Amanda Balzastones gives you a crash course in what you need to know.
September 20, 2008 (apj.us) – Remember the Glass-Steagall Act of 1933? It:
- created definition of types of banking institutions (for example, Commercial Banks, Investment Banks);
- SEPARATED these banking institutions from each other to eliminate conflicts and criminal collusion, and;
- created the foundation for our current regulatory design overseeing these newly separated institutions.
Check out Wikipedia for quick information, although not all information there has been verified for accuracy. You will nevertheless get a quick general idea of the act nonetheless.
The Glass-Steagall Act was partially repealed in 1980, and then mostly repealed in 1999 (in a bi-partisan effort), thanks to the tenacious decade-plus lobbying of Sandy Weill, who – you remember – was able to put Citigroup together when the repeal passed.
Congress FORGOT to restructure the regulatory agencies to deal with the new financial structures created by the 1999 repeal. This is why you now see the Federal Reserve and the Treasury scrambling for absolute oversight power, as there is no formal oversight for these institutions in their current form.
CONGRESS FORGOT. Do not forget this fact no matter what you hear from the media!
The result?
You know about the sub-prime debacle, but what about the tens of trillions of dollars of unregulated derivatives that were then created, valued and then highly leveraged with NO ONE WATCHING? No bank can estimate their total exposure to these viral derivatives, nor can the government put numbers on them.
The last estimates of the unregulated derivatives that I read was $45 TRILLION to $61 TRILLION; the former of the two estimates appeared in the New York Times in February 2008.
Here is a quick explanation of our government's part in this (and, as a sidebar, there are many, many parts – but this is significant). Our government does not understand finance, or study history. Oh yeah, that's right – most of them are lawyers! What was it the character Dick said in Shakespeare's Henry VI about lawyers? Check out Act IV, Scene II.
Anyway, here are some quick thoughts I gave my clients over 7 months ago about what to start doing. It scared them, but they are faring this storm pretty well, pretty flush with cash, albeit we surely did not sell all we could have. For what it is worth, I share it with you:
- Shore up your cash.
- Tone down your lifestyle.
- Put off large purchases unless necessary or you have an embarrassing surplus of cash.
- Love your family and friends, and stick together.
Picture this financial crisis like Hurricane Katrina over New Orleans.
When the storm hit, most residents were gone – those that were left were able to react fairly successfully as utility services disappeared and structural damage happened. They were able to survive, making quick fixes wherever possible and even more during the eye of the storm, and then battening down once again for the second part of the relentless hurricane.
New Orleans survived the immediate storm, though the damage was severe and not to be discounted or downplayed; nevertheless, the foundation of the area was intact and it could have been rebuilt in a year or two with concerted effort and appropriate funding. People's homes were damaged, but most were intact. Businesses were damaged and in disarray, but were able to restore themselves in most cases.
Then, a few hours after the storm had passed and there were sighs of "we made it", the levee broke, and all was lost – in a moment. The sand bags and patches didn't hold. The foundation was gone.
Our government leaders now find themselves in similar circumstances, throwing sandbags on the levee, trying to patch the gushes as quickly as they can but not always successfully. Merrill Lynch started to go while Lehman Brothers fell. They only had time to save one – they picked Merrill Lynch.
The US government has now created a sort of "eye of the storm" by putting the short sellers at bay for 10 days. They saved Fannie, Freddie, Bear Stearns, Merrill. They are creating another agency mirroring the Resolution Trust Corporation to buy the bad mortgage junk removing it from the markets and then holding the securities until they pay off. They guaranteed $4 trillion in mutual fund and other regulated money markets. For the next few days, the seizing up of cash will take a breath. The markets have been manipulated upward to provide the oxygen.
But I think we still have to deal with the second part of this storm, which will be the remainder of the leveraged derivatives unraveling: tens of trillions of unregulated dollars, values crashing, with loans against the crashing values defaulting, and the institutions currently holding them unable to even estimate their collateral liability to these securities due to their inherent intertwining intricacies. The financial system will heave again.
We don't know yet if the US government, or the global governments with the world's financial players, have shored up that levee enough to hold back the devastation after this next heave..
So brace yourself and your family just in case. And don't expect roses for a few years even if the levee holds – live with the wild daisies and be happy.
Don't let this election slip by with your thinking this was all Wall Street, although their carelessness is immeasurable. Listen to both candidates, hard, and see who can explain best what the causes of this crisis have been and, between all the mudslinging, who can best start the draining and repair if the levee does break.
Quite frankly, since you didn't hear about this until it actually happened, and are now watching the financial and governmental culprits grab the sandbags and run to plug the black holes of illiquidity, it would seem logical that neither side knows what the hell is going on, and both are going through crash courses with their advisors, not to mention their advisors going through crash courses.
Too bad we don't have Will Rogers this time around.
Luck to all. Stay healthy… AND VOTE.
Amanda Balzastones is a New York City-based senior executive with one the nation's largest banking and investment firms.