According to Labaton, this compromise was hatched "in a backroom meeting at the Capitol soon after midnight, when a group of moderate Senate Democrats -- led by Christopher Dodd of Connecticut and Charles E. Schumer of New York -- forced a compromise between [Senator Phil] Gramm and the White House over the legislation's effect on the Community Reinvestment Act, a 1977 anti-discrimination law intended to encourage lending to minorities and others historically denied access to credit."-

 

The compromise culminated in President Clinton signing the Gramm-Leach-Bliley Act (GLB) into law on November 12, 1999. This repealed the Glass-Steagall Act, allowing allowed banks to become "too big to fail"- and trade mortgage-backed securities and collateralized debt obligations via structured investment vehicles. Congressional Democrats put up little fight (only 8 Senators and 57 Representatives voted against the final version of the bill) because Republicans conceded expanding the Community Reinvestment Act (CRA), giving rise to creative subprime mortgages.

In a speech at HUD (June 18, 2002, 10:30 A.M. EDT), Bush said the following: "We need more capital in the private markets for first-time, low-income buyers. And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital."-

 

So, how did Fannie and Freddie help gather up $440 billion in capital? After gobbling up subprime mortgages, Fannie and Freddie repackaged them as mortgage backed securities and sold these to investment banks here and abroad.

While Fannie and Freddie were gathering up "good capital"- and restating over $10 billion in earnings, the Bush administration, according to a Washington Post article by Kathleen Day (10/8/2003), called for "tougher oversight"- and a "new regulator"- that would be independent of Treasury, which Barney Frank (D-MA) and Paul Kanjorski (D-PA) opposed.

Meanwhile, the Fed had lowered its target rate to one percentage point by mid-2003. Shortly thereafter, in a speech to the Credit Union National Association on February 23, 2004, Greenspan said, "homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages"- and "consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."- So after duping borrowers and lenders, the Fed began a historic rate hike four months later, raising its target 425 basis points in just over two years.

All of the above when stirred in with speculative sellers selling homes to speculative buyers in housing markets appreciating at 20 to 30 percent a year and builders erecting homes faster than they can be flipped yields one heck of a financial Molotov cocktail.

So why were so many--especially Democrats--willing to throw Glass-Steagall under the bus? Was this not the legislation that President Franklin D. Roosevelt referred to as "the most important and far-reaching legislation ever enacted by the American Congress."-

In a Senate Banking Committee press release, Senator Gramm said: "We are here today to repeal Glass-Steagall because we have learned that government is not the answer"- [and] "that we promote economic growth and we promote stability by having competition and freedom."- How is increased competition possible when the purpose of GLB was to allow banks to become "too big to fail?"-

Clinton is quoted in Labaton's article saying: "it [GLB] will strengthen the economy and help consumers, communities and businesses across America."- A few years later, GLB helped its lead sponsor become vice-chairman of UBS--another one of those "too big to fail"- banks.

Laboton also quoted Clinton's treasury secretary, Lawrence Summers, who was reported saying: "At the end of the 20th century, we will at last be replacing an archaic set of restrictions with a legislative foundation for a 21st-century financial system"- [and] "would provide significant benefits to the national economy."- Such opinions are based on the idea that mergers are beneficial because gains accrue through increases in efficiency, decreases in redundancy, reductions in expenses, and declines in earnings volatility as economies of scale and scope are achieved. However, unfettered consolidation creates banks that are just "too big to fail."-

 

As the crisis deepens, "too big to fail"- banks are getting even bigger. Bailouts for banks that are "too big to fail"- and getting bigger are problematic for a couple of reasons. First, they increase moral hazard. Why should banks change behavior if they expect to be bailed out for making similar poor decisions in the future? Two, the bailouts are akin to putting a band-aid on a cancerous tumor if the causes are not identified and addressed. Unfortunately there is no partisan cure for this cancer.

If bailouts are approved, they must be accompanied by bipartisan congressional investigations since they raise moral hazard. If CEOs and their boards are found guilty of bilking their shareholders (short selling company stock after books were cooked and before the bad news was unloaded), severance packages need to be confiscated and cots in federal penitentiaries assigned.

Political campaign contributions from "too big to fail"- banks paid to members of Congress and presidential candidates should be collected and used to offset the cost of the bailouts. This will begin the process of making government more accountable. This, however, is not enough. Elected leaders must be held accountable for all contributions received. One hundred percent transparency in DC is a must. A bipartisan website is needed to display sources and amounts of all contributions.

 

After markets recover and bailed out "too big to fail"- banks have paid back tax payers, the next Congress and President should follow Teddy Roosevelt's mantra of "bust the trusts."- Freddie Mac, Fannie Mae, and other bailed out banks should be busted into several competing companies. If such a quagmire should ever resurface, busted up "too big to fail"- banks will not be too big to fail.

 

Congress and the President should roll back CRA and mark-to-market accounting, restore mortgage lending standards, and increase mortgage transparency.

 

Seemingly unrelated is U.S. energy independence. Congress should follow up lifting the offshore drilling ban with rules that streamline construction of new generation nuclear power plants. Projects that harness the wind, sun, and earth (geothermal) should be pursued as well. As is done in Alaska, royalties from these projects could accrue billions of dollars into the US Treasury rather than flowing overseas, which could help offset the cost of the rescue.

 

Finally, the Fed's mission should be altered to avoid the problems that were created when it lowered the federal funds rate to forty-year lows.

 

Bailouts by themselves will not cure the cancer. If this is all that is done, the cancer will wield its ugly head in the all too-near distant future. If this band-aid is all that is done, we should consider outsourcing Congress, the Presidency, and the Fed to low cost labor from India.