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Global Financial and Economic Crises

US Financial Deregulation 1970s to 2001

Project: Global Financial and Economic Crisis 2007-Present
Open-Content project managed by KJF, mtuck

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Rep. Fernand J. St. Germain (D-RI), with 28 co-sponsors, introduces HR 6267, the “Net Worth Guarantee Act” officially entitled “A bill to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans.” [Library of Congress, 5/19/2008] As introduced, the bill would create a fund for loans to those troubled banks and savings and loans institutions that would have to be put into receivership if their condition deteriorates to a small degree from the bill’s qualifying requirements. The provisions are as follows:
bullet Amendments to the Federal Deposit Insurance Act (which regulates the Federal Deposit Insurance Corporation, FDIC), the National Housing Act (which regulates the Federal Home Loan Bank Board, FHLBB), and the Federal Credit Union Act (the National Credit Union Administration Board, NCUAB) so that the regulated bodies can guarantee the net worth of qualified insured institutions.
bullet Requirements that a qualifying depository institution be one that is threatened with insolvency, as measured by very low net worth and a recent trend of losses; that the institution be one that mainly serves the residential mortgage industry, as measured by the share of its loans or other assets that are held in or collateralized by residential mortgages or real estate; and that it continue in this service under the net worth guarantee, as measured by the share of its new deposits that it devotes to certain types of mortgages.
bullet Rules for determining the initial amount of the guarantee, and for either extending or phasing out the assistance to a given institution. Extensions after two years are to be contingent upon a showing that “certified continued earnings losses are caused by general market conditions and not by the actions of the institution.”
bullet Creation of a Net Worth Guarantee Account in the US Treasury in the amount of $8.5 billion to cover the payment of any guarantees.
bullet A sunset date for new extensions of guarantees.
bullet An oversight process in which the three bank regulating bodies report quarterly to Congress on their activities in granting guarantees, and the comptroller of the currency provides semiannual audits. [Library of Congress, 5/14/2008; Library of Congress, 5/14/2008]
Fate in the House - The Net Worth Guarantee Act passes the House of Representatives on May 20, 1982, with amendments that extend the coverage to qualifying State-chartered commercial banks, and qualifying national banks whether or not they are members of the FDIC; that add investment in residential housing co-operative stock and mortgages on multifamily rental projects to the qualifying activities for sustaining the guarantee; that alter the exit path from the program; that add compliance with community credit provision requirements under the Community Reinvestment Act of 1977; that make the Treasury senior to holders of existing subordinated debt of any guaranteed bank that later winds up in receivership; and that clearly give the sunset date as September 30, 1984. [Library of Congress, 5/14/2008; Library of Congress, 5/14/2008; Library of Congress, 5/14/2008]
Eventual Fate - With substantial amendments that address other banking regulatory issues besides the net worth of depository institutions, the bill finally passes the Senate under several short titles, of which the primary is “Depository Institutions Amendments of 1982,” superseding S.2879 sponsored by Sen. E.J. “Jake” Garn. The bill is enacted with the signature of President Ronald Reagan on October 15, 1982 as the Garn-St. Germain Depository Institutions Act of 1982. [Library of Congress, 5/14/2008]

Entity Tags: Charles Schumer, Steny Hoyer, Fernand J. St. Germain

Category Tags: 1980s Savings and Loan Crisis, US Financial Deregulation

The House Banking Committee approves H.R. 6267, the Net Worth Guarantee Act, by a vote of 25 to 15, with three abstaining. The approval is the first action of Congress to provide direct and specific financial assistance to troubled thrifts, although by a reported estimate in the New York Times, most of the nation’s 4,500 thrift depositories are “losing money” by this time. [New York Times, 5/12/1982, pp. D1, D13] Voting on the bill, which was introduced into the House by Representative and committee chairman Fernand J. St. Germain (D-RI) on May 4 (see May 4-October 15, 1982), is largely partisan: Republican members generally favor an alternative proposal by Rep. Chalmers P. Wylie (R-OH) that differs in qualifying firms at a higher current net worth, and in allowing regulators discretion over this qualification, although debate on the Wylie amendments is short-circuited by a motion to table the amendment made by Rep. Frank Annunzio (D-IL). [New York Times, 5/12/1982, pp. D1, D13] The Wylie provisions form the basis for the bill S.2531 which is introduced into the Senate on May 14, 1982 (see May 14, 1982). [New York Times, 5/12/1982, pp. D1, D13; Library of Congress, 5/19/2008]

Entity Tags: House Banking Committee, Chalmers P. Wylie, Fernand J. St. Germain, Frank Annunzio

