THE TRUTH ABOUT THE BANKING CRISIS

The TRUTH about who is at fault for the current financial mess......As stated in the following article the GSA was repealed in 1999.....The repeal was signed by CLINTON after a multi-million dollar lobbying effort in Congress and at the White House. Though the subsequent bill to replace GSA was sponsored by Republicans, it didn't take long for the lobbying groups to eat away at the regulatory features of the new act and we ended up with the typical result of a liberal philosphy. A free-wheeling sex, drugs, free love, "Damn the consequences, I want mine" attitude that collapsed two mortgage companies run by liberals and the investment banks that got stuck with all the worthless paper. And by looking at ALL campaign contributions by the major financial firms for the past 10 years you will find that the vast majority of those campaign donations went to Democrats.....NOT Republicans.

Chrsitopher Dodd and Barrack Obama are the top two recipients of political donations from Fanny Mae with about $400,000 each. McCain received $45,000. The Democrats were responsible for essentially "criminalizing" the practice of "redlining" which was the practice of banks to NOT give loans to people with little or marginal potential to be able to repay the money and were deemed high risk.

The elimination of this practice was at least partly to blame for real estate prices skyrocketing. Many homes were purchased just to take advantage of a real estate market gone insane and resold just months later at a substantial profit. Much like the Tech Bubble during the Clinton years this was not sustainable. Anyone with any understanding of markets in general and real estate in particular knows that purchasing a home is a LONG-TERM investment, not a short-term flip.

Because of the barriers that the GSA placed within the banking industry the exact scenario we are experiencing now would NOT have occured without the repeal. Mortgages would not have become a commodity, and high risk mortgages would not have been available, and the false housing boom we experienced would not have occured.

I don't care how you intend to vote in November, but the next time you hear Obama trying to blame this crisis on Bush.....You should know the facts.....Below is the article I was speaking of.....Below that is a link to the Treasury Department website and a working paper on the subsequent law passed to take the place of GSA......Obviously the outcome wasn't what they anticipated in their working paper since they didn't anticipate the sleaze factor of people like Tony Rezko, Franklin Raines, Richard Syron or any of the others who got rich at the ultimate expense of US; the TAXPAYERS OF THIS COUNTRY.


In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, "improper banking activity", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash. According to that reasoning, commercial banks took on too much risk with depositors' money. Additional and sometimes non-related explanations for the Great Depression evolved over the years, and many questioned whether the GSA hindered the establishment of financial services firms that can equally compete against each other. We will take a look at why the GSA was established and what led to its final repeal in 1999.

Reasons for the Act - Commercial SpeculationCommercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new ssues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

Effects of the Act - Creating BarriersSenator Carter Glass, a former Treasury secretary and the founder of the U.S. Federal Reserve System, was the primary force behind the GSA. Henry Bascom Steagall was a House of Representatives member and chairman of the House Banking and Currency Committee. Steagall agreed to support the act with Glass after an amendment was added permitting bank deposit insurance (this was the first time it was allowed).As a collective reaction to one of the worst financial crises at the time, the GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled. Banks were given a year to decide on whether they would specialize in commercial or in investment banking. Only 10% of commercial banks' total income could stem from securities; however, an exception allowed commercial banks to underwrite government-issued bonds. Financial giants at the time such as JP Morgan and Company, which were seen as part of the problem, were directly targeted and forced to cut their services and, hence, a main source of their income. By creating this barrier, the GSA was aiming to prevent the banks' use of deposits in the case of a failed underwriting job. The GSA, however, was considered harsh by most in the financial community, and it was reported that even Glass himself moved to repeal the GSA shortly after it was passed, claiming it was an overreaction to the crisis.

Building More Walls.-Despite the lax implementation of the GSA by the Federal Reserve Board, which is the regulator of U.S. banks, in 1956, Congress made another decision to regulate the banking sector. In an effort to prevent financial conglomerates from amassing too much power, the new act focused on banks involved in the insurance sector. Congress agreed that bearing the high risks undertaken in underwriting insurance is not good banking practice. Thus, as an extension of the Glass-Steagall Act, the Bank Holding Company Act further separated financial activities by creating a wall between insurance and banking. Even though banks could, and can still can, sell insurance and insurance products, underwriting insurance was forbidden.

Were the Walls Necessary? - The New Rules of the Gramm-Leach-Bliley ActThe limitations of the GSA on the banking sector sparked a debate over how much restriction is healthy for the industry. Many argued that allowing banks to diversify in moderation offers the banking industry the potential to reduce risk, so the restrictions of the GSA could have actually had an adverse effect, making the banking industry riskier rather than safer. Furthermore, big banks of the post-Enron market are likely to be more transparent, lessening the possibility of assuming too much risk or masking unsound investment decisions. As such, reputation has come to mean everything in today's market, and that could be enough to motivate banks to regulate themselves.

Consequently, to the delight of many in the banking industry (not everyone, however, was happy), in November of 1999 Congress repealed the GSA with the establishment of the Gramm-Leach-Bliley Act, which eliminated the GSA restrictions against affiliations between commercial and investment banks. Furthermore, the Gramm-Leach-Bliley Act allows banking institutions to provide a broader range of services, including underwriting and other dealing activities.

Conclusion.-Although the barrier between commercial and investment banking aimed to prevent a loss of deposits in the event of investment failures, the reasons for the repeal of the GSA and the establishment of the Gramm-Leach-Bliley Act show that even regulatory attempts for safety can have adverse effects.

by Reem Heakal

http://www.occ.treas.gov/ftp/workpaper/wp2000-5.pdf