Dodd-Frank Turns Four and Nothing Fundamental has Changed

This is an abridged version of my remarks on the 1933 Glass-Steagall Act and impotence of the 2010 Dodd-Frank Act at the Schiller Institute's 30^th Anniversary Conference in New York City. June 15 2014. Full text and video are here. July 21, 2014 marks four years since the Dodd-Frank Act was signed.

Thank you. I want to address a few things today, one of which is the Glass-Steagall Act, and what it meant to our country’s history, why it was passed, how it helped, and how the repeal of that Act in 1999 has created a tremendously unstable environment for individuals at the hands of private banking institutions and political-financial alliances with governments and central banks.

I also want to talk about how some of the remedies that have been proposed in the wake of the 2008 subprime crisis, including the Dodd-Frank Act, and its allegedly most important component, the Volcker Rule, are ineffective at combatting this risk; and that what we really need to do is go back to a time, and go back to a policy, and to use the strength and intent of the original Glass-Steagall Act to [attain] a new Glass-Steagall Act, in order for us to be safe going forward. When I say “us,” I mean everybody in this room. I mean the population of the United States. I mean the populations throughout the globe.

Because what we have today, and what we’ve had in the wake of the repeal of the Glass-Steagall Act, is [a condition] where the largest banking institutions have been able to increase the concentration of their capital, of their influence, and of their power. This has been subsidized and substantiated by [bi-partisan] political forces within the White House, the Treasury Department, the Federal Reserve, and governments throughout the world—in particular, throughout Europe and through the ECB—and it’s something that must change to achieve more [financial and] economic stability for the greater citizenry.

How the Glass-Steagall Act Came To Be

Let’s go back in time, to [consider] how the Glass-Steagall Act came about. We had a major crash in 1929. It was the result of a tremendous amount of speculation, and also rigging of markets by the larger financial institutions, as well as things called trusts, which were small components of these institutions, that were set up in order to bet on various industries, and collections of companies within those industries, and so forth, as well as to make special bets on foreign bonds in foreign lands; as well as to make bets on the housing market, which is something we’ve seen and are familiar with quite recently.

A lot of this activity was done, in particular, by the Big Six banks at the time—which included National City Bank and First National Bank, which today we know as Citigroup; the Morgan Bank and the Chase Bank, which today we know as JPMorgan Chase; as well as two other Big Six bank.  [The men running these banks] got together in the wake of the crash in 1929, which they had helped to [perpetrate], and decided that they needed to save the markets, as they were deteriorating very quickly.

The reason they wanted to save the markets was not because they wanted to protect the population; it was because they wanted to protect themselves. The way they chose to do that, was to put in $25 million each, after only a 20-minute meeting that occurred at the Morgan Bank on No. 23 Wall Street, catty-corner from the New York Stock Exchange. After this 20-minute meeting, which was called together by a man named Thomas Lamont, who was a major banker at the time, and the acting chairman of the Morgan Bank, these six bankers broke and went out into the streets. The press heralded them as heroes who [had] saved the day, and in particular, heralded the Morgan Bank as an institution that [had] yet again save the economy from virtual catastrophe.

It [the press] compared the decision that was made after that 20-minute meeting to what had happened after the Panic of 1907, when J.P. Morgan, the patriarch of the Morgan Bank, had been called upon by President Teddy Roosevelt, to save what was then a situation of deteriorating markets, and of deposits being crushed, and of citizens losing their money because of the rigging of markets.

At the meeting, the decision was to buy up stocks. The stocks that were bought were the ones in which the Big Six banks had the most interest. The market rose for a day, which is why the newspapers were so happy. It was why President Herbert Hoover, at the time, decided he might actually get re-elected, as opposed to facing not just “un-election”, but also, a bad historical legacy. And everybody was quite pleased with the results.

Unfortunately, as we know, after the market rose, after that day, after they put in the money to buy those stocks, it crashed by 90% over the next few years. The country was thrown into a Great Depression. Twenty-five percent of the individuals in the country were unemployed. There was a global depression that was ignited because of [global speculation and debt gone awry]. Foreclosures skyrocketed, businesses closed, thousands of smaller banks [collapsed], and the country plunged into dire straits, [as did the world].

