Here is a question that I have been wrestling with:

What exactly did the repeal of the Glass-Steagall Act accomplish?

Were there positives as well as negatives?

Should the Gramm-Leach-Bliley Act be repealed, and Glass-Steagall reinstated?

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What say ye?

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Category: Bailouts, Credit, Finance, Legal, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “What Did the Repeal of Glass-Steagall Do ?”

  1. willid3 says:

    well it got us those dandy high oil prices for one thing since it reduced over sight over commodities. nt sure that it didn’t create the housing bubble too. but the first one it definitely has that covered!

    ~~~
    BR: Wrong legislation

  2. 2cents says:

    BR

    This is probably not exactly what you were expecting, but here goes.

    I want to start commenting on the overarching role of the DTCC as a nexus of the financial system and what it has led to. I think it goes a long way towards explaining how/why decisions were made over the decades and explains why leverage was so easily increased over time. I think this will explain why Glass-Steagall was repealed and what it accomplished. The positives and negatives become relative to which side of the fence you chose to sit.

    The interesting thing is that if we look at the original movement to electronic clearing, we can see that due to physical constraints paper certificates were indeed a drag on operations. Nobody who has been around markets for 30-40 years would argue otherwise. The problem was that the masses could not implement electronic clearing in the 70′s and early 80′s. Only big institutions could afford the computers and programmers at the time (the PC was still just a glimmer). The “bridge” solution was to allow the big brokers to implement electronic clearing and to invite the masses to participate by holding securities in “street name”. The security’s owner was Cede & Co. (DTCC nominee name). Under existing law the DTCC became the legal owner of the security. You, the one who ponied up the money, are the “beneficial owner”. This is why there is no direct correspondence between you and the issuer of the security you ‘bought’. The correspondence is all via proxy (usually your broker). With both electronic and paper clearing coexisting side by side, there was always room for discrepancies to crop up and literally no way to systematically verify the source of the discrepancies. In short, the system greatly increased efficiencies and it was recognized that these discrepancies were the ‘cost’ of progress.

    However, the ‘brilliant’ minds at the investment banks soon realized that these “street name” securities could be manipulated to their benefit. In fact, these securities can be counted as the investment bank’s own collateral! When you pony up your money you are effectively giving the broker free money (actually they have the gall to charge you for the money you give to them). Due to the way the system works coupled with direct broker to broker transactions, the DTCC can never be sure that what its records have agree with what actually is occurring (the DTCC’s records are supposed to reflect reality, but there are too many holes and discrepancies for it to actually attain that goal). The end result is that the investment banks have had access to free capital via the ‘system’. This was akin to the fractional reserve scheme granted the C-banks! Only better!

    Eventually, the Commercial Banks realized that there was no way for them to compete with this “street name” system. They wanted a piece of the action and eventually Glass-Steagall was repealed. The deal in all this was that they would provide more capital to the system and both I and C-banks would benefit. This was fine with the I-banks now because a large portion of the securities were now being held in street name. In other words, there capital base was leveling off and they could lever up much more. However, with the C-banks at the table, the I banks created collateralized securities based on C-bank assets. How did this help? First, with the banks assets now converted into securities, it allowed these assets to be held in “street name” and voila new capital and more leverage was available. As for the C-banks, they benefited by getting an immediate pay out against their portfolio via the proceeds from the sale of the collateralized securities. Money that they can then multiply via fractional reserve banking and this increased their available collateral and therefore their ability to leverage higher. The kicker is that these bank securities which had been privately/institutionally held could now be also sold to the masses. Not only did the C-banks increase their customer base, but the asset got to be used twice! First in the traditional sense by a buyer via the collateralization and secondly via the ownership privileges of having the security held in “street name”

