GOP Whiffs On Bank Reform, Big Time

Investors Business Daily ^ | July 21, 2016 | Editorial

[expat_panama]

Financial Crisis: The Republican platform put forward in Cleveland is a lively and conservative document, full of great ideas to make America great again. But one thing stands out as a truly bad idea: reviving the partly-repealed Glass-Steagall Act.

"We support reinstating the Glass-Steagall Act, which prohibits commercial banks from engaging in high risk activities," says the platform document.

What? It was one of the Democrats' big talking points during the 2007-2008 financial crisis and after that a major cause of the panic was due to Bill Clinton in 1999 foolishly going along with the Republicans to get rid of Glass-Steagall...

...only problem is, it isn't true...

...It actually increased costs to consumers, but didn't really make the banking system safer...

...Glass-Steagall wasn't "repealed." The only part that was eliminated was one that kept banks from being affiliated...

Repeal of that provision had nothing -- zero -- to do with the financial crisis. It's a myth...

...securities had nothing to do with the crisis."

As we've noted literally dozens of times before, the financial crisis' origins lay in Bill Clinton's decision in the early 1990s to use Big Government to force banks to make mortgage loans to low-income people who were bad credit risks.

The banks did as they were told -- they were threatened, actually -- and then, when trillions in loans predictably went bad, the banks were demonized and scapegoated by the left...

...that's how Dodd-Frank, the worst financial law in modern history, was born...

...to believe that simply restoring one part of Glass-Steagall will end "too-big-to-fail" for banks. Not so... ...less profitable and arguably much weaker.

Let's hope the next Congress forgets this bad idea...

[DesertRhino]

“securities had nothing to do with the crisis. As we’ve noted literally dozens of times before, the financial crisis’ origins lay in Bill Clinton’s decision in the early 1990s to use Big Government to force banks to make mortgage loans to low-income people who were bad credit risks.”

Bullcrap, and then the banks bundled crap loans and labeled them grade A. They sold them to unwitting investors. And they even bet against them with AIG because they knew they were crap.
But the banksters love the story that they were forced to give aunt Beasley a homeloan and they were helpless victims.

[1rudeboy]

Kinda’ like what I say: if I’m walking home at night, get off the sidewalk and into the street. Make room for me.

[yefragetuwrabrumuy]

The Trump campaign quietly let slip a huge policy idea, when it suggested that Bernie Sanders’ idea of breaking up the giant banks, had merit.

If Trump does this, it will have to be by stealth, and he will need to get all his ducks in a row, because the giant banks will do *anything* to keep from being broken up.

It will make the breakup of AT&T look like a cakewalk.

It will almost have to have a subsection criminalizing *any* lobbying or even political contributions from them for the length of time it takes to tear them up.

Truthfully, it would help Trump immensely if he had filled two or even three SCOTUS seats with reliable conservatives.

[1rudeboy]

Wait a minute. Forcing banks to sell crap loans is ok, but banks reselling crap loans is not?

[expat_panama]

Trump needs to get this information out

He's not and we don't really know why. 

All we know is that he's got a pretty full plate these days and the public (and appearantly along w/ a pretty big chucnk of the FR) really hates banks more than they hate Marxists.  My personal guess is that he's playing along with the 'bash-the-rich' crowd to get elected and that he'll wind down as voters go back to sleep.

My concern is that the cause of America's ills is not which partisan faction controls, but rather the business-bashing that puts 'em in office.   I'd dearly love to see the public sober up and put aside this class warfare schtick once and for all.

[Pelham]

I think you’re correct that ‘repeal’ of Glass-Steagall isn’t what happened. ‘Repeal of G-S’ has become a catchall term for innovations that occurred in the 1990s and 2000s that did contribute to the crisis but probably didn’t involve G-S itself.

My own suspicion is that what gets called ‘the repeal of G-S’ was largely the result of the Commodities Futures Modernization Act 2000, signed by Clinton, that kept derivatives completely unregulated.

It’s my impression that due to CFMA 2000 banks were able to take on very high levels of risk in mortgage-related derivatives. Regulators were unable to measure the level of that risk, and unable to do anything if they did know.

