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Apr 16, 2012

Since 1792 when our government got into financial problems and credit markets froze, there had been a financial crisis about every 15 or 20 years for about 140 years until the one culminating in the Great Depression during the 1930s.

 As a result, in 1932 and 1933 there were 3 pieces of legislation passed:

  • The Glass-Steagall Act that separated commercial/community banks from Wall Street and investment banks
  • The FDIC which insures bank accounts
  • And SEC regulations that a.) subjected Wall Street traders to strong incentives to avoid fraud, b.) kept key financial institutions from taking on too much risk, and c.) subjected trades to an important requirement of publicity – each time a financial instrument was bought or sold, the market itself received information about the perceived value of the instrument.

 Because of those regulations, we went nearly 50 years with no bank failures and no panics.

 In 1956, the Bank Holding Company Act is passed, extending the restrictions on banks, including that bank holding companies that own two or more banks cannot engage in non-banking activity and cannot buy banks in another state.

 In the 1960’s the regulatory climate began to change.  Banks start lobbying Congress to allow them to ender the municipal bond market and a lobbying subculture springs up around Glass-Steagall.

 In the 1970’s some brokerage firms begin encroaching on banking territory by offering money-market accounts that pay interest, allow check writing and offer credit and debit cards.

 In Dec. 1986, the Federal Reserve Board reinterprets Section 20 of the Glass-Steagall Act which bars commercial banks from being engaged principally in securities business.  It decides that banks can have up to 5% of gross revenues from investment banking business.   This is the first time the Fed re-interprets Section 20 to allow some previously prohibited activities.  In the Spring of 1987 the Federal Reserve Board votes 3-2 in favor of easing regulations, overriding the opposition of Chairman Paul Volcker.  The vote comes after the Board hears proposals from Citicorp, JP Morgan and Bankers Trust advocating allowing banks to handle several underwriting businesses including commercial paper, municipal revenue bonds and mortgage-backed securities.    The bankers argue that since 1933 there were three “outside checks” on the industry, “a very effective SEC”, knowledgeable investors and “very sophisticated” rating agencies.  Volcker is opposed, as it boils down to the issue of two different cultures – a culture of risk in the securities industry and a culture of protection of deposits in the banking industry.  The Fed agrees with the banks however and also raises the limit from 5% to 10% of gross revenues.  The Board believes the new reading of Section 20 will increase competition and lead to greater convenience and increased efficiency.  In August 1987, Alan Greenspan (formerly a director of JP Morgan and a proponent of banking deregulation) becomes chairman of the Federal Reserve Board.  He favors greater deregulation to help U.S. Banks compete with big foreign institutions.

 In January 1989 the Fed approves an application by the big banks to expand the Glass-Steagall loophole to include dealing in debt and equity securities in addition to municipal securities and commercial paper.  This marks a large expansion of the activities considered permissible under Section 20.

 In December 1996 the Fed issues  a precedent-shattering decision permitting bank holding companies to own investment bank affiliates with up to 25% of their business in securities underwriting.  This expansion of Secion20 effectively renders Glass-Steagall obsolete. 

 In 1997 Bankers Trust (now owned by Deutsche Bank) buys the investment bank Alex. Brown & Co, thereby becoming the first U.S. bank to acquire a securities firm.  Later that fall, Travelers Insurance Co acquires the Salomon Brothers investment bank. Salomon then merges with the Travelers-owned Smith Barney brokerage firm to become Salomon Smith Barney.

 In 1998 Travelers proposes a merger with Citicorp which becomes the biggest corporate merger in history and the world’s largest financial services company.  This was the birth of Citigroup, Inc.  They quietly lobby banking regulators and government officials.  The Fed gives its approval to the merger on Sept. 23. 

Back in 1980, close to 100% of financial instruments traded in the market were subject to the “New Deal” exchange based regulatory regime.  However, during this time, a new class  of financial instruments, known as derivatives, was born.  Derivatives are assets whose value is derived from something else.  A derivative can pay you if the price of gold falls below $1,000 or if the temperature in San Diego rises above 100 degrees. A derivative is basically a bet entered into by two or more parties.

