Aliens and the Glass-Steagall Act

Well that about wraps it up for the whole alien thing – the U.S government denies contact with Alien Life.

 "The U.S. government has no evidence that any life exists outside our planet, or that an extraterrestrial presence has contacted or engaged any member of the human race," Phil Larson of the White House Office of Science & Technology Policy wrote in a statement published Friday (Nov. 4). "In addition, there is no credible information to suggest that any evidence is being hidden from the public's eye."

So now it is a slam dunk that not only have we had contact with aliens but I am pretty sure James Carville is one of them.  And all this said without mentioning Michelle Bachmann once.  Just saying…….

Having gotten that little tidbit out there here’s where this morphs into post about my having a man-crush on the Glass-Steagall Act and why I miss it so.  First a little background.  According to a summary by the Congressional Research Service of the Library of Congress:

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the "commercial" and "investment" banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions' securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass–Steagall Act.
Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia (mmmm.. Jack Daniels), a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.
The first Glass-Steagall Act of 1932 was enacted in an effort to stop deflation, and expanded the Federal Reserve's ability to offer re-discounts on more types of assets, such as government bonds as well as commercial paper. The second Glass–Steagall Act (the Banking Act of 1933) was a reaction to the collapse of a large portion of the American commercial banking system in early 1933. Literature in economics usually refers to this latter act simply as the Glass–Steagall Act, since it had a stronger impact on US banking regulation.

In 1987 the Congressional Research Service prepared a report “Glass-Steagall Act – Commercial vs. Investment Banking” which explored the cases for and against preserving the Glass–Steagall act.

The argument for preserving Glass–Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.
2. Depository institutions possess enormous financial power, by virtue of their control of other people's money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in "deregulated" financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.

Then, in the Great Depression after 1929, Congress examined the mixing of the "commercial" and "investment" banking industries that occurred i n the 1920s. Hearings revealed conflicts of interest and fraud i n some banking institutions ' securities activities (any of this sounding familiar kids?).  The Congressional report categorized the Glass-Steagall Act as a formidable barrier to the mixing of these activities.

So in the end, the main argument for repealing the Glass-Steagall Act kind of went like this........

We, the banks, are not making all the money in the universe (and that’s always a bummer).  Because hey we all know that maximizing profit above all else is the driving force, the reason we live and the ultimate good. Never mind that it will cause increased risk and conflicts of interest in U.S. financial markets.  

Conflict of interest between investment firms and their customers, conflict of interest between grading agencies and investment firms and conflicts of interest between politicians and the agencies they passed laws to regulate.

But in the end if we had left Glass-Steagall in place the banks would have made money the old fashioned way – lending money out and collecting interest.  Let’s assume that eventually the security firms and foreign institutions operating without oversight of Glass-Steagall, the very institutions that banks feared would take some of all of the money in the universe away from them would have run into the same problems and that system would have crashed.  Those institutions would fail and the government (me and you) would not have been on the hook.  We can say that as long as Glass-Steagall was in effect we did not have a financial meltdown.  I guess the proof is in the pudding.

 disclaimer - the next section is for those who are mildly curious – the rest of you may return to what ever it is you do when you're not reading my blog.

excerpted from the Senate report on United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs report “Wall Street and the Financial Crises: Anatomy of a Financial Collapse”

 “A. Rise of Too-Big-To-Fail U.S. Financial Institutions

Until relatively recently, federal and state laws limited federally-chartered banks from branching across state lines.  Instead, as late as the 1990s, U.S. banking consisted primarily of thousands of modest-sized banks tied to local communities. Since 1990, the United States has witnessed the number of regional and local banks and thrifts shrink from just over 15,000 to approximately 8,000 by 2009, while at the same time nearly 13,000 regional and local credit unions have been reduced to 7,500.  This broad-based approach meant that when a bank suffered losses, the United States could quickly close its doors, protect its depositors, and avoid significant damage to the U.S. banking system or economy. Decentralized banking also promoted competition, in the mid 1990s, the United States initiated substantial changes to the banking industry, some of which relaxed the rules under which banks operated, while others imposed new regulations, and still others encouraged increased risk-taking. In 1994, for the first time, Congress explicitly authorized interstate banking, which allowed federally-chartered banks to open branches nationwide more easily than before.5 In 1999, Congress repealed the Glass-Steagall Act of 1933, which had generally required banks, investment banks, securities firms, and insurance companies to operate separately, and instead allowed them to openly merge operations. The same law also eliminated the Glass-Steagall prohibition on banks engaging in proprietary trading regulation.  In 2000, Congress enacted the Commodity Futures Modernization Act which barred federal regulation of swaps and the trillion-dollar swap markets, and which allowed U.S. banks, broker-dealers, and other financial institutions to develop, market, and trade these unregulated financial products, including credit default swaps, foreign currency swaps, interest rate swaps, energy swaps, total return swaps, and more.

