Regulation of Financial Regulation of Financial InstitutionsInstitutions

Intro to American Legal System, Intro to American Legal System, Law 103Law 103

20102010

By Robert Boyle By Robert Boyle ©©

Types of Financial InstitutionsTypes of Financial Institutions

Commercial BanksCommercial Banks Savings and LoansSavings and Loans Credit UnionsCredit Unions CooperativesCooperatives

Investment BanksInvestment Banks Brokerage Firms Brokerage Firms Insurance CompaniesInsurance Companies Hedge FundsHedge Funds

The History of MoneyThe History of Money Ancient City of “Lydia” introduced Ancient City of “Lydia” introduced

first use of coins made of a mixture first use of coins made of a mixture of gold and silver about 604 B.C. of gold and silver about 604 B.C. These were oval and about the size These were oval and about the size of the end of one’s thumb. The king of the end of one’s thumb. The king stamped a lion’s head on each slug stamped a lion’s head on each slug to ensure authenticity. The stamping to ensure authenticity. The stamping flattened the slugs somewhat. . flattened the slugs somewhat. .

Jack Weatherford, “The History of Money”, p. 30-31 Jack Weatherford, “The History of Money”, p. 30-31

““Knights of Commerce”Knights of Commerce” The Knights Templar, founded in Jerusalem about The Knights Templar, founded in Jerusalem about

1118 A.D held well-fortified castles, had a reputation 1118 A.D held well-fortified castles, had a reputation as a fierce fighting force and were also very strictly as a fierce fighting force and were also very strictly religious. The nobility of Europe trusted them to keep religious. The nobility of Europe trusted them to keep their valuables safe. “The Templars’ castles soon their valuables safe. “The Templars’ castles soon became full-service banks, offering many financial became full-service banks, offering many financial services to the nobility . . .As bankers to the kings services to the nobility . . .As bankers to the kings and popes, the Templars grew into an institution and popes, the Templars grew into an institution somewhat akin to a modern treasury department. At somewhat akin to a modern treasury department. At their maximum strength, they employed their maximum strength, they employed approximately 7,000 people and owned 870 castles approximately 7,000 people and owned 870 castles and houses scattered across Europe and the and houses scattered across Europe and the Mediterranean from England to Jerusalem.” J. Mediterranean from England to Jerusalem.” J. Weatherford, p. 67. Weatherford, p. 67.

““Bills of Exchange”Bills of Exchange” Italian bankers (c. 1338) used the “bill of Italian bankers (c. 1338) used the “bill of

exchange” a written document ordering the exchange” a written document ordering the payment of a certain amount of money to a certain payment of a certain amount of money to a certain person at a certain time and place to disguise person at a certain time and place to disguise loans made with interest. loans made with interest. IdId. p.73-74. p.73-74

These bills of exchange seemed to increase the These bills of exchange seemed to increase the money supply by giving more than one person a money supply by giving more than one person a legal interest in the same coins at the same time. legal interest in the same coins at the same time. Id., p. 76Id., p. 76

Bills of exchange sped the rate of commerce Bills of exchange sped the rate of commerce because they could be transported and circulated because they could be transported and circulated faster than coins.faster than coins.

Italian Banking, Cont’dItalian Banking, Cont’d ““The entire system of money based The entire system of money based

on bills of exchange ultimately rested on bills of exchange ultimately rested on the honesty and good will of the on the honesty and good will of the participants, but when the participants, but when the government became to burdened by government became to burdened by debts, it had the power to cancel debts, it had the power to cancel them, thereby destroying the them, thereby destroying the system.” system.” IdId., p. 78., p. 78

Banking in the Renaissance Banking in the Renaissance ““At its height as a banking city in 1422, At its height as a banking city in 1422,

seventy-two “international banks” operated seventy-two “international banks” operated out of Florence . . . The Medici bank operated out of Florence . . . The Medici bank operated until the French invaded Florence in 1494. until the French invaded Florence in 1494. “The basis of their fortune came from what “The basis of their fortune came from what we might think of today as the private sector, we might think of today as the private sector, something that hardly existed in any degree something that hardly existed in any degree of importance in earlier times. The Medici . . . of importance in earlier times. The Medici . . . made their fortune and fame in the world of made their fortune and fame in the world of finance, separate from the state and the finance, separate from the state and the church . . .” church . . .” IdId., p. 82 & 84.., p. 82 & 84.

