¿What is the reason Glass-Steagall act repeal is blamed for surge of derivative?

[hugolp]

¿What is the reason Glass-Steagall act repeal is blamed for surge of derivative?

I am a bit tired of political propaganda about this, and would like to know the technical reason why the repeal of Glass-Steagal act in 1999 by the Clinton administration is blamed for the massive surge of the derivative market. I dont really get it.

The question poped to me because I am studying the Basels accords and Bassels I seems like the real reason why derivatives started to be used massively by banks. Once I have a clear vision of this I may open a thread, but can anyone tell me the explanation on how repealling Glass-Steagal created the surge in the derivative market.

Thanks.

 

[bobbyw24]

Who's More to Blame: Derivatives or the Glass-Steagall Repeal?

http://www.fool.com/investing/gener...to-blame-derivatives-or-the-glass-steaga.aspx

Dan Caplinger and Christopher Barker
March 24, 2009

Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is one of four second-round matchups you can vote on … enjoy!

The case for derivatives, by Dan Caplinger
Having already made the general case for why derivatives are most to blame for the financial crisis, I wanted to share some thoughts from a well-respected analyst on the subject:

* In correctly predicting last July that Wachovia would burn your portfolio, he cited accounting practices that "disguise the true extent of derivatives losses" as a primary factor for his winning call. The stock's price fell from $17 when he made this call to below $1 before Wells Fargo (NYSE: WFC) grabbed the bank out from under Citigroup's (NYSE: C) nose for $7.
* A year ago, he pointed out how the crisis would spread to Europe, noting that "toxic securitized debt instruments and deleveraging derivatives may be among the leading exports from the U.S. for a while."
* One oft-cited factor in his bullish calls for gold stocks like Yamana Gold (NYSE: AUY) is how "[c]redit markets remain effectively dysfunctional, and the multi-trillion-dollar derivatives market appears set to continue de-leveraging."

Who's this prescient analyst? None other than Christopher Barker, my esteemed opponent, who finds himself somewhat awkwardly on the other side of the argument in this debate.

Admittedly, I can see how the repeal of Glass-Steagall could seem like a tempting scapegoat for the crisis. Combining banks with securities firms carries the potential for huge conflicts of interest. But it fails to explain a number of things:

* How did banks and other lenders that didn't even have securities businesses, such as Countrywide Financial, Washington Mutual, and IndyMac, manage to set in motion the cycle of toxic mortgages that got us in this mess in the first place?
* How did securities firms that until recently had absolutely no banking exposure, including Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), get to the point of needing capital infusions in order to survive?

The answer to those questions is the proliferation of derivatives. That's why I believe derivatives deserve more of the blame.

The case for the repeal of the Glass-Steagall Act, by Christopher Barker
I'm proud of you, Fools!

Alan Greenspan certainly helped set the stage for this crisis by fostering excessive liquidity in the credit markets. Ben Bernanke is presently dumping indebtedness upon unborn generations of Americans in what I consider a fatally flawed response strategy.

Nonetheless, you well-informed Fools peered beyond those alluring scapegoats and voiced your greater discontent with the fateful extinguishing of Glass-Steagall and the creation of those convoluted instruments called derivatives. By selecting these factors over Greenspan and Bernanke, you exhibit a keen understanding of the historic events now unfolding.

 

[hugolp]

Thanks, bobbyw24, but that article, the part that claims against the repeal, does not blame the 1999 repeal act, the one that some people are blaming now, but it blames the 1980's partial repeals. I went to wikipedia and there was two repeals in the 80's. One in 1980 and the other one in 1982, and I suspect the one the article blames is the one in 1982 since it has to do with home mortgages. But from reading the wikipedia information I still dont understand exactly why. The article says that it allowed the banks to play with derivatives but wikipedia says nothing about it.

