The following is an excellent excerpt from the book “ALL THE PRESIDENTS’ BANKERS: The Hidden Alliances That Drive American Power” by Nomi Prins from Chapter 18 titled “The Late 1990s: Currency Crises and Glass-Steagall Demise” from page 385 and I quote: “The Euro and Bank Beasts – After years of debates as to the merits of a consolidated currency amid so many disparate national economies, on January 1, 1999, the euro was officially born. A driving force behind the euro was the idea that Europe could regain financial superpower status and compete with the dollar by combining its national economies in the form of a united currency.
Bankers in Europe, particularly at American company subsidiaries, were at first exuberant because their compensation would be tied to more European growth and deals than their New York brethren. Peter Sutherland, chairman of Goldman Sachs International, said that the monetary union is “the single most important political project” in more than forty years.
But in the months before the euro’s birth, derivatives bets ballooned as banks and hedge funds gambled on which countries would succeed in joining the unions, and how quickly they would do so. As a result, these foreign markets were experiencing another wave of hell. The Asian crisis had morphed into a speculative attack on the Russian ruble, for similar reasons. Speculators knew that Russia would try to maintain its currency peg, and it would have to borrow to the hilt in foreign currency to do so.
Speculators shorted the currency to near-death. With the ruble devalued, the country defaulted on its international loans on August 17, 1998. Citigroup’s third-quarter earnings fell $200 million, or 67 percent, due to Russian exposure and other world market turmoil. This time, George Soros lost $2 billion.
Hedge funds, capitalized by banks and massively leveraged (and they borrowed heavily to make their bets), took a big stake, too. But the bigger they were, the more protected from losses. The Fed, spurred by a set of personally invested CEOs, considered bailing out the hedge fund Long Term Capital Management to the tune of $3.65 billion as a result of leveraged bets that soured when the Russian crisis hit. LTCM’s gaggle of Nobel Prize-winning economists and exalted traders, including its head, Salomon Brothers bond trader John Meriwether, failed to recognize that highly leveraged trades can make tons of money if they work but can lose even more money, more quickly, if they don’t. New York Fed president William McDonough selected thirteen banks to participate in helping LTCM survive. (Lehman Brothers and Bear Stearns declined to be involved..) In September 1998, eleven banks put up $300 million each to keep LTCM from bankruptcy in return for 90 percent of the partners’ shares. They weren’t just saving LTCM; they were also protecting their own versions of LTCM’s trade. The last thing they wanted was to experience an unraveling in the markets that would hurt their own books. Within three weeks of the LTCM bailout, Greenspan cut rates by fifty basis points to make sure there was enough liquidity in the system to pave over the crisis.
Big banks had made similar bets. But they held a government shield. As long as they had depositor’s funds, they would enjoy protection from losses from governments and supranational banks. They used this cushion to get further involved in derivatives transactions that were designed to make bets on the same types of European convergence trades that LTCM had done, and to seek profit from positioning these bets on peripheral countries joining the euro. Some banks, like Goldman Sachs, would even help countries like Greece by creating derivatives deals that shielded Greece’s true debt status, thereby helping it meet the criteria to join the currency union.
The Fight Against the Euro Intensifies – On February 12, 1999, Rubin addressed the House Committee on Banking and Financial Services, claiming that “the problem US financial services firms face abroad is more one of access than lack of competitiveness.”
This time, he was referring to the European banks’ increasing control of distribution channels into the European institutional and retail client base. Unlike US commercial banks, European banks had no restrictions keeping them from buying and teaming up with US or other securities firms and investment banks to create or distribute their products. He did not appear concerned about destruction caused by sizeable bets throughout Europe.
Rubin stressed that HR 665 (the most recent version of HR 10), now called the Financial Services Modernization Act of 1999 and officially introduced on February 10, 1999, took “fundamental actions to modernize our financial system by repealing the Glass-Steagall Act prohibitions on banks affiliating with securities firms and repealing the Bank Holding Company Act prohibitions on insurance underwriting.”
