In 1933 the US government passed the Glass-Steagall Act. The act created the FDIC (Federal Deposit Insurance Corporation) for the purpose of insuring banks for up to $2,500 per depositor (this has increased to $100,000 per depositor). The act also prohibited banks whose main business was investment, from receiving customer deposits. This created the two major types of banks: deposit holding banks and investment banks.
The difference was that if you wanted to primarily be a bank that specialized in investing in the market, you could be regulated by the far less strict SEC (Securities and Exchange Commision, which was established the next year) and you could not receive any customer deposits. The deposit holding banks would have much stricter guidelines enforced by the Federal Reserve but would be insured by the FDIC for each depositor. This was done in the wake of the massive banking collapse and stock market crash of the late 20’s and early 30’s (the Great Depression). The bill essentially opened up separate competing markets for investment banks, securities banks and deposit holding banks while ensuring that any bank that Americans could physically give money to would actually be able to store it and the government could replace it if the bank was careless enough to lose it.
The SEC was meant to regulate investment banks and securities companies and to enforce the securities and investment laws. In the recent years many of the investment banks switched to deposit holding banks based on a law backed and signed by the Clinton Administration that allowed deposit holding banks to offer investment as well as insurance and securities. It was called the Gramm-Leach Bliley Act, it passed in 1999 and Clinton swears it is the saving grace of the economy during this crisis. The Act largely repealed the Glass-Steagall Act of 1933, which was meant to open up competition amongst the separate banking companies to help revive the market. Most of the smaller investment banks were bought up in merger deals after 1999 and only the major investment banks remained investment banks.
The banks that stayed investment banks just sold America out. Morgan Stanley, Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Sterns etc. all carelessly allowed themselves to get in to debt to equity rations above 15:1. For every dollar these companies had, they owed 15. Most of these companies were much higher than 15:1. Lehman Brothers had a ratio of 30:1 by the time they collapsed. Some of the banks faced bankruptcy and government intervention while others ended up being bought by larger banks in government brokered deals (which would have been prohibited before the Gramm-Leach Bliley Act in 1999).
The stock market began to slip significantly. People started questioning the stability of deposit holding banks that had been involved in subprime lending and adjustable rate mortgages and in the market in general. One of those banks was Washington Mutual. WaMu was one of the largest purchasers of mortgage debts from failing mortgage and loan companies. When people caught wind of all the major banks that were falling hard and fast, WaMu customers panicked and withdrew their money.
By the day’s end, the run on WaMu had destroyed it. Its nearly $300 billion dollars in assets was stranded by a completely devastated and broke bank. The government stepped in and brokered a deal that resulted in JP Morgan Chase buying up WaMu’s debt and deposits. WaMU’s collapse is not to be blamed on any presidential administration or failed oversight committee, though they should have been able to prevent it. WaMu’s collapse is to be blamed specifically on WaMu.
WaMu participated in irresponsible and careless subprime lending. Subprime loan recipients were already considered a huge risk and could not have previously received loans but companies like WaMu started giving out loans to anybody with a name and a social security number. The loans were unrealistic for the buyer, the homes were too expensive, the loan payments were too high and people could not afford them. Predatory, misleading lending at its best. This resulted in skyrocket real estate prices (then subsequently rock bottom prices) and massive amounts of foreclosed homes. It also resulted in the collapse of Indymac Bank and WaMu, which was the largest banking collapse in US history.
WaMu dismissed their CEO a couple weeks before the collapse and replaced him with another. The new CEO, who was employed by WaMu for 17 days received a $7.5 million signing bonus and an $11.6 million severance package while the shareholders were left with completely valueless stock. Similar situations occurred at Fannie Mae and Freddie Mac, both of which are under investigation for fraud charges. I would not be surprised to see WaMu’s executives investigated as well as all the other banks I mentioned. These executives ran their banks into the ground, screwing over their shareholders and employees and lying about it the whole time. They hid the financial situation from the world and when the bank suddenly collapsed, they cashed in their multi-million dollar severance packages (or golden parachutes as they are called) and left everyone else with nothing.
