I received this [timely] email today. It is long and infuriating; but, well
worth the read. (It came as one long glob of text, which I've attempted to
break into appropriate paragraphs. Sorry if it doesn't quite flow.)
Subject: CHICKENS COME HOME TO ROOST - FSMA
1999 Clinton, Republicans agree to deregulation of US financial system
By Martin McLaughlin - 1 November 1999
An agreement between the Clinton administration and congressional
Republicans, reached during all-night negotiations which concluded in
the early hours of October 22, sets the stage for passage of the most
sweeping banking deregulation bill in American history, lifting virtually
all restraints on the operation of the giant monopolies which dominate the
financial system.
The proposed Financial Services Modernization Act of 1999 would do away with
restrictions on the integration of banking, insurance and stock trading
imposed by the Glass-Steagall Act of 1933, one of the central pillars of
Roosevelt's New Deal.
Under the old law, banks, brokerages and insurance companies were
effectively barred from entering each others' industries, and investment
banking and commercial banking were separated. The certain result of repeal
of Glass-Steagall will be a wave of mergers surpassing even the colossal
combinations of the past several years. The Wall Street Journal wrote, "With
the stroke of the president's pen, investment firms like Merrill Lynch & Co.
and banks like Bank of AmericaCorp., are expected to be on the prowl for
acquisitions." The financial press predicted that the most likely mergers
would come from big banks acquiring insurance companies, with John Hancock,
Prudential and The Hartford all expected to be targeted.
Kenneth Guenther, executive vice president of Independent Community
Bankersof America, an association of small rural banks which opposed the
bill, warned, "This is going to begin a wave of major mergers and
acquisitions in the financial-services industry. We're moving to an
oligopolistic situation."
One such merger was already carried out well before the passage of the
legislation, the $72 billion deal which brought together Citibank, the
biggest New York bank, and Travelers Group Inc., the huge insurance and
financial services conglomerate, which owns Salomon Smith Barney, a major
brokerage. That merger was negotiated despite the fact that the merged
company, Citigroup, was in violation of the Glass-Steagall Act, because
billionaire Travelers boss Sanford Weill and Citibank CEO John Reed were
confident of bipartisan support for repeal of the 60-year-old law.
Campaign of influence-buying: They had good reason, to be sure. The banking,
insurance and brokerage industry lobbyists have combined their forces over
the last five years to mount the best-financed campaign of influence-buying
ever seen inWashington. In 1997 and 1998 alone, the three industries spent
over $300 million on the effort: $58 million in campaign contributions to
Democraticand Republican candidates, $87 million in "soft money"
contributions to the Democratic and Republican parties, and $163 million on
lobbying ofelected officials. The chairman of the Senate Banking Committee,
Texas Republican Phil Gramm,himself collected more than $1.5 million in cash
from the three industries during the last five years: $496,610 from the
insurance industry, $760,404 from the securities industry and $407,956 from
banks.
During the final hours of negotiations between the House-Senate conference
committee and White House and Treasury officials, dozens of well-heeled
lobbyists crowded the corridors outside the room where the final deal-making
was going on. Edward Yingling, chief lobbyist for the American Bankers
Association, told the New York Times, "If I had to guess, I would say it's
probably the most heavily lobbied, most expensive issue" in a generation.
While Democratic and Republican congressmen and industry lobbyists claimed
that deregulation would spark competition and improve services to consumers,
the same claims have proven bogus in the case of telecommunications,
airlines and other industries freed from federal regulations. Consumergroups
noted that since the passage of a 1994 banking deregulation bill which
permitted bank holding companies to operate in more than one state, both
checking fees and ATM fees have risen sharply.
Differing versions of financial services deregulation passed the House and
Senate earlier this year, and the conference committee was called to work
out a consensus bill and avert a White House veto.
The principal bone of contention in the last few days before the agreement
had nothing to do with the central thrust of the bill, on which there was
near- unanimous bipartisan support. The sticking point was the effort by
Gramm to gut the Community Reinvestment Act, a 1977 anti-redlining law which
requires that banks make a certain proportion of their loans in minority and
poor neighborhoods.
Gramm blocked passage of a similar deregulation bill last year over demands
to cripple the CRA, and bank lobbyists were in a panic, during the week
before the deal was made, that the dispute would once again prevent any bill
from being adopted.
Gramm and other extreme-right Republicans saw the opportunity to damage
their political opponents among minority businessmen and community groups,
who generally support the Democratic Party. Gramm succeeded in inserting two
provisions to weaken the CRA, one reducing the frequency of examinations for
CRA compliance to once every five years for smaller banks, the other
compelling public disclosure of loans made under the program. The latter
provision was particularly offensive to black and other minority business
and community groups, who have used the CRA provisions as a lever by
threatening to challenge mergers and other bank operations which require
government approval.
In most such cases, the banks have offered loans to businessmen or outright
grants to community groups in return fordropping their legal actions. These
petty- bourgeois elements have been able to posture as defenders of the
black or Hispanic community, while pocketing what are essentially payoffs
from finance capital and concealing from the public the details of this
relationship.