Three days later, Rubin, Greenspan, and Summers landed on the cover of Time magazine as the “Committee to Save the World,” effusively lauded for their efforts to prevent a global economic collapse. The piece painted a violins-strumming picture of the trio of “marketeers” as financial saviors and cozy operators:
“When the three talk about their special relationship, they are hinting at how fortunate it is that they can work together instead of apart. Says Robert Hormats, vice chairman of Goldman Sachs International; There have been moments in the past year when it has been, as Churchill said, a very near thing. These guys kept a near thing from becoming disaster. That has happened because the men feel that being at the right place at the right time also means doing the right thing, putting their egos aside and, in an almost antique sense of civic duty, answering the phone when it rings.”
Several European counterparts scoffed at the piece. As a high German financial official who played an active role in advising the Thai, South Korean, and Indonesian governments put it, “All those who experienced the Asian turbulence—from Thailand letting the baht float freely in early July 1997 to the turmoil spreading to South Korea and Indonesia—tell a very different story.”
The Gramm-Leach-Bliley Act Marches Forward – On February 24, 1999, in more testimony before the Senate Banking Committee, Rubin pushed for fewer prohibitions on bank affiliates that wanted to perform the same functions as their larger bank holding company, once the different types of financial firms could legally merge. That minor distinction would enable subsidiaries to place all sorts of bets and house all sorts of junk under the false premise that they had the same capital beneath them as their parent. The idea that a subsidiary’s problems can’t taint or destroy the host, or bank holding company, or create “catastrophic” risk, is a myth perpetuated by bankers and political enablers that continues to this day..
Rubin had no qualms with mega-consolidations across multiple service lines. His real problems were those of his banker friends, which lay with the financial modernization bill’s “prohibition of the use of subsidiaries by larger banks.” This technicality was “unacceptable to the administration,” he said, not least because “foreign banks underwrite and deal in securities through subsidiaries in the United States, and US banks [already] conduct securities and merchant banking activities abroad through so-called Edge subsidiaries.”
In a letter to Senate Banking Committee chairman Phil Gramm, Clinton briefly considered the ramifications of multipurpose financial mergers: “The bill could expand the ability of depository institutions and nonfinancial firms to affiliate, at a time when experience around the world suggests the need for caution in this area. But that notion was subsequently dropped.
Instead, he ended his letter with a plea for the Community Reinvestment Act: “I agree with you that reform of the laws governing our nation’s financial services industry would promote the public interest. However, I will veto the bill if it is presented to me in its current form.” It was as if providing loans to small communities, which should have been a given, made the idea of big banks running roughshod over the global financial sphere copacetic.
The CRA was not an obstacle in bankers’ greater fight for banking deregulation. They knew that if banks could become bigger, they could lend to smaller communities and capture their business anyway. If they had to promise to do so, so be it; they would find a way to make money off that promise.
On March 1, 1999, Gramm released a final draft of the Financial Services Modernization Act of 1999, or the Gramm-Leach-Bliley Act, and scheduled committee consideration for March 4. a bevy of excited financial titans including Sandy Weill, Hugh McColl, and American Express CEO Harvey Golub called for “swift congressional action.”
The Quintessential Revolving-Door Man – The stock market continued its rise in anticipation of a banker-friendly conclusion to the legislation that would deregulate their industry. Rising consumer confidence reflected the nation’s fondness for the markets and lack of empathy with the rest of the world’s economic plight. On March 29, 1999, the Dow closed above 10,000 for the first time. Six weeks later, on May 6, 1999, the Financial Services Modernization Act passed the Senate.
It was not until that point that one of Glass-Steagall’s main assassins decided to leave Washington. Six days after the bill passed the Senate, on May 12, 1999, Robert Rubin abruptly announced his resignation. As Clinton wrote, “I believed he had been the best and most important Treasury Secretary since Alexander Hamilton. . . . He had played a decisive role in our efforts to restore economic growth and spread its benefits to more Americans.” Clinton named Larry Summers to succeed Rubin.
