With the uprising of the Occupy Wall Street Movement it is necessary to go back and research why government has failed to provide the safeguards to avert the situations that lead to the bank bailouts and manipulation of the markets.
Many have blamed deregulation for this. This prompted me to go back and search my archives for a post first written September 25, 2008. After re-reading this post I can only conclude that all the banking regulations in the world can not avert a crisis if the government regulators fail to regulate. This is what happens when we place to much faith in government and let our guard down.
Very few people are happy with banks these days. That said, that unhappiness does equate support for the methods and demands of the OWS groups. I wonder how many people in the crowds even understand the impact that the Dodd-Frank Act has had on the mortgage banking industry. Isn't it ironic that the two people who were at the core of the banking crisis, one playing apologist for Fannie and Freddie and the other getting preferred deals through Country Wide, are the same individuals who draft "fix-it" legislation?
Here was my post from September 2008 . It is still relevant today:
Gramm-Leach-Bliley a/k/a- Deregulation, has been the red headed stepchild lately by many looking to assign blame to the financial industries woes. You hear democrats today screaming that it is to blame for the crisis, yet Joe Biden and Harry Reid voted for the legislation. Now yes they voted against the legislation before they voted for the legislation . So you can say they voted against it, but their vote veto-proofed it, so they do also vote for it. Sound kind of Washington to you?
After having read quite a few recent articles on this Act (and many have been flat wrong on the who voted for deregulation and many have said that the final version was only a committee report, misunderstanding how a bill becomes law when the House version and the Senate version differ) , I figured we should take a closer look at this particular Act.
What was the main point of this act originally?
Repeals the depression-era restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.
Creates a new "financial holding company" under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. Activities that are "complementary" to financial activities also are authorized. The nonfinancial activities of firms predominantly engaged in financial activities (at least 85% financial) are grandfathered for at least 10 years, with a possibility for a five year extension.
http://banking.senate.gov/conf/grmleach.htm
No you ask, and rightly so, what do you mean they voted against it before they voted for it? Am I trying to spin this or what? No.
All legislation must first pass Congress to become a law. After it passes Congress it gets forwarded on to the President . For the bill to become law it must either be signed (or not signed for ten business days if Congress is in session) or vetoed (or a pocket veto) by the President of the United States. It is a check and balance.
If the President uses his veto power, the Congress may opt to re-vote on the bill and if they have a 2/3rd's majority, it is known as veto-proof legislation. This is many times when the President who disagrees with the legislation will simply not sign it as a way to note his disapproval.
In 1999, Gramm-Leach -Bliley, ( the original version of the Act), passed the Senate, mostly on a party line vote of 55-44. Therefore, it was not veto-proof legislation. Thee is a high likelihood as written, and the party line vote in the Senate, it would be vetoed and there was not a 2/3 'rds vote in the Senate to pass it.
Let me be crystal clear here, when I reported before that Joe Biden and Harry Reid voted for the Deregulation Act and John Mc Cain did not, I am speaking about the Act that stands today, not the original bill that fell under a party line vote. John Mc Cain did support that original bill before committee and Joe Biden and Harry Reid did not.
Roll Call: http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105
How did the bill change for the vote to go from 55-44 to 90-8-1-1 ?
Democrats agreed to support the bill if it was amended to include the following Community Reinvestment Act provisions :
Financial Services Modernization Act
Community Reinvestment Act Amendments in the Gramm-Leach Act
Sunshine Requirements
- Requires full public disclosure of all CRA agreements.
- Requires each bank and each non-bank party to a CRA agreement to make a public report each year on how the money and other resources involved in the agreement were used.
Small Bank Regulatory Relief
- Applies to small banks and savings and loans, with no more than $250 million in assets.
- Small banks and S&Ls having received an outstanding rating at their most recent CRA exam shall not receive a routine CRA exam more often than once each 5 years.
- Small banks and S&Ls having received a satisfactory rating at their most recent CRA exam shall not receive a routine CRA exam more often than once each 4 years.
Preservation of Current Law
- Clarifies that nothing in the act repeals any provision of the CRA.
CRA Compliance Check
- The Federal Reserve may not permit a company to form a financial holding company if any of its banks or S&Ls did not receive at least a satisfactory rating in its most recent CRA exam.