FDR’s Bankers

Into that, came President FDR, and something that’s very interesting historically, that I did not even know before I [researched] my latest book, All the Presidents’ Bankers. FDR had friends - and they were bankers. Two of [his banker] friends were James Perkins, who ran the National City Bank after the Crash of 1929, and Winthrop Aldrich, who was the son of Nelson Aldrich, who happened to have been [the] Senator that [spawned] the Federal Reserve Act, or its precursor, as created at Jekyll Island in 1910 with four big bankers [See Chap. 1 in All the Presidents’ Bankers for more detail on this.]

These were men of pedigree. These were men of power. These were men of wealth. Even before the Glass-Steagall [or Banking] Act was passed in [June] of 1933, and signed into law, these men worked with FDR, because they believed that if they separated the institutions they were running - their banks, the biggest banks in the country - into keeping deposits of individuals safe and divided from speculative activities and the creation [and distribution] of securities that could sour very quickly - then not only their banks, but the general economy [would be sounder.]

That was the theory behind the Glass-Steagall Act: if you separate risky endeavors and practices, and the concentration of that risk, from individual deposits and loans, then you create a more stable banking system, a more stable financial market, a more stable population, and a more stable economy. FDR believed that, and the bankers believed that.

Even before the Act was passed, Aldrich and Perkins [met] with FDR in the first 10 days of his administration, and promised FDR they would separate their banks. And that’s why [Glass-Steagall] was more than just legislation. It was the [result] of a [positive] political-financial alliance and policy to stabilize the system, so that everybody could benefit.

Those [bankers] also did benefit. Their legacies benefitted. The National City Bank that was run by Perkins, the Chase Bank that was run by Aldrich—those banks exist today. But the Glass-Steagall Act enabled them to grow in a more stable manner. Aldrich and Perkins chose to keep the deposit-taking and lending arms of their banks. They promoted the Act [publicly] alongside FDR. Congress, in a bipartisan fashion and enthusiastically, passed the Glass-Steagall Act. So, it was a [sound] national platform on every level.

That’s something we don’t have today.

The Take-Down

What we’ve had since—and it started to a large extent in the late ’70s, and accelerated throughout the Reagan Administration, the Bush Administration, the Clinton Administration, and then ramifications through the second Bush Administration and the Obama Administration, is a disintegration of the idea of that Act. The idea that risky endeavors and deposits should be kept separate in order for stability to exist throughout.

In the ’80s, banks were allowed to merge across [more product lines]. In the ’90s, banks were allowed to [merge across state lines] and increase their share of financial services by re-introducing insurance companies, brokerages, the ability to create securities that we now know today can be quite toxic, as well as trade in derivatives and other types of more technologically complex, even more risky, securities, all under one roof.

[Because] in 1999, under President Bill Clinton, an act was passed, the Gramm-Leach-Bliley Act that summarily repealed all the intent of the Glass-Steagall Act. What it created in its wake, was a free-for-all, a merging and concentration and consolidation of the largest banks into ever-more powerful and influential entities: influential over our capital; over our economy; and with respect to the White House.

This is not something that the bankers ‘pushed’ upon the White House. We should realize this. It is something that [also stemmed from] Washington, under several administrations, under bipartisan leaderships, under different types of Treasury secretaries that came from the very same banking system that they were supposedly going to watch over from public office—they all collaborated to repeal this Act.

In 2002, 2003, 2004, when rates were low, and subprime loans started to be offered in bulk, these banks, that now had much more concentration over deposits, over insurance products, over brokerages, and over asset management arms, were able to create [toxic] securities out of a very small amount of loans. Out of a half a trillion dollars worth of subprime loans, extended to individuals, they were able to create a $14 trillion mountain of toxic assets. They were able to leverage that mountain, $14 trillion, to $140 trillion of risk, by virtue of the co-dependencies of the Big Six banks, by virtue of the derivatives involved in the securities [administered through other financial entities], that were laced with these mortgages, and by all sorts of complex different types of financial engineering.

As we know, that practice concluded [badly] in 2008. [But] this time, the result of that implosion was not to chop off the arms of these banks. It was not having men running these banks, like Winthrop Aldrich, say, “You know, this was a bad idea. We screwed up our banks, we screwed up the markets, we screwed up people, we screwed up the economy—let’s separate. Let’s go back to a time that was simpler, that was saner.”

