Pandora's Box - The Repeal of Glass-Steagall

"The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."

John Kenneth Galbraith, The Great Crash of 1929


“As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year’s financial crisis: the repeal of the Glass-Steagall Act.. and the deregulation of the derivatives market.”

Matt Taibbi

The crowning achievement of the efficient markets hypothesis, and the culmination of a decades long lobbying effort by the financial sector.   Setting capitalism free to do God's work.

Bubbles, control frauds, financial crises, human misery, and bail outs.

Lest we forget this 'broadly bipartisan effort' to set the predator class free.  And they remain largely unemcumbered, unindicted, and unashamed.

Today I have signed into law S. 900, the Gramm-Leach-Bliley Act of 1999. This historic legislation will modernize our financial services laws, stimulating greater innovation and competition in the financial services industry. America's consumers, communities, and its overall economy should reap the benefits of this Act.

Beginning with introduction of an Administration-sponsored bill in 1997, my Administration has worked vigorously to produce financial services legislation that would not only spur greater competition, but also protect the rights of consumers and guarantee that expanded financial services firms would meet the needs of America's underserved communities. Passage of this legislation by an overwhelming, bipartisan majority of the Congress demonstrates that we have met that goal.

The Gramm-Leach-Bliley Act makes the most important legislative changes to the structure of the U.S. financial system since the 1930s. Financial services firms will be authorized to conduct a wide range of financial activities, allowing them freedom to innovate in the digital age.

The Act succeeds in repealing provisions of the Glass-Steagall Act that, since the Great Depression, have restricted affiliations between banks and securities firms. It also amends the Bank Holding Company Act to remove restrictions on affiliations between banks and insurance companies. Finally, it grants banks significant new authority to conduct most newly 'authorized activities through financial subsidiaries.

Removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their sources of revenue. They will also be better equipped to compete in global financial markets...

William J. Clinton, November 8, 1999

Related: The Long Demise of Glass-Steagall

Pay and Deregulation in the US Financial Industry

"It is no exaggeration to say that since the 1980s, much of the global financial sector has become criminalised, creating an industry culture that tolerates or even encourages systematic fraud.   The behaviour that caused the mortgage bubble and financial crisis of 2008 was a natural outcome and continuation of this pattern, rather than some kind of economic accident."

Charles H. Ferguson


“Thus did a handful of rapacious citizens come to control all that was worth controlling in America. Thus was the savage and stupid and entirely inappropriate and unnecessary and humorless American class system created. Honest, industrious, peaceful citizens were classed as bloodsuckers, if they asked to be paid a living wage.

And they saw that praise was reserved henceforth for those who devised means of getting paid enormously for committing crimes against which no laws had been passed. Thus the American dream turned belly up, turned green, bobbed to the scummy surface of cupidity unlimited, filled with gas, went bang in the noonday sun.”

Kurt Vonnegut, God Bless You, Mr. Rosewater


"Call me dark, but what I see here is a toxic relationship between deregulation, underpriced risk, and exorbitant, inefficient pay scales that contribute to the growth of inequality, not to mention the shampoo economy (bubble, bust, repeat)."

Jared Bernstein, A Striking Picture of Pay and Deregulation in Finance

A country foolishly deregulates the safeguards created by their forefathers, trusts to the natural goodness of those most hungry for wealth and power, and increases the incentives for enormous wealth by creating loopholes and cutting tax rates, and de-penalizing even the most shocking kinds of white collar crimes.  They recreate the mistakes of history with a wanton disregard for the consequences.

And still they wonder why.  Why do we persecute the poor, and idolize those who would rule us all, without pity or even normal cautions against crises ?  And they say, for God and freedom.

Financial corruption has twisted and perverted public policy, distorted the economy, and polluted the corridors of political and economic power with a flood of easy money.

h/t Jared Bernstein

Related:
A Brilliant Warning On Robert Rubin's Proposal to Deregulate Banks, circa 1995
Andrew Jackson Day Remembered

Cyprus Is Not So Much An Anomaly as the Template For the Next Financial Crisis

This is not so much anything new, but a concrete reminder of the breadth of systemic banking risks inherent in the Anglo-American banking structure in which depositor money is intermingled with the Bank's speculative interests. 

The repeal of Glass-Steagall stripped the average person of important and time-tested safeguards against loss.   Things are different now.

Any deposits you have at a bank in excess of 'insurance guarantees' are at risk in case of another financial crisis.

This exposure may include wealth you think that you own, but do not know exactly where and how it is being held. This may include 401k's and IRA's, pension plans, health insurance deposits, life insurance and annuities, and so forth.

MF Global was very instructive on how even cash deposits and physical assets backed by a certificate of ownership may be fair game for the banking system in the event of a crisis.

Nothing is perfect and foolproof, but there are degrees of safety.

And you may wish to consider that the next time something like Occupy Wall Street starts up and demands reform, don't stand by on the sidelines and join in with the orchestrated jeering from the one percent's water bearers.

Simplify, streamline, organize.

Demand serious, meaningful, and genuine reform and transparency in the banking and political system.

"The goal is to produce resolution strategies that could be implemented for the failure of one or more of the largest financial institutions with extensive activities in our respective jurisdictions. These resolution strategies should maintain systemically important operations and contain threats to financial stability.

They should also assign losses to shareholders and unsecured creditors in the group, thereby avoiding the need for a bailout by taxpayers. These strategies should be sufficiently robust to manage the challenges of cross-border implementation and to the operational challenges of execution...

But insofar as a bail-in provides for continuity in operations and preserves value, losses to a deposit guarantee scheme in a bail-in should be much lower than in liquidation. Insured depositors themselves would remain unaffected.

Uninsured deposits would be treated in line with other similarly ranked liabilities in the resolution process, with the expectation that they might be written down."

Bank of England and Federal Reserve Joint Statement on Resolving Globally Active, Systemically Important, Financial Institutions.

Related:
A Message From the Banking and Brokerage System
Lawmakers Must Heed the Wisdom of the 1930's
Why Has the Financial System Failed and What Are We Going To Do About It?
A Brilliant Warning on Robert Rubin's Proposal to Deregulate the Banks in 1995

A Message From the Banking and Brokerage System

"At this late stage in the history of American capitalism I'm not sure I know how much testimony still needs to be presented to establish the relation between profit and theft."

