Question: Recently, several readers have questioned the significance of the removal of the Glass-Steagall Act in 1999, the current financial meltdowns and the similarities between now and the short period leading up to the Great Crash of 1929. In my readings a number of years ago, I came upon the testimony of Mr. Robert Kuttner, who appeared before the U.S. Committee on Financial Services on Oct. 2, 2007. Would you consider reviewing that testimony and sharing your thoughts with our readers?
- Michael R. Scott
Answer: Thank you for pointing me to Robert Kuttner's October 2007 testimony (which readers can access by clicking here.)
By Don Miller, Contributing Writer, Money Morning-
A little more than one year after the economy hit bottom during the Great Recession, American companies are sitting on nearly $1 trillion in cash, a capital wave serving as a call to action for a long-moribund mergers-and-acquisition market.And history shows that a burst of M&A activity can be just what the doctor ordered for a stock-market rally that's looking for a booster shot: After a near-record-breaking rally in the first year of the current bull market, a flurry of dealmaking could be the catalyst that fuels Year Two of the rally - perhaps even pushing stock prices back to, or even past, their previous highs.
As a rule, an increase in M&A activity is a bullish sign for both the economy and the stock market, says Money Morning Contributing Editor Shah Gilani, who tracks deals for his own advisory service, The Capital Wave Forecast. As far as capital waves go, this surge in cash-driven deals is one of the most powerful around, and will have substantial spillover effects.
But the real culprit - the one that regulators won't talk about publicly - is the funding scheme banks employ to load themselves up on speculative loans. T his scheme - far removed from most investor radar screens - has played a major role in the banking sector's growing woes, and will continue to contribute heavily to bank failures in years to come.
The centerpiece to this risky strategy is a funding vehicle known officially as a "brokered deposit." However, due to the narcotic-like effects brokered deposits can have on a bank's balance sheet, industry insiders have adopted a more-appropriate moniker - referring to them as "hot money."
To discover more about the risks posed by "hot money,"
When members of the Senate Banking Committee recently asked Paul A. Volcker how regulators would identify banks engaged in excessive, high-risk trading, the former U.S. Federal Reserve chairman quipped: "It's like pornography - you know it when you see it."
Volcker wants to make it illegal for banks to engage in such high-risk activities as "proprietary trading" - when an institution trades for its own accounts, as opposed to making trades for customer accounts. But as Volcker's comment illustrates, the proposal - known as "Volcker's Rule" - the whole concept of high-risk trading is pretty hazy and hard to define.
Just as hazy is the definition of what now constitutes a bank.
Long gone are the elegant subtleties of form and finesse that once defined the bank. In recent years, the entire concept has been cheapened by the vulgar obviousness of grossly enhanced compensation schemes.
No company better embodies this transformation than Goldman Sachs.
America's Founding Fathers were afraid of any concentration of power in the republic. They were particularly afraid that banking interests could hijack our fledgling democracy.
And yet today, 234 years later, our Founding Fathers' worst fears have come true. Wall Street's stranglehold on the economy threatens our very prosperity, and the future of a truly democratic republic.
It's high time we address the truth about Wall Street's tyranny and set a course for a more secure economic future - one that's anchored by a safe banking system, not a system rigged by banks.
Many so-called experts would have you believe that it's impossible to "time" the markets. They're wrong. There is a secret to market timing. And, investors who know what to look for will be able to lock in extreme profits.
Two years ago, an associate of mine lost $100,000 because he didn't listen to me. A year ago, I saved a manufacturing company from the same scam. And just last week I saved a friend of mine $300,000. For several years now, a far-fetched but seemingly plausible investment opportunity has been wreaking havoc across the […]
[Editor's Note: Shah Gilani, a retired hedge fund manager and noted expert on the global credit crisis, predicted this developing FHA debacle in a July 2008 Money Morning essay.] Is the government creating another subprime-mortgage bubble? The first time around, the three-headed federal serpent - the Bush administration, the Treasury Department and the U.S. Federal […]
When it comes to the U.S. credit crisis, we’ve all heard the numbers. The stock market decline wiped out $7 trillion in shareholder wealth. It forced the federal government to commit to $11.6 trillion in bailout programs and stimulus spending. And it’s led to the longest U.S. downturn since the Great Depression. Everyone also knows […]
A new Federal Deposit Insurance Corp. (FDIC) plan to offload busted banks to vulture investors strikes an uneven balance between private equity players and public taxpayers and may inadvertently sow the seeds for another round of bank failures. The FDIC currently insures bank depositors up to $250,000 – up from $100,000 prior to the financial crisis. […]
In just a few short years, exchange-traded funds have become the hottest item on the stock-market menu, with U.S. ETFs alone now holding more than $600 billion of investors’ money. While that’s dwarfed by the $9.3 trillion managed by non-ETF mutual funds, exchange-traded funds have an allure that conventional funds seem to lack: In 2008, […]
At its most basic level, the U.S. Federal Reserve's so-called "exit strategy" is designed to let government bailout and liquidity programs unwind on their own, as markets return to a state of "normalcy." But what investors don't realize is that without an exit strategy that includes plans for unwinding insolvent mortgage giants Fannie Mae (NYSE: […]
Fannie Mae (NYSE: FNM), originally designated as a "government-sponsored enterprise" (GSE), was born in 1938 as a child of U.S. President Franklin Delano Roosevelt's Great-Depression-fighting "New Deal," and was designed to stimulate mortgage lending. Fast-forward 30 years. In 1968, Fannie Mae shares were sold to the public to help finance the Vietnam War. Freddie Mac […]
If Goldman Sachs Group Inc.'s (NYSE: GS) blowout second-quarter earnings demonstrated one thing, it's that the new "equity-merchant-banking model" - the replacement for the Wall Street investment bank of pre-financial-crisis days gone by - is where financial-sector investors will make their money for years to come. And there are two clear frontrunners that investors will […]
Just when you thought the U.S. banking system had regained its footing, the reality is that a carefully woven federal-government PR campaign may actually be masking the next phase of the worst financial crisis since the Great Depression. Indeed, it’s what’s just out of sight that has some analysts and economists scared to death. To […]