Treasures of the AmericasTreasures of the Americas Scholars and historians estimate by Scholars and historians estimate by

1800 between 145,000 to 165,000 1800 between 145,000 to 165,000 tons of silver and between 2,739 to tons of silver and between 2,739 to 2,846 tons of gold were shipped from 2,846 tons of gold were shipped from the New World to European nations. the New World to European nations.

Id., p. 100 Id., p. 100

Price RevolutionPrice Revolution ““The quantity of goods produced could The quantity of goods produced could

not keep up with the volume of silver not keep up with the volume of silver shipped from America.” shipped from America.” IdId., p. 101., p. 101

The increase in the supply of gold and The increase in the supply of gold and silver led to a great decline in its value.silver led to a great decline in its value.

Inflation: between 1500 and 1600 prices Inflation: between 1500 and 1600 prices in Spain rose 400 %. in Spain rose 400 %. IdId. .

Silver & Gold as WealthSilver & Gold as Wealth ““In keeping with the economic In keeping with the economic

thinking of the time, silver and gold thinking of the time, silver and gold were regarded as the keys to wealth; were regarded as the keys to wealth; for most people, they were wealth for most people, they were wealth itself. The man with the most silver itself. The man with the most silver or gold was the wealthiest, as was or gold was the wealthiest, as was the country with the most gold and the country with the most gold and silver.” silver.” IdId. p. 104. p. 104

The Money CultureThe Money Culture ““The spread of American gold and silver across The spread of American gold and silver across

the Atlantic and Pacific oceans opened the the Atlantic and Pacific oceans opened the modern commercial era. During the sixteenth modern commercial era. During the sixteenth and seventeenth centuries, silver coins and and seventeenth centuries, silver coins and even gold coins became more readily even gold coins became more readily accessible than at any prior time in history. accessible than at any prior time in history. No longer would the use of precious metal No longer would the use of precious metal coins be limited to wealthy individuals . . . The coins be limited to wealthy individuals . . . The discovery of the great wealth of the Americas discovery of the great wealth of the Americas produced a far more immediate impact on the produced a far more immediate impact on the lives of common people than did the banking lives of common people than did the banking revolution.” revolution.” IdId., pp. 106-107., pp. 106-107

International CommerceInternational Commerce The greater supply of coins also The greater supply of coins also

facilitated international commerce and facilitated international commerce and financial ties that gradually began to knit financial ties that gradually began to knit together the regional economies of the together the regional economies of the world . . . Spain had unleashed a power world . . . Spain had unleashed a power that raced around the globe and that raced around the globe and operated with a force of its own, operated with a force of its own, independent of both church and state. independent of both church and state. The wealth of America had run amok, The wealth of America had run amok, and the world would never again be the and the world would never again be the same.” Id., pp. 107-108same.” Id., pp. 107-108

The Bank of EnglandThe Bank of England ““The gold standard, which formed the The gold standard, which formed the

heart of the international currency heart of the international currency system administered from the Bank of system administered from the Bank of England in the City of London, England in the City of London, represented the first completely global represented the first completely global system uniting the world. Gold had system uniting the world. Gold had done what no conqueror or religion had done what no conqueror or religion had managed to do: it had brought virtually managed to do: it had brought virtually all people on earth into one social all people on earth into one social system.” system.” IdId. P. 164.. P. 164.

The International Gold The International Gold StandardStandard

Imposed four criteria: (1) dollar (unit of Imposed four criteria: (1) dollar (unit of currency) must be defined relative to a currency) must be defined relative to a certain amount of gold of a particular certain amount of gold of a particular fineness; (2) the government must commit fineness; (2) the government must commit to coining all gold delivered to the mint; (3) to coining all gold delivered to the mint; (3) government must agree to convert paper government must agree to convert paper dollars to gold upon demand; and (4) gold dollars to gold upon demand; and (4) gold must be allowed to move freely into and out must be allowed to move freely into and out of the country.of the country.

H.W. Brands, H.W. Brands, Traitor to His ClassTraitor to His Class (Doubleday, 2008), p. 301-302(Doubleday, 2008), p. 301-302

Common Law ConceptsCommon Law Concepts ““Caveat Emptor” – Let the buyer Caveat Emptor” – Let the buyer

beware.beware. ““Fiduciary” – Derives from Roman law. Fiduciary” – Derives from Roman law.

Means a person holding the character of Means a person holding the character of a trustee. It requires scrupulous good a trustee. It requires scrupulous good faith and candor with respect to the faith and candor with respect to the trust or confidence involved.trust or confidence involved.

