Posts Tagged “too big to fail”

These Three Men Represent Everything That’s Wrong with Wall Street

9 | By Shah Gilani

I’ve already expressed my desire to embrace the Occupy Wall Street movement.

I said last week that I would join in wholeheartedly if I knew exactly what the protesters were trying to achieve.

But I don’t know – and I’m not convinced they do, either.

Still, that doesn’t mean we should dismiss them entirely. After all, there are millions of Americans who sense there’s something terribly wrong with our capitalist system, but they can’t pinpoint exactly what it is either.

But I can.

Bad actors have done bad things to good institutions and our capitalist system. Today, I’m going to let you in on who three of those bad actors are.

You see, part of the problem is that when we think of the “bad guys” on Wall Street, or in Washington for that matter, we don’t often think of specific people. We talk about “them” as faceless men we might imagine sitting in luxurious high-rises chewing on cigars and laughing as they rake in millions, or even billions of dollars on the backs of hardworking Americans.

I intend to fix that. I want to shed light on the faces of the people who are gaming the system and lay out before you the tools they’re using to get away with it.

So, I’m going to start today with three of the biggest perpetrators of the mess we’re in.

The Three Bears

There are hundreds of bad actors on Wall Street, but three in particular tell the inside story of how appallingly corrupt our country has become. They are:

  • Robert Rubin, who spent 26 years at Goldman Sachs Group Inc. (NYSE: GS), before becoming Treasury Secretary in the Clinton administration.
  • Lawrence Summers, who came out of the World Bank and was Deputy Secretary of the Treasury under his pal Rubin before becoming Treasury Secretary himself in 1999.
  • And Phil Gramm, once a practicing economist who served as a Republican Senator for Texas from 1985 to 2002.

These are the men who – with help of then-Federal Reserve Chairman Alan Greenspan – interfered with the Commodities and Futures Trading Commission (CFTC), an important regulatory body, to squash any regulation of derivatives.

And now the notoriously murky derivatives market, which was hugely responsible for the 2008 financial crisis, has grown into a $600 trillion trouble spot for the economy.

This group of very influential and powerful men made sure there was no oversight of derivatives products and markets. None.

While that was an incredible gift to Wall Street’s biggest banks and hedge funds, the Three Bears (I call them that because their actions drove us into the systemic economic bear market from which we’re still struggling to emerge) weren’t nearly done.

The Beginning of the End

On April 6, 1998 Citicorp and Travelers Group announced that they would merge into a single company.

But there was a problem.

At the time, such a merger would have violated the Glass Steagall Act. If you’re not familiar with it, the Glass Steagall Act is – or rather was – a piece of Depression-era legislation that established the Federal Deposit Insurance Corp. (FDIC) and mandated the separation of commercial banks, investment banks, and insurance companies. It incorporated other practical and prudent regulations enacted to safeguard investors and the public , as well.

But , lessons learned from the Depression were eventually forgotten – or maybe more precisely, steamrolled by a sweeping deregulatory movement that took root in 1980.

On the day of the announced combination, Traveler’s chairman, Sandy Weill, addressed impediments to the merger in the New York Times, noting that current law would allow the new Citigroup Inc. (NYSE: C) time to divest itself of assets in order to comply with Glass-Steagall.

However, ominously he added: “We are hopeful that over time the legislation will change.”

Just one year later, it did.

The same powerful group of influence-peddling government insiders overturned Glass-Steagall in November 1999, so the illegal merger didn’t have to be reversed. The law that obliterated the prudent separation of FDIC-backed commercial banks and swing-for-the-fences investment banks became known as the Gramm-Leach-Bliley Act.

This act is what paved the way for giant, financial super firms that are so intertwined in the financial markets they’re now all considered “too-big-to-fail.”

An Eerie Epilogue

So what happened to our three players? Were they penalized or held accountable for the undermining of our economy and the implosion of markets? No. They were rewarded.

Robert Rubin went to work for the new Citigroup as a senior adviser of the firm. Rubin made $126 million in cash and stock during his eight years of service, while the bank leveraged itself up by using depositor money. It had to be bailed out in 2008.

Lawrence Summers reportedly took some $20 million from D.E. Shaw & Co., a giant hedge fund that dabbles in derivatives, for a two-year stint doing something nobody at the firm could confirm.

And Phil Gramm, the venerable Texas senator, upon retiring from that powerful position, immediately became vice chairman of the investment bank division of UBS AG (NYSE: UBS).

Yes, UBS – the same Swiss bank that in 2008 had to be backstopped by the Swiss National Bank when its overleveraged and derivatives-laden balance sheet imploded. The same bank that later paid $780 million to settle criminal charges over its conspiracy to defraud the Internal Revenue Service (IRS) and federal government of legitimately owed taxes.

These are the kinds of things that are taking place every day thanks to Wall Street’s influence over our executive and legislative branches of government. And you better believe that average Americans and the Occupy Wall Street protestors can sense that, and they know they should be angry. They just can’t put their finger on why.

I can because I’m a Wall Street guy who spent 30 years working within the system. I studied economics and started my career as a trader on the floor of the Chicago Board of Options Exchange (CBOE). I ran the futures and options division of a giant international money-center bank.