Lewis H. Lapham


"In an oligarchy, private ownership is merely a concept, subject to interpretation and confiscation."

Jesse, Trustee to Seize and Liquidate Even the 'Stored' Customer Gold and Silver Bullion From MF Global

No comment about the bank notice below is necessary for those who understand what this means. And if one does not understand it at this point, no comment is sufficient.

Paper currency held in a bank is not a 'risk free' asset. To the contrary, it is like walking around with a very large and willfully powerful counterparty that has one hand in your pocket.  And in troubled times, a 'warehouse receipt' or a line item on a bank account statement held in another country is little more than another piece of paper.

And in the case of 'digital money' they do not even have to have a hand in your pocket.  They hold everything, all your savings, up front, and you have to apply for your money at a window, where they determine how much you may have.  And that window can be closed anytime at will.

They take your wealth, pay you almost nothing for it, and then offer you protection, with limits, from themselves.

The deregulation of banks and the overturn of Glass-Steagall was intended to create a license to steal, by design.  Hundreds of millions were spent in a decade long effort lobbying for it. These were the protections that were given to us, and fought for by our fathers and grandfathers.  And we squandered away that wisdom, having unlearned the lessons of the past.

This is predatory financial capitalism and modern monetary theory unrestrained by the rule of law and transparency.  This is the lesson from Cyprus, and of MF Global.  And it is no different in the US or UK, except in the matter of time and degree.    None are safe where there is no justice for all.

And the financial sociopaths and their enablers have no limit to their greed,  no sense of boundaries, and certainly no shame.  

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustainable recovery.

Max Keiser Interviews Nomi Prins on JPM and Derivatives Bets

Partnoy's Complaint: Lawmakers Must Heed the Wisdom of the 1930s

Here is Frank Partnoy's prescription for financial reform. Essentially he says that half measures are not sufficient. Wall Street will always find loopholes in weak regulation, and they have plenty of help in this in the halls of power in Washington, and in the think tanks, universities and the media. 

Even President Obama seems to be in denial about the effectiveness of his reforms, and the health of the US banking system. Obama: JPM One of the Best Managed Banks His own Treasury pressured regulators and lawmakers to create the loophole that allowed the loss in London, and that his administration has a horrible record in investigating and prosecuting bank fraud.

I do not think the US is ready to insist on serious reform. It will take another crisis.   The anti-regulatory slogans are too effectively ingrained in the public psyche. And self-deception is a powerfully addictive state of mind. Especially for those whose expansive lifestyles depend on it.

Financial Times
Rebuild the Pillars of 1930s Wall Street
By Frank Partnoy
May 13, 2012

...JPMorgan’s losses have generated renewed interest in tightening the “Volcker rule”, which would attempt to ban speculative trading by banks. Yet the losses also illustrate why the Volcker rule will not work. The synthetic credit trades were not proprietary bets; they were massive, mismatched hedges. (Well they were prop bets but were masquerading as hedges. But that merely underscores the problem with the Volcker Rule and regulating specific guidelines that can be circumvented by pathological liar as Mr Partnoy indicates in the next paragraph. - Jesse)

The current version of the rule arguably would not have barred these trades (It would have, except for the hedging loophole that JPM had obtained with the assistance of the Fed and the Treasury - Jesse). Moreover, wherever the line between speculating and hedging is drawn, Wall Street will easily find a way to step over it. It would be impossible for regulators to police what is a hedge and what is not.

A better way to stop the cycle of financial fiascos would be to emulate 1930s reforms, when Congress erected twin pillars of financial regulation that supported fair, well-functioning markets for five decades. First was a mandate that banks disclose important financial information. In today’s complex terms, that would mean disclosing not just a value-at-risk number but also worst-case scenarios. The law should require JPMorgan to tell investors what would cause a $2bn loss.

The second pillar was a robust anti-fraud regime that punished officials who did not tell the full truth. Unfortunately, this has been eroded by legislation and judicial decisions that make it more difficult for shareholders to allege fraud. Prosecutors are also reluctant to bring criminal cases, leaving the Securities and Exchange Commission to mount largely toothless civil actions. Instead, the law should punish anyone who defrauds investors by citing one value-at-risk number and then losing 30 times that amount.

By rebuilding these two pillars, regulators could create stronger markets and greater trust. At a minimum, they could wean bank managers, and themselves, off flawed maths. They could stop allowing banks to satisfy disclosure obligations simply by reporting one inevitably inaccurate value-at-risk number. They could give Mr Dimon more than a slap...

Read the entire article from the Financial Times here.

Carl Levin On JPM's Exploitation of the Loophole Which the Fed and Treasury Helped to Create

Carl Levin does a good job of bringing the discussion back on point again and again.

Why Has the American Economic System Failed, and What Are We Going To Do About It?

"We always want to keep in mind what the function, the purpose, of the economy is. The purpose of an economy is not producing GDP. It is increasing the welfare of citizens, and it is increasing the welfare of most citizens. And the American economic system has failed, and failed very badly. Most Americans today are worse off, most American households have lower real income adjusted for inflation than they had fifteen years ago."

Joe Stiglitz made an aside about half way through his talk about mercantilism at INET Berlin this month that is worth noting. I like the way he frames the problems and his fresh look on the situation but do not favor many of his suggested cures, especially the notion of something that sounds dangerously like central planning by a financial elite. I think that is something that needs much more work, but that is a discussion too often impeded by denial, misdirection, and diversion.

Although he initially addresses his talk to America, he goes on to include other countries, especially Germany. I would add the UK, among others including China, which is a disaster in the making.

I start the tape of his talk at 13:25, so you can hear the basic question and the simple truth that so many have overlooked. The American economic system has failed the public, and that failure has its roots in the 1990's, accelerating at the turn of the century into the financial collapse. It is a story of deceit, corruption, and betrayal.

And the majority of the people, who have suffered the most from this injustice, are being asked to suffer even more for a system that does not benefit them and actually works against them. And they are asking, 'is it worthy of our support?'

And history indicates that they will provide an answer that may be unpalatable for those who benefit the most from the current unsustainable arrangement, who are enriched by the misery of others.

