Financial Crisis || Politics || Insider @ Play

Events/Acts/Actions that speaks for "relationship of politics and money and consequently/unfortunately about the crisis: Past, Present and may be Future.....

Past:
1) November 1999 : Repeal of the 1933 Glass-Steagall Act passed and signed by Bill Clinton ( Democrat), bill presented by congress senator, Phil Gramm of Texas ( a Republican)2) Commodity Futures Modernisation Act of 2000

Present:
Democrates:
Robert Rubin (ex- Goldman Sacs) adviced Clinton on economic front. Robert Rubin supported clinton pushing NAFTA(1994) and bail out of Mexico's banks(1998) both act allegedly helped Goldman Sacs. Rober Rubin moved to Citibgroup and later Citigroup acquired Mexico's major bank Banamex, a sale facilitated by NAFTA. Rubin is now adviser to Obama.
Republican:
McCain is adviced by Gramm.
Bush Administration:Henry Paulson, ex-Goldman Sachs( he holds 523.5 million USD in the company's stock), proposed 700 bn USD will definitely (Privatise the gain, socilize the pain), lift the ailing Goldman and will protect Paulson's money. Going a leaf ahead, not only finacially but the proposed move seems to be seeking to protect "involved" not only from oversight but also from prosecution in the case of wilful mismanagement. The act reads " Decisions by authority (read paulson) are non-reviewable and committed to agency discreation, and may not be reviewed by any court of law or any administrative agency": surprisingly this is worlds leading democracy.

Future:
The most difficult of all the three but defnitely cannot be different from the first two.

Background: Details about the GSA & Banking Holding Act
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 theGlass-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.

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 issues 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 US Federal Reserve Syste, 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 WallsDespite 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.

The argument for preserving Glass-Steagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.

4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation

Source & referrence: Frontline Magazine, October 24, 2008 , Investopedia, WikiPedia