Background

I point fingers at Phil Gramm now and then when discussing the current bank implosion, and this is probably a good time to explain why. Gramm was the lead author of the Gramm-Leach-Bliley Act of 1999 (signed by Clinton) that repealed the Glass-Steagall Act of 1933.

Glass-Steagall was enacted during the Depression and specifically prohibited commercial banks from investment banking and brokerage collaboration. It basically protected regular bank depositors from the heightened risks involved with commercial banks investing depositor funds in collateralized loans and taking on unwise high risk-high reward ventures at the expense of regular depositors. It established the concept of bank deposit insurance (the FDIC), regulated the ability of large banks to compete against one another through financial services (a main reason it was repealed), and basically provided a firewall between deposits and securities so that faulty and irresponsible underwriting (giving loans, insurance, and securities to unqualified and high risk borrowers) would not affect the core of depositor banking in times of crisis.

Backers of the Gramm bill (with a big push from Fed chairman Alan Greenspan) saw the GSA as a chokehold on the banking industry - banks were forced to create entirely separate companies with an entirely separate capital base in order to function in the investment field, and pretty much banned bankers from the underwriting game.

One of the vehicles used to get around the GSA was the Savings and Loan Association, or Mutual Savings Bank, which had an entirely different set of rules. S&Ls were granted the authority to allow consumer and commercial loans, NOW accounts, and issue credit cards in 1980, and in a microcosm of what's happening right now, a slowdown in the real estate market essentially buried the unregulated S&L industry by 1990. The industry was rife with corruption, highlighted by the Lincoln S&L investigation involving five US Senators, including Charles Keating and John McCain.

Repealing the GSA opened the business opportunities for banks and allowed them to get into home and auto loans, global investments, and to take gains from one sector and invest them into others. The result of that deregulation was monolithic banking institutions with massive amounts of debt tied into credit and the booming real estate industry, with interest from those massive mortgage gains tied to auto loans, insurance, and foreign investments in the name of bigger profits.

And then the real estate boom went away. Those mortgages - some issued at subprime rates, some not, became assets valued below the loans attached to them. The money coming in against the mortgage values turned upside down, there was no liquid capital to cover the debts that those properties were collateralized against, industries like airlines found that their credit providers were asking for more up-front liquidity to cover transactions because of lack of funds elsewhere, people who couldn't manage to pay the mortgage they never should have had in the first place now found themselves unable to make the car payment or the credit card payment, and all those conduits of incoming liquidity to the conglomerate banking institutions basically dried up.

The Federal Reserve Bank, operating under the notion that a large corporation is sacred, has been throwing hundreds of billions of dollars in inflated cash at these failures hoping to stop the house of cards from falling, in turn devaluing the worthless stock its trying to save, creating corporate debt from taxpayer money that may never be repaid, and basically allowing proven irresponsible failures to go back to the table and lose more of my and your money.

GSA was repealed for a reason, but it also -existed- for a reason. We've now seen that the big bankers will play the game as dirty and as irresponsibly as we let them, with no regard for their investors, their country, or their duty. Perhaps the best strategy from here on out should be to kick them out of the game altogether.


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