    The party was on. I think if someone were to do a retrospective of the driving force behind many actions over the last 30+ years they would find that everything was geared to transport more collateral to financial institutions to allow them to lever it so that the country got the maximum use out of each dollar. 401Ks were another mechanism to feed collateral, drawing foreign investments expanded the available pool, and housing was collateralized to again provide more collateral, etc. My point is that, over these last decades, if an action could increase the collateral available to financial institutions then it bubbled into existence. If an action reduced capital available to financial institutions then it was cancelled. This is the real basis behind the ‘freedom’ allowed to reign in the markets. This directly led to an increase in the velocity of money, but it also disguised the degeneration of true wealth. Now the velocity is being greatly slowed and the guise is being lifted. What’s happening now is that collateral positions are being reinforced to shore up what never existed in the first place. Accounting constructs were invented to maximize the use of these new found sources of fictitious collateral, but what we now find is that the system is now putting real capital in its place so as to get reality to conform to the accounting positions!

    As a mater of fact, I think that in retrospect we are going to find out that the seed that this mess grew from is now a grown tree that is withering and bringing this all down. You see, all exchange traded securities are now required to be DRS (Direct Registration System) eligible. This has been an ongoing situation since 2006 and fully implemented in January of this year. This new system again was as obvious as its older sibling “street name” and had no rational argument against it. Yet, it was the beginning of the end of the feed the collateral to the financial institutions game. This was the first critical step in reducing capital available to financial institutions. You will find that all major/minor financial players now use DRS and it is the lowly small investor and 401K holder/mutual fund holder who still uses street name. This new system curbs the mismatches and discrepancies by having the issuer of the security directly involved in its movement about the financial system. Technically, the DTCC’s, the issuer’s , and the broker’s records should all agree! Because the communication is now directly between the issuer and the owner, there is less margin for hanky-panky. The legal owner and beneficial owner are again one and the same under DRS. Transparency is returning to the system and we are paying for the lack of it during the preceding decades. It is my firm belief that this single stroke will prove to be the straw that broke the camel’s back so to speak. Without this free and easy access to easy collateral, many positions had to be unwound which meant the securities most susceptible to a decrease in velocity were the ones to be hit first.

    In summary, Glass-Stegall was repealed because the C-banks wanted in on the I-banks access to free collateral and the C-banks wanted it repealed because they wanted access to the pent-up assets within the C-banks to again increase access to collateral. Both had to share in order to get what the other had.

    This brings us to our current situation where we are now stuck in the position of forcing reality to somehow agree with the book entries, or forcing the book entries to somehow agree with reality. Inflation if you are in the first camp and deflation if you are in the second camp. I don’t care what Obama, the FED, IMF, or whatever does, this is the battle that hey are waging. Personally, I would just prefer to adjust the book entries to agree with reality and move on. Mainly because I think that inevitably it is futile to do otherwise, but it’s not my sandbox.

  3. DMR says:

    As things stand, the standalone Investment banks have been the ones that have collapsed this year. Commercial and Retail banks provide sources of cash, which in a crisis can cushion the blow. This would support the Greenspan theory on “flexibility”.

    But, a true comparison cannot be made unless we can measure the effects of the collapse of a post Glass-Steagall behemoth like Citi, JPMC, or BofA. I would imagine that if such a crisis were to occur, my previous paragraph would appear rather naive!

    ~~~

    BR: Citi, WAMU, Countrwide, AIG — none are standalone investment banks.

  4. Crabbybill says:

    Is it my imagination or did the number of ‘commingled’ and ‘pooled asset’ investment funds that are not registered with anybody, increase dramatically in 401k offerings during 1999 and 2000. These things are black holes when it comes to reporting!

  5. Marcus Aurelius says:

    Gramm-Leach-Bliley, along with little or no enforcement or oversight of the newly liberated “Financial Services” entities created by the inherent repeal of Glass-Stegal, led directly to the problems we are experiencing today. The best analogy would be to repeal speed limit laws, and to tell traffic cops it was okay (even recommended) that they only patrol their local Dunkin’ Donuts.

    Sarbanes-Oxley, while full of good intentions, is also meaningless without strict enforcement. Being that there is a paper trail mandated by SarbOx, we should be seeing a tidal wave of prosecutions related to out current financial cluster____.

