From the
:: atakante :: blog: It seems that a 2004 rule change authorized by SEC, (Securities and Exchange Commission) which is tasked to regulate U.S. financial markets may have provided the highly flammable fuel that eventually led to the massive fire at Wall St. brokerage headquarters.
The rule change granted permission to Bear Sterns, Lehman, Merrill, Morgan Stanley and Goldman Sachs AND NONE OTHER to assume a new designation that would let them lever their portfolios by a ratio of up to
1 to THIRTY(30)!
It effectively replaced the old rule put in place in 1970s limiting the same ratio to 1 to 12. Especially interesting quote in the press release is that of then SEC Commissioner Harvey Goldschmid who said:
If anything goes wrong, it's going to be an awfully big mess.
Rightardia covered this story nearly two years ago. This is the "smokin gun" that directly ties the Bush Adminstration into the Wall Street melt down. Paulson had been a partner in Goldman-Sachs at the time. He eventually became the Goldman-Sachs CEO .
According to Wikipedia:
In 2004, at the request of the major Wall Street investment houses—including
Goldman Sachs, then headed by Henry Paulson—the
U.S. Securities and Exchange Commission agreed unanimously to release the major investment houses from the
net capital rule, the requirement that their brokerages hold reserve capital that limited their
leverage and risk exposure.
GW Bush and Henry Paulson
The investment banks complained of increasingly onerous regulatory requirements of the European Union
regulation over the foreign operations of U.S. investment groups.
In the immediate lead-up to the decision, EU regulators acceded to U.S. pressure, and agreed not to scrutinize foreign firms' reserve holdings if the SEC agreed to do so instead.
The 1999
Gramm-Leach-Bliley Act, however, put the parent
holding company of each of the big American brokerages beyond SEC oversight. In order for the agreement to go ahead, the investment banks lobbied for a decision that would allow "
voluntary" inspection of their parent and subsidiary holdings by the SEC.
The Republican Congress rescinded the depression-era Glass-Stegall Act. President Bill Clinton unwisely signed this bad act into law.
Phil Gramm was identified by Time Magazine as the number two man behind Alan Greensapn who was responsible for the meltdown.
At the time Democratic Senator Byron Dornan predicted a financial collapse would occur in 10 years after 1999
Gramm-Leach-Bliley Act became law. He was right on the money.
The repeal of the Glass–Steagall Act of 1933 effectively removed the separation that previously existed between Wall Street investment banks and depository banks and has been blamed by for exacerbating the damage caused by the collapse of the subprime mortgage market that led to the
Financial crisis of 2007–2010.
During this repeal of the net capital rule, SEC Chairman
William H. Donaldson agreed to the establishment of a risk management office that would monitor signs of future problems.
This office was eventually dismantled by Chairman
Christopher Cox, after discussions with Paulson.
According to
The New York Times, "While other financial regulatory agencies criticized a blueprint by Treasury Secretary Mr. Paulson proposing to reduce their stature and that of the S.E.C.
Mr. Cox did not challenge the plan. Three former Democratic and Republican commission chairmen complained that the new blueprint would "neuter the agency."
In late September 2008, Chairman Cox and the other Commissioners agreed to end the 2004 program of voluntary regulation.
It is peculiar after the Wall street disaster that Republicans are still calling for more deregulation and privatization.
What does deregulation and privatization ultimately produce? That would be an unregulated private monopoly.
This is a dangerous development. If we have learned anything from the earlier Savings and Loan scandal and the Wall Street meltdown, it is the government needs to be actively involved with he regulation of investment banks and similar monopolies.
If the government decides to privatize an industry, regulatory oversight is clearly needed.
sources:
http://en.wikipedia.org/wiki/Henry_Paulson#Goldman_Sachs and
http://www.atakante.com/2008/09/2004-sec-rule-change-and-wall-st.html
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