I cannot say it more simply or more emphatically, that the gaming of the system by the monied interests, marked by but not wholly due to the repeal of Glass-Steagall, the trade agreement with China without a floating exchange rate, and the Bush tax cuts for the wealthy while initiating aggressive war on multiple fronts, have set the American economy on a spiral of demise and eventual self-destruction.

What has institutionalized this demise and made it pernicious is the corruption of American power and distortion of thought by big money, and the short term selfishness and self-interest of the status quo. That is what I call the credibility trap.

The point must be made, that the system did not fail because our economic models were no good, that our financial leaders were simply mistaken, that the political powers were pursuing the right path but that things went wrong in ways that no one could have foreseen, and that even now, the thought leaders and spokesmodels for the monied interests are hard at work concealing and deceiving and misleading, feeding the rotten system that has brought us to where we are today.

It was never a mistake. They knew, but it was easier to go along or do nothing, being either craven or compromised. It was always about easy money, and the fraud.

Giving even more money to the Banks, and asking the people to pay for it, in the hope that it will eventually trickle down to the people from whom it has been stolen is not a policy, and not even a policy failure. It is an obscenity.

I sense we are in the negotiation phase, in which the powerful monied interests want to be let off with a wrist slap, and no admission of guilt.  And of course for change to come slowly, maximizing their returns. 

The powerful think that they are the system, the economy and the government, and that it exists to serve them. And so any change must suit their needs, first and above all. But a prideful greed and will to power can never really contain itself, as it can never be truly satiated. It always craves just a little more.

The existing US dollar trade regime dominated by global corporations and banks, backed by widely deployed military power, is not sustainable. We are entering the next phase of this unfolding crisis, and some countries are already there, in which we will see growing domestic unrest and repression, and regional trade wars and alliances, in the evolution of the ongoing currency war.

Reform will come, one way or the other.   The writing is on the wall.

For in that universal call,
Few bankers will to heaven be mounters;
They'll cry, "Ye shops, upon us fall!
Conceal and cover us, ye counters!

When other hands the scales shall hold,
And they, in men's and angels' sight
Produced with all their bills and gold,
'Weigh'd in the balance and found light!'

Jonathan Swift, The Run on the Bankers

Securitization - The Undead Heart of the Shadow Banking System

Here is a study of the shadow banking system, and what changed that helped to fuel the credit bubble and the financial collapse.

The root of this was in the overturning of the Glass-Steagall, the well funded lobbying effort for deregulation in the financial sector under the banner of the efficient markets hypothesis and the trickle down theory, and of course, a systematic undermining of regulation, the media, and the law by the monied interests.

Debt is not money. But it can be animated and treated as faux money through fraud, and the end is always bitter for the many, but sweet for the perpetrators of this scheme, if they can get away with it and keep their loot.  They are actively on the look out for fall guys and patsies, and their number one target are their past victims.

There is a difference, the subtlety of which is lost on many, between the deleveraging of a debt inflation and a genuine monetary deflation itself.  In this case the traditional money supply is expanded to save the banking system, which is the primary victim of a debt asset deflation.  That highly unproductive expansion of the fiat money supply, without a commensurate increase in production of real wealth, is what is causing the recession in the real economy today, and the soaring price of hard currency alternatives. 

The real economy is starved for real money, but instead is flooded with counterfeits which flows to frauds of every type.  It cannot bear to submit to economic discipline because it is not born of savings and investment.

Since this is someone else's thoughts it would be extraordinary for me to agree with everything, but I found it a fresh take and well said, and substantially congruent with my own thoughts.

Enjoy.

Securitization – the Undead heart of the Shadow banking machine
By Liar's Lexicon

At the centre of all debates about the Banking crisis, the shadow Banking system and the bank bail-outs is Debt. For a long time I have been arguing that what this debt is, is in fact a new, bank created, bank issued and ultimately bank debased debt-backed currency. And the collapse in value of this unregulated currency IS the crisis. Its cause and its logic.

In order to explain why I think this and why I do not think ‘fixing’ the banking system back to any semblance of how it was, just prior to the crash, will be anything other than a disaster, I have to explain how debt is turned into money. And how, clever as this process is, it also contains within it the seeds of its own undoing.

To do so I have to take you into the undead heart of the machine – securitization. Securitization is what animates the global financial and shadow banking system in whose shadow we now live. It is how modern finance turns debt into money. It is the impious alchemical dream of turning lead to gold, water into wine.

When Securitization was invented it soon wrested control of the money supply away from nations and gave it to the banks. Nations still printed and controlled their currency. But securitization gave banks the ability to print their own currency. And this new securitized currency, based on debt, was theirs to print, control, spend, and ultimately to debase. In short, it gave banks a power to rival nations. It is worth, therefore, understanding its outlines at least.

Please don’t panic. Like most financial stuff its not nearly as difficult as the priesthood would have you believe...

Read the rest of Part 1 here.

Read Part II here.

Read Part III here.

The Great Crash of 1929 - Bonfire of the Vanities

"There seems little question that in 1929, modifying a famous cliche, the economy was fundamentally unsound. This is a circumstance of first-rate importance. Many things were wrong, but five weaknesses seem to have had an especially intimate bearing on the ensuing disaster. They are:

(1) The bad distribution of income...
(2) The bad corporate structure...
(3) The bad banking structure...
(4) The dubious state of the foreign balance...
(5) The poor state of economic intelligence."

"The sense of responsibility in the financial community for the community as a whole is not small. It is nearly nil. Perhaps this is inherent. In a community where the primary concern is making money, one of the necessary rules is to live and let live. To speak out against madness may be to ruin those who have succumbed to it. So the wise in Wall Street are nearly always silent. The foolish thus have the field to themselves. None rebukes them."

John Kenneth Galbraith, The Great Crash of 1929

Galbraith gives a nice description of the credibility trap in the second paragraph. No one speaks out against the fraud or injustice, because their livelihoods may depend on it, and they themselves compromised, if not by action, then by omission.

This documentary from The American Experience is also available on Netflix streaming for those who have access to it. I particularly like this piece because it does not use economic theories and phony rhetoric to obscure and gloss over the financial and banking fraud that was pervasive in the 1920's. The system had been corrupted and compromised, and the economy had been largely hollowed out, like a shell that simply collapsed. 