 At first, derivatives were a very small portion of the market.  However, technology made it possible for this market to explode until the industry fixed on a particularly rich and ultimately disastrous vein of home mortgages and developed a whole series of assets backed by real estate mortgages. 

 As it was growing, the debate raged over how to regulate it but through a series of steps they were ultimately totally exempted from regulation.  In Jan of 1993 the departing chair of the Commodity Futures Trading Commission (Wendy Gramm) signed an order exempting most over the counter derivatives from federal regulation. (A few months later she was named a director of Enron, which was an active trader of natural gas and electricity derivatives.)  By the end of 1994, all anti-derivatives legislation had been killed in Congress.  This campaign was not just legislative, the SEC was told by members of Congress to lay off.  When the SEC chairman, Arthur Levitt tried to introduce tougher conflict-of-interest rules for the accounting industry, Senator Phil Gramm, Senate Banking Chair threatened to cut the SEC’s budget.  Finally, in 1999 President Clinton signed the law that abolished the Glass-Steagall Act, thereby confirming the deregulation already effected by bank regulators. 

 Now, the new head of the CFTC, Brooksley Born, felt that because derivatives functioned much likes “futures contracts” the CFTC should regulate them.  She drafted a release to this effect in May 1999 and sent it to other relevant federal agencies.  Every banker in Washington complained about it and following Wall Street’s urging, Treasury Secretary Robert Rubin (a former co-chairman of Goldman Sachs who days after the repeal of Glass-Steagall accepts a top job at Citigroup), Larry Summers and Alan Greenspan all berated her.  She persisted and Greenspan, Summers and Rubin announced they would seek legislation to stop her and her CFTC.  Shortly thereafter she resigned and the following year, Congress overwhelmingly passed the Commodities Futures Modernization Act, which expressly forbade the CFTC from regulating derivatives and expressly exempted derivatives from any other state law.  The markets shifted to the lowest-cost, least-regulated havens.

 From 1999 to 2008 the financial sector spent $2.7 billion in reported federal lobbying expenses and individuals and PACs in the sector made more than $1 billion in campaign contributions.  As the money flowed the appetite for deregulation grew.  But Congressman Jim Leach from Iowa who was the leading Republican on the House Banking Committee in 1994 was convinced that the derivatives market produced systemic risk to the economy.  After the savings-and-loan crisis of the late 1980’s and early 1990’s he issued a report that called for strong regulation of derivatives.  It was criticized by many in the industry and largely ignored.  What made him so different from his colleagues is that he did not receive financial support from Wall Street because he refused to accept contributions from political action committees.

 By 2008, 90% of the financial instruments traded in the market were exempted from regulations. We had flipped from a presumptively public market of exchange to a market where only insiders knew anything real about how the market worked or what the assets were worth.  That was great for the insiders but awful for the rest of us.

 Banks were encouraged to take more risks to get greater returns and due to the history of being bailed out by the federal government as “too big to fail”.  They didn’t think they would need to bear the losses because government would step in.  So in a way, it becomes a story of both too little and too much regulation.  Too little, since by relaxing regulatory constraints the banks were more vulnerable to competition, which forced them to take more risk.  Too much, since the implicit guarantee of a bailout encouraged the banks to be complacent about asset-price inflation. The combination, as we now know, was deadly for us.  The surviving banks are now stronger than ever.

 There were plenty of warning signs along the way that should have alerted us.

 In the late 1980’s there was the Savings and Loan Crisis, which was the failure of about 747 out of the 3,234 savings and loan associations.  The U.S. General Accounting Office estimated cost of the crisis to be around $160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government from 1986 to 1996.  The federal government ultimately appropriated 105 billion dollars to resolve the crisis. After banks repaid loans through various procedures, there was a net loss to taxpayers of approximately $124 billion dollars by the end of 1999.  This should have been a red flag.

