When I saw financial deregulation created “Too Big To Fail” … I mean “smaller government” created it … I mean “laissez-faire” economics created it … I mean self-regulation created it … I mean trickle-down economics created it … I mean a conservative ideology created it. History has shown that if government does not regulate the financial services industry – it will prey on the weak to the benefit of the wealthy. They will manipulate markets and rig the game if given the opportunity. Government MUST be in the game.
“Great corporations exist only because they are created and safe-guarded by our institutions; and it is therefore our right and our duty to see that they work in harmony with these institutions.”
~Teddy Roosevelt, State of the Union Message, December 3rd 1901
A week ago – the Federal Reserve of New York put out a research paper mapping the explosion of bank holding companies (BHCs)- they write HERE:
Chart 1 illustrates the rapid growth in the size and scope of BHCs over the past twenty years. As shown in the chart, nearly all U.S. banking assets are controlled by bank holding companies, and U.S. BHCs as a group (inclusive of firms whose ultimate parent is a foreign banking organization) control well over $15 trillion in total assets, representing a fivefold increase since 1991.1 By comparison, nominal GDP increased by only around 150 percent over the same period.
So the assets of banks have increased by 500% by America’s Gross Domestic Product has only increased by 150%. When you’re dealing with trillions of dollars – that’s kind of a big deal (in a Joe Biden way – not a Ron Burgundy way).
You’ll notice two things from the chart above …
#1 – After a Republican Congress passed and a Democrat President Bill Clinton signed the Gramm-Leach-Bliley Act which was the final deathblow to Great Depression era legislation like the Glass Stealy Act which said banks must completely separate their customer’s deposits from any other bank operations. Gramm-Leach-Bliley allowed for banks to use consumer deposits for whatever purpose they saw necessary. It is precisely this reckless behavior by banks where they did not have their consumer operation divided from their investment bank that created the Bush economic crisis in the first place.
#2 – The 2nd graph shows that the share of assets is growing for the top 10 largest bank holding companies meanwhile the number of bank holding companies in the market is shrinking. In short – larger banks are getting larger and pose a bigger systemic risk or “moral hazard” to the market. Now – thanks to the Dodd-Frank law passed in 2010 and signed by President Obama … the federal government may step in and break up these Too Big To Fail banks if they are deemed a systemic risk leaving taxpayers on the hook. The law even forced these banks to put together their own living wills to explain how they should be broken up in the event of a breakup. It also says that should the U.S. government ever have to come to their aid again … they WILL be broken up. Period. Mitt Romney wants to repeal the law in its entirety.
Bloomberg explains what the regulators have been doing relative to these “living wills” HERE:
U.S. regulators, seeking to prevent a repeat of taxpayer-funded bailouts of the financial system, released summaries of plans for breaking up nine of the world’s largest banks in the event of an emergency.
The Federal Deposit Insurance Corp. and Federal Reserve posted the public portions of so-called living wills on websites today as required by the 2010 Dodd-Frank Act. The documents outline more detailed proposals submitted privately describing how regulators could dismantle the companies if they fail.
And Republicans can’t hide behind small businesses or small banks or anything else although they’ve tried because it only affects the 9 largest banks in the U.S. Those banks are JP Morgan Chase, Citigroup, Goldman Sachs, Morgan Stanley, Barclays, Deutsche Banke, Credit Suisse and UBS. Surprisingly – Wells Fargo didn’t even meet the cut and they’re huge.
The Federal Reserve of New York even writes about what led to an environment that created this Too Big To Fail problem:
Changes in the legislative and regulatory environment have been a key driver of the trends toward greater BHC size, scope, and industry consolidation documented in Charts 1 and 2. The evolution of U.S. financial legislation in turn reflects a long-running public debate about the appropriate size and scope of banking organizations. As discussed in detail below, there has been a secular trend in recent decades toward enlarging the allowable scope of BHC activities. However, recent legislation represents something of a reversal of this trend; most prominently, the “Volcker rule” provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) prohibit BHCs from engaging in proprietary trading and limit their investments in hedge funds, private equity, and related vehicles.
