Are our stock, bond and money market investments vulnerable to another financial crisis? Can high frequency traders jeopardize the integrity of our financial markets? Is a systemic risk still present in the markets? Too big to fail was a major issue that emerged during the financial crisis of 2008 and 2009. Through consolidation the major banks are even larger and more subject to counter party risk than before.
The back and forth fight over regulation of the major financial institutions goes on daily. Are the regulations in Dodd-Frank too onerous to small businesses? Is the Volcker Rule too restrictive and costly to the bottom line of major Investment banks? Tweaking these regulations may provide the necessary common ground.
It will take some time to sort these questions out, and an unbiased opinion may never be drawn, but one thing is certain, large financial institutions do not self govern themselves well. Maybe it's time to revisit a post I originally wrote in October,2008, titled This Little Piggy Went To Market.
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"There is no doubt that the current financial crisis can be linked back to the elimination of the Glass Steagall Act in 1999. The Glass Steagall Act, otherwise known as the Banking Act of 1933, disallowed the combinations of commercial banks and other financial entities, i.e. investment banks and insurance companies.
Once the barriers to conflicts of interest and un-bridled greed were lifted, many financial companies in this country and around the world were free to embark on a campaign of greed, speculation, and risk-taking the likes of which we have never seen before.
Senator Phil Gramm introduced a bill that repealed the portion of Glass Steagall that was meant to curb speculation and excesses such as were experienced in the 1929 stock market crash, the banking collapse in 1933, and later in the financial meltdown of 2008.
In 1998, a year prior to Senator Gramm's bill, Sandy Weill, through a loophole in Glass Steagall, merged his company Citicorp with the Travelers Insurance company. This action along with $200 million in political contributions from the banking, insurance and real estate industries, prompted Congress to repeal Glass Steagall.
Robert Rubin was the U.S. Secretary of the Treasury from 1995-1999, and the most influential man in finance in the country. Later in 1999, Mr. Rubin took an executive position with Sandy Weill's company, Citicorp, and was paid $126mm over the next eight years.
Mortgaged backed securities, collateralized debt obligations(CDO's), and Structured Investment Vehicles(SIV'S), could now be packaged by the banks and sold throughout the world. The leveraging by the financial institutions at 40-1, is a major contributor to the financial morose that we are all experiencing.
Special purpose entities( SPE's), with names like Raptor and Talon that brought about the Enron collapse, were sold by Citicorp and many of the other large international banks. Citicorp was fined $1.66 billion for it's part in the fraud.
After the scandals Mr. Weill was pressured to step down from his CEO position in 2003 and as chairman in 2006. He left the company a billionaire. From a high stock price of $55 per share on 12/28/06 to a low price of $12.85 per share on 9/18/08 Citi lost more than $250 billion in value.
Phil Gramm, you may remember as the author of the bill repealing Glass Steagall, left the John McCain presidential campaign this year after making a public pronouncement that we were only going through a mental recession and that America has become a country of whiners. Phil Gramm's wife, Wendy, was a member of the board of directors of Enron when it went bankrupt and a Chairman of the Commodity Futures Trading Commission.
The lobbying efforts that caused deregulation, the lax response by the regulators, the greed of the financial community, and the corruption of many politicians, have jointly formed our current meltdown.
After the dot-com bubble burst (2000-2001), a strong President would have taken greater action against those financial institutions at the root of the illegalities. The current crisis was preventable. We needed a President with the resolve of a Teddy Roosevelt. We did not have one."