 

[hugolp]

Ok, so I think I've found the criticism, and its actually not about the repeal of Glass-Steagal exactly. The "Gramm–Leach–Bliley Act", the one that repealed what was left of Glass-Steagal, also changed other legislation, and that is where the blame is, not in the Glass-Steagal repeal. From Wikipedia:

Contrary to Phil Gramm's claim that "GLB didn't deregulate anything" (see Defense), the GLB Act that he co-authored explicitly exempted security-based swap agreements (a derivative financial product based on another security's value or performance) from regulation by the SEC by amending the Securities Act of 1933, Section 2A, and similarly the Securities Exchange Act of 1934, Section 3A, to read, in part:[28] [29]
1. The definition of "security" in section 2(a)(1) does not include any security-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act [15 USCS § 78c note]).
2. The Commission is prohibited from registering, or requiring, recommending, or suggesting, the registration under this title of any security-based swap agreement[.] ...
3. The Commission is prohibited from ... promulgating, interpreting, or enforcing rules; or ... issuing orders of general applicability; ... as prophylactic measures against fraud, manipulation, or insider trading with respect to any security-based swap agreement[.]

And the congressman that passed the law defend themselves saying that in reallity they did not left securities unregulated, but that just changed the regulatory oversight from the SEC to the Fed. I honestly dont trust neither the SEC (Madoff...) nor the Fed. From wikipedia too:

In February 2009, one of the act's co-authors, former Senator Phil Gramm, wrote in its defense that:
"...if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass-Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified.
" Moreover, GLB didn't deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB." [33]

Any clarifications wellcome.

 

[peacepotpaul]

If derivatives were made illegal, would Glass Steagall be relevant?

Or, if specific derivatives such as CDO, CDS, MBS, were banned, would any regulations be necessary?

 

[hugolp]

If derivatives were made illegal, would Glass Steagall be relevant?

Or, if specific derivatives such as CDO, CDS, MBS, were banned, would any regulations be necessary?

Banning derivatives would be in itself a regulation. But I dont see the point or how is this related to my question.

 

[hugolp]

Bump.

Anyone confirming that the change in regulatory oversight from the SEC to the Fed of the derivatives swaps would be much apreciated.

 

[HOLLYWOOD]

Replace the words; FEDERAL RESERVE with "The Banking Clearing House" aka Banking Cabal

Phil Gramm left the US Senate in January 2003 and immediately went to UBS AG as Vice Chairman. Gramm currently earns compensation well into the 7 figure category. What US Senator Judd Gregg (R-NH) to follow similar steps next January when he's out.

http://www.ubs.com/1/e/media_overview/media_americas/search1/search10?newsId=58925

UBS AG on The Gramm-Leach-Bliley Financial Modernization Act
http://www.ubs.com/1/ShowMedia/inve...archive?contentId=32868&name=handbook00_e.pdf

The Gramm-Leach-Bliley Financial Modernization
Act of 1999 was enacted last year, liberalizing
the restrictions on the non-banking activities
of banking organizations, including non-
US banks operating US banking offices. Among
other things, the Gramm-Leach-Bliley Act
– allows bank holding companies meeting management
and capital standards to engage in a
substantially broader range of non-banking
activities than previously was permissible, including
insurance underwriting and making
merchant banking investments;
– allows insurers and other financial services
companies to acquire banks;
– removes various restrictions that previously
applied to bank holding company ownership
of securities firms and mutual fund advisory
companies; and
– revises the overall regulatory structure applicable
to bank holding companies, including
those that also engage in insurance and securities
operations.
These provisions of the Gramm-Leach-Bliley
Act became effective on 11 March 2000. On
10 April 2000, UBS AG was designated a ‘‘financial
holding company’’ under the Gramm-Leach-
Bliley Act, which generally permits it to exercise
the new powers granted by that act.
The Gramm-Leach-Bliley Act also modifies
other current financial laws, including laws related
to the conduct of securities activities by US

These entities are regulated by a number of different
government agencies and self-regulatory
organizations, including the Securities and Exchange
Commission and the National Association
of Securities Dealers. Depending upon the specific
nature of a broker-dealer’s business, it may also be
regulated by some or all of the New York Stock
Exchange, the Municipal Securities Rulemaking
Board, the US Department of the Treasury, the
Commodities Futures Trading Commission, and
other exchanges of which it may be a member.
These regulators have available a variety of sanctions,
including the authority to conduct administrative
proceedings that can result in censure,
fines, the issuance of cease-and-desist orders of
the suspension or expulsion of the broker-dealer
or its directors, officers or employees.