In the late 1990’s there was the Long Term Capital Management failure.  LTCM was a speculative hedge fund and again used bad bookkeeping and accounting practices. Seeing no other options the Federal Reserve Bank of New York organized a bailout of $3.625 billion by the major creditors to avoid a wider collapse in the financial markets as they dealt with every major firm on Wall St. This should have been a red flag.

 In the early 2000’s Enron collapsed due to “mark to market” bad bookkeeping, which had little basis in reality.  Shareholders lost nearly $11 billion when Enron's stock price plummeted to less than $1 by the end of November 2001. The situation was not helped by the disclosure that Enron founder Ken Lay stood to receive a payment of $60 million, while many Enron employees saw  their retirement accounts, which were largely based on Enron stock, decimated as the price fell 90% in a year. An official at a company owned by Enron stated "We had some married couples who both worked who lost as much as $800,000 or $900,000. It pretty much wiped out every employee's savings plan as well as their jobs.  Of course, executives that understood the real picture sold their shares in advance of the collapse and waltzed away with billions.  This should have been a red flag.

We didn’t listen or learn from the above and the greed and risk-taking went on unabated with hedge funds and derivatives, false bookkeeping and bad loans until we ended up with the Great Recession of 2007/2008.  This resulted in the loss of millions of jobs, the loss of pension and retirement plans, the loss of homes. It shattered lives and dreams.  We still are facing huge unemployment and on-going foreclosures.  And nothing has changed.  No new regulations have been called for.  Glass-Steagall has not been reinstated, derivatives are still exempt from regulation.

 In this deregulated world, when markets are up things are great but when the markets go down it is not only those who have gambled or invested that are hurt but the pension funds, the jobs in related fields lost, the prudent, the middle class who have to pay.  We have allowed creation of those companies that are too big to fail, who are guaranteed bail-outs by American taxpayer funds and who demand no regulations.

 To compound the problem, during this time of corporate greed, of unethical bookkeeping and risk taking, revenues have been lost due to loopholes in the tax code so that the extremely wealthy and large corporations are not paying their fair share of taxes.  Jobs and manufacturing have been outsourced, and the middle class is, and has been, in decline for years with stagnant wages and a loss of purchasing power.

 The frosting on the cake for me however, was the Supreme Court decision for Citizens United vs the Federal Election Commission where it was ruled that corporations are people and have the same constitutional protections as humans and that money is speech.  This has created a hugely unequal playing field in our democracy as there is no limit on the funds large corporations and super PACs can use to buy candidates and campaigns and the record keeping requirements are very non-transparent.  This leads to funds being given by possible foreign nationals and multinational corporations who certainly do not have the well being of the American people as their priority.  It has led to corporate ownership of government.  It has also made the 1 person 1 vote concept irrelevant.  Our voices are not heard.  We have lost government of the people, by the people and for the people.

 Why I support Occupy:

 For these reasons, I support the Occupy movement which, although made up of people of all different political persuasions and different priorities, also seeks to overturn the Citizens United decision and to bring transparency and accountability to Wall Street.  It has effectively changed the dialog in this country.  It is giving us a voice.

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Posted: Apr 16, 2012 12:26am
Aug 12, 2010

Americans seem to be overly fond of labels. We group ourselves and each other into little boxes labeled Conservative, Liberal, Moderate, Independent, Left wing, Right wing, Native-American, African-American, Asian-American, Hispanic-American, (I would have to be an English-Irish-Scots-little bit of Dutch-American), Christian, Muslim, Jew, Mormon, Agnostic, and so on and so on, ad nauseum.

Labeling ourselves may have developed from a mentality necessary for tribal survival originally. Now it may lead us to associations with those whom we feel most comfortable because they must be like us. Unfortunately, labels tend to limit us and worse, cause major divisions between us. They lead to stereotyping and misinformation.

