Re: Wall Street Coverup and the repeal of the Glass-Steagall

[Paul Davidson <pdavidson@xxxxxxx>]

At 09:22 PM 4/28/03 -0400, you wrote:
> The big news today is the $1.5 billion Wall Street settlement which
> included findings of fraud against three banks - Citigroup's Salomon Smith
> Barney unit, Credit Suisse First Boston and Merrill Lynch. The regulators
> also released new evidence showing alleged conflicts of interest at other
> leading banks including Goldman Sachs and Morgan Stanley.
>
> The banks were accused of betraying investors by promising companies
> flattering stock research in exchange for investment banking work.


Of course under the Glass Steagall Act  stock researchers could not work in
a different branch of an investment bank,

As I have written elsewhere:

Following the financial shennangians -- inclkuding stock brokers selling
their :book" to the unsuspecting public -- that lead to the stock market
collapse, the New Deal institued several laws regulating financial markets
including:
the Glass Steagall Banking Act?. precluded banks from engaging in other
financial activities like investment banking or stock brokering or selling
insurance- and the Securities Act of 1933 which set up the SEC with the
responsibility for oversight and strong regulatory responsibilities over
financial markets, mutual funds and closed end investment companies, and
to  lay down the law to make sure companies? financial reports were reliable.

        Under the Glass Steagall act, for example, stock brokers could not
be employees of  corporations that had either banking or investment banking
divisions. Banks therefore could not help sell the shares of their
corporate customers to unsuspecting clients of a stock broker. But, after
25 years of unprecedented prosperity in the US,  starting in the 1970s
there was a philosophical change in Washington among Republicans and
Democrats alike. Government regulations were seen as the problem and
deregulation to a free market environment was seen as the solution.
[Remember Jimmy Carter deregulated the airlines with the promise of
creating an efficient and profitable air travel network ?where customers
obtained inexpensive fares while enjoying better service ? while  airlines
would be very profitable.. Those of you who have flown recently or own
stock in an airline corporation recognize the validity of these claims for
deregulation.  A sage once said ?Those who do not study history are
destined to repeat its errors?. These deregulators forgot that when the
railroads were deregulated, the ultimate result was a n almost
disappearance of passenger train service and the bankruptcy of all the
major train corporations.]

Since the 1970s both Carter and Clinton Democrats and Reagan and Bush
Republicans forgot some of the lessons of the Great Depression ? and
relaxed some financial and corporate governance regulations that resulted
in making it easier to repeat the errors of the historical past.

     Deregulation flourished under the Reagan and the President Bush
Administrations ? where politically appointed administrators of government
regulatory agencies were often advocates of deregulation.  This is like
putting the Happy Hooker in charge of the Vice Squad! (Remember Harvey Pitt
as Chair of the SEC)

 By the 1990s even a democratic President Clinton could support the repeal
of the Glass-Steagall Act  that prevented financial institutions such as
bankers from having corporate connections with, brokers, or underwriters,
etc.  Recently the media has shown that this movement towards one shop
banking and financial companies led to such scandals where the ?research
department? of a brokerage firm recommends to the public the buying of the
stock of the XYZ corporation while the XYZ corporation is a customer of the
banking division of the same corporation. The research analysts who were
promoting the XYZ stock to the general public at the same time were sending
emails to each other about what a ?dog? the XYZ corporation?s stock was.
        Enron was a strong supporter of the repeal of Glass Steagall. It
has been reported that some of the actions Enron took in the last years of
the 1990s ?which ultimately led to Enron?s bankruptcy and the destruction
of Enron employees?s retirement savings would have been illegal under the
Glass Steagall Act.


> Some were also accused of bribing their corporate clients' senior
> executives with shares of lucrative initial public offerings in return for
> business.


This is the efficiency of the free unregulated market place ---).

It also requires the banks to introduce structural reforms to insulate
research analysts from the influence of investment bankers.

How about reinstituting the Glass Streagall Act.



> These reforms are widely expected to end the multi-million dollar pay
> packets some analysts enjoyed in the bull market that were justified by
> the amount of investment banking business they brought in.


Dream on!

> But on Monday it emerged that CSFB had offered an equity analyst at rival
> JP Morgan Chase a package that could earn him up to $4m in the first year.


What else is new?
Paul
Paul Davidson
Editor, Journal of Post Keynesian Economics
Economics Department - 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone # (865) 974-4221
fax # (865) 974-1686
home phone  (865) 692-0802
http://econ.bus.utk.edu/davidsonextra/Davidson.html