And the liquidationist, or in more modern terms austerity, policies that followed nearly destroyed the country in the manner of the unfolding tragedy that the world did not yet recognize in Europe.

It is fitting that we review this page of history at this time, having now overturned most of the protections that had been put in place during the 1930's by our fathers to protect the people from financial predators.

It is good for the Banks and the monied interests that the people are so foolish and easily led, that they willingly bare their childrens' throats for them, giving all for the sake of a profane ideology of sneering arrogance and self-destructive greed. 

Cruel gods make for cruel people, people who justify their rites of cruelty as expediency, practicality, and frankness, but which are in reality little more than rationales for emotional deformity, narcissism and selfishness.

Watch The Crash of 1929 on PBS. See more from American Experience.

Silver Market Hit Hard With Bear Raid - The Infamous Dr. Evil Strategy

Yesterday I said:

"Today was the option expiration on the Comex, and those options which are 'in the money' and have not been settled for cash are now converted to March futures positions.

Depending on the size and distribution of those conversions we may see some 'action' in the front month because they are sometimes notoriously weak hands and will receive at least one 'gut check.'"

And a gut check to run the stops was very obviously delivered in the afternoon trading session at the Comex and across the monthly contracts.

This is remniscent of the 'Dr. Evil' strategy that got Citi warned and fined in Europe a few years ago. Memories of Citi's Eurobond Manipulation At the time one of the defenses offered by an ex-pat trader was 'in the US everybody does it.' Has JPM taken up the trading strategy that Citi once made infamous? And why would banks be trading for themselves in markets with players they help to finance, and with public money?

Large players can come into a relatively small market and drive the price by selling in size, running the stop loss orders which they often can 'see' through probing orders and positional advantage, and essentially bomb the market, manipulating the price in the short term to their advantage. The profit is made through derivative and correlated bets that depend on the price of the metal, index, or bond such as shorts on mining stocks, currencies, bonds, etc.

This is why the 'uptick rule' in stocks served a purpose, and why regulators are in place to keep an eye on big players with deep pockets and a far reach. In a properly regulated market the CFTC would immediatly pull the trading records for today and track the big sellers, and inquire as to the reasons for their sudden selling in a quiet market.

It *could* have been a hedge fund margin call. It could even have been a margin call provoked by a bank tightening credit lines with one hand while playing the market with their other hand. There were rumours being spread all week keying in on the day after expiration.  I do not have any inside information, no special knowledge, only the advantage of experience and a watchful eye on the markets.

And so there it all is. I was ready for it. I may or may not make money from it, but at least I had flattened my positions as I had said earlier this week and did not lose from it. But it sickens me to the heart nonetheless, to see a once great government fallen so low.

Concentration in US Banking Since the Repeal of Glass-Steagall

It should be noted that Glass-Steagall was repealed in stages before 1999, with relaxation of the rules as a result of the lobbying efforts led by the Wall Street banks, and with the backing of Alan Greenspan.

A Brilliant Warning on Robert Rubin's Proposal To Deregulate Banks 1995

The Great American Bank Robbery - William K. Black

Source: Systemic Risk In Banking EcoSystems

Remember, Remember, the Twelfth of November

"On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act (GLB) into law. This landmark legislation does much to unravel the influence of the Glass-Steagall Act on the United States' financial system.

Now banks and other providers of financial services have far greater freedom to compete against each other. No doubt, the legislation will prompt an altering of the financial landscape in this country."

John Krainer, Federal Reserve Bank of San Francisco Economic Review, 2000

Bernanke Says He Will Investigate

What Goldman and other the other banks have done in Greece is no different from what they have been doing around the world for the past ten years. They facilitate various forms of questionable financial instruments with corrupt partners, and then trade on their detailed knowledge of that misrepresentation, mispricing and even outright fraud to reap enormous profits, often at the expense of the productive economy and programs designed to protect legitimate commercial banking activities. This is at the very core of the CDO financial crisis in the States.

Banks should not be able to trade in their own proprietary portfolios on the integrity of financial assets of their own devices. Otherwise, the conflicts of interest are irresistible. This is the very problem that Glass-Steagall was originally enacted in 1933 to prevent.

Only the most conservative and restrained banking system can function in the face of such obvious temptations for self-dealing. And this does not describe the financial system in the US.

Setting up regulatory hurdles, 'chinese walls,' and capital requirements to try and stem such obvious temptation to greed is a fool's errand, but one that the banks encourage, knowing full well they will find ways to circumvent them as fast as they can be created.

The banks must be restrained, the financial system reformed, and the economy brought back into balance, before there can be any sustained recovery.

Bernanke: Looking at Goldman Sachs role in Greece
Thu Feb 25, 2010 10:03am EST

WASHINGTON (Reuters) - The Federal Reserve is examining the role that Wall Street firms including Goldman Sachs (GS.N) played in helping Greece arrange credit default swaps, Fed Chairman Ben Bernanke said on Thursday.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question for Senate banking Committee Chairman Chris Dodd.

Bernanke said the Securities and Exchange Commission was also "interested" in the issue and added: "Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive."

Five Former US Treasury Secretaries Endorse the 'Volcker Rule'

I do not expect the Volcker Rule to be passed by Congress for the simple reason that the Wall Street banks hate it. They spent hundreds of millions of dollars in lobbying money achieving the overturn of the original Glass-Steagall law.

The Senators who are beholden to the banks will simply not allow this restriction, which 'worked' for almost 70 years as effective regulation.

I have yet to read a coherent reason why the rule should NOT be passed, except that the Banks do not like it. I spent quite a bit of time listening to arguments and reading presentations, and even exchanging emails with a highly respected colleague who was not in favor of it.

Without exception, every argument was specious, misdirected, or founded on spurious assumptions. Most of the alternatives proposed are more complex and require the active vigilance of regulators.

Simple rules are best, and most easily enforced. This is why the banks hate them.

Part of the problem with this rule was the highly awkward method in which the Obama Administration chose to introduce it into the process, with little background and discussion. I would attribute this to the huge split amongst his advisors, with the Summers-Geithner group holding the most influence.

