Although not yet official, the verdict is on the way. Bear Stearns led the death march a few months ago. Now, Lehman’s bankruptcy filing signals the halfway mark of what will end up being the death of Wall Street. Now Goldman Sachs stands alone as the sole remaining true Wall Street firm.
What about Morgan Stanley? While they aren’t as much of a commercial bank as say Citigroup or Bank of America, they I certainly wouldn’t consider them anything near a Bear Stearns, Lehman or Goldman. They transitioned to the Merrill Lynch commercial banking business model a few years back.
As for Goldman, while they might make it through this mess, they will eventually get clobbered. If they do indeed make it, their eventual demise could be just a few years down the road, perhaps from something completely unrelated. But I wouldn’t bet on any bank in this crisis. Sure, we will still have the same scams in the tradition of Wall Street; only now they will be conducted by the quasi-Wall Street firms – the commercial banks.
The Glass-Steagal Act, passed in 1933, established the FDIC and brought several regulatory controls to the banking system. Overall, the Act was meant to prevent speculation. But that’s a very big goal in a nation where the financial industry runs the show. Yet, it did help curb speculation for a while.
But then the Greenspan Era began. In the 1990s, the Bubble Maestro allowed the financial system to experience a Financial Renaissance of sorts, with exotic derivatives and mortgage-backed securities entering into the picture. Greenspan’s hands-off approach led to the Financial Wild West. But things seemed to be working well. Today, we now know that lack of regulation led to the financial crisis. The derivatives market is still largely unregulated.
Clinton and the Gramm-Leach-Bliley Mistake
After the Glass-Steagal Act was repealed in 1999 through the passage of the Gramm-Leach-Bliley Act, things began to get out of control. This removed the previous separation between commercial and investment banks established under the Glass-Steagal Act. However, it allowed so many of the shenanigans to occur from the dotcom bubble – handing IPOs to select clients and CEOs as a way to land banking and other business….I trust you remember recent history.
Immediately thereafter, commercial banks rushed to get in on Wall Street’s dotcom gravy train. As a result, commercial banks were merging with Wall Street banks and vice versa. Tracing the course of these banks can feel like a search through your family tree unless you remember the deals.
For instance, Chemical Bank bought Chase Manhattan after the later experienced massive losses in real estate in the 1990s, but kept the more prestigious Chase name. Then a few years later, Chase bought JP Morgan. Right around the time that the Gramm-Leach-Bliley Act was passed, Chase Manhattan snatched up Hambrecht & Quist to get in on lucrative dotcom IPOs. After suffering indecisiveness in finalizing the name, the bank finally decided to add back the Chase name, but keep the more prestigious JP at the beginning.
Everything seemed to be going well. The economy appeared to be very strong and everyone was making money; that is, until reality set in. The dotcom collapse triggered a series of problems that threatened Bush’s chances at a second term. So, the White House went to the Fed and Greenspan had a solution. He used the banks to buoy a sinking economy.
Soon, speculation was in overdrive. It was the dotcom bubble all over again times two; except this time it was in real estate and credit. It now appears that if the Glass-Steagal Act had not been repealed, the current banking crisis would never have occurred and the dotcom collapse may have not been so pervasive.
After seeing the continuation of the crisis play out – Lehman, Merrill, AIG, and much more to come, I’m wondering when the media, economists, Washington and the pundits will stop the lies. Instead they remain firm in denying the onset of a depression….“no, there is no way we can have a depression; things are different now. We have the FDIC, unemployment isn’t that high, etc.”
When you see some of the world’s largest banks and Wall Street firms go under – firms that have been in existence for decades, many prior to the Great Depression and some for over 100 years – you have to question whether you are seeing a permanent rebalancing of things in America.
When you see a government bailout of Fannie Mae – an agency created during the depression to prevent the real estate devastation from happening again – you should start wondering not whether we are in the early stages of a depression, but whether this will be more severe than that in the 1930s.
Maybe once the FDIC runs out of cash they will start to see the light. On second thought I doubt it. Stay tuned, because as I have continued to state with confidence the devastation is far from over. Oh, and one more thing. If you have your money in Washington Mutual, you might consider taking it out as I have.
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