News Release

Wall Street: “A Minute Past Midnight on the Clock for Reform”

NOMI PRINS
Prins is a former investment banker turned journalist. She used to run the European analytics group at Bear Stearns and has also worked at Lehman Brothers and Goldman Sachs. She has written extensively about the 1999 repeal of the Glass-Steagall Act, which had regulated the financial industry since the New Deal. A photo of Clinton signing the repeal is online.

“On November 12, 1999, as President Bill Clinton signed into law, and former Federal Reserve Chairman Alan Greenspan, former Texas Senator and Banking Committee head Phil Gramm (now a top McCain adviser), and the rest of the captains of Congress gleefully applauded their final dissolution of the Glass-Steagall Act of 1933, there is a question that must be asked.

“Did they even consider that as [quoting Clinton at the ceremony] ‘Financial services firms will be authorized to conduct a wide range of financial activities, allowing them freedom to innovate in the new economy,’ they’d also be free to self-destruct, taking down with them the general economy and international confidence in the U.S. banking system amidst immense greed, overleveraged capital, poor transparency, and complete lack of judgment?

“Or did they simply not care?

“Notably absent from the ceremony was former Treasury Secretary and co-chairman of Goldman Sachs, Robert Rubin. Three weeks before the signing of the Gramm-Leach-Bliley Act that he had championed and that officially repealed Glass-Steagall, he rushed off to take on a plush vice-chairmanship position at Citigroup [which had merged with Travelers Insurance] — the institution that first benefited most from the repeal. Rubin is now a top adviser to Obama.”

Prins is now a senior fellow at Demos. She is the author of two books: Other People’s Money: The Corporate Mugging of America and Jacked: How Conservatives Are Picking Your Pocket. Her recent articles include “ As Wall Street Collapses: Will Washington Get a Clue?” and “Which Investment Bank will Be Next?

MICHAEL HUDSON
President of The Institute for the Study of Long-Term Economic Trends, Hudson is author of Super-Imperialism: The Economic Strategy of American Empire. His writings and interviews of him regularly appear on CounterPunch.org, and an in-depth piece of his titled “Saving Capitalism” is forthcoming in the next edition of Harper’s magazine. He appeared Wednesday on Democracy Now.
More Information

JOHN SAKOWICZ [see note below] Host of “The Truth About Money” on NPR affiliate KZYX, Sakowicz is a former trader and cofounder of a multibillion-dollar offshore hedge fund Battle Mountain Research Group; he also worked for Spear Leeds Kellogg, now a division of Goldman Sachs, and Merrill Lynch. His recent articles include “The Fannie and Freddie Flip.”

JANE D’ARISTA
D’Arista is an economic analyst at the Financial Markets Center, which monitors the Federal Reserve as well as financial markets. She said today: “The ongoing interventions by the Treasury and Fed to assist institutions and bolster confidence in U.S. financial markets illustrate many of the problems that have been spawned by deregulation, unfettered innovation and failure to analyze the implications of the shift from a bank-based to a market-based financial system. The Fed’s unprecedented loan to a large, global insurance company is a case in point. The tipping point for AIG is its role as a major counterparty in derivatives markets — the various trillion-dollar non-public, non-transparent markets in which the more important institutions in all sectors have become interrelated through the process of buying and selling various forms of financial insurance to one another. Having been allowed to develop outside the framework of exchange or clearinghouse structures, over-the-counter derivatives contracts pose a systemic risk by virtue of the fact that they cannot be sold; existing positions must be hedged by buying or selling even more contracts, pushing up the nominal value of outstandings to immense proportions and increasing interdependency (and the potential domino effect) within the global system.

“The systemic effects that flow from AIG’s sizable share of outstanding contracts result from the procyclical downward pressure imposed by the rules of the game in a market-based system: declining prices for the assets backing the contracts mean additional collateral must be posted; writedowns of asset values require charges against capital; the decline in capital triggers a drop in credit ratings that dries up funding, raising the cost of what little credit can be obtained while making it more difficult to raise additional capital.

“AIG warned last week that this scenario might play out if Lehman — one of the ten largest parties in the $62 trillion market for credit default swaps — went down. It did and it has. But is the loan to AIG the end? Where are the plans to deal with the systemic effects these markets have posed since the demise of Long Term Capital Management a decade ago? Ignoring the root of the problem can only increase the likelihood of more interventions. It is already a minute past midnight on the clock for reform.”

For more information, contact at the Institute for Public Accuracy:
Sam Husseini, (202) 347-0020; or David Zupan, (541) 484-9167

Note to journalists: [addendum posted May 5, 2009]

The Institute for Public Accuracy included John Sakowicz as a financial analyst in news releases on Sept. 18, 2008 and March 24, 2009. IPA recently received the following from the editors of the North Bay Bohemian newspaper in California: “Effective April 28, 2009, the North Bay Bohemian has disinvited contributing editor John Sakowicz from the paper. He is not to represent himself as anything but a former contributor to the Bohemian and our sister publications, the Metro Silicon Valley and the Metro Santa Cruz. Mr. Sakowicz has not proven his professional background to our satisfaction.” Similarly, IPA, which had identified Sakowicz as having been employed at various Wall Street firms, recently contacted Sakowicz, but he declined to give an on-the-record response on specific matters. We regret that IPA news releases passed along descriptions of his professional background that cannot be verified.