Black’s Law DictionaryBlack’s Law Dictionary

““The honest financiers who are The honest financiers who are using, as bankers and insurance using, as bankers and insurance company managers, etc., the company managers, etc., the money of others, realize that money of others, realize that they hold the money in trust for they hold the money in trust for its owners and must be fair to the its owners and must be fair to the beneficiaries.”beneficiaries.”

Louis D. Brandeis, 1911 Letter, reprinted inLouis D. Brandeis, 1911 Letter, reprinted inOther People’s Money and How the Bankers Other People’s Money and How the Bankers Use ItUse It. (St. Martin Press 1995). (St. Martin Press 1995)

Should the central government run a Should the central government run a national bank?national bank?

A bank sponsored by the central A bank sponsored by the central government can serve as a “lender government can serve as a “lender of last resort” to maintain the of last resort” to maintain the availability of credit in times of availability of credit in times of economic downturns.economic downturns.

Why doesn’t the U.S. have a central, Why doesn’t the U.S. have a central, national bank run by the federal national bank run by the federal government?government?

Democracy v. OligarchyDemocracy v. Oligarchy Presidents of the U.S. and other political Presidents of the U.S. and other political

leaders have expressed concern that leaders have expressed concern that the concentration of wealth in financial the concentration of wealth in financial institutions can corrupt the democratic institutions can corrupt the democratic process in various ways, i.e., by (a) process in various ways, i.e., by (a) providing financial support for providing financial support for particular political candidates and (b) particular political candidates and (b) by controlling access to credit.by controlling access to credit.

Andrew JacksonAndrew Jackson Andrew Jackson championed the union but Andrew Jackson championed the union but

favored state chartered banks. He determined favored state chartered banks. He determined not to recharter the Bank of the U.S., calling it not to recharter the Bank of the U.S., calling it a threat to democracy: a “permanent a threat to democracy: a “permanent electioneering engine.” He withdrew federal electioneering engine.” He withdrew federal deposits so that the Bank would not be able to deposits so that the Bank would not be able to use government funds to lobby Congress to use government funds to lobby Congress to recharter the Bank. The Bank president, recharter the Bank. The Bank president, Nicholas Biddle, restricted credit hoping to Nicholas Biddle, restricted credit hoping to create a popular backlash against Jackson.create a popular backlash against Jackson.Jon Meachum, Jon Meachum, American LionAmerican Lion (Random House 2008), pp. 269 & (Random House 2008), pp. 269 & 273273

Woodrow WilsonWoodrow Wilson ““The great monopoly in this country The great monopoly in this country

is the money monopoly . . . A great is the money monopoly . . . A great industrial nation is controlled by its industrial nation is controlled by its system of credit. Our system of system of credit. Our system of credit is concentrated. The growth of credit is concentrated. The growth of the nation, therefore, and all of our the nation, therefore, and all of our activities, are in the hands of a few activities, are in the hands of a few men . . .”men . . .”

Brandeis, Brandeis, Other People’s MoneyOther People’s Money, , suprasupra, p. 49, p. 49

The Pujo Investigating The Pujo Investigating Committee (1912)Committee (1912)

““Far more dangerous than all that Far more dangerous than all that has happened to us in the past in the has happened to us in the past in the way of elimination of competition in way of elimination of competition in industry is the control of credit industry is the control of credit through the domination of these through the domination of these groups over our banks and industries groups over our banks and industries . . .”. . .”

Brandeis, Ibid.Brandeis, Ibid.

The Pujo Investigating CommitteeThe Pujo Investigating Committee(Cont’d)(Cont’d)

Began in December 1912. Named after Louisiana Began in December 1912. Named after Louisiana Representative Arsene Pujo (D). Arose from The Representative Arsene Pujo (D). Arose from The Panic of 1907. The panic arose out of a period of Panic of 1907. The panic arose out of a period of rampant speculation in the U.S. securities markets.rampant speculation in the U.S. securities markets.

Representative Pujo called John Pierpont (“J.P.”) Representative Pujo called John Pierpont (“J.P.”) Morgan and other members of the “Money Trust” Morgan and other members of the “Money Trust” to task publicly. to task publicly.

