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Three Diaries in One!

First up: Comments from 1999 on the passage of the Gramm-Leach-Bliley Act.

Second: Comments from 2005 on the rising CDS bubble

And Finally: A citation for the Rolling Stone report that stated that the CDS bubble was exempted from gambling laws.

Hat-tip to Denniger who provided this link to a NYT article from 1999
I found this to be an interesting blast from the past.

Published: Friday, November 5, 1999

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses.

The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

"Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.'

"The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.

In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift."

"I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. "I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness."

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes."

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.

''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world,' said Senator Charles E. Schumer, Democrat of New York. ''There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.''

But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was ''mean-spirited in the way it had tried to undermine the Community Reinvestment Act.'' And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.

One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone.

Senator Byron L. Dorgan (ND) wins the internets!
Senator Paul Wellstone (MN) comes in a close second.

You can find Denninger's commentary here:

The following op-ed is not quite as prescient and doesn't skewer the lawmakers, but is an interesting look from 2005. Another guy who earned his 'told you so' stripes.

See a Bubble?
Published: June 5, 2005

... Although my bank did not describe it this way, an adjustable-rate mortgage is a bet between the bank and the homeowner. If rates fall or remain stable, I win; if rates rise, I lose. Of course, if I lose, the bank might also lose. I might, heaven forbid, default.

Why would a bank finance a home that under a conventional mortgage the borrower could not afford? Some computer in its vault was evidently mollified by the variability of the rate. What makes this bet rather interesting is that millions of other people have the same kind of loan that I do. If rates should take a sudden upturn, it is conceivable that a good many will default, in which case an instrument (a floating-rate mortgage) conceived to help the bank manage interest-rate risk will have resulted in increasing the bank's losses.

The saving grace is that home loans generally are the last thing people default on. But imagine how scary it would be if, say, businesses extended floating-rate contracts to one another -- if virtually every company were dependent on making the right calculation about how these risk-avoidance vehicles would function.

Well, actually, they do. They are called derivatives. Derivatives are contracts that call for one party to pay another according to the movement of an underlying yardstick, like a foreign currency, a bond, a stock or even the weather. Since the 1980's, Wall Street has marketed derivatives as a tool for making risk more palatable, and Alan Greenspan has consistently praised them for enabling firms to spread, or ''manage,'' their risk. For instance, a bank can hedge against the risk that one of its loans will sour. It simply -- well, not so simply -- purchases a ''credit default swap,'' which entitles it to a payoff if a specified company, G.M. for instance, goes into default or suffers a material downgrade in its credit rating. The party on the other side might be a hedge fund that is more sanguine on G.M.'s bonds or has a way (it thinks) to hedge that risk. Every financial firm uses some varieties of derivatives, which, again, are contracts that call for a payment (one way or other) depending on some underlying asset. Their growth has been explosive. Credit-default swaps, for instance, didn't exist a decade ago; today there are $8 trillion of them.[tcb: that number ballooned to over $150 trillion] No one has any idea of the losses that could ensue from a panic; credit-default swaps ''have never been stress-tested,'' notes the analyst James Bianco.

Neither the Fed nor the S.E.C. has ever really clamped down on derivatives or insisted on a form of disclosure that would tell folks what is going on. So forget hedge funds; if you're searching for the next financial storm, try derivatives. (Nothing much you can do about them, either.) Come to think of it, most of the sudden financial disasters of the previous decade -- Orange County, L.T.C.M., Enron -- involved derivatives, too.

There is a paradox here. A vehicle developed to help reduce individual risk has heightened risk to the system. At some point, the anxiety turned counterproductive. There was a time, of course, when people could buy only the homes they could afford and invested in only a few, carefully chosen stocks -- when traders could not run certain risks because no derivatives existed to provide a hedge. Today, whether you are a trader or homeowner, bank or corporate treasurer, our financial culture offers a prophylactic against every conceivable worry. Maybe weaving a giant insurance net is really the way to manage anxiety, but maybe it has us worrying about what we will do if the insurance fails. Perhaps, if there were fewer traders dulling their anxieties with financial Zoloft and fewer investment options available to the rest of us, we would make better decisions -- and sleep more soundly.

I heard an interview with the author of a piece published by the Rolling Stone on Democracy Now! the other night. What they claimed is that the Credit Default Swaps market not only looked like gambling  - with companies buying insurance on the survival of other companies  - but the case could be made legally that the CDS market was a form of gambling and that Congress had specifically exempted companies like AIG from regulation under 'gaming' laws. Sounded more like urban legend than congressional legislation to me, but here it is:

10 ``(2) This Act shall supersede and preempt the
11 application of any State or local law that prohibits
12 or regulates gaming or the operation of bucket shops
13 (other than antifraud provisions of general applicability) in the case of
15 ``(A) an electronic trading facility excluded
16 under section 2(e) of this Act; and
17 ``(B) an agreement, contract, or trans
18 action that is excluded from this Act under sec
19 tion 2(c), 2(d), 2(f ), or 2(g) of this Act or title
20 IV of the Commodity Futures Modernization
21 Act of 2000, or exempted under section 2(h) or
22 4(c) of this Act (regardless of whether any such
23 agreement, contract, or transaction is otherwise
24 subject to this Act).''.

Now this act was not passed into law directly. Wiki explains that it was incorporated by reference into the omnibus spending bill passed into law just before Christmas, Dec 2000. Lets look at the players behind that bill.

The "Commodity Futures Modernization Act of 2000" (H.R. 5660) was introduced in the House on December 14, 2000 by Rep. Thomas W. Ewing (R-IL) and cosponsored by Rep. Thomas J. Bliley, Jr. (R-VA) Rep. Larry Combest (R-TX) Rep. John J. LaFalce (D-NY) Rep. Jim Leach (R-IA) and never debated in the House.[2]

The companion bill (S.3283) was introduced in the Senate on December 15, 2000 (The last day before Christmas holiday) by Sen. Richard Lugar (R-IN) and cosponsored by Sen. Peter Fitzgerald (R-IL) Sen. Phil Gramm (R-TX) Sen. Chuck Hagel (R-NE) Sen. Thomas Harkin (D-IA) Sen. Tim Johnson (D-SD) and never debated in the Senate.

Don't get me wrong. Deregulation is only one leg of the stool. Those who argue that the mortgage market was increasingly distorted by multiple revisions to the Community Reinvestment Act and other manipulations of the mortgage market such as the ADDI in which the govt made millions of down payments on houses for those who couldn't afford it have a point. And then there is the Main Street personal responsibility of consumers taking on too much debt and Wall Street corporate responsibility of taking on too much risk.

Part of playing the political game is defending your guys in power. But there comes a time when the establishment must be broken and the gates crashed. Summers, Schumer, Frank, and Dodd are all neck-deep in this shit. They are all establishment members. I'm not keen on turning on each other, knives in hand. But now that we have won the electoral victory are we going to continue to allow the banking and financial industry to own the DNC in Washington?

Originally posted to TellerCountyBlue on Sat Mar 28, 2009 at 10:41 AM PDT.

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