Two weeks later, BusinessWeek reported signs of trouble in merger paradise—in the form of a growing rift between Reed and Weill at Citigroup. As Reed said, “Co-CEOs are hard.” Perhaps to patch their rift, or simply to take advantage of a political opportunity, the two men enlisted a third person to join their relationship: none other than Robert Rubin.
Rubin’s resignation from Treasury became effective on July 2. At that time, he announced, “This almost six and an half years has been all-consuming, and I think it is time for me to go home to New York and to do whatever I’m going to do next.” Rubin became chairman of Citigroup’s executive committee and a member of the newly created “office of the chairman.” His initial annual compensation package was worth around $40 million. It was more than worth the “hit” he took when he left Goldman for the Treasury post.
Three days after the conference committee endorsed the Gramm-Leach-Bliley Bill, Rubin assumed his Citigroup position, joining the institution destined to dominate the financial industry. That very same day, Reed and Weill issued a joint statement praising Washington for “liberating our financial companies from an antiquated regulatory structure,” stating that “this legislation will unleash the creativity of our industry and ensure our global competitiveness.”
On November 4, the Senate approved the Gramm-Leach-Bliley Act by a vote of ninety to eight. (The House voted 362-57 in favor.) Critics famously referred to it as the Citigroup Authorization Act.
Mirth abounded in Clinton’s White House. “Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the twenty-first century,” Summers said. “This historic legislation will better enable American companies to compete in the new economy.”
There were some who expressed concern about this giant step backward in banking legislation and what it could mean going forward. “I think we will look back in ten years’ time and say we should not have done this but we did because we forgot the lessons of the past,” said Senator Byron Dorgan, Democrat of North Dakota. Senator Paul Wellstone, Democrat of Minnesota, said that Congress had “seemed determined to unlearn the lessons from our past mistakes.” But these warnings were ignored in the truly irrational exuberance of the moment. .Several days later, a broad coalition of consumer and community groups called for an investigation for legislation that would benefit his eventual employer. Retired government officials were prohibited from lobbying their former agencies on behalf of an employer for at least one year after leaving public service. Yet only four months had elapsed between Rubin’s resignation and his appointment to Citigroup’s board.
Rubin claimed that his decision to take a job at Citigroup had nothing to do with any work he had done in the government. “During the time I was Treasury secretary, my sole concern was to produce the best possible public policy,” he said. “I could not have cared less how anyone in the industry reacted to my position or my views.”
Regardless of whatever his internal thinking was, history shows that Rubin was the quintessential revolving-door man, cultivating the appearance of working for the people while angling for private gain. He was instrumental in destroying the last vestige of the Glass-Steagall Act, which had prevented big banks from gambling with other people’s money and government guarantees. His ideology would be at the epicenter of mega-meltdowns and bailouts to come.
Beneath the surface of a massive deregulation victory, Reed and Weill continued having a tough time dealing with each other. Reed resigned in February 2000, though he didn’t do too shabbily in t he process. According to Bloomberg, “From 1997 to 1999, Reed received salary and bonuses totaling $23.4 million, and a retirement bonus of $5 million.”
Inequality and Heady Stock Prices – Clinton epitomized the vast difference between appearance and reality, spin and actuality. As the decade drew to a close, he basked in the glow of a lofty stock market, budget surplus, and the passage of this key banking “modernization.” It would be revealed in the 2000s that many corporate profits of the 1990s were based on inflated evaluations, manipulation, and fraud. When Clinton left office, the gap between the rich and poor was greater than it was in 1992, and yet the Democrats heralded him as some sort of prosperity hero.
When he had resigned in 1997, Robert Reich, Clinton’s labor secretary, said, “America is prospering, but the prosperity is not being widely shared, certainly not as widely shared as it once was. . . .We have made progress in growing the economy. But growing together again must be our central goal in the future.” Instead, the growth of wealth inequality in the United States accelerated, as the men yielding the most financial power wielded it with increasingly less culpability or restriction.
By 2003, the number of households living on less than $2 a day would skyrocket. In addition, a economists Emmanuel Saez and Thomas Piketty reported, during the Clinton administration, the incomes of the wealthiest 1 percent of Americans increased by 98.7 percent, while the bottom 99 percent increased by only 20.3 percent.