The reform will not be passed, no matter who endorses it. Congress is in the pocket of the Banks. That is the long and short of it, in my opinion.

US Treasury Secretaries of the last 40 years.

John Connally DEAD
George P. Shultz ENDORSES VOLCKER RULE
William E. Simon DEAD
W. Michael Blumenthal ENDORSES VOLCKER RULE
G. William Miller DEAD
Donald Regan DEAD
James Baker
Nicholas F. Brady ENDORSES VOLCKER RULE
Lloyd Bentsen DEAD
Robert Rubin
Lawrence Summers
Paul O'Neill ENDORSES VOLCKER RULE
John W. Snow ENDORSES VOLCKER RULE
Henry Paulson


Reuters
Ex-Treasury secretaries back Volcker rule
by Philip Barbara
Feb 21, 2010 8:49pm EST

WASHINGTON (Reuters) - Five former Treasury secretaries urged Congress on Sunday to bar banks that receive federal support from engaging in speculative activity unrelated to basic bank services.

"The principle can be simply stated," the five said in a letter to The Wall Street Journal. "Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services."

The Treasury secretaries said, however, that hedge funds, private-equity firms and other organizations engaged in speculative trading should be "free to compete and innovate" but should not expect taxpayers to back up their endeavors.

"They should, like other private businesses, ... be free to fail without explicit or implicit taxpayer support," said the former secretaries for both Republican and Democratic presidents.

The appeal comes as Senate lawmakers are pressing ahead with efforts to produce a financial regulatory reform bill that would curb some of the practices that led to the 2008 financial crisis.

Several major financial firms collapsed, were sold or had to be bailed out after a bubble in the housing market popped, causing real estate prices to plummet and leaving markets uncertain about the value of billions of dollars in mortgage-backed securities.

The liquidity crisis that followed threatened the financial system and deepened a U.S. recession that became the worst since the Great Depression.

The regulatory reform proposal endorsed by the five former Treasury secretaries is the so-called Volcker Rule, formulated by former Federal Reserve Chairman Paul Volcker, a top economic adviser to President Barack Obama.

Obama surprised the financial markets in late January when he announced the proposal, which calls for new limits on banks' ability to do proprietary trading, or buying and selling of investments for their own accounts unrelated to customers.

Volcker told the banking committee earlier this month that a failure to adopt trading limits would lead to another economic crisis and warned "I may not live long enough to see the crisis, but my soul is going to come back and haunt you" if proprietary trading is not curbed.

The five former Treasury secretaries -- Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow -- said in their letter that banks should not be involved in speculative trading activity and still receive taxpayer backing.

"We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform," their letter said. "It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities."

Volcker Rule: They Shoot Horses, Don't They?

If the Volcker Rule were posited as a panacea, much of the criticism that has been leveled by the bank lobbyists and their congressmen, and sincere critics who were surprised by its ungainly introduction into the reform deliberations, would be correct. However, I do not think it was, but I could be wrong.

Because a cure for heart disease does not also cure diabetes does not impugn its effectiveness in curing heart disease. And if the patient has both heart disease and diabetes, one might expect a variety of remedies used in careful combination.

What the Volcker Rule would have accomplished is to take the gamblers away from the new “discount window” of Fed and Treasury subsidized programs. It would have also put a serious dent in the ‘Too Big Too Fail’ meme, although it alone was not enough to do that, as it lacked some teeth. But it opened the door to a debate that is not occurring.

What exactly is the role of the financial system, and what needs to be done to regulate it, and help it to perform some utility to society's greater functions? Is the relationship between the financial sector and the productive economy out of balance?

I want to stress this. Any proposal that has not been hammered upon by multiple minds, and tempered with the objections and observations of many perspectives, is likely to be premature, needing much work. By its method of introduction, I fear that the reconsideration of the relationship between the FIRE sector and the productive economy is now off the table.

People seem to be making assumptions about what the Volcker Rule would and would not include. For example, there is reference to the 'shadow banking system' that is something relatively new, the intersection of investment banking and mortgage origination. Does anyone really believe that Volcker would object if mortgage origination and similar long term loans were relegated to the commercial banks and the GSE's? I think not.

For me, the 800 pound gorilla is who obtains access to the discount window and Treasury guarantee programs, and who can be a primary dealer for the Fed. I would say that a company that is not a bank cannot. It is as simple as that. And this is what Wall Street hates so much about anything like Glass-Steagall or the Volcker Rule. They want to be able to tap the Fed's balance sheet, and still maintain their aggressive leverage.

There is a reason that the banks engaged in a decades long effort, costing hundreds of millions in lobbying payments of various sorts, to overturn Glass-Steagall. To ignore that reality is to fall into the trap of the financial engineering distortion that is crippling the Western world. The bankers wanted to broaden their portfolio to intertwine their higher risk efforts with the public trust, as insurance against the occasional setback to even the best laid plans.

Relatively simple systems are more resilient and robust; needlessly complex systems are doomed to increase in complexity to the point of failure without accomplishing anything except more complexity.

The trade offs are always there, and a good system contains a mix of both.

Perhaps the new ‘reform legislation’ will be effective, but I doubt it quite a bit almost to the point of certainty. It will be hailed as an 'evolutionary effort' but will contain loopholes large enough to drive a CEO's bonus through. . If it does nothing to separate self interested, higher risk speculation from the trough of the Fed's balance sheet, it will institutionalize moral hazard, which has probably been the goal of the banks all along.

If the reform legislation relies on firms erecting 'chinese walls' within their firms, and regulators being able to sort out various types of regulated and unregulated activity within a firm, then it is my opinion that it is anathema to sound financial management, and doomed to failure. The problem is fraud, and deception, and regulatory capture. The rules must be as clear, simple, and difficult to cheat as is possible.

And then we will see the return of the financial pundits, suggesting this tweak, and that tweak, this addition to close that loophole, and if only we had made this change. Its a good game really, because it ensure a steady flow of funds from the bank lobby to the Congress, and full employment for financial engineers who can engage in endless argument about the relative merits of the latest tweak.

And the zombie banks will continue to drain the life from the real economy, not in dramatic bailouts, but in a steady stream of slow debilitation. But they will be able to pay enormous salaries and bonuses to their captains and lieutenants, by gaming nearly every financial instrument and market in the world.

