Misnamed Financial Services “Reform” Bill Passes, Systemic Risk is Alive and Well

Misnamed Financial Services “Reform” Bill Passes, Systemic Risk is Alive and Well
http://www.nakedcapitalism.com/2010/06/misnamed-financial-services-reform-bill-passes-systemic-risk-is-alive-and-well.html

I want the word “reform” back. Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are. This abuse of language is yet another case of the Obama Adminsitration using branding to cover up substantive shortcomings. In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.

(snip)

But the market action said it all. On a flat trading day, financial firms shares rose 2.7% after the deal was announced. And the Financial Times (the only financial news purveyor whose reporters and columnists were savvy enough to recognize the credit bubble and indicate it was likely to end badly) gave a wonderfully understated diss:

If approved as expected, the legislation would mark the most dramatic change in financial rules since the 1999 repeal of the Depression-era separation of investment and commercial banking. It would pave the way for President Barack Obama to claim, after the recent healthcare reform, his second key legislative victory.

Yves here. This is simply arch. To appreciate the significance of the comparison to the 1999 Glass Steagall repeal, you first need to compare it to the PR in the US press, which touts the bill as the most sweeping reform since the Great Depression. The FT isn’t buying the hype. Moreover, the Glass Stegall repeal was even less significant than the headlines then or more recent commentary would suggest. Why? By 1999, Glass Steagall was so shot full of holes with all the regulatory variances that Glass Steagall was close to a dead letter. Banks had been obtaining variances since the 1980s. By the mid 1990s, securities firms were making bridge loans and the biggest banks were increasingly influential in derivatives, stock, and bond underwriting.

So why was Glass Steagall dismantled? Banks were still restricted to making no more than 25% of revenues in their securities operations. The main reason for the repeal appears to have been to allow the merger of Citigroup and Travelers (which owned securities firm Salomon Smith Barney) to proceed.

And note the wording of the second sentence: by commenting Obama’s “legislative victory,” the pink paper dares suggest that the most important outcome of the bill’s passage is in giving Obama another notch on his belt.

So what does the bill accomplish? It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.


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After all, it worked for 70+ years.

This all makes me very nervous when this crowd talks about eduation or Social Security "reform". The way they use the word it seems to mean the working and middle classes are about to get screwed again.