Dock David Treece A Regulation That’s Right: Bring Back Glass-Steagall

[hvactec]

Now we’re begging: Will someone PLEASE bring back Glass-Steagall? The Glass-Steagall Act was, of course, the legislation passed in the early 1930s in response to a certain banking crisis that led to a particular Great Depression. Among other things, the Act erected a “Chinese wall” between a financial institution’s investment banking and merchant banking functions. In less complicated terms, the law forced banks to separate any business it was transacting on behalf of clients from the speculative moves it made with its own money. For the layman: banks can’t make dumb bets with clients’ money.

Sort of makes sense, doesn’t it?

Well apparently it seemed a bit stingy for President Clinton and the Republicans in Congress in 1999. We have Senator Phil Gramm and Representative Jim Leach to thank for that one. Here’s the problem: The heads of big banks have this terrible habit of thinking that they’re the smartest guys in the room. Anyone who doesn’t believe that need only watch Ben Bernanke talk for more than 30 seconds. Actually, let’s refine that a bit. The problem isn’t that banking executives think they’re savants, the real problem is that they aren’t.

In the modern financial age, a lot of very highly paid guys with impressive titles who look at way too many numbers and think they make sense have concocted some very complex “hedging” strategies for “managing risk.” They think they understand the crafty derivatives they’ve invented – which are completely unregulated and totally opaque – and all the counterparty risk involved. They don’t, and therein lies the rub.

Mark Twain once said “It’s not what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Truth be told, what bankers are doing wouldn’t be so bad if they were the only ones who suffered from their own idiocy. Enter Congressmen Gramm, Leach, President Clinton, then President Bush (II), hammerin’ Hank Paulson, and Bernanke. It’s not just that banks are using complicated models that they don’t understand to speculate on securities they think they comprehend but don’t, they’re now doing it with client money. Starting to get the picture?

The end of October brought with it a new addition to the top 10 biggest bankruptcies of all-time when MF Global went belly-up under the incredible leadership of ex-Goldman chief and New Jersey governor Jon Corzine. Yes, MF Global has been the subject of a good deal of headlines lately, but bear with us for a moment while we take a closer look and apply it to a growing — and scary – trend.

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[JakeStarkey]

That anyone who believes that bankers can be trusted with our or the government's money without supervision and regulation simply will not read and understand history's lessons.