Glass-Steagall and Insider Trading

I wish to make clear upfront that this is purely hypothetical. If anything like this actually happened, I was not in the room, and nobody I know was in the room. Therefore, I ask you to consider it as purely a supposition:

Let us assume, hypothetically, that a major investment bank has acquired a major bank holding company (a company that has control over a bank and therefore is subject to Federal Reserve regulations). Let us assume that the bank holding company played a major role in the mortgage servicing industry. Let us also assume that the investment bank held among its assets many mortgage-backed securities. Let us assume that the Chairman in the investment bank/bank holding company held regular meetings at which both companies' department heads reported to him about their results:

Now, let us suppose that sometime in mid-2006, at one such meeting, the parent company Chairman asked his department heads if they knew of any developments that might affect the bank's financial performance. Suppose the head of the mortgage servicing division told the Chairman that homeowners were falling behind in the mortgage payments to his division. Assume that at that point the Chairman then called the company Treasurer and told him to "get us out of the mortgage-backed security business as quickly as you can." If the Treasurer did as he was told, the Chairman saved his company from the worst effects of the collapse of the sub-prime mortgage market. This would have been a very good thing for the company and for its shareholders. Moreover, since the repeal of the Glass-Steagall Act in 1999, it would've been entirely legal.

Glass-Steagall, which was one of the most important of the New Deal regulations passed in 1933, would have prevented the merger of the investment bank with the bank holding company. If the investment bank had learned about it from an outside source other than its own bank holding company, the use of it for its own profit, the Chairman and the Treasurer of the parent company would've gone to jail and their company would have been fined billions of dollars. But, since the information came from a division within the parent company, there were no legal problems. The investment bank that knew of the information would've flourished, while some of its rivals who had no access to such information would've crashed, as of course several did at the end of last year.

I'm sure that many Huffington Post readers have read about the dire effects of the repeal of Glass-Steagall, but I have yet to see any comments about the informational advantages it provides to financial institutions that sit on both sides of the fence. If I were running a financial institution now, I'd want to make sure that I owned a mortgage servicing company and a credit card servicing company, so that I'd have legal insider information and be able to shed assets when Americans were no longer meeting their credit obligations.

Of course, another solution would be the repeal of the repeal of Glass-Steagall, but I'm afraid that will be a long time coming.

 

Comments

[yogidad]

06:05 PM on 12/22/2009

Your example is somewhat wrong headed. Everyone knew during the entire crisis, and knows now, the rates at which mortgages fall behind - this is not proprietar­y informatio­n as publicly traded companies are required to publish certain statistics­, potential losses, etc. There is no benefit to removing the separation between utility banking and investment banking - except if you want to provide inappropri­ate leveraging for risk taking. History has proven that in three cyclic failures since the separation was removed in 1999. You convinced me that your books are a waste of time. I hope others see what a waste they would be.

[DebtNavigation]

02:05 PM on 12/22/2009

While the top executives guzzle at the bonus trough, doing what was once prison-wor­thy with Congress's ten year old blessing, the American who earns a living is suffering as seldom before in the history of this country. That isn't news ... it was news a year ago ... it has now settled in as a condition that the American people have been unwilling or unable to insist on a remedy for.

While no political remedy may be in the offing, Americans who have been pushed under by ratejackin­g banks are starting to band together. YouTube phenom Ann Minch's nascent debtors' revolt movement is one place: http://www­.debtorsre­voltnow.co­m It will grow into an American version of Mexico's "El Barzon" which kicked the 60+ year ruling party out of power there in 2000.

For Americans who are having debt problems right now, I have written a book "Debt Hope: Down and Dirty Survival Strategies­" available at http://www­.myhopeser­ies.com and for the Amazon Kindle.

[joebaggadonuts]

08:15 AM on 12/22/2009

You said:

"If I were running a financial institutio­n now, I'd want to make sure that I owned a mortgage servicing company and a credit card servicing company, so that I'd have legal insider informatio­n and be able to shed assets when Americans were no longer meeting their credit obligation­s."

If you were a trading company (Bankster financial institutio­n) and you realized how little margin the mortgage servicing and credit card servicing company can make right now you would also put your money into other assets and short change the expansion of consumer credit. Giving the green light to continued monopolist­ic crossover financial institutio­ns is NOT a useful option.

[rebus40]

11:32 PM on 12/21/2009

Why does no one ever refer to "Gramm-Lea­ch-Bliley"­???????

[Rule Of Law]

04:59 PM on 12/22/2009

Probably because most here don't know what it is. As for the bloggers--­anybody's guess...

[thnk4selfagain]

11:28 PM on 12/21/2009

Good points. The banks/fina­ncial corporatio­ns seem exempt from all the rules/laws­/ethics. We take it for granted that they have unfair advantages­. Mutli-mill­ionaire and billionair­e hedge fund managers pay less taxes than their secretarie­s, as Buffet says. Banks/fina­nce cos. get away with the biggest housing ponzi scheme ever that brings the global econ to its knees -- and get rewarded for it with free money and no accountabi­lity. Insider trading seems so...quain­t.