That decision wasn’t made. What occurred instead was a decision at the highest levels of Washington, the Treasury Department, the Federal Reserve, the New York Federal Reserve, to coddle this very banking system, and to subsidize it, to sustain it, and all its flaws, and with all the risks that permeated [from it] around the entire population in the United States, and throughout the world, with trillions of dollars of loans, of debt, [of purchases], of cheap money, of a zero-interest-rate policy approaching its sixth year, which means these banks can continue to be liquid, even though they are very unhealthy, and promoting their interests over the interests of the wider population [or customer-base].

Dodd-Frank: The Banks Are Bigger Than Ever

The Dodd-Frank Act was passed and signed into law by President Obama on July 21, 2010. President Obama, then-Treasury Secretary Timothy Geithner, then-Federal Reserve Chairman Ben Bernanke, as well as many pundits in the media, said it would dial back this immense risk and [act as] sweeping regulation [just] like in the Great Depression.

But it has done absolutely nothing of the kind. In the wake of the 2008 crisis, the big banks are bigger. JPMorgan Chase was able very cheaply [to acquire] Bear Stearns and Washington Mutual, to become the largest bank in the United States again. This ties back to the legacy of J.P. Morgan in the 1907 Panic, throughout the decisions that were made at its request before 1929, in the wake of the 1929 Crash, and so forth.

Citigroup has managed to survive. Goldman Sachs, Morgan Stanley, Wells Fargo, [Bank of America]—all of these banks, the Big Six today, which are largely variations of the Big Six banks, historically, 100 years ago, with a couple of additions and many mergers along the way—have been able to sustain themselves due to a government policy that has enabled them to grow and promote risky practices that are dangerous to all of us.

The Dodd-Frank Act doesn’t separate these banks. It doesn’t make them smaller. It doesn’t diffuse their derivatives concentration [and co-dependencies]. The Big Six banks today in the United States, control 96% of all the derivatives trading in the United States. They control 45% of all the derivatives trading throughout the globe. They control 84% of the FDIC-assured deposits throughout all of the banks in the United States, and 85% of the assets throughout all of the banks in the United States. So their concentration, their power, is immense in the wake of the 2008 crisis, and in the wake of this alleged remedy to the crisis, which is the Dodd-Frank Act.

And the final component of that Act, which is supposed to at least reduce their riskiest trading practices, or proprietary trading: The Volcker Rule is an 892 page [piece of legislation], that [contains] 55 pages of definitions and rule, and the rest is exemptions to that rule. The banks can continue to make markets, to hedge, to provide hedge funds and private equity funds, just under different language, to keep their insurance arms, to keep their brokerages, to create complex securities that are so interlocked that if one fails, the rest of them fail. And if the bank that has the most of them fails or falters, the other banks in this entire system will fail or falter as well. So, nothing in the Volcker Rule of the Dodd-Frank Act materially changes anything.

Resurrect Glass-Steagall!

What we need is a resurrection of the Glass-Steagall Act. And We need to realize it wasn’t just a law; it was a policy of stability. It was a political and financial alliance between the White House and the biggest bankers of the time, and the population.

That’s what we must press, and that’s the only thing—a complete separation of risky endeavors from our money, from normal lending practices, [from government subsidies]—that can even start to foster a more stable financial system, banking system, and economic environment for all the rest of us.

That’s the take-away from today. There’s more information about the lead-up to the Glass-Steagall Act, the swipes at it over time, the particular alignment and relationships of Presidents and bankers that actually cared more about the population’s economic stability as well, as the ones that didn’t care at all. This can be found in my book All the Presidents’ Bankers, which I urge you to check out, to gain [further] knowledge about the reasons for why we had that Act, and why it’s more necessary than ever, today.

Declaration of Independence In the 21st Century

While much of America marks July 4th with fireworks, barbeques and family gatherings, people should also take a moment to pause and consider the state of the very freedoms, liberties and rights that the Declaration of Independence was produced to acquire for the population. At a mere 1302 words subject to editorially consent by its creators, the Declaration of Independence from British monarchical rule listed clear intentions of the-then 13 colonies that wanted to become the United States of America.

The preamble is more widely known than the rest of the document, but worth restating for its potency:

“When in the Course of human events, it becomes necessary for one people to dissolve the political bands which have connected them with another, and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.”

The ideology behind the document reflected a sense of spirituality, respect and commonality with God and Nature, but more than that, it underscored essentials that a government should provide the governed, and that the governed were entitled to receive, if said government was to remain appropriately responsible and humane to its citizens. 

