Bust Up the Big Banks! Here's Why.

In 1933, in the wake of the Great Depression, as a way to prevent the kind of reckless speculation that drove that economic calamity, the Glass-Steagall Act was signed into law by FDR. Among other things, including the establishment of the FDIC, the Act prohibited commercial banks, which took customer deposits and issued loans, from practicing investment banking, or issuing securities. This law worked beautifully for 66 years, preventing risk-taking with customer deposits while allowing investment banks to generate securities and trade to their heart's content.

Beginning around 1980 the banking industry began lobbying for the repeal of Glass-Steagal. In 1987 the Congressional Research Office issued a report, which concluded that there was a significant conflict of interest between issuing credit (lending) and using credit (investing) within the same institution. The report further argued that depository lenders possessed enormous power in holding other people's money and they needed to be prudent in their activities using that money, while securities investment was a risky endeavor. Congress did not act on the repeal at that time. 

But in 1999, the banks got their way. The impetus for repeal? Citigroup (a commercial bank) merged with Travelers (a conglomerate with investment activities) in 1998. According to law, Citigroup had to divest itself of the non-depository divisions within 2-5 years. But it took them less than two years to bribe Congress into repealing the act. 

This figure displays what happened to our banking system in the wake of the repeal of Glass-Steagal. Within a single decade the commercial and investment banks had merged into four behemoths, which represent an enormous proportion of all banking activity in the United States.

At the same time, complex derivatives have become the stock and trade of these investment banks. Remember, these derivatives in the form of mortgage backed securities, crashed the global economy in late 2008. They're largely unregulated, often referred to as shadow banking. Banks make enormous fees for originating, selling, and managing new derivatives vehicles. This derivatives business has become unfathomably large.   

Add to this the investment bank Goldman Sachs, and you've got 5 institutions that combined hold approximately $5 Trillion in assets. That's $5,000,000,000,000. That's a lot of money.That's more money than the yearly GDP of any country in the world save the U.S., China, and Japan. So where's the problem? 

The trouble is in the derivatives market. In 1996 the derivatives market represented approximately $30 Trillion in investment exposure, which was about 4 times the entire U.S. GDP. According tot the Comptroller's Office, that investment exposure currently sits at $249 Trillion in the U.S. alone. Now here's the startling part - 96% of that risk is held by the 5 largest banks. $239 Trillion against $5 Trillion in assets. They're leveraged at nearly 48:1. 

Now there's an financial trick known as bilateral netting, which essentially means that a bank holds a collateralized debt obligation (CDO) and then buys insurance against that CDO with a credit default swap (CDS). Therefore, presumably, their risk is minimized since they will not lose all of their investment. If the CDO fails, the CDS pays out. According to the same OCC report, bilateral netting currently covers approximately 90% of the exposure in the derivatives market. It doesn't matter. On the eve of the crash in 2008, bilateral netting covered 84% of all derivatives. It still brought down Bear Stearns, Lehman Brothers, and Merrill Lynch. It destroyed AIG. But for a ton of bailout money and more Federal Reserve support, the largest insurer in the world would have vanished from the face of the earth. At that time the bulk of the risk was spread accross 12 banking institutions. Today it is concentrated in just 5. 

So if Europe goes down the drain - and Europe is going down the drain - our 5 biggest banks' exposure to European banks, European sovereign debt, and European derivatives stands to bring these banks to their knees, again. And our economy with them.

The Dodd-Frank Act was passed as a bandaid for the hemorrhaging wound that is our banking system. It's done next to nothing. It is not protecting our citizens from the risk inherent in the combination of commercial and invsetment banks. It is not protecting our economy from the recklessness of these banks with derivaties ... remember how mortgage backed security derivatives brought down our economy in 2008? At that time our national exposure was approximately $180 Trillion. In just 3 years that figure has risen 38%. So rather than reining in the risk taking on Wall Street, things have continued to grow unabated.  

Ready for another bailout? Ready for another recession? Ready for our current first world problems to look meaningless in the face of the second major financial crisis in less than a decade?  

It's coming. Unless we act. 

 

 

OccupyWallStreet - 9/24 @ University & 12th

I'm not sure how or when exactly, but I was made aware of the plan to occupy Wall Street sometime before last Saturday's occupation by a group simply calling itself #OccupyWallStreet - a handy twitter hashtag that makes use of the social media site to keep each other informed and organized. You can also stay informed via their webiste (OccupyWallStreet.org)

It started off innocuously enough last Saturday with a few hundred people decending on Liberty Plaza to stage a sit-in at Zuccotti Park. The occupation entered its 2nd week yesterday and up until then it had met with little controversy - a few daily arrests by the growing police presence around the park and a couple of videoed confrontations between police and protesters. 

There'd also been little press coverage and there had been the claim that the corporate controlled media was intentionally ignoring the protest in hopes it would dissipate without their attention. My personal belief is that the protests were too small and new to draw media attention. The group is also truly grassroots, having started in the forums of adbusters.com. They don't have the deep pockets and media presence of the tea party, because they haven't had the support of insiders who could get the word out easiliy. Instead they have relied on their own media efforts. That's probably the right approach, but the lack of media attention was clearly frustrating to the organizers. 