  6. It is not just the repeal of Glass-Steagall that brought us to this plainly bankrupt point. Given the commitment to wipe out capital intensive industry in the U.S. as part of a drive to magnify short-term profit opportunities in the private sector, the repeal of Glass-Steagall made sense. However, this drive being the dominant activity within an economic paradigm whose mantra remains “Inflate or Die” has brought us to the point where the co-mingling of Commercial and Investment banking is no longer the most dire threat to our posterity as a developed, civilized nation. Rather it is the co-mingling of a thoroughly bankrupt economic ideology with the U.S. Treasury that stands as an unprecedented threat as ominous as global thermonuclear war.

    Without a sound agency at the core of our society assured in its capacity to utter credit whenever this might be most needed, a systemic crisis larger than the one we are experiencing at present stands as a potential means of destroying the American Republic.

    The Treasury may be able to float its debt today, but tomorrow might be a different story…

    Whether one would argue this vulnerability is being promoted intentionally really is irrelevant. What matters is only that the U.S. Treasury has been induced into sustaining the bankrupt paradigm whose mantra is “Inflate or Die,” and this increases the potential risk of a Great Calamity. For this alone, Paulson, Bernanke, and many others might rightly be charged with treason…

  7. David Merkel says:

    Barry, I don’t think GLB is the problem. Here are the problems as I see them:

    1) We should not let institutions get TBTF. Risk-based capital charges need to increase with firm size, creating a disincentive for hyper-large firms.
    2) We need one overarching national financial regulator for all depositary institutions, aside from insurers. For structural reasons, banks will not buy insurers, though insurers will own little banks and thrifts.
    3) Required capital needs to be contra-cyclical. As booms go on capital must increase.
    4) All assets and liabilities must be brought onto the balance sheet.
    5) Any asset that the regulators can’t understand fully should be prohibited to regulated institutions.
    6) Total separation of regulated and non-regulated financials — no derivatives, no debt, no equity.
    7) We need to limit the Fed’s ability to limit recessions, so that overall debt levels do not get out of hand.

    Those are the problems we need to solve. GLB is a sideshow.

  8. Ace says:

    Repeal of Glass Steagall did two things that are both related:

    1) allowed commercial banks to merge with investment banks. Would the Citi’s, BofA’s, and Chase’s of the world jumped into structured finance, CDS, and CDOs if they didn’t have investment banking arms?

    2) created institutions that were too big to fail. If it were just the investment banks that were the root of credit crisis, it would have soften the blow substantially. Hell, all the big Wall St banks could have been put to death and I bet the country would not have skipped a beat, but also would be MUCH better off in the long run. Smaller boutiques and privately held banks would have filled the gaps left by the failure of the BSCs, LEHs, and MERs of the world. There was actually proper risk management controls and moral hazard in the securities industry when the big i-banks were private partnerships.

  9. t1dude says:

    IMHO, Gramm-Leach (repeal of Glass Steagall) was the lynch-pin in the entire meltdown. But for the passage of Gramm-Leach, Credit Default Swaps would not be legal. If they were not legal, there would be no meltdown.

    Obviously, there are other factors at play: blind greed, incompetence, stupidity, irresponsible behavior at every point in the lending process, etc, etc. I am not trying to discount these problem. I am just pointing out that we managed to avoid this kind of calamity for 60+ years, then suddenly after Gramm-Leach we encounter huge problems very similar to those that Glass-Steagall was designed to prevent (problems that were encountered 60+ years ago before Glass-Steagall). Coincidence? Maybe.

    Perhaps there is a place for CDS’s and other derivatives, but opening the flood gates and a zeal for turning a blind eye was certainly stupid. I am so sick of ideology over evidence I can barely stand it.

    ~~~~
    BR: are you referring to the Commodity Futures Modernization Act ?

  10. Steve Barry says:

    CNBC often hypes up the jobs number as being so critical…this time it is an understatement. Since Americans have virtually no savings, a single job loss will likely translate into a foreclosure if they own a home. You can re-fi to zero and they will still default. Job losses are going to explode higher and the market must tank accordingly. Put/calls and short interest are dangerously low to stop a market plummet if the number is very bad.