This is what will doom the West to a stagflation that will mimic the long Japanese decline, their lost decades. It may not ultimately be resolved without social disorder.

The people are still too easily lulled by jargon and reassurance, and the econorati still believe in financial engineering. If only we put a clever tweak here, and an easy rule change there, things will be fine again. That is why allowing engineers to fix their own 'big system' problems is almost always doomed to failure, because they are too intellectually fascinated with their own creation, and cannot see it in the stark light of objectivity and its function as part of the whole.

How will we fix this? How will we accomplish that? Well, perhaps one can look at how those functions were addressed before the system started to go off kilter, say around 1990, and find an answer there. But that drives the financial engineering crew batty, because it sounds antithetical to Progress. It might stifle innovation.

Well, one might as well say that if they stop getting drunk and engaging in random sex, they will also not wake up next to so many new and interesting people. The point is, you do not have to engage in high risk behaviour to accomplish personal and institutional growth. And there is a role for stifling some things, so that only the good can thrive. It is a basic principle of what used to be called conservatism before it was co-opted by the neo-cons. We have to keep first principles in mind even as we change the specifics.

Was the real economy served better by subprime mortgage collateralization and the growth of an unregulated shadow banking system? Ask the average person, and the answer is clear. But the question is never put that way. To a financial engineer, it is the system itself that matters, and not its primary application, to serve the real economy.

The objective of reform would ideally be more than merely preventing the next collapse of the same sort. It would involve giving the middle class a fighting chance to recover itself and prosper again. And that would involve shrinking the portfolio of the Wall Street banks, and expanding the function and stability or regional and local banking. Already the elite are softening up that hope, of a middle class recovery, by forecasting years of underemployment and decline as an inevitability.

The title of this blog does not refer to the Volcker Rule, which was dead out of the gate by its method of introduction into the process, late and fleshless, and quite possibly by intent to stifle debate. It refers to the public, the poor horses that will be beaten senseless by the FIRE sector over the next ten years for their diversion and entertainment. Am I wrong?

So time to move on, to assess what will be coming out of Washington by way of reform. But I have little hope that there will be anything in it that does not serve about ten corporate institutions well, and a financial elite, to the disadvantage of the rest of the world in the form of distorted markets, institutionalized fraud, and the seignorage of the currency reserves.

Would that I am wrong, I doubt it very, very much.

Obama Proposes to Restrain the Banks from Speculation

A good first move, but almost a year late.

It still remains to be seen if it can pass with any teeth in it through a deeply conflicted and compromised Congress. The devil is in the details, loopholes, and exceptions.

Allowing the banks to speculate for their own accounts in the markets inexorably intermingles their risks with those of the broader financial system. It is also a tilt to the playing field to allow these market makers with access to proprietary information, very favorable positioning with the exchanges, and the Fed discount window and special programs to sit at the same table with other investors and funds.

This is so basic a move that one has to wonder why Obama waited so long to propose it. Or rather to listen to Paul Volcker who has been advising it, and largely unheeded.

Goldman and perhaps Morgan Stanley will give up the charade of commercial banking to become a full time investment bank, aka hedge fund, again. One positive outcome is that the next time they get into trouble they are on their own. And given their blind greed it won't be all that long before they do.

It is nice to see Paul Volcker gaining a voice in an administration dominated by Wall Street sychophants.

Let the threats, whining, tales of doom, financial media spin, and an army of lobbyists now go forth from Wall Street to try and stop this very basic reform.

It's a beginning. Barney Frank is already talking about putting a five year transition period on the change. Ludicrous really considering the banks that just grabbed their charters. Barney is part of the problem. A bigger part than most people probably suspect.

A good next step would be fire Larry Summers and Tim Geithner, and to permit Bernanke to gracefully step aside and go back to grading term papers. Obama needs to nominate someone with a stronger practical experience profile in that job. Volcker could do quite well.

National Post
Wall Street reels over plan to ban prop trading
Jeff Mason and Kevin Drawbaugh, Reuters
January 21, 2010

WASHINGTON -- President Barack Obama proposed stricter limits on financial institutions' risk-taking Thursday in a new populist-tinged move that sent bank shares tumbling and aimed to shore up the president's political base.

Mr. Obama, a Democrat who is just starting his second year in office, laid out rules to prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund.

He also called for a new cap on the size of banks in relation to the overall financial sector that would take into account not only bank deposits, which are already capped, but also liabilities and other non-deposit funding sources.

"We should no longer allow banks to stray too far from their central mission of serving their customers," Mr. Obama told reporters, flanked by his top economic advisors and lawmakers.

"Too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward."

The rules, which must be agreed by Congress, would also bar institutions from proprietary trading operations, unrelated to serving customers, for their own profit.

Proprietary trading involves a firm making bets on financial markets with its own money, rather than executing a trade for a client. These expert trading operations, which can bet on stocks and other financial instruments to rise or fall, have been enormously profitable for the banks but also increase market volatility.

The White House blames the practice for helping to nearly bring down the U.S. financial system in 2008.

Mr. Obama's move is the latest in a series to crack down on banks and comes as he reels from a devastating political loss for his Democratic Party in Massachusetts on Tuesday, when a Republican captured a U.S. senate seat formerly held by the late Democratic senator Edward Kennedy.

Bank shares slid and the dollar fell against other currencies after Mr. Obama's announcement.

JPMorgan Chase & Co fell 5.8%, helping push the Dow Jones Industrial average lower.

Citigroup Inc fell 6.36% and Bank of America Corp fell 7% while Goldman was down 5.5% despite posting strong earnings Thursday.

"This is going to have a tremendous impact on big-name brokerage firms like Goldman Sachs and JPMorgan," said Ralph Fogel, investment strategist at Fogel Neale Partners in New York.

"If they stop prop trading, it will not only dry up liquidity in the market, but it will change the whole structure of Wall Street, of the whole trading community."

Mr. Obama targeted banks for taking big risks while assuming taxpayers would bail them out if they failed.

"When banks benefit from the safety net that taxpayers provide, which includes lower-cost capital, it is not appropriate for them to turn around and use that cheap money to trade for profit," Mr. Obama said.