The power of the bankers increased dramatically in the wake of the repeal of Glass-Steagall. The Clinton administration had rendered twenty-first-century banking practices similar to those of the pre-1929 Crash. But worse. “Modernizing” meant utilizing government-backed depositors’ funds as collateral for the creation and distribution of all types of complex securities and derivatives whose proliferation would be increasingly quick and dangerous.
Eviscerating Glass-Steagall allowed big banks to compete against Europe and also enabled them to go on a rampage: more acquisitions, greater speculation, more risky products. The big banks used their bloated balance sheets to engage in more complex activity, while counting on customer deposits and loans as capital chips on the global betting table. Bankers used hefty trading profits and wealth to increase lobbying funds and campaign donations, creating an endless circle of influence and mutual reinforcement of boundary-less speculation, endorsed by the White House.
Deposits could be used to garner larger windfalls, just as cheap labor and commodities in developing countries were used to formulate more expensive goods for profit in the upper echelons of global financial hierarchy. Energy and telecoms proved especially fertile ground for investment banking fee business (and later for fraud, extensive lawsuits, and bankruptcies). Deregulation greased the wheels of complex financial instruments such as collateralized debt obligations (CDOs), junk bonds, toxic assets, and unregulated derivatives.
Glass-Steagall repeal led to unfettered derivatives growth and unstable balance sheets at commercial banks that merged with investment banks and at investment banks that preferred to remain solo but engaged in dodgier practices to remain “competitive.” In conjunction with the tight political-financial alignment and associated collaboration that began with Bush and increased under Clinton, bankers channeled the 1920s, only with more power over an immense and growing pile of global financial assets and increasingly “open” markets. In the process, accountability would evaporate.
Every bank accelerated its hunt for acquisitions and deposits to amass global influence while creating, trading, and distributing increasingly convoluted securities and derivatives. As the size of their books grew, banks increasingly provided loans or credit in exchange for higher-fee business, thereby increasing global debt and leverage. These practices would foster the kind of shaky, interconnected, and nontransparent financial environment that provided the backdrop and conditions leading up to the financial meltdown of 2008.”
(WHAT WE MUST DO IS BREAK UP THE TOO BIG TO FAIL BANKS, SINCE THEY ARE PROVEN THEY CAN’T BE EFFECTIVELY MANAGED BECAUSE OF THEIR SHEER SIZE. WE MUST AT LEAST, SINCE WE HAVE A LIMITED AMOUNT OF FUNDS, PROTECT THE SMALL COMMERCIAL BANKS AND REINSTATE THE GLASS-STEAGALL ACT THAT WORKED SUCCESSFULLY FOR MANY YEARS. MS. PRINS WILL EXPLAIN MORE ABOUT GLASS-STEAGALL IN CHAPTER 6, WHICH PRESIDENT FRANKLIN ROOSEVELT PASSED IN 1933. SINCE THEN, THE BIG BANK LOBBY STARTED TO DEREGULATE GLASS-STEAGALL, UNTIL THEY COMPLETELY ELIMINATED IT IN 1999. THEY DEREGULATED IN SMALL INCREMENTS, STARTING WITH THE S&Ls UNDER PRESIDENT GEORGE HW BUSH AND ENDED UP WITH PRESIDENT GEORGE W BUSH AND THE 2008 BANKRUPTCY. THE QUESTION IS—CAN WE FIND A PERSON THAT WILL PUT SOME REAL REGULATIONS ON THE BIG INVESTMENT BANKS BEFORE 2016, SUCH AS TAXING THE HEDGE FUND DEALERS OR PASSING THE ROBIN HOOD TAX TO FINALLY BRING UNDER CONTROL, THE HUGE RISK THE BANKS ARE TAKING, USING UNREGULATED, TOXIC DERIVATIVES THAT ARE DEVALUING THE DOLLAR AND RUINING OUR ECONOMY, AS WELL AS THE WORLD ECONOMY?
LaVern Isely, Overtaxed Independent Middle Class Taxpayer and Public Citizen and AARP Members
isely 