  11. danm says:

    The length of 2cents explanation plus the number of reasons posted by others confirms how complex our system has become and how easy it is today to miss the forest for the trees.

    For me, the repeal of Glass-Stegall was more philosophical: a red flag. It meant that we had completely forgotten the Great Depression, convinced we could never repeat it. It was another mental check on my long list of items that would lead us to a full blown credit crisis.

    It’s not one thing that put us in dire straights. It’s been a little thing here and there along the way for the last few decades. It’s like when you put on weight. A pound here and there until you wake up one morning, look in the mirror and wonder where all those extra pounds came from.

  12. Robert M says:

    It was a horrible mistake. the concentration of banking power in our country was not what it is in Europe and elsewhere. As a consequence the “so-called juicy parts” became available to the merchant/investment side where the absense of risk margin allowed them to take the best advantage of it. Itis the Gram Leach bill was/is the more dangerous move as it allowed commodity products which already had low margins now had none. In addition commodities moved into a world wide phenomena simultaneouly with the rise of the PRC manufacturing economy, creating an even bigger bubble worldwide.
    they both need to be repealed.

  13. constantnormal says:

    Here’s a counter-question:

    How bad will things have to get before we have the Congressional backbone to work out viable legislation to change the system in a beneficial (i.e., more stable) way?

    I can envision things like extending the antitrust laws to encompass TBTF situations, automatically mandating breakups (no fault, no blame) when corporations exceed certain metrics of size and/or market share. I think that would lead to healthier markets.

    For instance, if Microsoft had been broken up back when they lost their antitrust case, instead of rewarding them with mandated “gifts” of free software into markets that they had previously found to be difficult to penetrate, it seems likely to me that the industry would be stronger today and the stockholders better rewarded, much as when AT&T was broken up (in that instance, progress increased, prices came down, and stockholders were richly rewarded). I don’t think that anyone can credibly argue that Microsoft is, in its current form, too unwieldy to innovate and lead the markets. New releases take too long to bring to market, and quality control is much lower than it ought to be. Their games division is still not turning acceptable profits, and the over all ROI from that particular business must be regarded as a disaster. Same thing with their business services division.

    But just how likely is it in our current lobbyist-directed Congress of feeble minds, that ANY kind of sweeping legislation could be proposed that would break up companies when they became TBTF?

    Another kind of rewriting of the rules would be some kind of legislation (GAAP rule changes might also accomplish this) to more tightly control leverage and limit the amount of risk that public corporations can take on. Again, not very likely that such rule changes would make it past the industry lobbyists.

    And then there is the issue of regulating (i.e., making some rules to keep things from degenerating into effective frauds, as has occurred in the CDS markets) new financial instruments, and providing transparency and traceability throughout the markets (fixing the major problem in the CDO concept).

    We probably need misery and agony comparable to that of the Great Depression before Congress would be motivated to make structural changes like that. Of course, it would be a Congress utterly devoid of members with more than one or two terms in office, those having been ejected by enraged voters. Ultimately, THAT’s where Congressional motivation comes from — fear and greed, just like everyone else.

  14. RugbyD says:

    I’m not going to claim to be well-versed in this matter, but an all-or-none repeal/re-enact approach seems simplistic and shortsighted. To a certain extent I think some people are doing the equivalent of blaming the car driven by the 12yr-old for the hit & run. 12yr-olds aren’t supposed to drive cars but we don’t take cars off the road to prevent such things. I would think there’s a way to construct a regulatory regime using lessons learned in the past few years. The world is a very different place than when Glass-Stegall was passed and current legislation should reflect those differences. Also, was the Gramm bill a pre-req to allowing the Big 5 to lever up 30-40x? I honestly don’t know the answer.

  15. t1dude says:

    danm – you hit the nail on the head. This is along the lines of the sentiment that I tried to convey in my comment. You stated is very nicely and succinctly. Nice work.