"That is especially true when this kind of trading often puts banks in direct conflict with their customers' interests," he said.

Before the announcement, Mr. Obama met with Paul Volcker, the former Federal Reserve chairman who heads his economic recovery advisory board and who favors putting curbs on big financial firms to limit their ability to do harm.

The House approved a sweeping financial regulation reform bill on Dec. 11.

The House bill contains a provision that empowers regulators to restrict proprietary trading by financial firms subjected to stricter oversight because they are judged to pose a risk to the stability of the financial system.

The Senate has not yet acted on the matter, but the Senate Banking Committee continues to seek bipartisan agreement on financial regulation reform.

Gold Hit With a Bear Raid Yesterday - Memories of Citi's Eurobond Price Manipulation

If the longs had been exiting the market, the open interest would have declined more significantly.

These big plunges in price look to be driven by short selling, with weak hands being driven out, and then short covering or determined buyers stepping back in to maintain the overall number of contracts at a relatively steady level, but with some good profits from covering their short positions at cheaper prices.  There is also a lucrative cross trade to be had in other markets like the mining stocks.  An operation in bullion is often preceded by some noticeable movements in the miners.

Recall the case in the Euro bond market, wherein Citi came in and sold an enormous volume precipitously, running the stops and driving the price down sharply. The Citi trader came back in and covered his shorts, pocketing the difference in his market disruption based on size. This trading strategy was known as 'the Dr. Evil' trade at Citi, but has deep roots in speculative market manipulation, with its counterpart being the bull pool.

Citi Fined for Euro Bond Trades By British Regulator; Italy Indicts Citi Traders; Citi Haunted by Dr. Evil Trades in Europe; Citi Agrees to Pay 14m in Bond Scandal

I recall reading at the time how the Citi traders were incredulous at being outed by the regulators, because that is how they would do things in the States, running the stops and using outsized positions to perform short term price manipulation. In the states 'price management' has become quite notorious around key market events, such as option expiration. It is so prevalent that it has its own momentum among traders. The only time that it is remarked by the exchanges in the states, however, is when other prop trading desks are caught by it unawares and complain. The public is fair game.

Even the Treasury recently got into the act, with young Tim's Treasury granting a $38 Billion tax break to Citi in order to enhance their financials and the price of their stock.

Citi had quite a record of bad behaviour around the world a few years ago. Citi Never Sleeps The power of money corrupts, and under-regulated banks that have the power to create and confer wealth can corrupt all that they touch, absolutely: regulators, media, exchanges, economists, politicians.

Has Citi cleaned up its act? Well, it was one of the banks at the heart of the debt securitization scandal that almost brought the US financial system to its knees last year, and is still a major source of global instability. The US seems unable to do anything to keeps its house in order. But in fairness, all the big US banks were caught up in the scandals, most notoriously in those exposed by Eliot Spitzer, who was later 'taken out' in a scandal exposed by a special federal investigation ordered by the Bank's good friends in government.

This may give you some idea of how the US markets continue to operate these days, with the banks loaded with cash and regulators turning a blind eye to their antics and outrageously non-productive economy related trading positions. The large hedge funds do the same things, but do not have the clout that the banks have, especially with the commingling of guaranteed deposits and subsidized liquidity from the Fed. These banks do not lend; they gamble while rigging the game. The most outrageous example is Goldman Sachs, the upstart which bought the lordly title of Bank from the Fed, and all the privileges of seignorage therein. Droit du seigneur with the public money, at the heart of its creation.

It was not all that long ago that speculative manipulation by the predators at Enron in the energy markets caused widespread disruption in the State of California. And little has been done by the US regulators to prevent this happening again and again. All is hushed up to maintin the facade of freedom and public confidence. Reform is continually weakened and placed on hold for "the good of the financial system" and its global competitiveness.

Barrick Gold filed a motion to dismiss the 2003 price manipulation lawsuit against it and J. P. Morgan on the basis that some foreign central banks (England, Germany?) and other bullion banks were involved, but were not named as defendants. These foreign central banks were immune from litigation. Naturally the scandal kicked up by this caused the defendants to regroup their strategy and the motion was withdrawn. Barricks February, 2003 Motion to Dismiss

The claim that J. P. Morgan was engaged in fulfilling government policy in its price manipulation was intriguing indeed. It is too bad that it was not granted and sent to discovery and disclosure. But it does highlight one potential reason why a government might not wish to downsize its 'too big to fail' banks, who can become instruments of financial engineering and policy, both foreign and domestic. Who can say what is truth, because unfortunately despite the many abuses, cases are normally settled with no admission of guilt, wristslap fines, and genuine reform is push aside for the sake of temporary expediency.

In closure, the opaque short position in the silver market held by J. P. Morgan and a few other banks is a potential scandal and a disgrace for a 'reform' administration. They do not deserve the benefit of the doubt any longer. Innocent until proven guilty is correct procedure for the courts, but 'where there is smoke there is fire' and 'once bitten twice shy' has its own place in the court of public opinion where trust is a necessary component of good judgement.

Friday, December 18, 2009

The CME Final, just posted, indicates that open interest yesterday rose 475 lots (1.48 tonnes) to 502,930 contracts. Volume remained as reported in the Preliminary at 258,576 lots, 15% above the estimate. See CME Daily Bulletin.

For a $28.80 down day (indeed down $46 intraday) this result is astonishing. Considerable stop losses must have been triggered, but apparently fresh short selling predominated.

Of course, the CME reported a similar event following gold’s $48.80 drop on Friday Dec 4th – only to apparently slip a 21,000 lot fall into the following Monday’s data

But then they did have the excuse of huge volume –almost 400,000 lots that day. And presumably they do not actually want to make these errors.

So on its face the gold market has seen the entry of a large volume of new Shorts, who will have to contend with reviving Eastern physical appetite. If commercially motivated, this is likely to be an alarming experience.

A Brilliant Warning On Robert Rubin's Proposal to Deregulate Banks, circa 1995

There is little doubt in this mind that the GDP number will be revised lower, and the chain deflator lowball will prove to be transitory, and the recovery will be ephemeral, at least based on real numbers. The Clunkers programs pulled sales forward, which is a useful thing only if there is the follow up of systemic reform. The consumer is flat on their back, and median wages and employment are going nowhere. One can stoke monetary inflation with enough Fed expansion, but without the vitality that bestows permanence and self-sufficiency.