In 2002, the Treasury Department, along with other federal bank regulatory agencies, altered the way capital reserves were calculated for banks, and encouraged the retention of securitized mortgages with investment grade credit ratings by allowing banks to hold less capital in reserve for them than if the individual mortgages were held directly on the banks’ books.  In 2004, the SEC relaxed the capital requirements for large broker-dealers, allowing them to grow even larger, often with borrowed funds. In 2005, when the SEC attempted to assert more control over the growing hedge fund industry, by requiring certain hedge funds to register with the agency, a federal Court of Appeals issued a 2006 opinion that invalidated the SEC regulation. These and other steps paved the way, over the course of little more than the last decade, for a relatively small number of U.S. banks and broker-dealers to become giant financial conglomerates involved in collecting deposits; financing loans; trading equities, swaps and commodities; and issuing, underwriting, and marketing billions of dollars in stock, debt instruments, insurance policies, and derivatives. As these financial institutions grew in size and complexity, and began playing an increasingly important role in the U.S. economy, policymakers began to ask whether the failure of one of these financial institutions could damage not only the U.S. financial system, but the U.S. economy as a whole. In a little over ten years, the creation of too-big-to-fail financial institutions had become a reality in the United States.  Over the last ten years, some U.S. financial institutions have not only grown larger and more complex, but have also engaged in higher risk activities. The last decade has witnessed an explosion of so-called “innovative” financial products with embedded risks that are difficult to analyze and predict, including collateralized debt obligations, credit default swaps, exchange traded funds, commodity and swap indices, and more. Financial engineering produced these financial instruments which typically had little or no performance record to use for risk management purposes. Some U.S. financial institutions became major participants in the development of these financial products, designing, selling, and trading them in U.S. and global markets. In addition, most major U.S. financial institutions began devoting increasing resources to so-called “proprietary trading,” in which the firm’s personnel used the firm’s capital to gain investment returns for the firm itself rather than for its clients. Traditionally, U.S. banks, brokerdealers, and investment banks had offered investment advice and services to their clients, and did well when their clients did well. Over the last ten years, however, some firms began referring to their clients, not as customers, but as counterparties. In addition, some firms at times developed and used financial products in transactions in which the firm did well only when its clients, or counterparties, lost money. Some U.S. banks also sponsored affiliated hedge funds, provided them with billions of dollars in client and bank funds, and allowed the hedge funds to make high risk investments on the bank’s behalf, seeking greater returns.

By 2005, as U.S. financial institutions reached unprecedented size and made increasing use of complex, high risk financial products, government oversight and regulation was increasingly incoherent and misguided. Under the Glass-Steagall Act of 1933, certain types of financial institutions had been prohibited from commingling their services. For example, with limited exceptions, only brokerdealers could provide brokerage services; only banks could offer banking; and only insurers could offer insurance. Each financial sector had its own primary regulator who was generally prohibited from regulating services outside of its jurisdiction.  Glass-Steagall also contained prohibitions against proprietary trading. One reason for keeping the sectors separate was to ensure that banks with federally insured deposits did not engage in the type of high risk activities that might be the bread and butter of a broker-dealer or commodities trader. Another reason was to avoid the conflicts of interest that might arise, for example, from a financial institution pressuring its clients to obtain all of its financial services from the same firm. A third reason was to avoid the conflicts of interest that arise when a financial institution is allowed to act for its own benefit in a proprietary capacity, while at the same time acting on behalf of customers in an agency or fiduciary capacity. Glass-Steagall was repealed in 1999, after which the barriers between banks, brokerdealers, and insurance firms fell. U.S. financial institutions not only began offering a mix of financial services, but also intensified their proprietary trading activities. The resulting changes in the way financial institutions were organized and operated made it more difficult for regulators to distinguish between activities intended to benefit customers versus the financial institution itself. The expanded set of financial services investment banks were allowed to offer also contributed to the multiple and significant conflicts of interest that arose between some investment banks and their clients during the financial crisis.”