The Pujo Committee Investigation led to the The Pujo Committee Investigation led to the passage of (1) The 16th Amendment in February passage of (1) The 16th Amendment in February 1913, (2) The Federal Reserve Act in December 1913, (2) The Federal Reserve Act in December 1913 and (3) The Clayton Antitrust Act in October 1913 and (3) The Clayton Antitrust Act in October 1914. These Acts continue to define America’s 1914. These Acts continue to define America’s financial-economic regulatory framework.financial-economic regulatory framework.

Brandeis’s ProposalBrandeis’s Proposal Brandeis detailed the faults of the Brandeis detailed the faults of the

American financial system of the 1900’s. American financial system of the 1900’s. He recommended “industrial democracy” He recommended “industrial democracy” and small, local banks for increased and small, local banks for increased competition. He noted farmers’ competition. He noted farmers’ cooperatives in Germany were small, local cooperatives in Germany were small, local and were, “truly banks of the people, by and were, “truly banks of the people, by the people, and for the people.”the people, and for the people.”

Other People’s MoneyOther People’s Money

Liberalism Old and NewLiberalism Old and New““Capitalism originally developed as an Capitalism originally developed as an affirmation of individual rights against the affirmation of individual rights against the power of the state. As corporate and later, power of the state. As corporate and later, monopolistic business created vast power monopolistic business created vast power aggregates within the structure of aggregates within the structure of capitalism, the threatened individual turned capitalism, the threatened individual turned to the state for the protection of his rights to the state for the protection of his rights against the power of impersonal, against the power of impersonal, bureaucratic entities . . .bureaucratic entities . . .William Ebenstein, William Ebenstein, Great Political Thinkers, Plato to the Great Political Thinkers, Plato to the Present, 4Present, 4thth Ed Ed. (Dryden Press 1969), p. 644 . (Dryden Press 1969), p. 644

Liberalism Old and New, Liberalism Old and New, Cont’dCont’d

“ “ . . .Liberals found themselves . . .Liberals found themselves therefore in the paradoxical position of therefore in the paradoxical position of looking to the state – their historical looking to the state – their historical enemy – for help against the new enemy – for help against the new forms of economic and financial power forms of economic and financial power . . . . . . All liberalismAll liberalism – whether old or new – whether old or new – – is about curbing poweris about curbing power, whether , whether power manifests itself in politics or power manifests itself in politics or economics.” economics.” IbidIbid, page 644., page 644.

National Bank Act of 1864National Bank Act of 1864 From the time of Andrew Jackson (1836) to From the time of Andrew Jackson (1836) to

the Civil War (1863), states were the sole the Civil War (1863), states were the sole chartering authority for banks;chartering authority for banks;

During the Civil War it was possible to enact During the Civil War it was possible to enact a federal banking law because 11 agrarian a federal banking law because 11 agrarian Southern states were out of Congress;Southern states were out of Congress;

The National Bank Act of 1864 established The National Bank Act of 1864 established a national banking system and the a national banking system and the chartering of national banks;chartering of national banks;(FDIC website)(FDIC website)

State Usury LawsState Usury Laws Each state passes “usury” laws, which set Each state passes “usury” laws, which set

upper limits to the amount of interest that upper limits to the amount of interest that can be charged for a loan;can be charged for a loan;

The US Supreme Court has held that state The US Supreme Court has held that state usury laws cannot be applied to nationally usury laws cannot be applied to nationally chartered banks. The National Bank Act chartered banks. The National Bank Act provides its own limit on interest rates provides its own limit on interest rates that national banks can charge.that national banks can charge.

Federal Reserve Act of 1913Federal Reserve Act of 1913 One goal of bank regulation is to One goal of bank regulation is to

prevent depositor panics. There prevent depositor panics. There were panics in 1873 and 1907.were panics in 1873 and 1907.

The Federal Reserve Act of 1913 The Federal Reserve Act of 1913 established the Federal Reserve established the Federal Reserve System as the central banking System as the central banking system of the U.S.system of the U.S.

Federal Reserve and the Great Federal Reserve and the Great DepressionDepression

““Unfortunately, responsible leaders in Unfortunately, responsible leaders in the Federal Reserve System, Congress the Federal Reserve System, Congress and the President failed to act boldly, and the President failed to act boldly, and with big enough emergency credits and with big enough emergency credits in the 1929-1932 crisis . . . in the 1929-1932 crisis . . . [E]conomists now believe the Federal [E]conomists now believe the Federal Reserve could have greatly restricted Reserve could have greatly restricted the scope and duration of the Great the scope and duration of the Great Depression.”Depression.”William A. Lovett, William A. Lovett, Banking and Financial Institutions Banking and Financial Institutions Law In a Nutshell, 6Law In a Nutshell, 6thth Ed Ed. (Thomson/West 2005), p. 15. (Thomson/West 2005), p. 15

The Pecora CommissionThe Pecora Commission Named after attorney Ferdinand Pecora. Named after attorney Ferdinand Pecora.