Because of a lack of transparency in the derivatives market banks themselves were in the dark on the real value of the derivatives that they were buying. And banks were misled on the high risk involved because the rating agencies were calling the loans that the derivatives were based upon AAA when they were more like time bombs... a result of the entire industry basing their pricing on the David X Li ‘Gaussian copula function’ IIRC.

Brooksley Born at the Commodity Futures Trading Commission (CFTC) was the voice in the wilderness warning that big trouble was coming from the derivatives market.

http://wallstreetonparade.com/2015/05/brooksley-born-still-telling-the-uncomfortable-truths-about-wall-street/

‘Brooksley Born is best known as the sole regulator in the Clinton administration who attempted to regulate derivatives and became the target of bullying by then Treasury Secretary Robert Rubin, his enforcer, Larry Summers, and Fed Chair Alan Greenspan. Frontline aired an expose on the guts Born summoned to stand up to the Wall Street enablers’ cartel. In the end, of course, Wall Street had its way and derivatives remained unregulated. Born resigned her post.

‘In her talk at the conference, Born takes on the preposterous proposition that markets can self-regulate. During her time at the CFTC, Born said Wall Street had poured billions of dollars into deregulation lobbying which was “supported by the fallacious beliefs championed notably by Alan Greenspan that financial markets are self regulating and that financial firms are capable of policing themselves.”

‘Born told the crowd that the dangers have only grown since the collapse:

“The power and influence of the financial sector threatens a continuation of the regulatory capture that contributed to the financial crisis. Financial firms, too often, have significant say in the appointment of high regulatory officials. The tendency of some former government officials to obtain highly lucrative positions in the financial sector after leaving government may well act as an inducement to those remaining in government to serve the interest of the financial sector rather than those of the public.”

‘Born reminded the audience that since the enactment of the Dodd-Frank financial reform legislation, the country has witnessed more frauds, manipulations and reckless behavior on the part of the very same financial firms, adding:

“With respect to derivatives trading, JPMorgan lost $6 billion through speculative trading of the London Whale and both MF Global and Peregrine Financial went bankrupt after allegedly engaging in misappropriation of customer funds. In light of all this, we must ask ourselves whether the financial and political power of our largest financial firms poses a threat to our policy making on financial regulation and seriously undercuts the administration of justice.”

‘Born also cautioned the public against believing that the derivatives’ market has been fixed, stating:

“Dodd-Frank gave the Commodity Futures Trading Commission an enormous new responsibility to impose regulation on this previously unregulated market which was a significant cause of the financial crisis and which is currently estimated to be $400 trillion in notional amount [face amount] in the United States and almost $700 trillion globally. It’s actually larger than it was at the time of the financial crisis…The jury is still out on whether the regulatory regime under Dodd-Frank will be adequate to address the dangers of this market…”

‘According to Born, too many exemptions have been carved out in the derivatives arena under Dodd-Frank, including derivatives used for hedging and foreign exchange swaps.

[Wolfie]

Sure thing. Enjoy funding the next bank bailout.

[ek_hornbeck]

As we've noted literally dozens of times before, the financial crisis' origins lay in Bill Clinton's decision in the early 1990s to use Big Government to force banks to make mortgage loans to low-income people who were bad credit risks.

And who forced the banks to roll these high risk mortgages into packages and unload them to investors under false pretenses?

The Goldman-Sachs crowd is playing the "poor little rich boy" card, I'm not buying it. They aren't the victims here, the American taxpayers are.

[Toddsterpatriot]

Enjoy funding the next bank bailout.

The bank bailout was profitable.

[Toddsterpatriot]

It’s my impression that due to CFMA 2000 banks were able to take on very high levels of risk in mortgage-related derivatives.

I don't consider typical MBS to be derivatives. They're usually a pile of mortgages. In some cases, sliced into tranches of different grades.

[expat_panama]

From the article posted above: ...Glass-Steagall wasn't "repealed."...

From rstrahan's post #2: IBD thinks reinstatement of Glass-Stegall is a bad idea

Some times I feel like I've fallen into a parallel universe...

What's going on is that IBD's just pointing out that the Marxists blame the 2009 crash on deregulation in the form of a GS 'repeal' that never happened.

 I'm not sure which is craziest, believing that GS got repealed in 1999, or that the 1999 wasn't just a pile of new regulations, or maybe it's thinking that regulation is what we want in the first place.