 

[bobbyw24]

Senators’ plan would put derivatives under the Federal Reserve

Bump.

Anyone confirming that the change in regulatory oversight from the SEC to the Fed of the derivatives swaps would be much apreciated.

Senators’ plan would put derivatives under the Federal Reserve


Senators are considering giving the Federal Reserve power to regulate clearinghouses for derivatives in a wide-ranging financial overhaul bill.

Sens. Jack Reed (D-R.I.) and Judd Gregg (R-N.H.) have been deep in negotiations on how to impose new restrictions on the opaque and multitrillion-dollar market for derivatives that many blame for exacerbating the financial crisis.



Gregg has been considering ways to give the central bank more authority over clearinghouses, the third-party entities that settle derivatives transactions.


“It is important that the Federal Reserve be involved in the risk management, oversight and regulation of clearinghouses,” Gregg said in a statement to The Hill.

The House passed legislation in December giving the bulk of the authority to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

“The SEC and the CFTC should maintain a role on governance, market structure and access,” Gregg said in the statement.

The Federal Reserve is the main regulator of the nation’s largest bank holding companies, which also are the biggest players in the derivatives market.

Derivatives transactions have been a major source of profit for the nation’s largest banks and financial institutions. In the third quarter of last year, banks took in $5.7 billion in revenue on derivatives, according to the Office of the Comptroller of the Currency. Five large U.S. commercial banks control 97 percent of the total face value of those transactions.

Banks also have major stakes in the clearinghouses, and some lawmakers have looked for ways to limit the influence of the banks.

http://thehill.com/business-a-lobby...uld-put-derivatives-under-the-federal-reserve

 

[hugolp]

Replace the words; FEDERAL RESERVE with "The Banking Clearing House" aka Banking Cabal

Phil Gramm left the US Senate in January 2003 and immediately went to UBS AG as Vice Chairman. Gramm currently earns compensation well into the 7 figure category. What US Senator Judd Gregg (R-NH) to follow similar steps next January when he's out.

http://www.ubs.com/1/e/media_overview/media_americas/search1/search10?newsId=58925

UBS AG on The Gramm-Leach-Bliley Financial Modernization Act
http://www.ubs.com/1/ShowMedia/inve...archive?contentId=32868&name=handbook00_e.pdf

I dont doubt there were big banks after the Gramm-Leach-Bliley Act. In the USA and specially in the finantial sector nothing becomes law without the involment of big banks. Even the original Glass Steagal Act of 1933 was a movement from the Rockefeller to attact the Morgans, as explained by Rothbard in his book "America's Great Depression" and latter confirmed by other economists. Basically what happened is that the banks under the influence of the Rockefeller where either investment or commercial banks but they were almost not mixed banks. On the contrary JPMorgan was a investment and a commercial bank and the law hurt the Morgan interests big time. That was the real reason Roosevelt passed the Glass Steagal Act. He was not trying to protect the banking system or whatever. Hoover, the previous president, was under Morgan influence, but Roosevelt was under the Rockefeller influence and he passed the law to attack the Morgan interests. It was not the only finantial reform that Roosevelt passed that was a direct attact from the Rockefeller to the Morgans.

Since the original law was alredy a bankers fight, I have no doubt the repeal was also motivated by some banker faction.

The point is that it seems to me that the Gramm-Leach-Bliley Act did not had a bad effect, on the contrary. And that all the attacks on that act are just political propaganda and are distracting a lot of people from the real problems of the finantial and monetary markets (and there are a lot).

 

[hugolp]

Senators’ plan would put derivatives under the Federal Reserve


Senators are considering giving the Federal Reserve power to regulate clearinghouses for derivatives in a wide-ranging financial overhaul bill.

