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.

Defiance, Denial and Downgrades Won’t Help our Economy

Yes, the US has a debt problem. But, more than that, it has a priorities and accountability problem. Yet, rather than giving Washington a pause for reflection, the S&P downgrade of US debt from ‘AAA’ to ‘AA+” merely gave Capitol politicians renewed opportunity for elaborately orchestrated hissy fits that won't lead to introspection or policy change.

First, let’s again acknowledge the irony that this rating agency rubberstamped $14 trillion of toxic assets in the five years leading up to the crisis of 2008, thereby enabling the Wall Street manufacturing and global dispersion machine to thrive. Then, let’s sign that Washington still doesn't get it.

We racked up debt predominantly, but not exclusively (less revenue due to fewer jobs and an antiquated system where not everyone pays a comparative share contributed, as did the cost of three wars) because of the choice to subsidize Wall Street.

Nearly 80% of the new debt created by the Treasury since the financial crisis was either sold through the banks, is sitting on the Fed's books doing nothing productive, or was used to bolster various elements of the banking system through cheap loans, guarantees for faulty assets, and other methods.

Chances are near one hundred percent, that this next round of debt will exhibit the same pattern. The Treasury will issue bonds and a big portion will wind up on the Fed’s books, doing zero for the greater population. More bi-partisan squabbling over why the economy isn’t growing quickly enough will eschew.

A few months ago, Treasury Secretary, Tim Geithner made the talk show rounds to declare empathically that there was ‘no chance’ of a downgrade of US debt. After the downgrade, with the stock market plummeting, President Obama took to the airwaves to explain that the US was ‘AAA’ no matter what ‘some rating agency says’.

As Obama opined that ‘there will always be economic factors we can’t control,’ the stock market kept dropping.  Some of that fall was for ‘technical reasons.’ People and firms borrow money to bet on the market, and put down collateral (or margin) in order to do so. When the value of their purchases (stocks) falls beneath a certain amount, they are required to put up more margin to continue to participate in the market. If they don’t have the cash, they have to sell stocks to come up with it, thereby pushing the market down further. These ‘margin calls’ were the technical cause of the Great Crash of 1929.

The other reason for the drop was uncertainty, precipitating cashing out stocks to buy bonds, and reaction to the fact that no matter what anyone says, we’re not in an economic recovery, and things are getting worse. In all, the Dow Jones Index dropped 633 points during the first post-downgrade trading day, regaining a third of it the next day.

The bond market shrugged off the downgrade, meaning global investors were buying, not selling, Treasury bonds. This puts the debt cap drama and catastrophic consequence threats into scary perspective. Recall, the sky was going to fall if we didn’t bail out and subsidize the banks, too. The political fear-mongering would be laughable if it didn’t have dire consequences for the rest of us – an anemic economy unable to add jobs effectively and a banking sector floated on debt.

So, does the downgrade matter? In terms of infusing the market with more uncertainty as to whether it might lead to another one – sort of. But, in terms of Washington, it means nothing. The GOP will blame Obama for causing it by not cutting spending further. President Obama and the Democrats will act defensive and dismissive about it.

Beneath the banter, remains the stark fact that the extra debt wasn’t created to help the economy, it was created to help Wall Street. Any future political fights (and there will be many) about debt, missing that point, will therefore be unable to tackle the most important economic problem we face – lack of job and real (not paper) growth in the US and throughout the globe. Political denial and finger-pointing is not productive growth policy, no matter which party is doing what.

S&P’s downgrade got a bit of this right when it labeled Washington dysfunctional, yet, by denying there’s more to the downgrade, S&P continues to shield its own actions in the crisis build-up and Washington’s reaction to it - massive bank subsidies and a tepid bank regulation bill that didn't even break up the too big to fail banks as Glass-Steagall did in the wake of the pain banks caused leading up to the Great Depression.

A one notch ratings drop from  AAA to AA+ makes no difference to the US production capacity. Indeed, with all the scaremongering about how much more expensive it would be to borrow at a higher rate (reflecting the lower credit rating), the bond market rose in a sigh of relief that the downgrade was ‘over’ rendering the cost of the downgrade minor. As for other countries dumping our bonds, though they should because our policy remains financial market subsidization through debt creation, as long as the dollar remains the dominant global currency, other countries will lend to us though buying our Treasury bonds. They don’t want their own portfolio of US Treasuries to decline in value.

Obama stated that, “we need jobs and growth.” Absolutely. But austerity compromises won’t get us there. A reality check might. He said that Americans have come through (more denial, as we haven’t come through anything, we’re still in it) the biggest financial crisis since the 1930s with grace. He made no mention of the dual DC-banks role at all.

In the 1930s, the government made a bi-partisan decision to smack the banking system into place and separate bank trading and commercial functions so banks couldn’t take risks with other people’s money; it didn’t lavish Wall Street with cheap loans and debt at the public’s expense.

All Americans should be deeply concerned that our government supported, and continues to support, banks over people. The Treasury Department and Fed continue to mislead us over this. And we all pay the price.

Treasury's Titillation over TARP and budget increase

The Treasury department spends an awful lot of PR time extolling the success of the TARP program (and never mentioning any of the other myriad of bank subsidies and guarantees provided outside the realm of Congressional approval that rendered the $700 billion program a small percentage of the financial aid package to Wall Street or a peep about the $4.1 trillion of debt it issued since the fall of 2008, $ 1 trillion of which rotated through banks and into historically high excess reserves at the Fed).

Good for them.  Today, Geithner spewed another projectile of self-pride over the $24 billion profit we taxpayers are gonna reap from his stellar investment in reckless banks and risky assets. This silenced the critics, as one commentary pointed out. Sure, cutting us a check wasn't the point - I mean, if it was successful betting he was going for, the $700 billion of TARP money put into say, silver , would have bagged us $2.1 trillion.  

But, TARP only appears to have worked if you ignore the shell-game that surrounded it. Without the amount of collective federal support, including the lavishing of guarantees, toxic asset purchases that remain on federal books, the abolition of accounting requirements that would force banks to reveal the real risk in their existing loan portfolios, the cheapening of money to historically low levels by the Fed's QEX efforts, and the very notion that the Treasury department was the banks' financial cushion,  banks would have not been able to repay the isolated TARP handouts with interest. They wouldn't have had the money from other avenues to use. It's meaningless to consider this a savior type of economic strategy. Aside from which, the CBO tallied the budget cost of TARP at $25 billion, so at best, the shell-game paused at a wash.

On a separate note, if TARP was so successful, why is Geithner requesting a 14.2% budget increase for the Office of Inspector General. It may be small potatoes after his $24 billion windfall to quibble over a $5 million dollar hike, but  given the noise about the program winding down in this time of budget banter in Washington, and unless the next SIGTARP stepping into Neil Barofsky's shoes is getting a $5 million raise,it seems excessive. Just saying.