[ek_hornbeck]

The bank bailout was profitable

The banks and investment firms certainly made a killing, thanks to tax dollars. Does this mean that you're all in favor of losses being subsidized by taxpayers as long as Wall Street speculators are at the receiving end?

A lot of people have a strange thought process when it comes to these things. If some left-wing politician suggested that taxpayers bail out failing garages or grocery stores across the country, most Republicans would (rightly) condemn that as socialist micro-management of the economy by the state. Apply the same essential policy to Wall Street and suddenly it becomes sound "conservatism".

[Sequoyah101]

We can’t run a country lurching from one set of rules to another every decade or two. The turmoil is destroying us. What is more, each lurch of regulation only adds to the last one. None of our regulatory baggage ever really goes away. It just morphs with more attached to it.

We are buried by regulation that is enforced spottily instead of just having had the regulatin we had enforced steadily and unifromly.

[Toddsterpatriot]

Does this mean that you're all in favor of losses being subsidized by taxpayers

The taxpayers didn't spend a dime to cover bank losses. The TARP bailout was repaid, the US Treasury made a profit.

[Night Hides Not]

Nobody forced the banks to develop CDS’s and MBS’s and fraudently sell them around the world while boasting of ripping their customers’ faces off.

I worked at the FDIC for five years. My section oversaw the thousands of mortgage loans acquired from closed banks. It was our primary job to get those loans cleaned up, and put back in the private sector, and by extension, replenish the Deposit Insurance Fund.

Our section did a pretty good job. In fact, we had two servicers voluntarily withdraw from their contracts, because we were too tough on them.

Whatever trust I had for bankers vanished during my time there. There were hundreds of good reasons for closing each and every one of the 500 banks we closed from 2008 to 2012. Our job was not to investigate fraud, it was to clean up the mess.

I've read The Big Short, and seen the movie a couple of times...it's now on Netflix. It did a great job of explaining sophisticated financial products such as CDO's. So good, that I hope Albert Ruddy applies the same literary genius in the coming miniseries on Atlas Shrugged.

[Pelham]

Weren’t the banks also able to invest in the derivatives based upon mortgage backed securities? The ‘CDOs Squared’, the ‘Synthetic CDOs’, and other instruments that Warren Buffett in a moment of clarity mockingly called “weapons of mass financial destruction”.

I thought that this was the sort of fire that banks had been able to play with.

I know that Credit Default Swaps (CDS), which are more of an insurance product than a derivative, played a big role in the mess. There was a way to use an unlimited number of CDSs to bet against the very mortgages that you were writing, even when you didn’t hold any of them. An incentive to write bad loans knowing that your CDSs would pay off when the mortgages defaulted.

[Laser_Ray]

I’d wager that 1. Banking stuff is hard to understand in the first place unlike illegal immigration or crime issues, 2. Many of the marginal Democrat voters he’s trying to attract are too stupid to understand something that complicated, 3. If he can’t build a wall and keep the economy from imploding stuff like this will rapidly become academic.

[Toddsterpatriot]

Weren’t the banks also able to invest in the derivatives based upon mortgage backed securities?

Synthetic MBS and synthetic CDOs are definitely derivatives.

I thought that this was the sort of fire that banks had been able to play with.

Most banks had nothing to do with the synthetic ones, they lost their ass on plain vanilla mortgages and MBS.

There was a way to use an unlimited number of CDSs to bet against the very mortgages that you were writing, even when you didn’t hold any of them.

When Goldman, for example, created synthetic MBS and sold them, they, Goldman, had the other side of that bet.

Like when you write (sell) an option, you have the opposite market position as the option buyer.

An incentive to write bad loans knowing that your CDSs would pay off when the mortgages defaulted.

If you can get someone to take the other side of the bet, sure.

[expat_panama]

what gets called ‘the repeal of G-S’ was largely the result of the Commodities Futures Modernization Act 2000, signed by Clinton, that kept derivatives completely unregulated.

You can't possibly be saying that buying and selling of every single financial security derivative contract in the U.S. since 2000 happened completely w/o any government oversight at all.  Like, I looked in the html text and the PDF and I didn't get that at all.

[Toddsterpatriot]

I think he means OTC derivatives. Exchange traded derivatives, options and futures, are heavily regulated.