  16. Winston Munn says:

    The irony is that Glass-Steagall was a confirmation of free enterprise and capitalism. The purpose was to divide depository institutions from investing institutions, granting safeguards to the depository institutions while allowing the investing institutions to succeed or fail unfettered by governmental stipulations.

    The repeal of G-S was based on hubris, the same type of arrogant pride that led Ben Bernanke to claim “The Great Moderation” was due to improved central banking.

  17. retrogrouch says:

    While there’s a lot of debate about the technical impacts of the repeal G-S, from my perspective one of the principle results and simpler things was it facilitated the i and c bank mergers, allowing ever larger entities and giving us the “too big to fail” institutions.

  18. SpeakToMe says:

    This thread has made me rethink some things about the current financial crisis.

    I still believe that the crisis was caused by a massive mistake in measuring risk in the mortgage market and overleverage. I no longer think that these errors can be mitigated in the future simply through better disclosure. I think we also need to force some separation of risks into the financial sector. This is a way for us as a society to hedge our bets.

  19. Peter Pan says:

    I was under the impression that the GLB legislation was passed so that a Fed regulated bank could be combined with an investment bank and an insurance company or any combination of each. The primary example being Citi and Travelers, promoted by Robert Rubin for which he was substantially rewarded.

    Of course Alan Greenspan had been undermining GLB for some time. Combine that with the CFMA legislation and the SEC allowance of investment bank to go from 12 times leverage to 30 to 40 times leverage and you’ve got yourself a fairly decent potion of explosives.

    So you’ve got Fed regulated banks tied at the right hip to investment banks (shadow banking) and tied at the left hip to insurance companies (shadow insurance) which offers an excellent means to transmit the explosive forces.

    Perhaps the primary benefit of Glass-Steagall is to help defend against transmission of the explosive force.

  20. Peter Pan says:

    Correction: Alan Greenspan had been undermining Glass-Steagall for some time, not GLB.

  21. montysano says:

    Add all this up: GLB, CFMA, allowance of 30x to 40x leverage. Realize that the swaps market was still relatively small circa 2000, then began geometric growth around 2005.

    Is there any way to characterize this other than: the greatest act of financial irresponsibility (or financial incompetence, or both) in history?

  22. Groty says:

    The “universal banking model” has been the de facto banking standard in Europe. The keiritzu is the main form of large business/financial organization in Japan. I may be wrong, but I’m pretty sure the U.S. was the only country in the developed world with legislation that prohibited a firm from engaging in both commercial banking and investment banking activities.

    As globalization grew, the argument for repealing G-S was that its repeal would enable the merged commercial and investment banks to compete more effectively against the European universal banks and the keiritzus (and to a lesser extent the Korean chaebols).

    The advantages are obvious. Ability to cross sell banking and investment banking services; reduce administrative headcount; better utilization of office space, etc.

    The repeal of G-S was not the problem. The problem was failing to create a new or different regulatory framework to replace it.

  23. kaleberg says:

    The repeal of Glass Steagall was a symptom of the problem, not a primary cause. The primary cause was a blind acceptance of an ideology of capitalism that was no more valid than the Marxist garbage that sank the old Soviet Union. In fact, the two blind ideologies were mirrors of each other, almost caricatures. Our nation adopted a bogus ideology which argued against certain types of regulation and lauded efficiency and profit as ends in and of themselves. The market was accepted as self correcting, much as devout Catholics accept that the Eucharist is the body of Christ. As Mao destroyed the Chinese farming system and starved tens of millions of Chinese, Americans repealed Glass Steagall, turned off its regulators, clamped its governors, put pennies in the fuse boxes, and welded the little strip of each thermostat to full heat. Then all the ideologues got to stand around in amazement asking why things overheated and exploded. No one else was surprised.

    Anyone who has studied the real world knows that efficiency has its price. No one would think of writing a block of data to a disk drive or sending a packet of data on the internet without a wasteful checksum and some routing or formating data. No one would build a bridge that could take only its maximum load under maximum wind conditions. No one would build a road just wide enough for a typical car, with no margin for driver error and correction. Of course, you can make good money by cutting things to the bone, and as long as you take your money off the table before things collapse, you have nothing to fear. When ideological structures collapse, those riding at the top always have several redundant and inefficient layers beneath them so that it is heads they win, and tails everyone else loses. That sort of inefficiency never goes out of style.

