No one person is responsible for the credit crisis, the failure of investment
banks, the insolvency of commercial banks world-wide, the implosion of the
world’s stock markets, or for leading us to the precipice of another great
depression.
The truth is there were many.
Fundamental and pragmatic banking regulations, which arose from the
devastating financial collapses of the Great
Depression, for decades strengthened U.S. banks and capital markets, making
them the twin engines of American growth and the envy of the world.
The systematic dismantling of those same regulations by greedy bankers began
in earnest in 1980, peaked in 1999, and finally climaxed with an insane
Securities and Exchange Commission ruling in April 2004, a final decision that
paved the way for the implosion of everything regulation was designed to
protect.
Just how did we get here?
Wall Street bankers, their exorbitantly well-paid lobbying army of former
congressmen and former regulators, their greatly contributed-to sitting
legislators and, most egregiously, the self-righteous and still mega-rich
“former” Street executives have systematically eviscerated the muscle and bones
from the regulatory bodies charged with protecting us from banks’
self-destructive greed. An inordinately powerful group of executive insiders
from the once-deeply respected House of Goldman Sachs (GS) have served as U.S.
Treasury secretaries and in innumerable other administrative capacities.
A Reflection on Reform
The Depository
Institutions Deregulation and Monetary Control Act of 1980, signed into law
by President Jimmy Carter,
was the first major reform of the U.S. banking system since the Great
Depression.
While touted as a boon to consumers, the law was actually a gold mine for
bankers. Among other requirements and banker “gifts” the 1980 Act’s
provisions:
- Lowered the mandatory reserve requirements banks keep in non-interest
bearing accounts at U.S. Federal Reserve banks.
- Established a five-member committee, the Depository
Institutions Deregulation Committee, to phase out federal interest rate
ceilings on deposit accounts over a six-year period.
- Increased Federal Deposit
Insurance Corp. (FDIC) coverage from $40,000 to $100,000.
- Allowed depository institutions, including savings and loans and other
thrift institutions, access to the Federal Reserve Discount Window for credit
advances.
- And pre-empted state usury laws that limited the rates lenders could charge
on residential mortgage loans.
In 1980, in a virtual landslide, Ronald Reagan
was elected and grabbed the conservative mantle. A year later, the shock troops
of the heralded Reagan Revolution launched their attack and embarked on a
massive, systematic de-regulatory campaign. President Reagan’s first treasury
secretary, former Merrill Lynch & Co. Chief Executive Officer Donald T.
Regan, became chairman of the Depository Institutions Deregulation
Committee.
In a burst of deregulatory bravado in 1982, Treasury Secretary Regan ushered
through the Garn-St.
Germain Depository Institutions Act. Key provisions of the Act ultimately
coalesced with Treasury Secretary Regan’s protection of the lucrative “brokered
deposits” business, in which Merrill was a major player, and paved the way
for the future collapse of the savings and loan industry.
Some of the provisions in that 1982 Act would later be blamed for thousands
of bank failures. The provisions permitted the following:
- Allowed savings and loans to make commercial, corporate, business or
agricultural loans of up to 10% of their assets.
- Authorized a capital assistance program - the “Net Worth Certificate
Program” - for dangerously undercapitalized banks, under which the Federal
Savings and Loan Insurance Corp.