The government began to panic as well. People were very concerned about the situation and talks of a “Second Great Depression” started hitting the rumor mill and blogosphere. President Bush suddenly claimed he had a plan. Now, it has taken me nearly two pages, single spaced, to even touch on the crisis and give some background. President Bush’s plan to “fix” the economy was 3 pages long. I am not sure of the exact wording on it but the gist was this:
Give $700 billion to the Secretary Of The Treasury (Paulson) and provide no oversight or regulation as to how he spends the money.
I shit you not. That was his plan. Secretary Paulson came out in favor of it and said there was no time to debate what would happen to the money or who he would give it to. He said it was “a debate for another time” because we needed to act fast in the wake of the severely time sensitive emergency. President Bush said the same, he made it seem like if they didn’t agree to the bill then the whole country would suddenly turn into Kazakhstan, all newborn babies would die, the women raped, children tortured, etc.
Congress, thank God, refused the request and instead called for a bipartisan hearing on the bailout bill. There were a ton of things to be added that included congressional oversight on spending, anti-golden parachute laws, assurance that no single dollar would go from a taxpayer to a company’s executive, extra insurance from the FDIC per depositor, etc.
The fundamental flaw of the bill seemed to be overlooked by the entire “bipartisan” group who worked on it. The flaw is that because the government failed to properly oversee the investment banks and mortgage companies, and because those companies behaved irresponsibly, the whole economy has collapsed on itself or at least is on the verge thereof and now we, the taxpayers and hard working, normal American people are being stuck with the bill to bail them out while the bill offers no help to the people who were hurt most by it. US!!!
Where does 700 billion dollars come from? Right from your pocket. You aren’t going to be getting a bill in the mail anytime soon but over the next decade you will slowly pay off the debt created by this abomination. Assuming there are approximately 250 million working and tax-paying Americans, the bailout bill runs each working adult about $3,000 each. Some economists and politicians say it is necessary to prevent the total collapse of the US economy while others say that the bailout package could unnecessarily prolong the ordeal for a decade.
I believe the latter. I think that when the banking system in an economy drives itself so far into debt that it collapses, the last thing you would want to do is drive the nation’s Federal Reserve into a 700 billion dollar debt with it. They have nowhere to get 700 billion dollars especially since it is expected to round out closer to a trillion dollars. It doesn’t exist. They are simply going to print fake bills and hand it to the banks. The congressional oversight that is supposed to protect the money from being wasted will likely be as pathetic as the oversight that allowed it to happen.
The democrats and republicans could not decide on the bill. They deliberated for hours carrying hand written pages of the bill from office to office of the House. Finally, after midnight that day they had reached an agreement and the bill was polished and sent to the House floor to be voted on the next day. The Democrats swore they had their votes in line and the Republicans swore they had theirs.
They were both either very dishonest or very naïve. There was a three hour “general debate” session before the vote and various candidates got up to speak their mind on the bill, many in favor, many not. Nancy Pelosi, speaker of the house, stood up to give her support of the bill. At least that is what she said she was going to do. Instead, she gave a speech about the failed economic policies of the Republican party and the President. She said that deregulation and free markets were essentially a myth. She said “the party is over”. She made it feel like voting for the bill meant you were voting to confirm that Democrats were always right and Republicans were always wrong.
She was endorsing and supporting the bill while damning it. The speech was disgusting and only proved that she was extremely biased and all she could see in politics was black and white. Right and wrong. Democrat and Republican. It was all about Nancy’s ego and the ego of the Democratic Party. Some Republicans, who had remained undecided, decided. They decided to follow Nancy’s pathetic example. They voted against the bill and put partisanship before the country. The bill was defeated in the house. Over 100 Republicans voted against it and about 90 Democrats voted against it.
The whole situation painted a picture of what politics today is all about for these people. It isn’t about the country, it isn’t about the people, it is about them. The whole thing is disgusting. They are both blaming each other for something that is very clear and plain and I would like to spell it out for them.
If you are a Congressman or Senator… this is your fault.
It is the whole government’s fault. Nancy is quick to blame deregulation and to idolize Clinton’s magical economic policies. She is quick to blame the republicans for deregulation and causing this whole mess but if it weren’t for the Gramm-Leech Bliley Act that deregulated the banks and securities then all of the major buyouts that I mentioned (Merrill Lynch, WaMu, Lehman Brothers, etc.) would have been illegal or at least heavily regulated and difficult to pull off in time. They would have been regulated under the Democratic supported Glass-Steagall Act of 1933. McCain Voted for the 1999 Gramm-Leach Bliley Act and Obama has been falsely blaming the Act for the crisis. Bill Clinton himself has defended the act saying it saved the economy from certain collapse.
