The blog is back after a short late Summer, early Fall Cape Cod get-away. We play tourists and visit many wonderful towns...Hyannis, Falmouth, Dennis, Chatham and Provincetown. Always a great time. And now to the blog desk.......
Many articles have been written about our current economic mess. Let's go back to November 12, 1999 when President Bill Clinton repealed the Glass-Steagll act of 1933.
The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms, some of which were designed to control speculation.(Recall the recent term "speculators?" Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999 by the Gramm-Leach-Bliley Act signed by President Bill Clinton. the Glass-Steagall Act, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.
The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. An example of this was when Citibank merged with the Travelers Group and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services. Other major mergers in the financial sector had already taken place such as the Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation combination in the mid-1990s. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Acts by combining insurance and securities companies, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.
Many of the largest banks, brokerages, and insurance companies lusted after this Act at the time. Their reasoning was that most folks usually put more money into investments when the economy is doing well, but they put most of their money into savings accounts when the economy turns bad. With the new Act, they would be able to do both 'savings' and 'investment' at the same financial institution, which would be able to do well in both good and bad economic times.
Prior to the Act, most financial services companies were already offering both saving and investment opportunities to their customers. On the retail/consumer side, a bank called Norwest led the charge in offering all types of financial services products in 1986. American Express attempted to own almost every field of financial business. Things culminated in 1998 when Travelers, a financial services company with everything but a retail/commercial bank, bought out Citibank, creating the largest and the most profitable company in the world. The move was technically illegal and provided impetus for the passage of the Gramm-Leach-Bliley Act.
Also prior to the passage of the Act, there were many relaxations to the Glass-Steagall Act. For example, a few years earlier, commercial Banks were allowed to get into investment banking, and before that banks were also allowed to get into stock and insurance brokerage. Insurance underwriting was the only main operation they weren't allowed to do, something rarely done by banks even after the passage of the Act.
Much consolidation occurred in the financial services industry since, but not at the scale some had expected. Retail banks, for example, do not tend to buy insurance underwriters, as they seek to engage in a more profitable business of insurance brokerage by selling products of other insurance companies. Other retail banks were slow to market investments and insurance products and package those products in a convincing way. Brokerage companies had a hard time getting into banking, because they do not have a large branch and backshop footprint. Banks have recently tended to buy other banks, such as the recent Bank of America and Fleet Boston merger, yet they have had less success integrating with investment and insurance companies. Many banks have expanded into investment banking, but have found it hard to package it with their banking services, without resorting to questionable tie-ins which caused scandals at Smith Barney.
Senator Phil Gramm led the Senate Banking Committee which sponsored the Act; he later joined UBS Warburg, at the time the investment banking arm of the largest Swiss bank.
We have never in memory had a situation where at any one time we have a combination of bad challenges, bad politicians and bad policies.
This past Summer the government tried to straighten out our energy mess, get federal spending under control and try to manage our nation's health system.
The feuding, fighting and posturing remain as I file this report on an early Friday morning. It is hoped that by Noon today, there would of been some mutually acceptable agreement. And.....most important, provide restrictions on what can and cannot be done with guidelines. I applaud the Republican's who are cautious.
I would also hope that any changes made in this problem can me amended and changed while in process. I would love to now see a steel cage match between Neil Cavuto and John Bradshaw Layfiend of the WWE. A stockbroker match.
So what if a friend I know lost $459,000 last week. No biggie at all. Nah............
HumanEvents.com have some wonderful articles posted about this. Please take a look.