The banks and other financial institutions did not themselves oppose
continuation of the CRA, which they have treated as nothing more than a cost
of doing a highly profitable business in minority areas. Loans tied to the
CRA average a 20 percent rate of return. Financial industry lobbyists
complained that they were being caught in a crossfire between the
Republicans and Democrats which was unrelated to the main purpose of the
bill.
The Clinton White House threatened to veto the bill if CRA provisions were
substantially weakened, in response to heavy pressure from the Congressional
Black Caucus and the Reverend Jesse Jackson, whose Operation PUSH has made
extensive use of CRA in its campaigns to pressure corporations and banks for
more opportunities for black businessmen. But eventually the White House
caved in to Gramm, accepting his amendments so long as the program remained
formally in place.The White House similarly retreated on pledges that
consumer privacy would be protected in the legislation.
Consumer groups pointed to the potential for abuse of financial information
once giant conglomerates were created which would handle loans, investments
and insurance at the same time. For example: a bank could refuse to give a
30-year mortgage to a customer whose medical records, filed with the bank's
insurance subsidiary, revealed a fatal disease.
The final draft of the bill contains a consumer privacy protection clause,
but it is extremely weak, applying only to the transfer of information
outside of a financial conglomerate, not within it. Thus Citigroup will be
able to pass on financial information about its bank depositors to Travelers
Insurance, but not to an outside company like Prudential. Even that
limitation would be breached if there was a contractual relationship withthe
outside company, as in the case of a telemarketer which did work for
Citigroup and was given private information about Citigroup depositors to
aid in its telephone solicitations.
Threat to financial stability: The proposed deregulation will increase the
degree of monopolization in finance and worsen the position of consumers in
relation to creditors. Even more significant is its impact on the overall
stability of US and world capitalism. The bill ties the banking system and
the insurance industry even more directly to the volatile US stock market,
virtually guaranteeing that any significant plunge on Wall Street will have
an immediate and catastrophic impact throughout the US financial system.
The Glass-Steagall Act of 1933, which the deregulation bill would repeal,
was not adopted to protect consumers, although one of its most celebrated
provisions was the establishment of the Federal Deposit Insurance
Corporation, which guarantees bank deposits of up to $100,000. The law was
enacted during the first 100 days of the Roosevelt administration to rescue
a banking system which had collapsed, wiping out the life savings of
millions of working people, and threatening to bring the profit system to a
complete stand still. As a recent history of that era notes: "The more than
five thousand bank failures between the Crash and the New Deal's rescue
operation in March 1933 wiped out some $7 billion in depositors' money.
Accelerating foreclosures on defaulted home mortgages - 150,000 homeowners
lost their property in 1930, 200,000 in 1931, 250,000 in 1932 - stripped
millions of people of both shelter and life savings at a single stroke and
menaced the balance sheets of thousands of surviving banks" (David Kennedy,
Freedom from Fear, OxfordUniversity Press, 1999, pp. 162-63).
The separation of banking and the stock exchange was ordered in response to
revelations of the gross corruption and manipulation of the market by giant
banking houses, above all the House of Morgan, which organized huge
corporate mergers for its own profit and awarded preferential access to
share issues to favored politicians and businessmen.
Such insider trading played a major role in the speculative boom which
preceded the 1929 crash.Over the past 20 years the restrictions imposed by
Glass-Steagall have been gradually relaxed under pressure from the banks,
which sought more profitable outlets for their capital, especially in the
booming stockmarket, and which complained that foreign competitors suffered
no such limitations to their financial operations.
In 1990 the Federal Reserve Board first permitted a bank (J.P. Morgan) to
sell stock through a subsidiary, although stock market operations were
limited to 10 percent of the company's total revenue. In 1996 this ceiling
was lifted to 25 percent. Now it will be abolished.
The Wall Street Journal celebrated the agreement to end such restrictions
with an editorial declaring that the banks had been unfairly scapegoated for
the Great Depression. The headline of one Journal article detailing the
impact of the proposed law declared, "Finally, 1929 Begins to Fade."
This comment underscores the greatest irony in the banking deregulation
bill. Legislation first adopted to save American capitalism from the
consequences of the 1929 Wall Street Crash is being abolished just at the
point where the conditions are emerging for an even greater speculative
financial collapse. The enormous volatility in the stock exchange in recent
months has been accompanied by repeated warnings that stocks are grossly
overvalued, with some computer and Internet stocks selling at prices
100times earnings or even greater.
And there is a much more recent experience than 1929 to serve as a
cautionary tale. A financial deregulation bill was passed in the early 1980s
under the Reagan administration, lifting many restrictions on the activities
of savings and loan associations, which had previously been limited
primarily to the home-loan market. The result was an orgy of speculation,
profiteering and outright plundering of assets, culminating in collapse and
the biggest financial bailout in US history, costing the federal government
more than $500 billion. The repetition of such events in the much larger
banking and securities markets would be beyond the scope of any federal
bailout.
--
Ed Jay (remove 'M' to reply by email)
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