For example, being labeled a Christian seems to be very straightforward. In reality however, there are many types of Christians. There are Catholics and Protestants and within that, there are those who feel that being saved is the mainstay of their belief. There are others who believe that living a life based on the example that Jesus lived is what constitutes true Christianity. As in other religions there are those who believe God is a god of love and those who believe God is vengeful and judgmental. And there are few who would admit to not knowing.

But ethnic and political labels seem to stir up the most divisive feelings. In many comments I've heard and in columns I've read, Democrat seems to equate to lazy, liberal bleeding heart, welfare state, big government lover, and Socialist loser. Republican seems to mean greedy, corporate loving, narrow-minded, legislate my morality, everyone else is evil obstructionists. Even Independents are considered wishy-washy rather than open-minded.

In the real world, not all Democrats are created equal, nor are Republicans. The vast majority of both political parties are hard working, family loving, patriotic folk who basically want to be left alone to live their lives, raise their families and practice their faith. Neither wants government to interfere in their lives but they do have some basic philosophical differences in what should be the function of government. But surprise, surprise! There are Democrats who own guns and believe in the second amendment and there are Republicans who don't belong to the NRA. There are Democrats who don't believe in abortion or welfare and Republicans who do. And there are those in both camps who don't think the definition of marriage should be legislated.

What concerns me is that there are those who cultivate and promote our differences with lies, distortions and downright hatred. They ignore everything we have in common. They love to stir things up for the sake of ratings and are not concerned with accuracy in their opinions and rants. They do this not for love of country or humanity but for power and profit at our expense.

Until we can see each other beyond the labels, until we can sit down and have a civil discourse about our ideas, until we can ignore the voices of intolerance and misinformation, we will not be able to solve the very real problems that confront us. We'll also miss out on the richness of our diversity and getting to know each other on a deeper level.

It is time to stop the harsh rhetoric and name-calling and get back to a commonsense approach of communication and civility.

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Posted: Aug 12, 2010 7:56pm
Aug 12, 2010

Terrorists don’t just blow up buildings. They aren’t all suicide bombers. They are also those who seek to destroy our democracy from within… by spreading hate, fear and division.


We, as a nation of diverse citizens, have honest differences about how things should be done to solve the problems of our country, and who should take charge of those solutions: government or the private sector. We have different ideas about the economy, the balance of trade with other nations, how to reduce the price of energy and health care costs, how to solve immigration reform and the out-sourcing of jobs. If we can come together in rational discourse, we can find solutions to all these problems.


But when we are continually distracted by the lies and distortions around this or that politician, the terrorists win. When we are consumed by fear or hate, anger or greed, the terrorists win. When we spend our time calling our fellow citizens names and pitting neighbor against neighbor, when anger is the prevalent emotion when we think about the problems of this country, the terrorists win.


When we allow our values and our liberties to be overridden for the sake of so-called security, the terrorists win.


There are many talk show hosts that have an agenda of their own, that seek to divide us. We must not support them or spread their vitriol. While free speech is a cornerstone of our democracy, we can choose not to listen to those who offer fear and hate, sound bites instead of solutions.


When we take the time to do our homework, to dig for the truth, to seek compromise, to take responsibility for our actions, America wins. When we hold our elected officials accountable, America wins.  When we acknowledge our differences as well as our ideas and ideals in common, America wins.


There are a number of emails that have been making the rounds castigating one political party or the other, sent as gospel but grossly inaccurate and in many cases outright lies. We must take the responsibility of checking information before blithely sending it on as the truth. With and it is easy to sort fact from fiction. Those who seek to spread lies and vitriol and pit us against each other are the anonymous terrorists who seek to destroy our nation and they are gaining traction.


Let us regain the high road and take back the America of tolerance, integrity, and ingenuity. Let us regain the America of neighbors and communities working together. We have the ability to have constructive conversations and more than enough ingenuity to find solutions to the problems that beset us. Let us be more than the sum of our doubts. Let us defeat liars, fear mongers and greedy profiteers.  


