Dec 15

House Thinking About Glass-Steagall

Posted by Kristjan Velbri | Posted in Financial Regulation | Posted on 15-12-2009

From Bloomberg:

The U.S. House is considering reinstituting the Depression-era Glass-Steagall Act, which barred bank holding companies from owning other financial companies, Majority Leader Steny Hoyer said today.  A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer, a Maryland Democrat, told reporters in Washington. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. by the $46 billion merger of Citicorp and Travelers Group Inc.

Glass-Steagall was the law that kept commercial banks (the likes of Bank of America before its purchase of Merrill) and investment banking separate. It was intended to stabilize the banking system and is served its purpose for over 60 years until 1999, when it was repealed by the Gramm-Leach-Bliley Act. The latter is what got many banks into trouble in the current financial crisis. When the Glass-Steagall Act was first instated, it was done to stabilize the banking system that had failed after the crash of 1929. It was only the Great Depression that got politicians thinking. Out of it, the SEC was born. But the formation of SEC came with a lot of new regulations, regulations that investors and traders these days consider to be vital. Mandatory reporting is one of them – before the financial reform of the 30s, companies didn’t have the obligation to report quarterly or even yearly transactions. There was no obligation to disclose insider ownership or even the number of outstanding shares, for that matter. Glass-Steagall was one of the cornerstones of these reforms and the US has to reinstate it, for the sake of its trustworthiness, but also for the sake of the banking system as a whole.

Phil Gramm, the former Republican Senator from Texas who co-wrote the act that undid Glass-Steagall:

I’ve never seen any evidence to substantiate any claim that this current financial crisis had anything to do with Gramm-Leach-Bliley. In fact, you couldn’t have had the assisted takeovers you had. More institutions would have failed.

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May 17

Alan Grayson Strikes Again

Posted by Kristjan Velbri | Posted in Financial Regulation | Posted on 17-05-2009

A lot of talk about who should regulate, what to regulate. No talk about specifics. Grayson applies pressure. Enjoy!

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May 15

OTC Regulation

Posted by Kristjan Velbri | Posted in Financial Regulation | Posted on 15-05-2009

Recently, there has been a lot of talk about OTC regulation. Financial Times reports:

In reality, Geithner never subscribed to Greenspan’s extreme, free-market anti-deregulation views. In public, when Geithner was head of the New York Federal Reserve, he took care not to contradict Greenspan because that would have undercut central banking convention (and, in any case, Greenspan was very powerful then).

In private, Geithner was aware as early as 2005 that free-market self-discipline was not producing rational outcomes, or curbing the wilder excesses of banks – and he was fretting about the opacity of the OTC world.

And this week’s announcement suggests that Geithner is now firmly determined to start a new era on his terms. For what this week’s announcement essentially represents is not just an effort to reform the letter of the 2000 act; it is also a move to overturn the spirit – and idea that free market discipline alone can encourage bankers to behave.[1]

And even though some banks claim that OTC regulation will harm the brokers the overhaul of the derivatives industry is expected to vastly increase the amount of information available to regulators around the world and could increase the cost of trading and taking on positions [2]. This can only be good in the long term as there have been numerous reports about using CDSs and other derivates for short term profit, effectively bankrupting the weakest companies involved.

And it’s not only the US, the Europeans are jumping on the train as well.

1. Insight: Big steps taken to reform Wall Street
May 14 2009

2. Shining a light into the world of derivatives
May 13 2009

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May 01

Bill Moyers Journal on the Pecora Commission

Posted by Kristjan Velbri | Posted in Financial Regulation, Video | Posted on 01-05-2009

Bill Moyers Journal did an excellent video report (also available as a podcast) on the Pecora Commission, the name commonly used to describe the inquiry begun on March 4, 1932 by the United States Senate Committee on Banking and Currency to investigate the causes of the Wall Street Crash of 1929. The name refers to the fourth and final chief counsel for the investigation, Ferdinand Pecora. Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino.

You can read more about the Pecora Commission here. If you feel like you have a lot of time on your hands, you can go deep into the archives of the Federal Reserve Archival System for Economic Research and read all about it.

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