Wednesday, July 17, 2013

Elizabeth Warren DESTROYS

Here she is, making the case for the reintroduction of Glass-Steagall. She knows her history, and she knows how to wallop the plutocratically-purchased pundits who try to confuse the audience with faux-history.

In the above clip, one of those pundits argues that the failure of Continental of Illinois in the 1980s means that Glass-Steagall was ineffective -- so, hey, let's not even try to regulate the banks, because regulation doesn't work. Warren rightfully points out the fact that New Deal banking regulation had created fifty years of serene, uneventful banking in this country, compared to the preceding long, long history of boom/bust/boom/bust.

She's right, of course -- but the matter goes deeper. Let's talk about Continental.

It was rumored to be a mobbed-up bank, sort of like the one the Joker rips off at the beginning of The Dark Knight. A further set of rumors tied Continental in with the Vatican banking scandal, which has been the subject of a number of books that don't always make sense.

But we don't need to traffic in rumors to understand what went wrong. It's simple. The bank got "greedy" -- that was the word used by one of its chief executives -- and made dangerously large investments in energy at a time of falling oil prices. Executive John Lytle received sizable kickbacks when he arranged for the bank to hand out massive, iffy loans to energy concerns.

In 1984, the financial earthquake hit. Rumors of a forced sale led to a run on the bank, which led, in turn, to government intervention. Yes, Continental was the first bank deemed "too big to fail"; the term originated at that time.

Uncle Sam owned the bank for the next ten years, until it was sold to B of A. Such a move would now be deemed socialism. I guess that makes Ronald Reagan a socialist.

By the way: John Lytle went to jail. That's another difference between the 1980s and our own era.

The Lytle conviction underlines an important truth: Continental's failure was not due to regulation, and not in spite of regulations. The failure occurred because regulations were broken. If you argue that Continental proved the uselessness of banking laws, you might as well argue that Ted Bundy proved the uselessness of laws against homicide.
This is awesome. Check out another awesome woman standing up to the much as I hate linking to Truth-out, Mayor Gayle McLaughlin of Richmond is kicking wall street ass.

I respect Ms. Warren, but I think she's bought into an incorrect diagnosis from which she derives an incorrect prescription. While I do favor regulations, and perhaps the re-institution of GS-type rules, we ought to operate on a correct analysis of the past, not pleasing sounding inaccuracies.

One tell-tale of her incorrect diagnosis is her mention of Long Term Capital Management as a relevant cautionary tale.

But LTCM was not a commercial bank taking insured deposits and gambling with them. It was purely a Wall Street trading company, never a bank, and never subject to GS.

Summarizing the argument that the GLBA which repealed GS was not the proximate or any cause of the financial meltdown is this text [Wiki, sorry]:

"Lawrence White and Jerry Markham [...] argued that products linked to the financial crisis were not regulated by [GS] or were available from commercial banks or their affiliates before the GLBA repealed [GS] sections 20 and 32. Alan Blinder [asked] [...] the question “what bad practices would have been prevented if [GS] was still on the books?” Blinder argued that “disgraceful” mortgage underwriting standards “did not rely on any new GLB powers,” that “free-standing investment banks” not the “banking-securities conglomerates” permitted by the GLBA were the major producers of “dodgy MBS,” and that he could not “see how this crisis would have been any milder if GLB had never passed.” Melanie Fein has written that the financial crisis “was not a result of the GLBA” and that the “GLBA did not authorize any securities activities that were the cause of the financial crisis.” Fein noted “[s]ecuritization was not an activity authorized by the GLBA but instead had been held by the courts in 1990 to be part of the business of banking rather than an activity proscribed by [GS].” 1978 the OCC approved a national bank securitizing residential mortgages.

Carl Felsenfeld and David L. Glass wrote that “[t]he public [...] does not understand that the investment banks and other “shadow banking” firms that experienced “runs” precipitating the financial crisis (i.e., AIG, Bear Stearns, Lehman Brothers, and Merrill Lynch) never became “financial holding companies” under the GLBA and, therefore, never exercised any new powers available through Glass–Steagall “repeal.” They joined Jonathan R. Macey and Peter J. Wallison in noting many GLBA critics do not understand that GS restrictions on banks (i.e., Sections 16 and 21) remained in effect and that the GLBA only repealed the affiliation provisions in Sections 20 and 32. The American Bankers Association, former President Bill Clinton, and others have argued that the GLBA permission for affiliations between securities and commercial banking firms “helped to mitigate” or “softened” the financial crisis by permitting bank holding companies to acquire troubled securities firms or such troubled firms to convert into bank holding companies."

Some critics of GLBA resort to the argument that even if GLBA didn't cause the financial crisis, it set a tone that contributed.

That part is true. We needed control and regulation of the shadow banking system, derivatives markets, and MORE, not less, regulation. But those were areas not covered at all by GS. We still do, and re-instituting GS will not accomplish that.

A friendly pedant writes...

"Lockheed is just too big to fail – the government can't let it" - Ralph Nader, 1976.
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