By Pam Martens: July 21, 2012
After reading Frank Partnoy’s new book, Wait: The Art and Science of Delay, it occurred to me that Congress reformed Wall Street before it had any clear idea of what needed to be reformed. It should have waited, held two years of in-depth investigative hearings, as happened after the crash of 1929, and then went about thoughtful reform. Instead, Congressional hearings responded more to what was hot in the press at the moment. The hearings lacked cohesiveness and showed little advance investigative preparation.
The outcome of that hasty, poorly constructed effort was the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed on July 21, 2010.
That lackluster effort stands in stark contrast to what occurred after the 1929 crash during hearings by the Senate’s Committee on Banking and Currency between 1932 and 1934. Senators compiled 12,000 pages of hearing testimony and actually came into the hearings prepared to investigate, based on a carefully constructed plan by Ferdinand Pecora, counsel to the Senate investigations.
Senators showed up with evidence that had been subpoenaed in advance of the hearings: evidence like cancelled checks paid to journalists to shill for stocks; evidence that Wall Street CEOs were shorting their own stocks; documented proof that Wall Street was funneling money into trusts to pump stocks to elevated levels and then dump them on unsuspecting public investors. Ferdinand Pecora produced evidence that high ranking politicians had been taking bribes by accepting hot Initial Public Offerings (IPOs) of stock that had risen dramatically above its offering price.
The biggest Wall Street firms maintained what they called “Preferred Lists” for distributing hot IPOs. One name on the list was William Woodin, who later became Secretary of the Treasury under President Roosevelt. On February 1, 1929, JPMorgan sent Woodin the following letter:
“My Dear Mr. Woodin:
You may have seen in the paper that we recently made a public offering of $35,000,000 Alleghany Corporation 15-year collateral trust convertible 5 per cent bonds, which went very well…We have kept for our own investment some of the common stock at a cost of $20 a share…we are asking some of our close friends if they would like some of this stock at the same price it is costing us, namely, $20 a share. I believe that the stock is selling in the market around $35 to $37 a share…We are reserving for you 1,000 shares at $20 a share, if you would like to have it.”
Today, Senators are still holding hearings on new Wall Street scandals, two years after the Dodd-Frank financial reform legislation was passed, on matters never anticipated by the legislation: like JPMorgan gambling with insured depositor funds in an outpost in London; MF Global losing $1.6 billion in customer funds because there was no proper safeguards for segregating customers funds from corporate assets; Russell Wasendorf, founder of PFGBest, embezzling over $200 million of customer funds because a self-regulator did not verify bank balances directly with the bank. And the latest, a cartel of Wall Street firms and international banks rigging the interest rate index, Libor, thus bilking untold billions from municipalities, state and foreign governments, school districts and transit authorities to which they sold interest rate contracts. There was also illegal manipulation of Libor to benefit the firms’ trading positions, according to regulators. That’s called insider trading and that’s a criminal offense.
When I read the emails released in the Libor investigation, showing traders illegally giving instructions on how to rig the index to a person they were barred from even speaking with – the bank’s submitter of the Libor borrowing rate – I knew I had read this all before – literally.
It was August 1996. The SEC settled with all the typical Wall Street suspects for price fixing on Nasdaq. Much like the news coming out today about Timothy Geithner and the Federal Reserve Bank of New York knowing about the banks cheating on Libor as far back as 2008 and not stopping it, the SEC said in its 1996 report that Nasdaq’s self regulator, the National Association of Securities Dealers (NASD), was aware of the price fixing and did not put an end to it.
In the Nasdaq price fixing case, a trader who has learned that the price fixing has been detected and may be stopped, tells another trader on a taped conversation:
“I’m not going to initiate it [a narrower spread]. Why should I do that? You know? We might as well milk it for as long as we can, and you know, it’s going to be a different business. Hopefully, we’ll all figure a way to make money in it.”
Nasdaq market makers were not just price fixing, but artificially moving the market to accommodate making trades profitable for one another. In one taped call, two traders agree to manipulate the price of a stock. “Go up there,” means the trader is illegally moving the price higher to accommodate another trader.
“Trader 1: Are you doing anything in Parametrics [sic]?
Trader 2: Ah, running for the hills, bro.
Trader 1: Okay, can you…
Trader 2: What can I do for you?
Trader 1: Can you go ¼ bid for me?
Trader 2: Yeah, sure.
Trader 1. If you want, I’ll sell you two at ¼, just go up there. I’m long them and I want it going.
Trader 2: Yeah.
Trader 1: Okay, I sold you…
Trader 2: Two. That would be great.
Trader 1: I sold you two at ¼. Just go up there, okay.
Trader 2. I’m goosing it, cuz.
Trader 1: Thank you.”
In an OpEd for the Washington Post on July 19, 2012, Elizabeth Warren, Democratic nominee for a U.S. Senate seat in Massachusetts, said the heart of accountability “rests on acknowledging that we cannot trust Wall Street to regulate itelf — not in New York, London or anywhere else. The Club is corrupt. When Mitt Romney says he will move to repeal all of the new financial regulations, he supports a corrupt system. When members of Congress grill regulators for being too tough on Wall Street and slash the budgets of the regulators charged with overseeing Wall Street, they prop up a corrupt system…The fantasy that reducing oversight of the biggest banks will make us safer is just that — a dangerous fantasy. The Libor fraud exposes rot at the core. Now, who will stand up to fix it?”
Warren is precisely correct. The only way to fix Wall Street is to restore the Glass-Steagall Act and add the word insurance (removed in Gramm-Leach-Bliley) to the restrictions. It would take only the following phrase in enacted legislation to get the country back on track:
“No bank holding insured deposits can own or be affiliated with an investment bank, broker-dealer, futures commission merchant, insurance company or engage in the underwriting of stocks and bonds.”
It would take just those 31 words to get America back on the road to financial responsibility. Wall Street is inherently corrupt and that will always be the case. All that we can do is make sure that the life savings of hardworking Americans, who are willing to accept a modest rate of interest in order to hold FDIC insured deposits, are never again at the mercy of Wall Street. And that Wall Street never again rewards itelf with multi-million dollar bonuses achieved through gambling with depositor funds.