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News : International Last Updated: Jun 29, 2010 - 7:14:51 AM


US Financial Reform: 2000-page Dodd-Frank Bill a worthy successor to 34-page Glass-Steagall Act?
By Michael Hennigan, Founder and Editor of Finfacts
Jun 28, 2010 - 4:51:37 AM

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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 Glass-Steagall Act.  

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 crises.

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 everyone’s favourite multisyllabic wonderment these days: derivatives."

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.

June 16, 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 Crash.

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 New York Times reported in November 2008 that in September 2007, Citigroup’s then chief executive, Chuck Prince, had learned for the first time that the bank owned about $43 billion in mortgage-related assets! On January 2, 2009, Citigroup said that Robert Rubin had resigned as a senior adviser and would not seek re-election as a board director. The Wall Street Journal says Rubin made $115 million in pay since 1999, excluding stock options. Rubin told the Journal his pay was justified and that there were higher-paying opportunities available to him. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said. Asked if he had any regrets, Rubin said: "I guess that I don't think of it quite that way," adding that "if you look back from now, there's an enormous amount that needs to be learned." - - Michael Hennigan - Finfacts Photo: © Bettmann/CORBIS  

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 Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup. 

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.

Federal lobbyists’ clients spent more than $3.47bn last year, often driven to Washington, DC’s power centres and halls of influence by political issues central to the age: health care reform, financial reform, energy policy.

Finfacts 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, Salon 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."

Hours later, 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 investment banking.

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."

The late 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!

Plus ça change, plus c'est la même chose!

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