Clinton, Rubin and Summers, Graham, Leach and Bliley – thank you

In the early 1900’s, commercial banks began to establish security affiliates that floated bond issues and underwrote corporate stock issues. (In underwriting, a bank guarantees to furnish a definite sum of money by a definite date to a business or government entity in return for an issue of bonds or stock.)

Then the stock market crashed.

In 1930 the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market, FDR closed the banks for four days, 4000 failed permanently, and Congress created the Glass-Steagall Act of 1932, then amended it in the Banking Act of 1933.

The act forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities, with the exception of U.S. Treasury and federal agency securities, and municipal and state general obligation securities.

More specifically, the act authorizes Federal Reserve banks to use government obligations and commercial paper as collateral for their note issues, in order to encourage expansion of the currency. Banks can also offer advisory services regarding investments for their customers, as well as buy and sell securities for their customers. However, information gained from providing such services cannot be used by a bank when it acts as a lender.

Likewise, investment banks cannot engage in the business of receiving deposits.

A bank is defined as an institution organized under the laws of the United States, any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands, that both accepts demand deposits (deposits that the depositor may withdraw by check or similar means for payment to third parties or others) and is engaged in the business of making commercial loans (12 U.S.C.A. § 1841 (c)(1) [1988]).

Investment banking consists mostly of securities underwriting and related activities; making a market in securities; and setting up corporate mergers, acquisitions, and restructuring. Investment banking also includes services provided by brokers or dealers in transactions in the secondary market. A secondary market is one where securities are bought and sold subsequent to their original issuance.

It also created the Federal Deposit Insurance Corporation (FDIC) to protect depositors in the future.

The Act was passed because it was largely believed, after hearings in Congress, that commercial banks were being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

Enter the Clinton Era and the Graham-Leach-Bliley Act of 1999, the act which ultimately repealed the Glass-Steagull Act. The final bi-partisan version passed in the Senate 90-8-1 and in the House: 362-57-15. Without forcing a veto vote, this bipartisan, veto proof legislation was signed into law by President Bill Clinton on November 12, 1999, though most of his Democratic colleagues voted against it, initially (Senate 54-44, House 343-86).

The Graham-Leach-Bliley Act sought to “modernize” financial services–that is, end regulations that prevented the merger of banks, stock brokerage companies, and insurance companies. It nullified all prior acts that strictly regulated those who stored your money such as the Bank Holding Company Act that prohibited a bank from controlling a non-bank company which passed in 1956 and the 1982 amendment that further forbid banks from conducting general insurance underwriting or agency activities.

Why is this related to today? According to the Online Law Encylopedia,

The expansion of commercial banks into securities underwriting was substantial until the 1929 stock market crash and the subsequent Depression. In 1930 the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market.

As a result of the bank closings and already devastated economy, public confidence in the U.S. financial structure was low.

Is this sounding at all familiar? It should be.

The Glass-Steagull Act made all of that history, GLBA repealed it and history, my friends, is repeating itself.

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Fast forward to October 2011 – With unemployment remaining steadily at over 9 percent for the last several years, foreclosures at an all time high and banks squeezing the dimes out of people with fees for everything but walking in the door, groups around the country are occupying financial districts, parks, banks and anywhere they believe they will have an impact. In New York occupiers shut down the Brooklyn Bridge and in Chicago they have been camped out for a couple of weeks on a corner that conveniently houses the Board of Trade, the Federal Reserve Bank of Chicago and Bank of America down the street. A recent rally joined by four other groups including several labor unions, shut down Monroe Street between Michigan and Columbus — ironically on Columbus Day.

Sources GLBA, Glass-Steagull(1), Glass-Steagull(2)

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So why are we asking the experts anything?

NABE, the National Association of Business Economists, today released the results of their annual member survey. Reuters reports they predicted “the recession-hit economy would begin to recover in the second half of this year, returning to a potential growth trend in 2010.”

