Wall Street watchers have breathlessly greeted the news that the Bernie Sanders’ camp was able to place restoring the Glass-Steagall Act in the final draft of the Democratic Platform and get a unanimous vote on the measure from the Drafting Committee. The Committee includes five individuals selected by Senator Bernie Sanders, six from Hillary Clinton and four selected by DNC Chair, Debbie Wasserman Schultz.
The 1933 Glass-Steagall Act, which came in response to the Wall Street collapse from 1929 to 1932, protected the U.S. financial system for 66 years until the Bill Clinton administration repealed it at the behest of his pals on Wall Street in 1999. It took just nine years after the repeal for the financial system to collapse in the same epic fashion as 1929. The Act makes it illegal for banks holding insured deposits, which are backstopped by the taxpayer, to merge with the gambling casinos of Wall Street – the investment banks and brokerage firms. Restoring the Act would mean that Wall Street institutions like JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley, would have to shed their commercial banking operations that hold the insured deposits.
The public debate on the threat posed by these financial fireworks factories should have ended after they collapsed the system in 2008 with reckless and callous disregard for the country’s interests. The debate should have ended again in 2012 when JPMorgan Chase was caught using hundreds of billions of dollars of its depositors’ funds to speculate in exotic derivatives in London (the London Whale fiasco) and losing $6.2 billion of those funds.
But when Hillary Clinton took to the Democratic debate stage last year, she said her “experts” had indicated that the biggest threat is not coming from the big banks but from the “shadow” banks. When pressed on the stage by both Sanders and former presidential candidate Martin O’Malley on restoring the Glass-Steagall Act, Clinton declined to embrace the idea, hunkering down instead on her “shadow” bank thesis. That makes it all the more interesting that the Drafting Committee has now voted unanimously for the measure.
What Clinton’s so-called experts have failed to explain to the candidate, or she is amicably agreeing to ignore in public forums, is that shadow banks only pose a threat to financial stability because the Wall Street banks have put them, once again, on the hook for the banks’ derivative and securities lending losses. If those shadow banks can’t pay off their obligations in a crisis to the giant Wall Street banks, another taxpayer bailout is coming. In the 2008 crisis, more than half ($93.2 billion) of the $185 billion taxpayer bailout of the big insurer AIG, which had secretly become a shadow bank for Wall Street’s derivatives and securities lending, went out the back door to pay off obligations to Wall Street financial institutions.
Public pressure eventually forced AIG to release a chart of those payments, but the chart showed just a narrow window of disbursements from September to December 2008. Just how vast the full tally actually was has yet to see the light of day.
The inclusion of the Glass-Steagall Act in the Democratic Platform could not come at a more critical time for the country. Like something out of an old Keystone Kops movie reel, on the very eve of a calamitous wave of share price carnage at Wall Street banks, their Federal regulator, the Federal Reserve, ruled little more than a week ago, on Thursday, June 23, in its annual stress test analysis, that all 33 of the biggest banks in the U.S. had adequate capital to weather a hypothetical severe economic downturn with unemployment as high as 10 percent. (This is an annual exercise to falsely assure the public that the Fed will not be wearing blinders again as the next crisis creeps up on its fogged rearview mirror.)
What the Wall Street banks apparently didn’t have enough capital to weather was a country located 3500 miles away on the other side of the Atlantic Ocean deciding to assert its autonomy from the European Union.
Just one day after the Fed made its call on the stress tests, the most dangerous banks on Wall Street began to hemorrhage capital. On Friday, June 24, and again on Monday, June 27, Wall Street mega banks and their foreign counterparts were bleeding capital like it was 2008 all over again. The fallout came immediately after the Brexit vote for the U.K. to withdraw from the European Union. In the span of two trading sessions following the vote, Citigroup, the recipient of the largest taxpayer bailout in U.S. history in 2008, lost $17.55 billion in equity capital as its share price dropped 13.45 percent. Morgan Stanley lost $7.13 billion of its equity market capital in the two-day span while Bank of America cratered a stunning $19.11 billion. Every major Wall Street bank took a beating in that two-day span.
It was all so eerily reminiscent of the last meltdown. As we reported here at CounterPunch on November 24, 2008:
“Citigroup’s five-day death spiral last week was surreal. I know 20-something newlyweds who have better financial backup plans than this global banking giant…Altogether, the stock lost 60 per cent last week and 87 percent this year.”
Notwithstanding the fact that prior to the 2008 crash the Federal Reserve had reassured the American people that things were fine with the big banks (right up to the moment they weren’t), Citigroup required taxpayer bailouts totaling $45 billion in equity infusions, over $300 billion in asset guarantees, and $2 trillion in secret, cumulative below-market-rate loans over more than two years from the Fed. (Only because of the work of Senator Bernie Sanders and a separate lawsuit by Bloomberg News did the public learn of the $13 trillion in secret loans from the Fed.)
What was apparently furrowing the brows of Wall Street traders after the Brexit vote was how U.K. banks and businesses were going to be able to pay back the almost $1 trillion they owe to U.S. banks for loans, derivatives, and guarantees when their currency was setting a three-decade low against the U.S. dollar. And, of course, there is the ever present worry that some big derivative counterparty will go belly up from the chaos, leaving the Wall Street banks exposed to tens of billions of dollars in losses.
The key question now is will the final vote by the full Democratic Platform Committee at the July 8-9 confab in Orlando, Florida leave the restoration of Glass-Steagall in the final Democratic Platform. Or will those ever present invisible hands on Wall Street be able to kill the amendment.
According to the summary document released by the DNC, the language to restore the Glass-Steagall Act in the final draft reads as follows:
“The Democratic Platform will make clear that Wall Street cannot be an island unto itself, gambling trillions in risky financial instruments and making huge profits, all the while thinking that taxpayers will be there to bail them out again. The draft calls for defending and expanding Dodd-Frank. The Clinton and Sanders teams brought forward an amendment for an updated and modernized version of Glass-Steagall and breaking up too big to fail financial institutions that pose a systemic risk to the stability of our economy, which the Committee unanimously adopted.”
If this language survives in the final platform and eventually becomes the law of the land again, Senator Bernie Sanders and his visionaries on the Drafting Committee may have just saved the United States of America.