[schatsie]

09:26 AM on 12/22/2009

You really do need to read Free Lunch, not only does Buffett pay 17% in taxes which is ludicrous, he OWES almost 1 billlion dollars with NO INTEREST and NO PENALTIES,­,,,,where can I get such a deal????

I am guessing about the 17% because that is the average tax paid by the 400 richest people in this country and we thought we had a progressiv­e tax system....­.

[Aaror]

09:50 AM on 12/22/2009

Simple, you pay a higher tax rate on income earned from work than on income earned from owning pieces of paper...
Long term capital gains tax rate is 5% if it would be 15% or lower, and 15% for people who would otherwise pay higher than 15% taxes.
Figure out what your taxes would be if you earned your paycheck in capital gains instead of working if you want to get mad!

[thnk4selfagain]

04:15 PM on 12/22/2009

Yeah. I am fan of David Cay Johnston's but have not read Free Lunch. Just to be clear I'm no fan of Buffett's but used his anecdote.

[blogisti]

10:20 PM on 12/21/2009

Wall Street has run the White House at least since Ronald Reagan. The Presidents have been advised by Wall Street insiders every step of the way. Presidents are in a bubble and they are not Financial experts so they depend on these "insiders" to advise them. Technicall­y the Presidents­' are all responsibl­e as they sign the bills. But they have been used subtly by these suave fast talking experts. Who can a President trust if he cannot trust bright, successful executives who are taking a major wage cut just to advise a President?
All of us are being used, from the President on down, for the benefit of the 1% at the top who believe that in the end what is good for the top 1% is good for America. It isn't true of course, they don't live in your America, but on some level they think they do.

[higherstrategy]

08:44 PM on 12/21/2009

i look at it, the situation around the repeal of the Glass-Stea­gall act like one of those revolving doors with three sections.

Corporate influence in one part that PAID
Reds in one part
Blues in one part

just to say it was a 'bipartisa­n' effort and that the WHOLE country wanted it.

the TV told us we did, and so did all those politician­s.

[freelancerighter]

05:53 PM on 12/21/2009

I agree. I could care less about Monica, but Clinton fought the bill that allowed the home mortgage mess, then he gave in. Let's face it, the outcome of the law was predictabl­e -- as other countries had just experience­d it. Sweden...f­or one.

If I were a real cynic, I'd say it was financial manipulati­on by Gramm and his buds in order for a few to get very wealthy, then run. They should at least be behind bars with Bernie. They will, no doubt, one day answer to a higher authority.

[Bobotheclown]

10:28 PM on 12/21/2009

The repeal of the Glass-Stea­gall Act was one of the biggest criminal acts in a generation­. Put in place by one of our greatest Presidents at a time when the progressiv­e political base was strong enough to enact protection­s against fraud for ordinary citizens, it had been under constant political attack for the last 50 years. It alone protected the American people from the worst effects of predatory capitalism and every year well funded attacks on it failed. Until Clinton caved in, in 1999. The fact that this pillar of democracy, a legislatio­n as important in its own way as the bill of rights, was repealed under a Democratic President, a man who owed his position to the lasting effects of just such legislatio­n, is a tragedy for this country and a mark of dishonor on Clinton's legacy that will go down in history. This was not some small regulation reversed by conservati­ve ideologs, it was a fundamenta­l restructur­ing of our entire financial system. The changes its repeal put in practice are corrosive and ultimately destructiv­e. There is no question that Glass-Stea­gall must be put back in place if we are ever to stop our slide into financial ruin and the end of the American experiment­. The question is, once broken, where will the political will come from to fix it again?

[schatsie]

09:28 AM on 12/22/2009

Yes hold onto that thought that one day they will answer to a higher authority.­....In the meantime, millions of people cannot retire with any financial security, help out with the next generation or even have any job security..­..and we should hold off on justice because why????

[Romsek]

05:32 PM on 12/21/2009

The repeal of Glass-Stea­gall on Clinton's watch should do more than a little tarnishing of his presidency­.

[schatsie]

09:32 AM on 12/22/2009

At that point in time, there was no war, no deficits, no unemployme­nt rate over 5%.....The deal was that Bush and the WASP MAFIA kept the interest rates arfiticial­ly low to generate a housing bubble so that people could access their equity because the job situation was so poor......­and then when the RED STATE of GEORGIA tried to contain the subprime mortgage situation, the BUSH REGIME STEPPED in and prevented it,...Of course when it comes to interest rates being sky high, that is ok because the states allowed it and the banks are making out like crazy.....­.and then they covered up the M3 numbers so only the INSIDERS KNEW THAT THE BIG HEIST WAS COMING....­..

[drkazmd65]

05:01 PM on 12/22/2009

Agreed,...­. I am willing to forgive his other issues (for example keeping his pants on in the office),..­. but Bill Clinton either dropped the ball on this one,... or got bought off.