The blame rests on the Republicans as well. If they want deregulation then they need heavy oversight. I agree that the Federal Government should not regulate businesses. Free market is wonderful; it made the US what we are. Regulation is another step towards socialism. However, deregulation with no oversight is another step towards suicide. If you want to deregulate and let the free market work its magic then you have to keep an eye on the companies to ensure that they are not putting the American people in financial danger or wrongly convincing the American people to invest. It can’t be so black and white, regulated or deregulated.
The blame cannot be placed entirely on the government either. The companies involved are to be held responsible as well. They had the privilege of participating in an actual free market and they fucked us. They were irresponsible, misleading, predatory and immoral. They didn’t give a shit about the country or the economy or their own investors and employees. They only cared about themselves. While the government should have been overseeing these companies and their actions, these investment banks are not the only businesses with little to no oversight. Hedge funds and private equity firms have little to no oversight and they haven’t been anywhere near collapse. This only shows that these banks were responsible for their own problems.
The bailout bill was reworked in the Senate this week and they passed it. It went down to the House for a vote today and passed. The bill made no sense when it originated from the Bush administration, it made no sense when it changed in the House and it makes no sense coming from the Senate. The bill is just plain reckless and unintelligent.
It will prolong our crisis. It offers money to the lenders, not the homeless and poor Americans that the lenders fucked over. It offers a bailout to companies that neither deserve nor require a bailout. It offers no punishment to executives who sold out their country and its economy. It has no basis of funding. It offers no common sense whatsoever.
It is a damned shame and the whole scene in Washington is disgusting. They are all frantically trying to figure out how they can save face politically, not whether or not the bill is realistic.
I wouldn’t say were completely fucked yet, but I wouldn’t deny it either. Especially since the two presidential candidates offer almost equally recockulous economic plans to “fix” the market. Jobs are down 159,000 this month. 6% unemployment is the lowest rate in five years. The country just bailed out Wall Street and added some small side notes that they claim could help the mortgage borrowers as well. I don’t buy it at all. The benefits for the actual American people that were added to the bill sound far too vague and not nearly firm enough. There should have been specific funds set aside for these people.
For now the nation isn’t completely fucked, but it is pretty close. I am not necessarily forecasting a “Second Great Depression” but…
Stay tuned because that will probably change.
August 1st, 2008 at 10:44 am eHey dude, so yeah, Comcast sucks and everything, but it’s probably about time you stopped worshiping Google. Don’t kid yourself, they’re just as big of a corporation as any other. And if you want to talk about children, well http://valleywag.com/5016355/google-daycare-now-a-luxury-for-larry-and-sergeys-inner-circle .
August 1st, 2008 at 10:50 am eOh, or maybe http://news.bbc.co.uk/2/hi/technology/4647398.stm if you’re more into the “technology ethics” shtick.
Allow me to start by saying that I dont think i necessarily “worship” google. I also dont claim that google has never or will never “do evil” as their motto claims. What i do claim is that from my point of view Google has the best behavior of any company I have encountered, at least in their dealings with me and anyone i know personally and anyone i have read about (save the kinderplex victims which i will address below).
The second comment is in reference to Google’s Chinese site. The story the comment links to seems to say it all for me. This article only seems to prove to me why i like google so much. In China the government controls everything. They can censor what they want, demand what they want and they get what they want. For years China has been censoring the internet and companies like Yahoo, Microsoft, Baidu, etc. are being forced to censor certain websites. For instance, if you are in china and you search for Tiananmen Square, you will not be finding any sites who talked about how screwed up it was for the Chinese to kill anti-communist protesters. If you searched for information on liberating Taiwan, you would be redirected to sites only who support China’s opinion (which of course is that Taiwan should never be free).
The linked article points out Google’s participation in this terrible market. And yes, I think it is awful to censor the internet, I think it is a violation of someone’s civil rights (unless you are using it to look at naked children, see previous post). The only thing i disagree with Jim on is that i dont think this shows that Google is just another big company. I think it defines Google.