And I am an advocate of breaking up the big banks just like Bernie Sanders has called for HERE. So does former CEO of Citibank – Sandy Weill – who advocated for the deregulation of the banking industry; he now is on record saying the big banks should be broken up (source). Even the former FED chairman and Ayn Rand follower – Alan Greenspan has been on record that we should nationalize the banks (source).
People forget that the reason banks have been able to grow and make obscene profits is because the government GUARANTEES per the FDIC that a person’s money if lost due to a bank going out of business will get every $ back up to $250k per account. Without that – banks wouldn’t exist …. believe it.
But how the hell did we get here?
What we have seen since 1980 is a string of laws designed to deregulate the financial services industry. Another way to look at it is these bill eliminated safeguards put in place after the Great Depression was caused by the financial services industry. This complete clusterf#ck is courtesy of both parties:
The Depository Institutions Deregulation and Monetary Control Act of 1980 - this bill allowed for S&L’s to expand from home mortgages into a range of riskier loans and investments. It eliminated Regulation Q enabling banks to compete for deposits with higher interest rates.
The Garn-St. Germain Depository Institutions Act (1982) hailed by President Reagan as “the first step in our administration’s comprehensive program of financial deregulation” and thus eliminating many regulations on the S&L industry. In 1983 – on order of this bill – the Office of the Comptroller of the Currency lifted all restrictions on loan-to-value ratios (banks could loan as much as they want regardless of the value of a house), maturities (banks could offer terms for as long as they would like 15, 30 years, interest only), amortization schedules (banks could offer mortgages where the principal balance went up over time). It also allowed for banks to operate across borders by allowing inter-state mergers between banks and S&L’s.
The Secondary Mortgage Market Enhancement Act of 1984 allowed for investment banks to buy up mortgages, create derivatives in the form of pools and then resell them with varying levels of risk on Wall Street.
The Tax Reform Act of 1986 created tax advantages making mortgage backed securities more attractive.
Of course – some might conclude that there was a relationship between these acts of deregulation and the fact that Reagan’s treasury secretary was the former CEO for Merrill Lynch. In 1986 – the Federal Reserve opened up another loophole allowing commercial banks to deal in specific securities that were otherwise off limits to commercial banks. . Alan Greenspan expanded that loophole over the next decade including municipal bonds, morgage-backed securities, commercial paper, corporate bonds and equities.
Over 2,000 banks failed between 1985 and 1992 with a peak of 534 in 1989. Over 1,000 people were indicted and thrifts suspected of fraud cost the government over $54 billion. The total volume of private mortgage-backed securities (not including those issued by Fannie and Freddie) grew from $11 billion in 1984 to over $200 billion in 1994 to close to $3 trillion in 2007.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 signed by President Clinton removed many constraints on interstate banking allowing for greater consolidation in the banking sector via mergers and acquisitions. Banks one after the other bought each other until there were only a handful of major banks; they then starting merging with other large financial services companies in the insurance and investment banking industries creating massive conglomerates. And because hedge funds are laregely unregulated, large risk exposures were building up outside the view of the financial regulators.
Between 1980 and 2000, the assets held by commercial banks, securities firms and the securitizations they created grew from 55% of GDP to 95% of GDP. Financial sector profits grew froman average of 13% between 1978 and 1987 to 30% from 1998 and 2007.
This led to a growth in exotic financial transactions with governments, pension funds, mutual funds etc. One employee in the derivatives trade summed it up quite succinctly:
“Lure people into that calm and then just totally fuck them”
~Bankers Trust Derivatives Salesperson
In 1998 – the first hedge fund to go completely insolvent in a big way was Long Term Capital Management. It had failed to propertly account for the risks inherent in both Russia and other markets like Korea, Japan etc. Initially successful with annualized returns of over 40% (after fees) in its first years, in 1998 it lost $4.6 billion in less than four months following the Russian financial crisis and the fund closed in early 2000. You can read more about that HERE.
The Gramm-Leach-Bliley Act of 1999 effectively eliminated all other Depression era restrictions and regulations separating commercial and investment banks.
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