    Even a first year economics student knows that economic growth requires some kind of money multiplier, usually based on some system of credit. Multipliers have a multiplication factor, usually in the form of reserve requirements, and they have a cycle time, usually limited by the pace at which business can be performed. If you keep the multiplier under control, raising an lowering its components in response to actual growth, you can grow the economy healthily, just as you can keep your car on the road, even if the road is wet, though you may have to slow down or pay better attention to the road. If you just keep your foot all the way down on the accelerator and stop looking out the window, you have a recipe for disaster. You may even repeal Glass Steagall as you pass through your windshield.

  24. Boomer108 says:

    This is such an important, and complex, question. I remember when GS was repealed, I thought, “uh oh, here go the banks down the tubes”. And nothing happened. Maybe we got distracted by the dot com boom, bust, 9/11, recession, and finally then the seeds were sown to create the blow up.

    It was repealed, as I recall, because of globalization and because traditional deposits couldn’t compete with money market funds, mutual funds, and other places investors’ cash was going; nor were banks able to compete with the different entities offering credit. You had hedge funds, I banks, all kinds of entities extending credit and the banks weren’t competing, on either front. The Euromarkets were extremely competitive for debt deals, and the banks were losing out.

    So I don’t believe it was the repeal of GS per se that caused the crisis, it was symptomatic of the changes taking place in the financial markets.

    Some solution, involving credit-extending entities keeping a good portion of the loan on their books; the owners of the institutions having their own capital at risk; restriction of leverage ratios, and perhaps even high taxation of excessive income earned in financial markets would be the right approach.

  25. wow, no one even picked up on this:

    ” 2cents Says:

    December 4th, 2008 at 9:20 pm
    BR

    This is probably not exactly what you were expecting, but here goes.

    I want to start commenting on the overarching role of the DTCC as a nexus of the financial system and what it has led to. I think it goes a long way towards explaining how/why decisions were made over the decades and explains why leverage was so easily increased over time. I think this will explain why Glass-Steagall was repealed and what it accomplished. The positives and negatives become relative to which side of the fence you chose to sit.

    The interesting thing is that if we look at the original movement to electronic clearing, we can see that due to physical constraints paper certificates were indeed a drag on operations. Nobody who has been around markets for 30-40 years would argue otherwise. The problem was that the masses could not implement electronic clearing in the 70’s and early 80’s. Only big institutions could afford the computers and programmers at the time (the PC was still just a glimmer). The “bridge” solution was to allow the big brokers to implement electronic clearing and to invite the masses to participate by holding securities in “street name”. The security’s owner was Cede & Co. (DTCC nominee name). Under existing law the DTCC became the legal owner of the security. You, the one who ponied up the money, are the “beneficial owner”. This is why there is no direct correspondence between you and the issuer of the security you ‘bought’. The correspondence is all via proxy (usually your broker). With both electronic and paper clearing coexisting side by side, there was always room for discrepancies to crop up and literally no way to systematically verify the source of the discrepancies. In short, the system greatly increased efficiencies and it was recognized that these discrepancies were the ‘cost’ of progress.

    However, the ‘brilliant’ minds at the investment banks soon realized that these “street name” securities could be manipulated to their benefit. In fact, these securities can be counted as the investment bank’s own collateral! When you pony up your money you are effectively giving the broker free money (actually they have the gall to charge you for the money you give to them). Due to the way the system works coupled with direct broker to broker transactions, the DTCC can never be sure that what its records have agree with what actually is occurring (the DTCC’s records are supposed to reflect reality, but there are too many holes and discrepancies for it to actually attain that goal). The end result is that the investment banks have had access to free capital via the ’system’. This was akin to the fractional reserve scheme granted the C-banks! Only better!