I wondered who these people were, and if they were the same people that missed this economic problem altogether, and were wondering for a year or two if we “might” be in a recession.

I found another survey summary that led to the current question, the topic of this entry. What do you think? Here’s what NABE says of its members:

Substantial percentages of economists report little familiarity with complex instruments and other financial innovations. Despite the prevalence of NABE members holding advanced degrees in economics and other business-related disciplines, substantial percentages admitted to having little or no familiarity with the structure, activities, and risks associated with hedge funds (45%), private equity funds (40%), asset-backed securitization (48%), credit default swaps (CDS, 68%) and collateralized debt obligations (CDOs, 51%).

That was in August 2007, when they also thought:

The five-year housing outlook remains largely positive. A slight plurality (42%) of respondents expects U.S. home prices to be flat, on average, over the next five years. But respondents who expect home prices to rise on average over the next five years (41%) far outnumber those who expect prices to fall (16%). NABE members continue to place low odds (1 in 10) on a large drop in U.S. home prices similar to that experienced in Japan during the 1990s.

No comment.

Follow the yellow gold road…..

What a couple of days it’s been in the financial world. Allen Stanford, scammer extraordinaire, whereabouts still unknown, is now known to have contributed large sums of money to congressional recipients, to vote against a financial services antifraud bill that would have linked the databases of state and federal banking, securities and insurance regulators. The bill died in the Senate.

Biggest recipients of his cash?

Sen. Bill Nelson, D-Fla. ($45,900); Sen. John McCain, R-Ariz. ($28,150); Sen. Chris Dodd, D-Conn. ($27,500); and Sen. John Cornyn, R-Texas ($19,700). Rep. Pete Sessions, R-Texas, also received $41,375.

The full list is here and here.

Barack Obama’s presidential campaign fund received only $4600 and it was immediately donated, yesterday, to a Chicago charity, according to the Chicago Tribune.

But the other big story is the deal Swiss UBS Bank made with the feds. Accused of assisting U.S. citizens avoid income taxes, UBS Bank has agreed to lift the veil of secrecy and identify “certain” clients. This could be 17,000 of their 20,000 clients whose combined deposits are worth $20 billion dollars.

In July 2008,Sen. Carl Levin (D-Mi) was calling for them to clean up their act. According to The Consumerist Levin told ABC News “UBS’s banking license should be revoked until the bank “cleans up its act.”” He listed the following as what the bank does to conceal its clients names and assets.

* Code Names for Clients
* Pay Phones, not Business Phones
* Foreign Area Codes
* Undeclared Accounts
* Encrypted Computers
* Transfer Companies to Cover Tracks
* Foreign Shell Companies
* Fake Charitable Trusts
* Straw Man Settlors
* Captive Trustees
* Anonymous Wire Transfers
* Disguised Business Trips
* Counter-Surveillance Training
* Foreign Credit Cards
* Hold Mail
* Shred Files

Prepared by the U.S. Senate Permanent Subcommittee on Investigations, July 2008.

For the record, Levin took no money from Stanford or his PAC. I’ll bet he even pays his taxes – all of them. Can he be Treasury Secretary?

Reuters reports the deal with UBS goes like this:

Swiss bank UBS AG has agreed to a deal with the U.S. Justice Department that would let the bank avoid tax-violation charges in exchange for identifying some of its U.S. account holders and paying $780 million in fines.

Here are the key terms of the deal:

– UBS, under orders by Swiss market regulators, is to give the United States identities and account information of “certain” U.S. customers. Details are to be filed under seal with U.S. federal court and turned over as soon as the court accepts the agreement.

– UBS agrees to pay $780 million in fines, interest and penalties. This includes $200 million to be paid to the U.S. Securities and Exchange Commission. The remainder is to be paid to the Justice Department over 18 months, with options to pay early or extend the terms up to four years.

– UBS acknowledges that it helped U.S. taxpayers open accounts that concealed their identities from the U.S. Internal Revenue Service. About 17,000 of 20,000 U.S. cross-border clients concealed their identities and the existence of their accounts, with $20 billion in assets, from the IRS, the Justice Department said.