Arose after The Crash of 1929. Hearings Arose after The Crash of 1929. Hearings spanned March 1932 to May 1934.spanned March 1932 to May 1934.

Results: passage of (1) The Banking Act in Results: passage of (1) The Banking Act in June 1933, referred to more commonly as June 1933, referred to more commonly as “The Glass-Steagall Act,” (2) The “The Glass-Steagall Act,” (2) The Securities Act in May 1934 and (3) The Securities Act in May 1934 and (3) The Securities and Exchange Act in June 1934.Securities and Exchange Act in June 1934.

Banking Act of 1933: “Glass-Banking Act of 1933: “Glass-Steagall”Steagall”

Also known as the Glass-Steagall Act, Also known as the Glass-Steagall Act, established the FDIC;established the FDIC;

Required banks to pay insurance Required banks to pay insurance premiums to finance FDIC;premiums to finance FDIC;

FDIC protection nearly eliminated runs on FDIC protection nearly eliminated runs on the banks;the banks;

Separated commercial banking from Separated commercial banking from investment banking, establishing them as investment banking, establishing them as separate lines of commerce.separate lines of commerce.

FDIC website; LovettFDIC website; Lovett

The FDICThe FDIC Commercial banks are required to Commercial banks are required to

pay insurance premiums into a pay insurance premiums into a central fund that is kept for the sole central fund that is kept for the sole purpose of providing a federal purpose of providing a federal guarantee of bank deposits;guarantee of bank deposits;

From 1999 to 2009 the FDIC did not From 1999 to 2009 the FDIC did not require commercial banks to make require commercial banks to make premium payments.premium payments.

Bank Holding Company Act of Bank Holding Company Act of 19561956

““Another significant development in Another significant development in postwar banking law was the increased postwar banking law was the increased importance of antitrust policy, and importance of antitrust policy, and concerns for adequate competition in concerns for adequate competition in financial markets.” Lovett, p. 20;financial markets.” Lovett, p. 20;

The Bank Holding Co. Act of 1956 required The Bank Holding Co. Act of 1956 required Federal Reserve Board approval of a bank Federal Reserve Board approval of a bank holding company (“BHC’s”). Prohibited holding company (“BHC’s”). Prohibited BHC’s headquartered in one state from BHC’s headquartered in one state from acquiring a bank in another state. acquiring a bank in another state.

FIRREAFIRREA Financial Institutions Reform, Recovery Financial Institutions Reform, Recovery

and Enforcement Act of 1989;and Enforcement Act of 1989; Response to the “Savings & Loan Response to the “Savings & Loan

Scandal”Scandal” Purpose was to restore confidence in Purpose was to restore confidence in

Savings and LoansSavings and Loans Created the Resolution Trust Corporation Created the Resolution Trust Corporation

(“RTC”) as a temporary agency to manage (“RTC”) as a temporary agency to manage and dispose of assets of failed institutions.and dispose of assets of failed institutions.

Crime Control Act of 1990Crime Control Act of 1990 Comprehensive Thrift and Bank Fraud Comprehensive Thrift and Bank Fraud

Prosecution and Taxpayer Recovery Act of 1990;Prosecution and Taxpayer Recovery Act of 1990; Greatly expanded authority of federal regulators Greatly expanded authority of federal regulators

to combat financial fraud;to combat financial fraud; Act prohibited under capitalized banks from Act prohibited under capitalized banks from

making golden parachute and other payments making golden parachute and other payments to affiliated parties;to affiliated parties;

Increased penalties/prison time for bank crimes;Increased penalties/prison time for bank crimes; Gave FDIC increased authority to take Gave FDIC increased authority to take

enforcement actions.enforcement actions.