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Posted: Aug 12, 2010 7:43pm
Aug 12, 2010

Sadly, it seems that our current political system is only dividing our country. While we are a nation of great strength, compassion, ability and ingenuity, we are also a nation that has become weakened rather than strengthened by our politics.

When our nation was conceived and the Constitution ratified, the role of government was defined as follows: …”to provide for the common defense and general welfare of the United States”.

We seem to have strayed from that principle. It is not the job of the federal government to weigh in on social or religious issues. That is more rightly the province of church, conscious and communities. We have made politics more of a battleground around social mores than a tool for creating legislation that benefits the general welfare of the whole.

According to the Constitution, the federal government must regulate commerce. Should it legislate to stop those who willfully run their companies into the ground while handing out obscene bonuses to a chosen few, thereby robbing hard working Americans of not only jobs, but health insurance, pensions and savings? Should government create regulations to keep competition keen and keep health care and insurance costs down and not exempt from anti-trust laws? Should companies be kept from becoming “too big to fail”? When is too much enough? Should we give tax breaks to companies who ship jobs abroad? Are we creating legislation that will have all of our intelligence agencies sharing information so that nothing slips through the cracks in our security? During emergencies should all first responders be able to communicate with each other? Should we require that the budget be balanced? Should there be a debt ceiling? How best do we create jobs and support small business? How do we address climate change and create new alternate energy industries? These are the questions we should be addressing.

Our two-party political system has become a vehicle for some to grab power and influence, to foment greed and personal political gain cloaked by self-righteous pronouncements, flag waving and fear mongering. Never before the past decade have I seen all members of one political party bent on destroying the presidency of the other, regardless of the real need of finding common ground to solve the problems that confront us.

America is a nation of great diversity but instead of celebrating new ideas and ways of doing and being, we gather in mini-tribes desperately trying to feel more righteous, more superior, and stronger than others. Where once we came together as Americans to solve problems and help one another, today we are pitted against one another in ideological wars. We let social and religious issues keep us from solving economic, defense and infrastructure needs.

We have become a nation of name callers, of those who label. We put boxes around each other and sort by names… liberal, conservative, straight, gay, Democrat, Republican, Asian American, African American, Hispanic American, Christian, Jew, Muslim, Buddhist and so on. We find ways of separating ourselves from others, and in so doing, promote hate and ridicule those that are different from us.

There is much talk today of taking back our country. I would ask what are we taking back and from whom? If we are taking our country back from the greedy, from the judgmental, from the angry, the liars and the haters, then I say well and good. Our freedom has not been lost but we have lost our way. It is up to each and every one of us to take responsibility for those we elect to govern. It is up to us to sort the facts from the flack and to quit relying on the viewpoints of those who seek to inflame us and pit us against one another for their own gain. It is time to evaluate each candidate on merit and not political party. It is not one party or the other who weaken us; it is our own apathy and lack of responsibility.

We must research candidates based on voting records and actions, and how what they say compares to what they do. We can not rely on talk show hosts or cable TV opinion shows disguised as news because they definitely have an agenda that it is not necessarily for the good of the nation as a whole or even for us individually.

I’m tired of the claims that one party can keep us safe and the other cannot, of each party distorting the position of the other, of those who obstruct rather than construct. I’m tired of the fear mongering and angry rants that prevail because it seems easier to fan the flames of anger rather than find constructive solutions and compromise. I’m tired of the lies.

Let us concentrate on working together to find solutions to job creation, affordable health care, protecting our air, water and natural resources, repairing and maintaining our infrastructure and keeping our country strong and safe. Each political party has some good ideas. Let us use them. Let us hold our elected officials responsible for their actions as well as their words and hold ourselves accountable and responsible for electing those who truly serve us.

Let us become Americans first, once again.

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Posted: Aug 12, 2010 6:23pm


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