A reader sent in this prescient warning from 1995, when then Treasury Secretary Robert Rubin, late of Goldman Sachs, mentor to Larry and Timmy of the current US ship of state, wanted to unleash the power of the big money center banks to ensure their "efficiency and international competitiveness."

If only the US had rejected the Rubin - Greenspan doctrine then, and firmly said no to freewheeling finance, and not succumbed to the hundreds of millions of dollars in lobbying and donations spread about Washington in that 1990's campaign by Wall Street that culminated in Fed preemptive action, followed by a massive lobbying campaign led by Sandy Weill.

In December 1996, with the support of Chairman Alan Greenspan, the Federal Reserve Board issues a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25 percent of their business in securities underwriting (up from 10 percent).

This expansion of the loophole created by the Fed's 1987 reinterpretation of Section 20 of Glass-Steagall effectively renders Glass-Steagall obsolete. Virtually any bank holding company wanting to engage in securities business would be able to stay under the 25 percent limit on revenue. However, the law remains on the books, and along with the Bank Holding Company Act, does impose other restrictions on banks, such as prohibiting them from owning insurance-underwriting companies.

In August 1997, the Fed eliminates many restrictions imposed on "Section 20 subsidiaries" by the 1987 and 1989 orders. The Board states that the risks of underwriting had proven to be "manageable," and says banks would have the right to acquire securities firms outright...

As the push for new legislation heats up, lobbyists quip that raising the issue of financial modernization really signals the start of a fresh round of political fund-raising. Indeed, in the 1997-98 election cycle, the finance, insurance, and real estate industries (known as the FIRE sector), spends more than $200 million on lobbying and makes more than $150 million in political donations. Campaign contributions are targeted to members of Congressional banking committees and other committees with direct jurisdiction over financial services legislation.

PBS Frontline: The Long Demise of Glass-Steagall

One might be tempted to conclude from this that they bought the attention of the Congress for their agenda then, and based on additional substantial contributions, have held it ever since.

As you may recall, it was in December, 1996 when Alan Greenspan made his famous 'irrational exuberance' speech. And then shortly thereafter laid the groundwork for the tech bubble of 1999, and the series of bubbles that are the basis of the American economy even today, and the long twilight of the US dollar.

Based on our read, the financial reform plans crafted by Tim Geithner, Larry Summers, and their friends on Wall Street is merely a continuation of the Rubinomics. Is there any wonder, as we have Rubinomics Recalculated by Obama.

Thanks to Mark for sharing this on a day in which I had not intended to post anything. There seem to be about 12,000 regular visitors to Le Cafe each day. Although this is not a lot by internet standards, I have to say that based on their valuable comments and exceptionally well-informed messages sent in by email, that when it comes to astute readers, we have an embarrassment of riches. And for this we give thanks and are grateful.

NY Times
End Bank Law and Robber Barons Ride Again
Published: Sunday, March 5, 1995

To the Editor:

Re "For Rogue Traders, Yet Another Victim" (Business Day, Feb. 28) and your same-day article on Treasury Secretary Robert E. Rubin's proposal to eliminate the legal barriers that have separated the nation's commercial banks, securities firms and insurance companies for decades: The American Bankers Association, Senator Alfonse M. D'Amato, Representative Jim Leach and Treasury Secretary Rubin are gravely misguided in their quest to repeal the Glass-Steagall Act.

Their contention that insurance companies, commercial banks and securities firms should be freed from legislative obstructions is predicated on fallacious, historically inaccurate statements. If the Baring Brothers failure does not give them pause, a history lesson is our only hope before the Administration and bank lobby iron out their differences and set the economy back 90 years.

The argument that American financial intermediaries will become "more efficient and more internationally competitive" is false. The American financial system is the most stable, most profitable and most dynamic in the world.

The notion that Glass-Steagall prevents American financial intermediaries from fulfilling their utmost potential in a global marketplace reflects inadequate understanding of the events that precipitated the act and the similarities between today's financial marketplace and the market nearly a century ago.

Although Glass-Steagall was enacted during the Great Depression, it was put in place because the Aldrich-Vreeland Act of 1908, the blue-sky laws following 1910 and the Federal Reserve System of 1913 failed to keep the concentration of financial power in check. The investment climate that ultimately led to Glass-Steagall was one filled with emerging markets, interlocking control of productive resources and widespread bank ownership of securities.

Ever since railroad securities began driving secondary capital markets in the late 1860's, "emerging markets" have existed for investors looking for high-yield opportunities, and banks have been primary agents in industrial development. In the 19th century, emerging markets were scattered throughout the United States, and capital flowed into them from New York, Boston, Philadelphia and London. In the same way, capital flows from the United States, Japan and England to Latin America and the Pacific rim -- today we just have more terms to define the market mechanisms.

The economy and financial markets were even more interconnected in the 19th century than now. Commercial and investment banks could accept deposits, issue currency, underwrite securities and own industrial enterprises. With Glass-Steagall lifted, we will chart a course returning us to that environment.

J. P. Morgan and Andrew Mellon made their billions through inter locking directorates and outright ownership of hundreds of nationally prominent enterprises. Glass-Steagall is one crucial piece of a litany of legislation designed to place checks and balances on the concentration of financial resources. To repeal it would be tantamount to bringing back the days of the robber barons.

The unbridled activities of those gifted financiers crumbled under the dynamic forces of the capital marketplace. If you take away the checks, the market forces will eventually knock the system off balance.

MARK D. SAMBER
Stamford, Conn.
Feb. 28, 1995

The writer is a management consultant specializing in business history.

The Great American Bank Robbery

If you suspected that fraud, corruption, incompetence, and coverups at the highest levels are at the heart of our current financial crisis, you're right.

"...ideology enabled criminality and political failure led to economic crisis as Wall Street bought Capitol Hill..."

The Great American Bank Robbery
Video - Lecture
By William K. Black

1. Why do we have repeated, intensifying economic crises?
2. What can white collar criminology add to our understanding of what's going wrong?