as Glass-Steagall ably
protected bank customers, individual investors and the
financial system as a whole from the kind of outright
destruction witnessed over the last few years.
Glass-Steagall was a 34-page document, The New York
Times' Gretchen Morgenson noted in her Fair Game column
last month that even if the best of both
bills becomes law, investors,
taxpayers and the economy will
remain vulnerable to banking
She said some will argue that
these bills, at around 1,500
pages each, have to be weighty
and complex if they are to curb
the ill effects of convoluted
and inscrutable financial
instruments: "That makes it
doubly disappointing that the
bills don’t go far enough in
bringing greater transparency
and better oversight of
multisyllabic wonderment these
President Obama, in his comments on the Dodd-Frank bill, which was shepherded
through Congress by Senator Chris Dodd and Representative Barney Frank, on
Friday proclaimed it “the toughest financial reform since the one we created
in the aftermath of the Great Depression.”
Glass-Steagall significantly altered the structure of the financial system
but apart from reduced income, the big Wall Street players will still dominate
the system. There will be some changes restricting proprietary trading by banks
and regulators will force them to spin off their swaps desks into separately capitalised operations. However, the big banks retain the biggest part of their
derivatives business, which is dominated by interest-rate and foreign-exchange
swaps. An estimated 80 to 90 per cent of that business will remain within the
banks, and JP Morgan Chase, Goldman Sachs, Citigroup, Bank of America, and
Morgan Stanley control more than 95 per cent, or about $200trn worth of that
market. The banks may also end up having significant influence on the planned
new clearinghouse exchanges.
1933: Washington, DC- President Franklin D. Roosevelt affixes his signature to
the Glass-Steagall Bank Reform Act--deposit insurance measure, one of the last
bits of legislation put through before Congress adjourned, at the end of the
famous first 100 days of the Administration. Behind the President (l-r) are:
Sen. Allen Barkley; Sen. Thomas Gore; Sen. Carter Glass; Comptroller of Currency
J.F.T. Connors; Sen. William G. McAdoo; Rep. Henry S. Steagall; Senator Duncan
U. Fletcher; Rep. Alan Goldsborough; and Rep. Robert Luce.
In addition to deposit insurance, this second
Glass-Steagall Act, separated investment banking and commercial banking, which
is why Morgan Stanley and JP Morgan are two different firms.
Commercial banks were seen as having taken on
too much risk in share trading, with depositors' money, up to the October 1929
The Glass-Steagall Act was repealed by Congress
in November 1999, a measure that has been termed the "Citigroup Authorization
Act." Robert Rubin had pushed for repeal of the Glass-Steagall Act as
Treasury Secretary. He resigned in July 1999 and was succeeded by Lawrence
Summers, now President Obama's head of the National Economic Council. President
Clinton called Rubin the "greatest Secretary of the Treasury since Alexander
Hamilton" - - President George Washington's Treasury Secretary - - and the
former Cabinet officer, who had spent 26 years at Goldman Sachs before joining
the Clinton Administration, took a senior position at Citigroup. Rubin who earned $17.0 million at Citi in
2008, was not aware of the detail of $55 billion of collateralized debt
obligations (CDOs) and other subprime-related securities on the group's balance
sheet. "The answer is very simple," he told Fortune
Magazine. "It didn't go on under my nose."
The bill restricts banks from investing no more than 3 per cent of their
'Tier One' capital in hedge or private-equity funds, and in amounts not
exceeding 3 per cent of those funds’ capital.
Separately, the Basel III group proposals on bank capital and bigger buffers
for risky transactions, will also impact bank profitability.
A consumer unit within the Federal Reserve will monitor financial innovation
and there will be more attention to systemic oversight.
However, many provisions are left to regulators to flesh out and
this is where
the influence of well-financed trade groups and the lure of more lucrative jobs
for regulators on Wall Street,
will remain unchanged.
Prof. Simon Johnson of the
Massachusetts Institute of Technology (MIT) and
a former chief economist at the IMF commented:
"While the financial reform negotiation process grinds to its
meaningless conclusion, the real action lies elsewhere -- in
Jamie Dimon’s executive suite.
Dimon, the head of JPMorgan
apparently seeking to (a) become more global, (b) move
further into emerging markets, and (c) become more like
This is terrific corporate strategy
-- and very dangerous for
the rest of us.
Jamie Dimon clearly wants to become too big to fail, too
interconnected to fail, and - - above all -- too global to fail."
Insight on the sweeping deal on financial reform, with Rep. Barney Frank (D-Mass.):
Count Otto von Bismarck may or may not have remarked that "laws
are like sausages. It's better not to see them being made,"
and we have previously documented the pernicious influence of money and Wall
Street on American lawmaking.
The New York Times reported
last April that from anonymous midlevel workers to former House and Senate
majority leaders, more than 125 former Congressional aides and lawmakers are now
working for financial firms as part of a multibillion-dollar effort to shape,
and often scale back, federal regulatory power, data shows.
reported last year, that in his two-and-a-half-year stint as a banker, Rahm
Emanuel, President Obama's chief of staff and former adviser to President
Clinton, made $16.2m, even though he had no financial experience.
In April 2009,
the White House released records, which showed that the President's top economic
adviser Lawrence Summers, earned nearly $5.2m in just two years at one of the
world’s largest hedge funds - - working one day a week.
In April 2008,
investment bank Goldman Sachs paid Summers $135,000 for a one-day appearance at
a company event.
In April 2009,
reported that Senator Dick Durbin of Illinois, a former colleague of
President Obama, on a local Chicago radio station, blurted out "an obvious
truth about Congress that despite being blindingly obvious, is rarely spoken":
"And the banks -- hard to believe in a
time when we're facing a banking crisis that many of the banks created -- are
still the most powerful lobby on Capitol Hill. And they frankly own the place."
President Obama makes comments on the passage of the financial regulatory bill:
Roosevelt as traitor to his class
Money has always had a significant
role in US politics and in the nineteenth century, US Senate seats were for sale
by most state legislatures.
However, the patrician Franklin Delano
Roosevelt was not for bullying by his own class.
"The money-changers have fled from their high
seats in the temple of our civilization," Roosevelt proclaimed in his March 4, 1933
inaugural speech. "We may now restore
that temple to ancient truths."
he signed an executive order shutting every bank in the country and earned the
enmity of the bankers he saved by establishing a comprehensive regulatory
structure, including the creation of the Securities and Exchange Commission, the
establishment of serious banking oversight, the guaranteeing of bank deposits
and the passage of the Glass-Steagall Act, which separated commercial and
Raymond Moley, a member of Roosevelt's New Deal brains trust said "capitalism
was saved in eight days" and Roosevelt observed in 1936: "Now that these people are coming out of their
storm cellars, they forget there was ever a storm."
American historian and aide to President Kennedy, Arthur M. Schlesinger,
recounts in his book
The Age of Roosevelt: The coming of the New Deal 1933-1935,
how the president produced a parable of a man in a silk hat who fell off a
pier and was drowning in the ocean. A bystander jumped off the pier and saved
him, but the drowning man's silk hat floated away. The bystander was thanked
profusely by the man for saving his life. But three years later, the same man
attacked the bystander for not saving the silk hat!