The rest of the document delineates grievances against the King of Great Britain that prevented these new Americans from attaining “unalienable Rights” including to “Life, Liberty and the pursuit of Happiness.” It also expressed the idea that “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

The notion here was that if a government was not properly supporting the people it represented or was moreover plaguing them through various forms plundering, ravaging, or otherwise destroying lives, then, it should be abolished. The signers condemned the King for “repeated injuries and usurpations” that promoted “the establishment of an absolute Tyranny over these States.”

Most of the 27 listed pieces of the evidence to these injustices related to demands for fair representation regarding the setting of legislation for the “public good”, as well as for justice, commerce, privacy, war and peace. They also included condemnation of the King for ”transporting large Armies of foreign Mercenaries to compleat the works of death, desolation and tyranny.”

They concluded that “A Prince whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people” and did “solemnly publish and declare” the “United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved.”

The Declaration of Independence aimed to dissolve monarchical tyranny and associated destructive and aggressive military and financial forces. It aimed to instigate the establishment of a government and legislation that would administer and create policies so as to achieve the reasonable requirements of “Free and Independent States” and the individuals that dwelled in them. But, today's political-financial elite have resurrected a new brand of tyranny.

Tyranny comes in many forms, in particular through actions and decisions that disproportionately elevate the concerns of the most powerful at the expense of the public good or its longer-term stability, liberty or safety.

Today’s most select politicians float seamlessly between elected or appointed public office to the private sector where their personal fortunes and influence are endowed with extravagant speaking or advisory engagements and commensurate fees. 

Former president Bill Clinton having ascended to the presidency through a cadre of wealthy benefactors and the firms they represented, amassed millions of dollars after leaving the White House bestowing his charisma and connections to scores of corporate gatherings at top dollar prices. Hillary Clinton has been doing the same thing since leaving her Secretary of State Post. Barack Obama is poised to reap even greater gains from private sphere elitists that dictate his policies if not his rhetoric.  Vice President Joe Biden recently keynoted Goldman Sachs’ North American Energy Summit conference.

The spirit of the Declaration of Independence, even if some of its signers were richer than others,  reflected one of government for the public good, and not to augment the King’s desires for power or additional riches. Our current system is a long way from that particular ideology. Control of the fate of the population is more than ever in the hands of a select group of families, individuals and the corporate legacies they represent.

Today, the bix six banks hold 85% of the bank assets in the country and 96% of its derivatives activity. The Federal Reserve subsidizes banks with zero interest rate and bond buying policies. Five companies run most of publishing. Six media giants control 90% of  American media, in the process forming editorial content, notions of pop-culture and the dispersion of information to the population. Five health insurance companies dominate half of our nation’s health insurance policies (covering over 100 million people) and thus our access to the most cost-effective care. The approximately half a trillion-dollar federal defense budget favors five prime defense contractors.

More than half of the people in Congress are millionaires (with Democrats and Republicans about equally wealthy), placing them in the top 1% of the nation’s citizens from a wealth perspective.

Today’s tyranny of power lies also in the myth that we citizens enjoy equal participation or even representation in the political system within which the elected and unelected powerful operate, and through which they impact the rest of  us. But one vote of one individual does not equal the influence of one conversation with one major CEO or one golf-game with a blue-blood patriarch. Millions of votes don’t compensate for decades of tight relationships between the political and financial elite that collaboratively shaped domestic and international economic, military, national security and social policies.

Our country is much bigger in terms of population and land domination today than it was on July 4, 1776, but the concentration of power and wealth is smaller. Back then, we sought freedom from a King, now we must seek freedom from a plutocracy that operates to constantly consolidate its riches and influence to the detriment of broader economic equality and political representation.

In this latest course of human events, we must pursue independence from oligarchical control over our lives, liberties and pursuits of happiness.

We must pursue independence from corporate dominance over our individual economic destinies and collective opportunities to afford basic needs.

We must insist upon the separation of public office and private power crony alliances that increase rather than reduce inequality.

We must demand the reduction in defense budgets that foster international destruction and infringe upon individual liberties.

We must alter the fundamental trajectory of government-banking ties that dictate the flow of money backed by debt to the hands of those that speculate most dangerously with it.

In short, we must elevate the equality of humanity that pervaded the intent of the Declaration of Independence by moving away from the rapaciousness of old and modern tyranny that prevents it.