All of that changed yesterday.

On Saturday, September 24th, around noon several thousand people began a march from Zuccotti Park to ... well, the destination didn't appear to be entirely clear - but the people began marching. The police, with the advantage of motorized transport and coordinated radio communications were able to stay one step ahead of the protesters and made the march very difficult to follow as the group zig-zagged through lower Manhattan, eventually arriving at Union Square. 

Union Square is where I caught up with the marchers having chased them uptown along their route, always a few blocks behind. And in Union Square, that's where things got surreal. 

The police blocked the marchers from heading East out of ths square, so the protesers switched to Southwest, streaming across 14th Street and around police fencing that had been set up to pen them in. We followed down University - behind a mass of probably 30-40 police officers who were following several hundred marchers.

Upon reaching 12th & University things got real. At least a dozen people were arrested, two women were pepper sprayed by an overzealous NYPD officer. One protester was bleeding from a head wound. A woman was shoved to the ground by an officer dragging an arrested protester away. All of the violence was instigated by the NYPD. The protesters remained peaceful throughout. Agitated once the police began using violence, no question, but at no time did I see a protester initiatve a physical altercation with a police officer. 

A block away another 50+ protesters were arrested while sitting peacefully on the sidewalk - where they'd been told to sit by the police. Including a PBS reporter who was trying to interview one of the women who was pepper sprayed. 

 

To see my photos from the altercation at University & 12th Street in Manhattan.

The unclear part of this whole thing, to me, is why didn't the police simply allow the protesters to return to Zuccotti Park? Why the show of force? What are they afraid of? 

I'm deeply ashamed to see such indiscriminate force used against peaceful proteters in my city. This isn't supposed to happen in the United States. Since when is it okay for the authorities to deny our citizens their first amendement rights? 

I attended this march mostly out of curiosity. Now I'm engaged. Word is that thousands of others have been similarly outraged and are now flooding the park with support and plenty of new activists. These are our children, our friends, our neighbors out there putting their freedom at risk for our country. You should too. 

It's the economy, stupid (again).

For much of 2009 I think much of the country was perplexed by Washington, DC's focus on health care reform. The economy was in shambles, businesses were hemorrhaging jobs, home foreclosures hit record highs. And the politicians were busy in their big marble buildings negotiating (or filibustering) on issues related only to health care.

A case could be made that health care reform was addressing the longterm health of the economy, but I won't make that argument, because too much of the cost control needs were kicked down the road to worry about later. That said, health care reform represented an enormous victory for progressive ideals. For egalitarianism. For the believe that nobody should go bankrupt because they get sick.

Granted early in 2009 a first stimulus was passed and immediately excoriated  by the Republican party as not working - even as they took credit for its job creation in their home districts. Politicians are nothing if not opportunistic.

Finally, in 2010 the powers that be got down to business by passing the Dodd–Frank Wall Street Reform and Consumer Protection Act- a reform measure intended to reign in the excesses of the financial industry and protect average investors from predatory behaviors. This again didn't directly address jobs and the economy, but will hopefully help avoid future Wall Street initiated weapons of mass destruction. 

Despite these gains, the public punished Democrats for a lackluster economic recovery, putting the GOP in charge of the House of Representatives in the 2010 midterm elections. 

What's their first order of business?

A symbolic repeal of the health care reform law. Mission accomplished. The entirely meaningless repeal was passed with no hope of escaping the Senate. Well done.

Their second?

An attempt to limit the Environmental Protection Agency's ability to protect the environment. No surprise from a party that has demonstrated time and time and time again that they're more interested in protecting businesses than the people of this country.


I'm guessing I know what's third.

Representative Michelle Bachmann (R-MN) has proposed a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I mean, why protect consumers when bank profits are threatened?

Of course, even if the House passes all of this legislation, it won't pass the Senate. These are all symbolic votes. Which means what? It means they are a waste of time.

At least one Republican gets it. Something Democrats tend to forget is that even though Joe Miller lost the election for an Alaska Senate seat, he lost to a write-in Republican. Fortunately, Lisa Murkowski (R-AK) represents one of the few voices of reason left on the right. She's come out with this gem:

I don't believe that there are votes sufficient in the Senate to repeal health care reform....We're in this situation where there is some messaging going on ... The real question is how much time do we as a Congress spend on this messaging? We've got a situation where our economy continues to be in the tank, the longest extended period of high unemployment since World War II. ... As important as making sure that we're reining in our health care costs -- spending a lot of time on the messaging vote? I don't think that's what the American public wants us to do. ... I don't think what people want is kind of the messaging that's going on.

 I guess this is why the tea party wanted her out of office. She's too pragmatic. Why get down to resolving the economic calamity when time could be spent symbolically voting against things that don't have a chance in hell of being changed?

Of course the cynic in me realizes that the longer the economy is in the toilet, the better the GOP's chances of taking the White House in 2012. Since Senator Mitch McConnell (R-KY) has already said that Job #1 is making Obama a one term president, I guess getting to things like economic recovery would not be a priority. The well-being of the American people isn't nearly as important as controlling the executive branch of government.