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Here is why Glass-Steagall Bank Regulation Act must be reinstated now

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whistle Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Oct-19-08 09:27 AM
Original message
Here is why Glass-Steagall Bank Regulation Act must be reinstated now prevent these kinds of abuses:

Wall Street banks in $70bn staff payoutPay and bonus deals equivalent to 10% of US government bail-out package

The Guardian, Saturday October 18 2008

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased yesterday when Germany's Deutsche Bank said many of its leading traders would join Josef Ackermann, its chief executive, in waiving millions of euros in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and, most controversially, bonuses appear to bear no relation to the losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year. Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week the Morgan Stanley $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP Morgan $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the total accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of August by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m.

None of the banks the Guardian contacted wished to comment on the record about their pay plans. But behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of investment banks have questioned why firms continue to siphon off billions of dollars of bank earnings into bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One source said: "That's a fair question - and it may well be that by the end of the year the banks start review the situation."

Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007.

Last year Merrill Lynch's chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs. In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is public. Last year he received a salary of 250,000, but his total pay, including bonuses, reached 36m.

NOTE: Financial & Investment Dictionary: Glass-Steagall Act of 1933

Legislation passed by Congress authorizing deposit insurance and prohibiting commercial banks from owning full-service brokerage firms. Under Glass-Steagall, these banks were prohibited from investment banking activities, such as underwriting corporate securities or municipal revenue bonds.

The law was designed to insulate bank depositors from the risk involved when a bank deals in securities and to prevent a bank collapse like the one that occurred during the Great Depression.

The original separation of commercial and investment banking had already significantly eroded when, on November 12, 1999 the Financial Services Modernization Act of 1999 was signed into law, repealing parts of the 1933 Glass-Steagall Act and the 1956 Bank Holding Company Act and effectively allowing banks, brokers, and insurers into each other's businesses. Basically, the 1999 Act allows banks to affiliate with securities firms and insurers through a holding company structure and permits nationally chartered banks to engage in most financial activities through direct subsidiaries. While provisions of Glass-Steagall continue to restrict banks from most underwriting activities and securities firms from taking deposits, these restrictions apply only to the banks and securities firms, not to their Financial Holding Company affiliates and are, therefore, technical.

Not everyone was happy with the legislation though. I ran across an Amendment by Democratic Senator Byron Dorgan that would limit derivatives. The amendment reads: "To prohibit insured depository institutions and credit unions from engaging in certain activities involving derivative financial instruments." Unfortunately it was voted down in a voice vote.

You can see this video warning about what would happen if Glass-Steagall was repealed. It's pretty much what's happening now.

After the Great Depression, federal (taxpayer) money was used to insure deposits and loans. Part of the price for that insurance was regulations that would keep banks in line. If the financial institutions want the regulations to go away, so should the safety net.

<see 1999 Senator Byron Dorgan and current comments video>

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Turbineguy Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Oct-19-08 09:34 AM
Response to Original message
1. Some form of Glass-Steagal
is very likely to come back. As long as the GOP doesn't get its way.
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geckosfeet Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Oct-19-08 09:43 AM
Response to Original message
2. We need much much more regulation than what was previously in place.
I agree regulation desperately needs to be restored, increased and vigorously maintained. Glass Steagall was a product of the 1920's/30's economy. We need to look closely at the world economy, plan where it is going for the next 100 years or so, and regulate accordingly.
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Phred42 Donating Member (1000+ posts) Send PM | Profile | Ignore Sun Oct-19-08 09:45 AM
Response to Reply #2
3. agree - A LOT MORE
COrporations are fascist by nature and must be kept under tight control
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