Sens. Jack Reed (D-R.I.) and Judd Gregg (R-N.H.) have been deep in negotiations on how to impose new restrictions on the opaque and multitrillion-dollar market for derivatives that many blame for exacerbating the financial crisis.



Gregg has been considering ways to give the central bank more authority over clearinghouses, the third-party entities that settle derivatives transactions.


“It is important that the Federal Reserve be involved in the risk management, oversight and regulation of clearinghouses,” Gregg said in a statement to The Hill.

The House passed legislation in December giving the bulk of the authority to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

“The SEC and the CFTC should maintain a role on governance, market structure and access,” Gregg said in the statement.

The Federal Reserve is the main regulator of the nation’s largest bank holding companies, which also are the biggest players in the derivatives market.

Derivatives transactions have been a major source of profit for the nation’s largest banks and financial institutions. In the third quarter of last year, banks took in $5.7 billion in revenue on derivatives, according to the Office of the Comptroller of the Currency. Five large U.S. commercial banks control 97 percent of the total face value of those transactions.

Banks also have major stakes in the clearinghouses, and some lawmakers have looked for ways to limit the influence of the banks.

http://thehill.com/business-a-lobby...uld-put-derivatives-under-the-federal-reserve

Yes, I have heard that the Fed might get more powers as bank regulator. You have to tell me some day how do you find information and articles the way you do.

The thing is that I wanted confirmation of the claims of Senator Phil Gramm when he says that the bill of 1999 moved the regulatory powers over securities-based swaps from the SEC to the Fed and not, as some claim, leaved them unregulated. I want to know if Senator Phil Gramm is trying to lie his way out of the accusation or he is right and the accusation is false.

 

[bobbyw24]

You have to tell me some day how do you find information and articles the way you do.

I am a lawyer who deals with Mortgaged Backed Securities (I represent debtors in foreclosures and bankruptcy cases). I had to learn this stuff to defend my client's cases and fight the banks and securitized trusts

Check out this site: http://finviz.com/news.ashx

Read the book The Web of Debt. Many people here don't agree with Ellen Brown's solutions but you will learn a helluvalot about finance, and the modern crisis.

Here are some excerpts:

It's the Derivatives, Stupid! Why Fannie, Freddie, AIG had to be Bailed Out

http://www.globalresearch.ca/index.php?context=va&aid=10265

Ellen Brown – Stock Market Collapse: More Goldman Market Rigging?

http://maxkeiser.com/2010/05/08/ellen-brown-stock-market-collapse-more-goldman-market-rigging/

Ellen's site has parts of her book for free:

LESSONS FROM THE WIZARD OF OZ

http://www.webofdebt.com/excerpts/chapter-1.php

 

[hugolp]

I am a lawyer who deals with Mortgaged Backed Securities (I represent debtors in foreclosures and bankruptcy cases). I had to learn this stuff to defend my client's cases and fight the banks and securitized trusts

Check out this site: http://finviz.com/news.ashx

Read the book The Web of Debt. Many people here don't agree with Ellen Brown's solutions but you will learn a helluvalot about finance, and the modern crisis.

Here are some excerpts:

It's the Derivatives, Stupid! Why Fannie, Freddie, AIG had to be Bailed Out

http://www.globalresearch.ca/index.php?context=va&aid=10265

Ellen Brown – Stock Market Collapse: More Goldman Market Rigging?

http://maxkeiser.com/2010/05/08/ellen-brown-stock-market-collapse-more-goldman-market-rigging/

Ellen's site has parts of her book for free:

LESSONS FROM THE WIZARD OF OZ

http://www.webofdebt.com/excerpts/chapter-1.php

The first web is very interesting. I see now where you get all the interesting news. Great finding.