Some of these clients are unindicted co-conspirators.

The business generated about $200 million a year in revenue for UBS from 2002 to 2007, it said.

– UBS agrees to quit providing cross-border banking services to U.S. clients with undeclared accounts.

– After 18 months, the U.S. government will recommend dismissal of charges against UBS providing it honors the terms of the agreement.

The Stanford saga, in the meantime, continues to rock the world of the wealthy.

Venezuela seized a local bank affiliated with the Stanford Group, after there was a rush to withdraw funds through online banking. According to Reuters,

Depositors withdrew cash using Internet banking services. The bank takes deposits and makes loans only in the OPEC nation’s local currency.

“Most depositors of Stanford Bank Venezuela are from the (highest) income classes. They move their funds on the Internet, and this allowed for a massive withdrawal that pushed the bank into a precarious state,” Finance Minister Ali Rodriguez told reporters.

“The authorities were forced to take the decision to intervene and there will be an immediate sale,” he added.

And in Antigua, the Associated Press reports that customers were turned away from the Stanford bank there, because its assets were frozen. Depositors were arriving by private jet to withdraw their cash and were panicking when they discovered they couldn’t. One man, who owned a software firm, complained that his life savings was in that bank.

Let me guess. There is no F.D.I.C. insurance in Antigua.

It would seem this is just the beginning (of the end?).

Wonder how many of our congresspeople have offshore accounts? We already know they have an aversion to paying taxes.

Wonder if Geithner has one?

But most of all, I wonder if anyone who is caught will go to jail, go directly to jail, not pass go, and not collect $200.

And second I would like to know, will their assets be seized?

If the answer to the second question is yes, I would recommend to the Treasury Department and President Obama, that the assets seized from anyone in the financial industry caught up in these, or any future messes uncovered by the IRS and the FBI, be dumped into an account called the TARP Rebate Fund, which recoups the cash for the taxpayers, from the cheats and thieves who bought us this mess in the first place. (Oh, did I say bought, I meant brought – Freudian slip). And any congresspeople who return campaign contributions from any of these cheats, should also be dumped into this fund.

As a matter of fact, start with Geithner‘s payments, Daschle‘s Kellefer‘s and Solis‘. It would be a good start.

And any congress person who is found to have an offshore account in the UBS debacle, should be bounced from their office, forbidden from holding any public office anywhere in the U.S. or its territories, and prosecuted to the fullest extent of the law.

These people all need to do serious jail time. Nothing like seized assets and jail time to straighten up a class of people.

Is there a law against “betraying the public trust?” Because if there isn’t there should be.

Sentence: 20 to life in a Supermax prison. Enjoy. You built it.

Bush and the economy – a way to solve the problem

Bush, yesterday announced we aren’t heading for a recession, we are in an economic slowdown. This announcement defies the belief of most economists, who are careful to say they haven’t proved we are in a recession but believe we “could” be or “probably” are. It gives one cause to wonder if he thinks his just saying it will make us all feel better that Uncle Sam is looking out for us, and we can go into our homes where the heat is turned down to save money on gas bills, and we’re wrapped in blankets to stay warm.

Good thing the White House isn’t in Minnesota. I can’t imagine how much it would cost to heat that place.

He also hadn’t heard gas was possibly going to go up to $4.00 a gallon. Maybe he should be forced to pay his own fill ups at the pump instead of doing it on our dime. He might keep a little in touch with the rest of us.

Ironically, Bush and Exxon Mobile’s mortal enemy Hugo Chavez predicted last year when gas hit $60 a barrel that it would soon hit $100 a barrel. Wonder how he knew, or could it be it was his experience working with our oil companies who were keeping over 60% of the profits from his oil before he made them redo the contracts. Every oil company agreed to the new contract terms (Venezuela gets 60% they get 40%) except Exxon Mobile who sued instead. Surprise, surprise.