- No bank or financial holding company may commence new activities authorized under the Gramm-Leach Act if any bank, or bank affiliate of a financial holding company, received less than satisfactory rating at its most recent CRA exam.
Federal Reserve Study
- Directs the Federal Reserve Board to conduct a study of the default rates, delinquency rates, and profitability of CRA loans.
Treasury Study
- Directs the Treasury, in consultation with the bank regulators, to study the extent to which adequate services are being provided as intended by the CRA.
Source: http://banking.senate.gov/conf/craamd.htm
Roll Call : http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00354
What is CRA?
The CRA was passed into law by the U.S. Congress in 1977 as a result of national grassroots pressure for affordable housing, and despite considerable opposition from the mainstream banking community. Only one banker, Ron Grzywinski from ShoreBank in Chicago, testified in favor of the act.
http://www.fdic.gov/regulations/laws/rules/6500-2515.html
The CRA mandates that each banking institution be evaluated to determine if it has met the credit needs of its entire community. That record is taken into account when the federal government considers an institution's application for deposit facilities, including mergers and acquisitions. The CRA is enforced by the financial regulators (FDIC, OCC, OTS, and FRB).
In 1995, as a result of interest from President Bill Clinton's administration, the implementing regulations for the CRA were strengthened by focusing the financial regulators' attention on institutions' performance in helping to meet community credit needs. These revisions with an effective starting date of January 31, 1995 were credited with substantially increasing the number and aggregate amount of loans to small businesses and to low- and moderate-income borrowers for home loans. These changes were very controversial and as a result, the regulators agreed to revisit the rule after it had been fully implemented for seven years. Thus in 2002, the regulators opened up the regulation for review and potential revision
Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns. The number of CRA mortgage loans increased by 39 percent between 1993 and 1998, while other loans increased by only 17 percent.
In 2003, the Bush Administration recommended what the NY Times called "the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago." This change was to move governmental supervision of two of the primary agents guaranteeing subprime loans, Fannie Mae and Freddie Mac under a new agency created within the Department of the Treasury. However, it did not alter the implicit guarantee that Washington will bail the companies out if they run into financial difficulty; that perception enabled them to issue debt at significantly lower rates than their competitors. The changes were generally opposed along Party lines and eventually failed to happen.
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63
http://people.boston.com/forums/news/politics/general/?p=discussiondetails&activityid=7945311818817113507
Don't have the tools they need
The Times article of 9/11/2003 recounts this:
''The current regulator does not have the tools, or the mandate, to adequately regulate these enterprises,'' Mr. Oxley said at the hearing. ''We have seen in recent months that mismanagement and questionable accounting practices went largely unnoticed by the Office of Federal Housing Enterprise Oversight,'' the independent agency that now regulates the companies.
''The regulator has not only been outmanned, it has been out-lobbied,'' said Representative Richard H. Baker, the Louisiana Republican who has proposed legislation similar to the administration proposal and who leads a subcommittee that oversees the companies. ''Being underfunded does not explain how a glowing report of Freddie's operations was released only hours before the managerial upheaval that followed. This is not world-class regulatory work.''
Significant details must still be worked out before Congress can approve a bill. Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.
''These two entities -- Fannie Mae and Freddie Mac -- are not facing any kind of financial crisis,'' said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ''The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.''
Representative Melvin L. Watt, Democrat of North Carolina, agreed.
''I don't see much other than a shell game going on here, moving something from one agency to another and in the process weakening the bargaining power of poorer families and their ability to get affordable housing,'' Mr. Watt said
http://query.nytimes.com/gst/fullpage.html?res=9E06E3D6123BF932A2575AC0A9659C8B63
In reviewing this over and over, of course you see where both growth and problems occurred with repealing depression era legislation. Many people would not own homes today if it were not for both deregulation and the Community Reinvestment Act and subprime mortgages.
What is unnerving is that it is dishonest to say that an act is solely to blame , when along the way, you encounter problems that were either not foreseen because of new market conditions or abuses and problems that occur as the system develops.
That is where you look for track records, who saw what and who tried to do what. The person who has gotten me the most outraged out of this whole political situation is Speaker Nancy Pelosi denial of any culpability.
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