Gramm-Leach-Bliley Act of Gramm-Leach-Bliley Act of 19991999

Repealed last vestiges of the Glass-Repealed last vestiges of the Glass-Steagal Act of 1933;Steagal Act of 1933;

Modified Bank Holding Company Act;Modified Bank Holding Company Act; Now banks, insurance companies and Now banks, insurance companies and

brokerage firms could all work under brokerage firms could all work under the same financial holding company;the same financial holding company;

Restricted disclosure of nonpublic Restricted disclosure of nonpublic customer information by financial customer information by financial institutionsinstitutions

Gramm-Leach, cont’d.Gramm-Leach, cont’d. ““In 1999 the Gramm-Leach Financial In 1999 the Gramm-Leach Financial

Services Modernization Act authorized Services Modernization Act authorized Financial Holding Companies to Financial Holding Companies to operate in banking, insurance and operate in banking, insurance and securities markets. Thus, even more securities markets. Thus, even more consolidation in banking and some consolidation in banking and some conglomerate financial integration is conglomerate financial integration is occurring recently.” Lovett, p. 21 occurring recently.” Lovett, p. 21 (2005)(2005)

AIG, the Bailout Bomb: Why AIG, the Bailout Bomb: Why AIG=WMDAIG=WMD

““As [Ben] Bernanke explained recently, As [Ben] Bernanke explained recently, ‘AIG exploited a large gap in the ‘AIG exploited a large gap in the regulatory system. There was no regulatory system. There was no oversight of the Financial Products oversight of the Financial Products division. This was a hedge fund, division. This was a hedge fund, basically, that was attached to a large basically, that was attached to a large and stable insurance company. That and stable insurance company. That hedge fund-like unit built up a portfolio hedge fund-like unit built up a portfolio of $ 2.7 trillion in derivatives.” of $ 2.7 trillion in derivatives.” TimeTime, , 3/20/09, page 283/20/09, page 28

AIG, cont’dAIG, cont’d ““How was AIG able to live so How was AIG able to live so

dangerously for so long? In part dangerously for so long? In part because for years Washington looked because for years Washington looked the other way. The company the other way. The company befriended politicians with campaign befriended politicians with campaign cash – $ 9.3 million divided equally cash – $ 9.3 million divided equally between Democrats and Republicans between Democrats and Republicans from 1990 to 2008.” from 1990 to 2008.” TimeTime, “AIG”, , “AIG”, page 29.page 29.

The Quiet CoopThe Quiet Coop““The crash has laid bare many unpleasant The crash has laid bare many unpleasant

truths about the United States . . .[T]he truths about the United States . . .[T]he finance industry has effectively captured finance industry has effectively captured our government . . . If the [International our government . . . If the [International Monetary Fund] could speak freely about Monetary Fund] could speak freely about the U.S., it would tell us . . .recovery will the U.S., it would tell us . . .recovery will fail unless we break the financial fail unless we break the financial oligarchy that is blocking essential oligarchy that is blocking essential reform.”reform.”Simon Johnson, Simon Johnson, The AtlanticThe Atlantic, May 2009, , May 2009, page 46. page 46.

Coop, cont’dCoop, cont’d““Oversized institutions disproportionately Oversized institutions disproportionately influence public policy; the major banks we influence public policy; the major banks we have today draw much of their power from have today draw much of their power from being too big to fail. Nationalization and being too big to fail. Nationalization and reprivitization would not change that; while reprivitization would not change that; while the replacement of the bank executives who the replacement of the bank executives who got us into this crisis would be just and got us into this crisis would be just and sensible, ultimately, the swapping-out of one sensible, ultimately, the swapping-out of one set of powerful managers for another could set of powerful managers for another could only change the names of the oligarchs.”only change the names of the oligarchs.”Atlantic, “The Quiet Coop”, May 2009, page Atlantic, “The Quiet Coop”, May 2009, page 54.54.

The “New Foundation”The “New Foundation” The President’s proposal for regulating The President’s proposal for regulating

financial markets.financial markets. Would establish comprehensive regulation Would establish comprehensive regulation

of financial marketsof financial markets Would protect consumers from financial Would protect consumers from financial

abuseabuse Would give government tools to deal with Would give government tools to deal with

financial crisesfinancial crises Would seek to promote similar standard Would seek to promote similar standard

internationallyinternationallyU.S. Dept. of Treasury websiteU.S. Dept. of Treasury website

New Foundation, cont’dNew Foundation, cont’d ““No financial firm that poses a No financial firm that poses a

significant risk to the financial system significant risk to the financial system should be unregulated . . .”should be unregulated . . .”

““The challenges we face are not just The challenges we face are not just American challenges, they are global American challenges, they are global challenges.”challenges.”

