The Safety Systems Were Deliberately Dismantled

We have learned from communism that government without business is tyranny. It seems we are learning that business without government is piracy.

Here’s something to consider.

PHASE 1

After the Great Depression two major lessons were learned about money, markets and banking. Legislation was introduced accordingly.

1. The Glass Steagall Act 1933 separated investment banking (taking risks with your money for bankers gain) from traditional banking (looking after your money, processing payments and conservative Mr Mainwaring type lending). This division meant that any losses taken by bankers taking risks would not affect the basic banking that you and I and everyone else depend on.

2. The “uptick rule” was introduced in 1938 after a review of the effects of short selling and effectively stopped it.

Sensible stuff.

PHASE 2

Following intense lobbying by the banking sector, the Glass Steagall Act was actually repealed in 1999 by the Gramm-Leach-Bliley Act.

As a direct result of this major banks became legitimised in their involvement in, amongst other things:

Mortgage Backed Securities (viz sub-prime);
Special Investment Vehicles (SIVs) (off balance sheet stuff); and our friends,
Collateralised Debt Obligations (CDOs) (See Synthetic Money post below).

In addition, the uptick rule was eliminated by the SEC in July 2007.

Hmm.

PHASE 3

The US Commodity Futures Modernization Act 2000 (nice sounding title) was hurriedly tacked on at the last minute to a must-pass 11,000 page budget bill on December 15, 2000 (the last day before the Christmas holiday when the politicians went home). Its sponsor was one Senator Gramm (same Gramm as above).

Of note also was that this was in the short period following George W Bush's election while then President Clinton was sill serving out his final days as President and as outgoing president was in no position to veto anything. Like the period we have just had between Bush and Obama.

The timing and procedure adopted by Gramm meant the bill by-passed the substantive policy committees in both the House and the Senate so that there were neither hearings nor opportunities for recorded committee votes.

As no-one had time read the 250 page bill (11,000 were in the budget bill) they just went on what Gramm said it was.

Gramm characterised the Act as follows: to ensure that neither the SEC nor the Commodity Futures Trading Commission got into the business of regulating newfangled financial products called swaps—and would thus:

"protect financial institutions from overregulation" and "position our financial services industries to be world leaders into the new century."

Splendid, they said. Now can we all go home for Christmas? And they did.

What they had signed up to was extraordinary. The “protection for financial institutions” (poor lambs) was provided by actually barring, yes barring, regulators from regulating, amongst other things, the credit default swaps (CDS) market and banking involvement in derivatives generally.

The regulation of banks' involvement in CDSs and derivatives was actually made illegal.

Pause for breath needed?

As a result, what became a $62 Trillion market (four times the size of the US stock market) was unregulated. No one was allowed to make sure hedge funds and banks had the assets to cover the losses they guaranteed.

Well, reeling as I am sure you are, there’s just a wee bit more. It's a side show now, but it seemed important at the time.

The same Act exempted most over-the-counter energy trades and trading on electronic energy commodity markets from government regulation. This was at the behest of lobbyists working with Gramm from a company which no-one had really heard of then, Enron.

Gramm's wife, coincidentally, was on the board of directors of Enron when it collapsed.

The “Enron loophole” which deregulated energy trading was sought to be closed in Senate Bill S.2058 in 2008, in large part because unregulated speculation had led to rocketing oil prices (remember $148 a barrel last year?).

President Bush vetoed it. Thankfully he was overridden by the House and Senate.

And finally.

In 2004, at the request of the major Wall Street investment banks, including Goldman Sachs, then headed by Hank Paulson , the SEC agreed unanimously to release the major investment houses from the net capital rule.

This was the end of the requirement that the US investment banks’ brokerages hold reserve capital.

The effect of this was to take the limit off leverage.

The SEC decision came following on from the complete dilution of restrictions regulating the capital requirements of the foreign operations of US investment banks in the European Union.

EU regulators said they would accede to US pressure and not scrutinize foreign firms' reserve holdings if, and only if, the SEC agreed to do so instead. The problem, however, was that the 1999 Gramm-Leach-Bliley Act (yes) had put the parent holding company of each of the big American investment houses beyond SEC oversight.

In order for the agreement between the EU and the US to go ahead, the investment banks lobbied for a decision that would allow "voluntary" inspection of their parent and subsidiary holdings by the SEC. This was accepted. (I am weeping)

As part of the deal repealing the net capital rule, the SEC agreed to the establishment of a risk management office that would monitor signs of future problems.

This office was later dismantled after discussions with Hank Paulson.

It took until late September 2008 for the SEC to agree to end the 2004 program of voluntary regulation.

My sincere hope is that these events will rekindle the debate about the roles of capital and labour (money and people), about individual freedom (personal and corporate) and the inevitable social contract with the communities those individuals and corporations live in, and about law making and ideals. There never has been such a thing as a "free" market. That was a quite conscious rebranding of capitalism that took place in the late seventies, and it was a polarised and lop sided reaction to the then opposing philosphy of communism.

In the name of the free market, and indeed ironically of democracy, our society effectively killed off debate about what was individual and social good. Since then the prevailing philosophy has been that all society needs is individuals pursuing their economic goals, regardless of moral, ethic or conscience, and that everything will take care of itself.

This is the time for hope for something new to be able to collectively flower.



(With thanks to research on Wikipedia)