First, very briefly
recapping some very welcome news via the headlines, courtesy of Calculated Risk: "
Obama to Propose New Bank Rules"
Obama to Propose New Bank Rules
Wednesday, January 20, 2010
by CalculatedRisk on 1/20/2010 10:56:00 PM
Supposedly a return to the "spirit of Glass Steagall" ...
--SNIP--
President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country's biggest banks ...
--SNIP--
Obama, who is meeting tomorrow with former Federal Reserve Chairman Paul Volcker, will propose the new rules as a part of an overhaul of financial regulations to help limit the size of financial institutions ...
This sounds like a Volcker like approach to regulating the largest banks.
Today's WSJ: "
Obama to Propose New Limits on Banks."
Last night, via Bloomberg: "Obama to Propose New Financial Rules On Proprietary Trading"
Obviously, the devil's in the details. Hopefully, unlike almost all of the financial services regulatory reform legislation that's preceded it over the past few months, this will have some teeth in it. But, that's just a preface to the history you didn't know...so, that being said...
(h/t to Zero Hedge)
IS WALL STREET GETTING ANOTHER GET-OUT-OF-JAIL-FREE CARD?
...upon closer look at the myriad of issues swirling behind Thursday's anticipated pronouncements by President Obama and former Federal Reserve Board Chair Paul Volcker relating to the administration's efforts to foster a return to "Glass-Steagall-like" requirements, at least as far as breaking-up our nation's too-big-to-fail banks are concerned, is the very basic reality that at least one recent, major financial services industry study has found that Wall Street firms that trade their own equity portfolios (a/k/a engage in "proprietary trading") have been matter-of-factly manipulating their clients and the marketplace, violating various industry regulations and, allegedly, breaking the law for the benefit of their own bottom line for quite some time.
So, while it's great that the White House is now putting forth the appearance of cracking the whip on Wall Street, like so many other realities in life, there's a hell of a lot more to the backstory than meets the eye.
As many reading this know, the repeal of the Glass-Steagall Act (with the signing of the Gramm-Leach-Bliley Act in 1999, also known as the Financial Services Modernization Act), led to tremendous risk-taking, and "financial innovation" (i.e.: the creation of numerous toxic investment vehicles) throughout Wall Street over the past decade, in what has been cited by scores (if not hundreds) of economists and economic pundits, as one of the primary causes (if not "the" primary cause) of our country's deep economic downturn into our current Great Recession, which commenced in December 2007.
The Gramm-Leach-Bliley Act
Wikipedia
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106-102, 113 Stat. 1338, enacted November 12, 1999) is an act of the 106th United States Congress (1999-2001) which repealed part of the Glass-Steagall Act of 1933, opening up the market among banking companies, securities companies and insurance companies. The Glass-Steagall Act prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and/or an insurance company.
The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, securities firms and insurance companies to consolidate. For example, Citicorp (a commercial bank holding company) merged with Travelers Group (an insurance company) in 1998 to form the conglomerate Citigroup, a corporation combining banking, securities and insurance services under a house of brands that included Citibank, Smith Barney, Primerica and Travelers. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act of 1956 by combining securities, insurance, and banking, if not for a temporary waiver process.[1] The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the "financial services industry".
The Wall Street Journal started to venture into exposing the fine line between stock market manipulation and the publication and distribution of a financial services firm's proprietary research in an article on Goldman-Sachs' related practices in late August 2009, entitled: "Regulators Examine Goldman's Trade Tips."
But, it wasn't until a study was published in the October 2009 edition of the Journal of Finance by Jennifer Juergens and Laura Lindsey, entitled: "Getting Out Early: An Analysis of Market Making Activity at the Recommending Analyst's Firm," where it was pretty much demonstrated that many--if not most--Wall Street firms allegedly violated a slew of securities trading laws by failing to maintain even a semblance of a "Chinese Wall," (i.e.: separation between the various divisions of a financial services firm) as mandated by an assortment of federal regulations, and a variety of government and industry agencies, not the least of which being the U.S. Securities and Exchange Commission (SEC).
The Sarbanes-Oxley Act (2002) is widely considered to be one of the best known pieces of legislation that delineates federal regulations relating to the establishment of Chinese Walls within the financial services industry.
Sarbanes-Oxley, from Wikipedia (see link in above paragraph):
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House) and commonly called Sarbanes-Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002. It is named after sponsors U.S. Senator Paul Sarbanes (D-MD) and U.S. Representative Michael G. Oxley (R-OH).
The bill was enacted as a reaction to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of affected companies collapsed, shook public confidence in the nation's securities markets.
The legislation set new or enhanced standards for all U.S. public company boards, management and public accounting firms. It does not apply to privately held companies. The act contains 11 titles, or sections, ranging from additional corporate board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Harvey Pitt, the 26th chairman of the Securities and Exchange Commission (SEC), led the SEC in the adoption of dozens of rules to implement the Sarbanes-Oxley Act. It created a new, quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, charged with overseeing, regulating, inspecting and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
Precisely, as Juergens and Lindsey pointed out in their Journal of Finance study, many large Wall Street firms regularly violated the Wall Street-self-regulating agency known as the Financial Industry Regulatory Authority's (FINRA) rule number 2110-4, which the Zero Hedge blog describes as a regulation that "prohibits member firms from trading ahead of their own research analyst stock downgrades, upgrades and other calls..."
We may refer to all of this via a variety of terms, running the gamut from market manipulation (kind of self-explanatory), to frontrunning (the practice of trading ahead of a client's trade) to tailgating (the practice of trading behind a client's trade).
So, looked at in a very different light, one could say that today's scheduled announcement by President Obama and former Federal Reserve Board Chair Paul Volcker to, among many other things, eliminate bank proprietary trading, including the illegal and/or unethical practices of "...trading ahead of their own research analyst stock downgrades, upgrades and other calls..." is a very nice, polite and neat way (i.e.: double-speak) of telling Wall Street: "You will stop breaking the law."
However, I don't think we'll be reading that sentence in the MSM on Thursday.
Once again, Wall Street reminds us that laws are for the little people.
# # #
I'll let Nobel Prize-winning economist close this diary out with his timely perspective on what really matters, IMHO.
"Joseph Stiglitz: 'We're More Strict With Our Poor Than With Our Banks'"
Huffington Post
Ryan McCarthy First Posted: 01-20-10 08:47 AM
Updated: 01-20-10 12:41 PM
....What we should have done is identified the banking institutions that are lending, we should have given them more money and given them money on the condition that they lend.
When we had our welfare reform of 1996 [when Stiglitz was in the Clinton administration], we made welfare conditional. That is to say, you got welfare payments but you had to go to training and look for a job.
We put the banks on welfare, but we didn't put any conditions. We said, "You can spend the money you gave them on a Florida vacation." It's ironic that we were more "strict" with our poor than our banks...
--SNIP--
...The market coverage of the recovery and meltdown has been very much driven by the market, Wall Street and the [Obama] administration, all of whom have the incentive to talk up the economy. Do you remember the "green shoots" Bernanke mentioned in March? [Larry] Summers recently said every one agrees the recession is over -- well, except for the one out of six Americans who can't get a job.