But about Ellen Brown, I really think she is full of bullshit. I just started reading the last link, the Lessons from the wizard of oz:

Money reform advocates today tend to argue that the solution to the country's financial woes is to return to the "gold standard," which required that paper money be backed by a certain weight of gold bullion. But to the farmers and laborers who were suffering under its yoke in the 1890s, the gold standard was the problem. They had been there and done it and knew it didn't work. William Jennings Bryan called the bankers' private gold-based money a "cross of gold." There was simply not enough gold available to finance the needs of an expanding economy. The bankers made loans in notes backed by gold and required repayment in notes backed by gold; but the bankers controlled the gold, and its price was subject to manipulation by speculators. Gold's price had increased over the course of the century, while the prices laborers got for their wares had dropped. People short of gold had to borrow from the bankers, who periodically contracted the money supply by calling in loans and raising interest rates. The result was "tight" money – insufficient money to go around. Like in a game of musical chairs, the people who came up short wound up losing their homes to the banks.

Bankers had control over the monetary system back then because the government had passed a law to centralize credit on the banks of New York. But since this law was passed by Lincoln and this people like Lincoln they will ignore this, and just say that bankers controlled all the gold, wich does not make sense. They are just twisting history to fit a monetary theory that makes no sense and also that has its bases on keynesian economics.

Anyway, I really want to keep this thread about making sense of the Glass Steagal Act repeal and its consequences, and the only part I am missing is this:

The thing is that I wanted confirmation of the claims of Senator Phil Gramm when he says that the bill of 1999 moved the regulatory powers over securities-based swaps from the SEC to the Fed and not, as some claim, leaved them unregulated. I want to know if Senator Phil Gramm is trying to lie his way out of the accusation or he is right and the accusation is false.

Any help from anyone apreciated.

 

[FrostyLeaf]

I am a bit tired of political propaganda about this, and would like to know the technical reason why the repeal of Glass-Steagal act in 1999 by the Clinton administration is blamed for the massive surge of the derivative market. I dont really get it.

The question poped to me because I am studying the Basels accords and Bassels I seems like the real reason why derivatives started to be used massively by banks. Once I have a clear vision of this I may open a thread, but can anyone tell me the explanation on how repealling Glass-Steagal created the surge in the derivative market.

Thanks.

I don't you can say that the repeal itself was a 'lone gunner' so to speak. The principles of Banking found in the Act were long ignored, especially by Greenspan. The repeal just allowed the fire to burn even hotter.

We have to seperate Commercial Banking, and the physical economic processes that are with it, from Investment Banking. Glass-Steagal did that from 1933. It whiped out the worthless paper while allowing the processes that were apart of everyday life to keep going.

We have to protect the people while we go through a process of Bankruptcy. I.E. Putting the Federal Reserve System under a Glass-Steagal Standard of Banking. You then get rid of the "monopoly money." What you have left is a system of national banking that is free of speculation and gambling. Don't get me wrong. People should be able to gamble. But they shouldnt be allowed to carry so much speculative garbage to an extent they hinder the abilities of the depository functions of commercial banking practices.

http://www.larouchepac.com/lpactv?nid=14492

Brief Video on Glass-Steagal. Others can be found.

 

[hugolp]

I will use this post that I did not see back then to bumb this thread.

I don't you can say that the repeal itself was a 'lone gunner' so to speak. The principles of Banking found in the Act were long ignored, especially by Greenspan. The repeal just allowed the fire to burn even hotter.

We have to seperate Commercial Banking, and the physical economic processes that are with it, from Investment Banking. Glass-Steagal did that from 1933. It whiped out the worthless paper while allowing the processes that were apart of everyday life to keep going.

We have to protect the people while we go through a process of Bankruptcy. I.E. Putting the Federal Reserve System under a Glass-Steagal Standard of Banking. You then get rid of the "monopoly money." What you have left is a system of national banking that is free of speculation and gambling. Don't get me wrong. People should be able to gamble. But they shouldnt be allowed to carry so much speculative garbage to an extent they hinder the abilities of the depository functions of commercial banking practices.

http://www.larouchepac.com/lpactv?nid=14492

Brief Video on Glass-Steagal. Others can be found.

Well, you have not answered to any of my questions. What you say is just another way of putting the same arguments that I alredy explained why they seem wrong.

Seriously, the original 1933 Glass Steagal act was just a political war and did not help the economy. Rothbard in his book about the Great Depression gives all the historical details.