By Pam Martens and Russ Martens: April 24, 2017
In the past two weeks, newspaper headlines have revived the debate on whether the mega Wall Street banks continue to pose a systemic threat to the U.S. banking system and the economy. This is a desperately needed public debate that demands facts – not a revisionist history of what actually caused the 2008-2010 Wall Street collapse and the worst economic downturn since the Great Depression.
This recent attention has been fueled by reports that Gary Cohn, former President of Goldman Sachs who now heads Donald Trump’s National Economic Council, met privately this month with members of the Senate Banking Committee and indicated he would be open to the restoration of a modernized version of the Glass-Steagall Act. (Mr. Cohn did not refute those reports.)
The 1933 Glass-Steagall Act was passed by Congress at the height of the Wall Street collapse and Great Depression. It acccomplished two equally critical tasks. It created Federally-insured deposits at commercial banks to restore the public’s confidence in the U.S. banking system and it barred insured commercial banks from being part of a Wall Street investment bank or securities underwriting operation because their high-risk speculative activities frequently blew up the house. That legislation protected the U.S. banking system for 66 years until its repeal under the Bill Clinton administration in 1999 at the behest of Wall Street power players like Sandy Weill of Citigroup. It took only nine years after its repeal for the U.S. financial system to crash, requiring the largest public bailout in U.S. history.
The problem with the newspaper debate today is that almost no one has their facts straight. On April 13, John Authers correctly wrote at the Financial Times that “The continuing yearning for Glass-Steagall shows that the world (not just the US) has not come to terms with the crisis of 2008. Justice has not been seen to be done; remedies to prevent a repeat have not been seen to be applied. Dodd-Frank has failed to instill confidence.” All that is absolutely true. But Authers also bizarrely states that “Bringing back Glass-Steagall would not alter the scale of today’s financial institutions.”
The Financial Times journalist is apparently not aware that the hundreds of trillions of dollars of derivatives sitting on the books of the biggest Wall Street banks would not exist but for the insured deposits providing the ballast and credit rating.
Next came the Washington Post’s Editorial Board on April 19, which went with the headline: “A Depression-era law could get a new life under Trump. Here’s what it should look like.” But the article made the preposterous claim that “The actual causal link between the repeal of Glass-Steagall and the financial crisis is a matter of great dispute…because the investment firms whose failures triggered the panic, Bear Stearns and Lehman Brothers, had never been subject to the law.”
The multiple errors in the above sentence are symbolic of a general lack of public understanding of the financial crisis. Every Wall Street firm was “subject to the law” until its 1999 repeal. Bear Stearns collapsed in March 2008 – long before the real panic set in during September of that year. Lehman Brothers was not only subject to the Glass-Steagall Act but it benefitted dramatically from its repeal by engaging in insured-deposit banking. As we reported in 2012:
“Lehman Brothers owned two FDIC insured banks, Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank. Together, they held $17.2 billion in assets as of June 30, 2008, 75 days before Lehman went belly up. Lehman Brothers Banks FSB is where Lehman handled its mortgage loan originations. When the FDIC approved the Lehman Brothers Commercial Bank application in 2005, it specifically noted that the FDIC insured bank ‘anticipates acting as a derivatives intermediary, engaged in matched trading of interest rate products, primarily interest rate swaps, as well as forward purchase agreements and options contracts.’ ”
The New York Times has played a leading role in obfuscating what actually caused the financial crash – first through writer Andrew Ross Sorkin and more recently under the pens of economist Paul Krugman and writer William Cohan.
In a July 2015 column, Cohan ridiculed Senators Elizabeth Warren and John McCain for introducing legislation to restore the Glass-Steagall Act. Cohan wrote:
“Despite the relentless rhetoric, the fact that commercial banks are in the investment banking business and investment banks are in the commercial banking business had almost nothing to do with causing the financial crisis of 2008.”
The unassailable facts simply do not support this wild assertion. The largest bank in the country at the time, Citigroup, played the key role in the banking panic. Its share price collapsed by more than 89 percent in 2008, eventually to trade as a 99-cent penny stock. Citigroup received the largest taxpayer bailout in U.S. history – much of it initially shielded from public view. The U.S. government infused $45 billion in equity into Citigroup and over $300 billion in asset guarantees; the Federal Deposit Insurance Corporation (FDIC) guaranteed $5.75 billion of Citigroup’s senior unsecured debt and $26 billion of its commercial paper and interbank deposits; the Federal Reserve secretly funneled $2.5 trillion in almost zero-interest loans to units of Citigroup between 2007 and 2010. And those are just the details the public has been given. It took a multi-year court battle to unleash the details of what the Fed was doing behind a dark curtain.
That Citigroup, a behemoth commercial and investment bank, played a pivotal role in the financial panic is not just the opinion of Wall Street On Parade. Multiple government insiders at the time of the crash share that opinion, including Sheila Bair, the Chair of the FDIC at the time.
Citigroup was so big that its tentacles reached into every major institution on Wall Street. Prior to the collapse of Lehman Brothers, Bloomberg News ran a story on July 13, 2008 regarding Citigroup’s massive off-balance sheet exposures, including a chart which stated: “Citigroup keeps $1.1 trillion of assets in off-balance-sheet entities, an amount equivalent to half the company’s assets and more than 12 times its dwindling market value.”
A week later, Bloomberg News was back to reporting on the decaying situation at Citigroup with the headline: “Citigroup Unravels as Reed Regrets Universal Model.” The article said that the bank “is mired in a crisis” with “$54.6 billion in writedowns and credit costs.” The article further notes that Citigroup “made some of the biggest bets in the subprime lending debacle,” it had to “bail out at least nine off-balance-sheet investment funds in the past year” and “defaults are rising.”
The official report on the crisis, the Financial Crisis Inquiry Report, also called out Citigroup as a pivotal player in the crash. The report noted:
“More than other banks, Citigroup held assets off of its balance sheet, in part to hold down capital requirements. In 2007, even after bringing $80 billion worth of assets on balance sheet, substantial assets remained off. If those had been included, leverage in 2007 would have been 48:1…”
A few days ago, Cohan penned his latest revisionist history of the crash, calling the concept of separating investment banks from commercial banks to be among Washington’s “silly ideas.” Cohan now adds to his unsupported repertoire the following preposterous assertion:
“The problem on Wall Street is not the size of the banks, their concentration of assets or the businesses they choose to be in.”
In fact, researchers at the agency created under the Dodd-Frank financial reform legislation to monitor systemic risk on Wall Street, the Treasury Department’s Office of Financial Research (OFR), has published data showing that massive concentration of risk and interconnectivity of the largest Wall Street firms is precisely the continuing problem that threatens long-run financial stability in the U.S.