Google decided to take place in the Chinese web market with the stance that participating and attempting to change things is better than boycotting. If Google boycotts the Chinese internet because of censorship, then everyone will use Yahoo, Microsoft or Baidu (who already has a higher percentage of searches than Google). Google, instead of turning tail and running, or boycotting like a hippie has decided to stay and follow the Chinese governments terrible internet rules.
Google at least tells the user when they are being censored, the other sites i mentioned do not. Google also has removed all networking and blogging from their chinese site due to the Yahoo incident. Yahoo gave personal information about one of their users to the Chinese government and it helped put the journalist in jail for the next ten years. Google refuses to hand over this information but because they are in China and must fly by Chinese law, they are simply not going to take that information from their users.
“The company, whose motto is “Don’t do evil”, launched its new Chinese service less than a week after resisting efforts by the US Department of Justice to make it disclose data on what people were searching for.”
The above quote from the linked article says it all for me. In the US where google can tell the government to stick it where it hurts, they do so. In china where the government controls everything, they are forced to play ball or go home and i think they do the right thing. I commend Google for thier actions in China and i hope to God that they are able to make a difference.
The first comment refers to a debacle in which Google’s founder allowed his sister-in-law Sergey Brin to convert the Google’s headquarter’s childcare facility into a much, much more expensive and luxurious center that many Google employees could not afford. This is a very rare mistake made by google although I do think Jim from the comment is stretching to point fingers now.
Sergey Brin is the woman who rented out the basement that Google was started in, she now holds a lucrative, high paying position at Google. I will admit that i found it funny reading a story that claimed after interviewing several Google employees nobody could figure out exactly what her duties entail. It seems her duties are “helping us start the company in your basement all those years ago” and not much else. If i started a multi-billion dollar company i would probably bring the people who supported me along for the ride, any way i could.
Though, Google did fumble here. Recently Google’s childcare facility, known as Kinderplex was in danger of being shut down due to the extremely low prices it was offering. Instead of going back to allowing an outside agency to control their childcare (as most corporations do) Google’s founders wrote Sergey a blank check to design one of the most impressive childcare facilities you could imagine. The square footage per child is astounding and the luxuries are plentiful. Google held focus groups and asked Google employees what they would think about a 75% raise in tuition for the center and the Google employees responded with a loud “Hell NO!” For whatever reason Google did it anyway, though they did manage to cut it down to a 70% tuition raise, which is a pathetic change in price and would be taken as an insult (if i were a google employee).
Several Google employees have left the company over this or have been forced to seek outside childcare off campus. I do see why they are upset and I would be too. However, this is a very rare google fault. I am extremely interested to see how this develops over the next couple months as this is a relatively new turn of events and we haven’t heard much from Google’s founders.
Again, Jim i think you are stretching to point fingers here. Google has made an obvious mistake and have done something that is not in their Employee’s best interest and they should fix it and apologize for it or give a damned good explanation as to why they stepped out of character here.
On the other hand, even with extremely expensive childcare Google still treats their employees much better than most other companies. Google offers free meals, doctors on site, swimming and spa facilities, engineer’s are allowed to spend 20% of their time on independent projects, dry cleaning services, on site oil changes and car washes, 8000 dollars a year toward a relevant degree, etc.
Like i said, Google messed up here and I am not questioning that, but to say that this makes them “just as big of a corporation as any other” as the comment says it, is petty. I think people will always take a look at something like Google and try to point fingers, try to destroy the reputation of a company that is being appreciated, try to have the dissenting view. Be the one in the know. I do not claim that Google will never make a mistake and Google has problems like any business or group will. Still, if you really look at Google’s behavior in the market, politics and net neutrality they are still way ahead of the competition on the whole “do no evil” bit.
I am glad that people will always try to find something to point about. Maybe if more people pointed fingers at Enron, then it wouldn’t have happened the way it did. I hope that people do keep pointing and trying to disprove their motto and reputation. That will only make Google stronger or expose them as liars and either is good. If something proves that Google has stopped doing all the good things it does and starts replacing them with bad things then i will be the first to condemn them, but these two incidents do not prove it.
They are just something to point at.