Here’s how you fix the problem with high gas prices – take it off the stock market.

That’s the ONLY reason the price is so high. Our supply is the highest it’s been in 14 years. There’s no reason for the prices to be this high.

Oil didn’t trade on the stock market until 1984. I’ll let you figure out who was president then, and since. Before that, the only time we had high gas prices was during the oil embargo. Supply went down, prices went up. Now, it has nothing to do with supply and demand, just speculators and greed.

In fact, by trading oil on the stock market, it is in the oil companies’ bets interests to ensure something, somewhere, effects the oil supply. As soon as there is a blip on the supply screen, anywhere, they make more money.

Remember the beginning of the Iraq war? Every time an Iraqi pipeline got bombed, the oil prices went up. WE HAVEN’T GOTTEN OIL FROM IRAQ FOR DECADES!!

No, off the stock market. If the only way the oil companies could turn a profit was to provide us with a steady, uninterrupted, dependable stream of oil, they would have incentive to maintain their pipelines, ensure their refineries didn’t have fires of strange origin, and they would probably stop drilling in hurricane prone areas because even THEY wouldn’t be able to depend on that oil source.

They might even voluntarily invest in alternative fuels. But why do it now. If we keep demanding oil and they keep sitting on a dwindling supply, they just make more money because the price goes up the less there is.

Wake up America. The only ones who benefit from oil trading on the stock market are the people who can afford to play the stock market. And that isn’t us.

Economists living in a dream world

WBBM radio reported today that economists are increasingly convinced that the United States will fall into recession soon. One economist they quoted said he believed that we were already in a recession, that it probably started in the fourth quarter of last year, and that it will probably be over by mid-year when people start spending their rebate checks.

This guy can’t really believe these rebate checks will stop a recession can he?

The ContraCosta Times reported in December that an Associated Press  analysis of financial data from 17 of the largest credit card issuers and found

The value of credit card accounts at least 30 days late jumped 26 percent from a year earlier to $17.3 billion in October.

Does this sound like something a $600 check is going to fix?

The foreclosure rate continues to grow, the dollar is worth .47 compare to what it was worth in 1984 (DOL statistics), the cost of milk alone has jumped 13% since last year.

And then there are the banks. They are borrowing billions from the Fed, which, not being a government agency but merely a conglomeration of private banks owned by the Rothschild’s, Rockefeller and JP Morgan, probably does NOT have an unlimited supply of money and will likely cut that little auction jackpot out at some point.

What happens then?

Step in the government who wants to bail people out, some of  whom made bad decisions, bought houses they couldn’t afford, and lived large on the equity which has now all but disappeared due to the drop in housing prices.

The idea of a moratorium on foreclosures is lovely, but the banks borrowed the money to loan people to begin with. Who is going to make the payments they owe, do they just borrow more from the fed?

People victimized by predatory lenders should be helped, but the predatory lenders should be on the hook. Prosecute them for their practices and fine them for each mortgage they sold. Pool that money and help these people out, but only these people.

The Wall Street jerks who brought us this mess, and received billions in bonuses for doing it,  should also be held responsible. But don’t expect that to happen if Clinton gets in because the top people, CEO’s, CFO’s of the major investment firms, Goldman Sachs, JP Morgan, Lehman Brothers, etc., all contributed tens of thousands to her campaign  for president.  (Check out huffington.fundrace.com) Somehow I don’t think she’s looking our for us. If I’m not mistaken I heard her say she would bail out homes up to a value of $650,000.

Sounds like idiots who bought property with Wall Street bonuses to me.

No, it’s time to stop listening to the economists and just look around us with a critical eye. There is no way we can avoid a recession and I would be amazed if we didn’t avoid a depression.

My guess is as soon as the election is over and the new president in is in place, the fed policy will abruptly change, the discount window will be slammed shut, the auction will be over and the banks will be on their own, probably to fail.

At least that way Bush won’t have to add a depression to the long list of dismal failures his two terms will already be remembered for.

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