““Hedge funds and other private pools Hedge funds and other private pools of capital operated completely of capital operated completely outside of the supervisory outside of the supervisory framework.”framework.”

New Foundation, cont’dNew Foundation, cont’d ““All large, interconnected firms whose All large, interconnected firms whose

failure could threaten the stability of failure could threaten the stability of the system should be subject to the system should be subject to consolidated supervision by the Federal consolidated supervision by the Federal Reserve, regardless of whether they Reserve, regardless of whether they own an insured depository institution. own an insured depository institution. These firms should not be able to These firms should not be able to escape oversight of their risky activities escape oversight of their risky activities by manipulating their legal structure.”by manipulating their legal structure.”

New Foundation, cont’dNew Foundation, cont’d ““Consumer protection is a critical Consumer protection is a critical

foundation for our financial system. foundation for our financial system. It gives the public confidence that It gives the public confidence that financial markets are fair and financial markets are fair and enables policy makers and regulators enables policy makers and regulators to maintain stability in regulation.”to maintain stability in regulation.”

New Foundation, cont’dNew Foundation, cont’d ““[R]egulation is still set largely in a national [R]egulation is still set largely in a national

context. Without consistent supervision and context. Without consistent supervision and regulation, financial institutions will tend to regulation, financial institutions will tend to move their activities to jurisdictions with move their activities to jurisdictions with looser standards, creating a race to the looser standards, creating a race to the bottom and intensifying systemic risk for bottom and intensifying systemic risk for the entire global financial system.” the entire global financial system.”

International financial policy must be International financial policy must be coordinated through the G-20. coordinated through the G-20.

In April 2009, the G-20 had a summit in In April 2009, the G-20 had a summit in London.London.

New Foundation, cont’dNew Foundation, cont’d Doesn’t break up BHC’s or FHC’s;Doesn’t break up BHC’s or FHC’s; Doesn’t reestablish the Glass-Steagall wall Doesn’t reestablish the Glass-Steagall wall

between risky financial activities and between risky financial activities and essential ones;essential ones;

Depends on the expertise and discretion of Depends on the expertise and discretion of federal regulators;federal regulators;

Enables the U.S. to gauge its oversight of its Enables the U.S. to gauge its oversight of its financial institutions to what other countries financial institutions to what other countries are doing – avoids the flight of wealthy are doing – avoids the flight of wealthy investors and their capital from the U.S.investors and their capital from the U.S.

Senator Chris DoddSenator Chris Dodd In November of 2009, Senator Chris Dodd In November of 2009, Senator Chris Dodd

of CT, chair of Senate Banking Committee, of CT, chair of Senate Banking Committee, proposed a financial reform bill that would proposed a financial reform bill that would consolidate U.S. banking supervision in one consolidate U.S. banking supervision in one agency other than the Federal Reserve.agency other than the Federal Reserve.

On Jan. 6, 2010 Dodd announced he won’t On Jan. 6, 2010 Dodd announced he won’t run for reelection, which the media run for reelection, which the media predicted would slow the momentum of predicted would slow the momentum of financial reform. financial reform.

““The Wall Street Reform and Consumer The Wall Street Reform and Consumer Protection Act” passes the House of Protection Act” passes the House of

Representatives 12/11/09Representatives 12/11/09 If made law, this Bill (H.R. 4173) would: create If made law, this Bill (H.R. 4173) would: create

Consumer Financial Protection Agency (CFPA); Consumer Financial Protection Agency (CFPA); create a council of regulators to identify financial create a council of regulators to identify financial firms that are so large, interconnected, or risky that firms that are so large, interconnected, or risky that their collapse would put the entire financial system their collapse would put the entire financial system at risk; end taxpayer bailouts for firms “too big to at risk; end taxpayer bailouts for firms “too big to fail;” regulate executive compensation; strengthen fail;” regulate executive compensation; strengthen the SEC’s regulating powers; regulate, for the first the SEC’s regulating powers; regulate, for the first time ever, the opaque $600 trillion over-the-time ever, the opaque $600 trillion over-the-counter (OTC) derivatives marketplace; outlaw counter (OTC) derivatives marketplace; outlaw predatory mortgage lending practices; and require predatory mortgage lending practices; and require registration of hedge funds (closing a regulatory registration of hedge funds (closing a regulatory hole that allows hedge funds and their advisors to hole that allows hedge funds and their advisors to escape any and all regulation).escape any and all regulation).