    Eventually, the Commercial Banks realized that there was no way for them to compete with this “street name” system. They wanted a piece of the action and eventually Glass-Steagall was repealed. The deal in all this was that they would provide more capital to the system and both I and C-banks would benefit. This was fine with the I-banks now because a large portion of the securities were now being held in street name. In other words, there capital base was leveling off and they could lever up much more. However, with the C-banks at the table, the I banks created collateralized securities based on C-bank assets. How did this help? First, with the banks assets now converted into securities, it allowed these assets to be held in “street name” and voila new capital and more leverage was available. As for the C-banks, they benefited by getting an immediate pay out against their portfolio via the proceeds from the sale of the collateralized securities. Money that they can then multiply via fractional reserve banking and this increased their available collateral and therefore their ability to leverage higher. The kicker is that these bank securities which had been privately/institutionally held could now be also sold to the masses. Not only did the C-banks increase their customer base, but the asset got to be used twice! First in the traditional sense by a buyer via the collateralization and secondly via the ownership privileges of having the security held in “street name”

    The party was on. I think if someone were to do a retrospective of the driving force behind many actions over the last 30+ years they would find that everything was geared to transport more collateral to financial institutions to allow them to lever it so that the country got the maximum use out of each dollar. 401Ks were another mechanism to feed collateral, drawing foreign investments expanded the available pool, and housing was collateralized to again provide more collateral, etc. My point is that, over these last decades, if an action could increase the collateral available to financial institutions then it bubbled into existence. If an action reduced capital available to financial institutions then it was cancelled. This is the real basis behind the ‘freedom’ allowed to reign in the markets. This directly led to an increase in the velocity of money, but it also disguised the degeneration of true wealth. Now the velocity is being greatly slowed and the guise is being lifted. What’s happening now is that collateral positions are being reinforced to shore up what never existed in the first place. Accounting constructs were invented to maximize the use of these new found sources of fictitious collateral, but what we now find is that the system is now putting real capital in its place so as to get reality to conform to the accounting positions!

    As a mater of fact, I think that in retrospect we are going to find out that the seed that this mess grew from is now a grown tree that is withering and bringing this all down. You see, all exchange traded securities are now required to be DRS (Direct Registration System) eligible. This has been an ongoing situation since 2006 and fully implemented in January of this year. This new system again was as obvious as its older sibling “street name” and had no rational argument against it. Yet, it was the beginning of the end of the feed the collateral to the financial institutions game. This was the first critical step in reducing capital available to financial institutions. You will find that all major/minor financial players now use DRS and it is the lowly small investor and 401K holder/mutual fund holder who still uses street name. This new system curbs the mismatches and discrepancies by having the issuer of the security directly involved in its movement about the financial system. Technically, the DTCC’s, the issuer’s , and the broker’s records should all agree! Because the communication is now directly between the issuer and the owner, there is less margin for hanky-panky. The legal owner and beneficial owner are again one and the same under DRS. Transparency is returning to the system and we are paying for the lack of it during the preceding decades. It is my firm belief that this single stroke will prove to be the straw that broke the camel’s back so to speak. Without this free and easy access to easy collateral, many positions had to be unwound which meant the securities most susceptible to a decrease in velocity were the ones to be hit first.

    In summary, Glass-Stegall was repealed because the C-banks wanted in on the I-banks access to free collateral and the C-banks wanted it repealed because they wanted access to the pent-up assets within the C-banks to again increase access to collateral. Both had to share in order to get what the other had.

    This brings us to our current situation where we are now stuck in the position of forcing reality to somehow agree with the book entries, or forcing the book entries to somehow agree with reality. Inflation if you are in the first camp and deflation if you are in the second camp. I don’t care what Obama, the FED, IMF, or whatever does, this is the battle that hey are waging. Personally, I would just prefer to adjust the book entries to agree with reality and move on. Mainly because I think that inevitably it is futile to do otherwise, but it’s not my sandbox.”

    BR,

    as you know, the DTCC should bea post onto itself, so few understand, even want to look at, that ugly beast, with an uglier history, it needs its own Spotlight..