I’ve done everything from trading bonds and mortgage-backed securities to running my own hedge funds. And I have hundreds of stories full of corruption and greed – just like this one.

Not everyone on Wall Street is a bad actor. Most of the professionals working in the capital markets across America are good and honest people. But, there are kingpins and kingmakers whose greed is so disgusting they will sink America for their own fistful of dollars.

It’s time we had better insights into what’s really going on and time to indict some of these bad actors.

Shah

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Dear Occupy Wall Street: Will You Stand with Me?

8 | By Shah Gilani

Dear Occupy Wall Street Demonstrators,

Let me start by saying that I applaud your initiative. Grassroots protests are the essence of democracy. And as we’ve seen with the Tea Party movement and the Arab Spring, nonviolent protests are a powerful way to effect meaningful change.

Yet even though I’m 100% behind you in spirit, I can’t fully support your cause.

Don’t get me wrong, I want to join you. But I can’t - not yet, anyway.

And the reason why I can’t support your ultimate goals is a simple one: I don’t know what they are.

So how about this? I’m going to tell you what I stand for. I’m going to tell you what my goals are. And if you agree, then we can stand together. And i f you agree with me, I won’t wait another minute before joining you whenever and wherever I’m needed.

So here it goes.

The reason I’m already leaning towards your side is that the fountainhead of your disgust seems to be “Wall Street.”

Now, I don’t know what Wall Street means to you. But to me, it means all the crony capitalists and market manipulators whose calculators and spreadsheets say the present value of their self-serving greed is worth discounting all of America’s future.

That’s the Wall Street that I’m committed to fighting – the Wall Street that’s littered with greed and corruption.

But to me, the “Wall Street” we’re fighting against is not synonymous with capitalists. The enemy we share doesn’t include the entrepreneurs and self-starters that have built this country up brick by brick.

So if you think socialism is better than capitalism, you can count me out. If you think that redistributing earned income from hard working Americans to support lazy, self-indulgent, able-bodied crybabies is fair, count me out. If you think that making a lot of money, fairly and honestly, is un-American, count me out. And, if you’re thinking about violence or destroying other people’s property, count me out.

But if you’re mad that Wall Street money has bought our Congress; if you’re mad that there’s an oligarchy of banker puppeteers pulling the strings of the U.S. Federal Reserve; if you’re mad that Wall Street is hell-bent on toying with the stock market and turning the screws on fixed-income investors, parents, and retirees to expand their profit margins; and, if you are mad that “too-big-to-fail” banks can wreck the economy and get bailed out, only to become bigger bullies while tens of millions of Americans lose their homes, jobs, and retirement savings, then I am solidly with you.

And, if you’re with me, we agree that we need to tear down Wall Street to rebuild Main Street!

That’s where we stand, hopefully united.

Now let me offer up a list – a manifesto, if you will – that you may or may not choose to adopt. But remember, I’m not trying to hijack your movement. I just want to offer some vision and clarity.

So these are the goals I’d like for us all, as fed-up Americans, to undertake:

  1. Break up too-big-to-fail banks so they aren’t threatening our financial system .
  2. Investigate failed banks for fraud, and indict and incarcerate guilty parties.
  3. Scale banker bonuses progressively with long-vesting stock options.
  4. Legislate pay claw-back provisions and criminal statutes for bad banker behavior.
  5. Eliminate volatility-inducing high-frequency-trading and ETF program arbitrage.
  6. Make all derivatives exchange traded, highly margined, and transparent.
  7. Limit credit default swaps to two times the value of at-risk underlying credits.
  8. Mandate exhaustive studies of the potential market impact of newly created financial products.
  9. Create simple, effective, light-touch regulations with heavy criminal penalties .
  10. Cap Wall Street’s political contributions and make them transparent.
  11. Audit the Federal Reserve and limit its lending to domestic banking institutions.
  12. Give the Consumer Protection Finance Bureau (CPFB) criminal indictment powers, including over the Federal Reserve.
  13. Make Wall Street answer to the needs of Main Street, not the other way around.

Please don’t get me wrong. It’s not that there aren’t plenty of other things in the United States that need fixing. I think we’d all agree we need to simplify and “fairify” the tax code, if not throw it out altogether. But, your movement is Occupy Wall Street, so let’s stick to that.

There’s one last thing. I’m certain that with thousands of supporters you’ll find a broad spectrum of ideas and beliefs. That we may be united in belief does not necessarily mean we are all alike .

Take me, for example. In some ways, I am a “Wall Street” guy, and in other ways I am one of the 99% you claim to represent. I want an opportunity to make a good living, honestly and fairly. But, like all of you, like all of America, I am sick and tired of the powerful, moneyed oligarchy that runs America profiteering off the backs of hardworking Americans.

That’s why we need strong, transparent, and fair capital markets and honest, smart leaders. The two are not incompatible.

So what I’m saying is that I’m ready to join your revolution, if you’re ready to accept a Wall Street insider who’s determined to restore the system’s integrity – not destroy it.

And that’s why you’re going to hear more from me every week, as I call Wall Street’s biggest players onto the carpet. And I can promise you this: Some of the indictments I make are going to shock you.

Shah Gilani

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