Financial Crisis Inquiry Financial Crisis Inquiry CommissionCommission

On January 13, 2010 this Committee met On January 13, 2010 this Committee met for first time. 10-member, bipartisan for first time. 10-member, bipartisan committee ordered by Congress to committee ordered by Congress to investigate 22 topics related to the 2008 investigate 22 topics related to the 2008 financial meltdown and to submit report financial meltdown and to submit report to Congress by 12/15/10.to Congress by 12/15/10.

A factfinding committee similar to the A factfinding committee similar to the 911 Commission.911 Commission.

Brooksley Born, Esq.Brooksley Born, Esq. Attorney Brooksley Born. Former Attorney Brooksley Born. Former

Chair of the Commodities Futures Chair of the Commodities Futures Trading Commission (C.F.T.C.).Trading Commission (C.F.T.C.).

Panel member, Financial Crisis Panel member, Financial Crisis Inquiry Commission.Inquiry Commission.

Subject of PBS “Frontline” special Subject of PBS “Frontline” special report, “The Warning.”report, “The Warning.”

““Financial Crisis Responsibility Financial Crisis Responsibility Fee”Fee”

On 1/14/10, President Obama On 1/14/10, President Obama proposes to impose a ten-year fee proposes to impose a ten-year fee upon the large banks that benefited upon the large banks that benefited from the federal bailout.from the federal bailout.

1/16/10, Obama discusses fee during 1/16/10, Obama discusses fee during weekly radio address. weekly radio address. (www.whitehouse.gov/briefing-(www.whitehouse.gov/briefing-room/weekly-address).room/weekly-address).

Speculative BubblesSpeculative Bubbles Dutch Tulip Craze, 1633 – 1637Dutch Tulip Craze, 1633 – 1637 U.S. Dot-Com Bubble, 1995 – 2001U.S. Dot-Com Bubble, 1995 – 2001

In 1925, stocks in the U.S. were valued at 55 % In 1925, stocks in the U.S. were valued at 55 % of GDP.of GDP.

In March of 2000, the height of the dot-com In March of 2000, the height of the dot-com bubble, stocks were valued at 183 % of GDP.bubble, stocks were valued at 183 % of GDP.

U.S. Housing Bubble, 2001-2008U.S. Housing Bubble, 2001-2008 1951-1995, homes prices increased with inflation1951-1995, homes prices increased with inflation 1995-2000, home prices rose at rate 40 % above 1995-2000, home prices rose at rate 40 % above

inflation.inflation.Peter Hartcher, Peter Hartcher, Bubble ManBubble Man

Alan Greenspan / Ben Alan Greenspan / Ben BernankeBernanke

Alan Greenspan was aware of the Dot.com Alan Greenspan was aware of the Dot.com bubble in 1996 but did not raise interest bubble in 1996 but did not raise interest rates. rates. SeeSee Peter Hartcher, Peter Hartcher, The Bubble The Bubble ManMan

The Federal Reserve Chairman have been The Federal Reserve Chairman have been reluctant to raise interest rates to pop reluctant to raise interest rates to pop speculative bubbles in one segment of the speculative bubbles in one segment of the economy because interest rates apply to economy because interest rates apply to all aspects of the economy. all aspects of the economy.

Bernanke has said that it is like using a Bernanke has said that it is like using a sledge-hammer to perform brain surgery.sledge-hammer to perform brain surgery.

Peter Hartcher, Peter Hartcher, Bubble ManBubble Man

Impose a Graduated Transfer Tax to Impose a Graduated Transfer Tax to Discourage SpeculationDiscourage Speculation

““The introduction of a substantial Government The introduction of a substantial Government transfer tax on all transactions might prove the transfer tax on all transactions might prove the most servicable reform available, with a view to most servicable reform available, with a view to mitigating the predominance of speculation over mitigating the predominance of speculation over enterprise in the United States.” John Maynard enterprise in the United States.” John Maynard Keynes, Keynes, The General Theory of Employment, The General Theory of Employment, Interest & MoneyInterest & Money (Prometheus Books 1997), page (Prometheus Books 1997), page 160.160.

X % of capital gains resulting from the purchase X % of capital gains resulting from the purchase and resale of a stock within one month; X + Y and resale of a stock within one month; X + Y percent of gains resulting from P & S within one percent of gains resulting from P & S within one week; X + Y + Z for a P & S within a twenty-four week; X + Y + Z for a P & S within a twenty-four hour period.hour period.