Today’s output from BPI’s state-of-the-art HEMMED (High-Energy Meta Mojo Elucidation Detector) machine has a definite odeur. It has to do with a subhead seen on most of the news sites yesterday that caused a foul smell to emanate from the little orange tube over on the right.

The news articles described the FinReg conference bill as “The biggest rewrite of financial rules since the Great Depression”.

Er…actually…no.

They did not “rewrite” the financial rules in place since the Great Depression…they are reinstating parts of the financial rules removed by the banksters and their enablers in the GOP and the Clinton Administration.

The Banking Act of 1933, also known as the Glass-Steagall Act, introduced banking reforms, some of which were designed to control speculation. It also included the establishment of the Federal Deposit Insurance Corporation (FDIC) noted for this accomplishment: since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act. The repeal of this part of the Glass-Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks.

The banking industry had been seeking the repeal of Glass–Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the cases for and against preserving the Glass–Steagall act. These reasons were cited in the debate in the late 1990s when repeal was being actively discussed. Among the reasons given for why this separation should be removed were these:

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.

(Pausing here to wait for you to catch your breath after that uncontrollable laughter.)

First, I spotted the words “regulation” and “enforcing legislation”. Given the dismantling of the federal government started during the Reagan years, not really slowed down much by the Clinton years and put into hyperdrive in the George W. Bush years this is like handing the banksters the keys to the family sedan and saying “don’t drive over 500 miles an hour”. Ok, Dad, I think I can avoid THAT. Wink wink.

Second, this statement “Lessons learned from [depository institutions around the world] can be applied” is nonsensical when the people in charge of our government during this time frame had nothing but scorn for the “socialists” in Europe and elsewhere and who had just witnessed the lost decade of the 1990s in Japan and ignored those lessons completely.

In contrast, here are the reasons, from the same study, for keeping Glass-Steagal in place:

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).

Look at #3. It bears repeating (with my emphasis added):

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

Sigh. So it turns out that this was not a case of “who could have predicted this would happen?” but “who could have worked harder to ignore the facts?”.

Maybe it was former Federal Reserve Chairman Alan Greenspan (who, it turns out, was Fed Chairman in 1987 when that study came out) and who famously said:

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity (myself especially) are in a state of shocked disbelief.”

There was one new thing from the FinReg conference bill that was good but not, unto itself, the “biggest rewrite of financial rules since the Great Depression”. A Consumer Financial Protection Bureau will be established. This is the slimmed down, defanged version of the Consumer Financial Protection Agency first proposed by Dr. Elizabeth Warren. The CFPB will instead look like what is described below and will not be allowed to regulate auto dealers because they got to Congress first with the biggest bags of money they said it would disrupt their businesses:

A new Consumer Financial Protection Bureau, to be housed in the Federal Reserve but run independently, will have the power to write consumer protection rules for banks and other financial institutions, like mortgage lenders. It will also examine and enforce regulations already in place at mortgage lenders and banks that hold more than $10 billion in assets. The bureau will have the power to ban financial products that it considers unsafe. It could also outlaw anything that might be confusing to consumers, like the fine print on credit cards or mortgages.

I guess this begs the question: how hard would it have been to include the subhead or text “re-regulates the financial industry after controls were removed in 1999”? Obviously too difficult for the mainstream media.

So the next time you read a headline and subhead, do yourself a favor and before you believe it (or repeat it), read the entire story, click on a few links to get the source material (and be very skeptical if there is none) and check out a few more sources.

Otherwise you may just be reading “Lies, Damned Lies and Headlies“.

Happy Saturday to everyone! And fist bumps.



Return to HEMMED In three days a week on Tuesday, Thursday and Saturday for more output from Blogistan Polytechnic Institute’s state-of-the-art HEMMED (High-Energy Meta Mojo Elucidation Detector) machine.