Category Tags: US Financial Deregulation

The Capital Assistance Act of 1982 is introduced by Sen. E.J. (Jake) Garn (R-UT) and three co-sponsors under the title, “A bill to provide flexibility to the Federal Savings and Loan Insurance Corporation and the Federal Deposit Insurance Corporation to deal with financially distressed institutions.” [Library of Congress, 5/20/2008; Library of Congress, 5/20/2008] The bill provides the following:
bullet Amendments to the National Housing Act and the Federal Deposit Insurance Act so that the Federal Savings and Loan Insurance Corporation (FSLIC) and the Federal Deposit Insurance Corporation (FDIC) may buy capital certificates from institutions that they regulate, for the purpose of either increasing or maintaining the capital of those institutions.
bullet Criteria that qualifying institutions must meet to receive this assistance. The criteria differ from those required by the Net Worth Guarantee Act importantly in requiring a prior net worth of three percent of assets, instead of two percent in the House version.
bullet Parameters of the initial capital certificates, and provision for the subsequent modification of those parameters at the discretion of the FSLIC and FDIC.
bullet Restriction of aid to cases in which this course of action is less costly than liquidation of the institution would be. [Library of Congress, 5/20/2008] The most important difference between the Capital Assistance Act (CAA) and the Net Worth Guarantee Act (NWGA) is that the CAA is meant to avoid the need for a Congressional appropriation of funds. Instead of establishing a Treasury account to be drawn on to fund the assistance, as does the NWGA, the CAA would permit the assisting agencies, FSLIC or FDIC, to give the thrifts promissory notes in exchange for the thrifts capital certificates. [New York Times, 5/15/1982] The Capital Assistance Act of 1982 is evidently the bill that Rep. Wylie promised several days previously would be introduced into the Senate, on the occasion of the approval by the House Banking Committee of the Net Worth Guarantee Act without the amendments that Wylie had offered for that bill. The new bill in the Senate has several features of Wylie’s amendments. [New York Times, 5/12/1982] According to Sen. Garn, Treasury Secretary Donald T. Regan also contributed to the new bill.
Eventual Fate - On August 19, while under consideration in the Senate Banking Committe, the key provisions of S.2531 will be incorporated into S.2879 and passed to the floor of the Senate the next day. Bill S.2879 will be passed by the Senate on September 24, and ultimately incorporated into H.R.6267, the Garn-St Germain Depository Institutions Act of 1982. [Library of Congress, 5/20/2008; Library of Congress, 5/20/2008]

Entity Tags: Capital Assistance Act of 1982, Donald Regan, E. J. (“Jake”) Garn, Federal Deposit Insurance Corporation, Chalmers P. Wylie, Federal Savings and Loan Insurance Corporation, National Housing Act of 1933, Federal Deposit Insurance Act, Fernand J. St. Germain

Category Tags: US Financial Deregulation

Congress approves legislation which repeals the Glass-Steagall Act of 1933, greatly reducing regulation of Wall Street and clearing the way for the cross-ownership of banks, securities firms and insurers. The measure is approved in the Senate by a vote of 90 to 8 and in the House by 362 to 57. President Bill Clinton will sign the Gramm-Leach-Bliley Act into law on November 12th, 1999. [Library of Congress, 3/27/2009] The New York Times reports that passage of the bill elicits optimism that the measure will enhance American competitiveness and ensure American dominance in the global financial marketplace, as well as concerns that deregulation will lead to a future financial meltdown. The Times further notes that experts predict the new law will result in a wave of large financial mergers.
Optimism over Passage of the Measure - Treasury Secretary Lawrence H. Summers praises the legislation, declaring that the law “will better enable American companies to compete in the new economy.” Among others praising passage of the measure:
bullet Senator Phil Gramm (R-TX), sponsor of the bill, says: “We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.”
bullet Rep Jim Leach (R-IA) remarks: “This is a historic day. The landscape for delivery of financial services will now surely shift.”
bullet Senator Charles E. Schumer (D-NY) says, “There are many reasons for this bill, but first and foremost is to ensure that US financial firms remain competitive.”
bullet Senator Bob Kerrey (D-NE) says, “The concerns that we will have a meltdown like 1929 are dramatically overblown.”
Warnings over Implications of the Measure - The measure provokes warnings from a handful of dissenters that “the deregulation of Wall Street would someday wreak havoc on the nation’s financial system,” according to the Times. Among the dissenters are:
bullet Senator Byron L. Dorgan (D-ND), who says: “I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010;”
bullet Representative Maxine Waters (D-CA), who remarks that the bill is “mean-spirited in the way it had tried to undermine the Community Reinvestment Act;”
bullet Senator Paul Wellstone (D-MN), who says: “Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.” [New York Times, 11/5/1999]

Entity Tags: Clinton administration, Byron L. Dorgan, Barney Frank, Bob Kerrey, Charles Schumer, William Jefferson (“Bill”) Clinton, US Congress, Jim Leach, Phil Gramm, Gramm-Leach-Bliley Act, Larry Summers, Paul Wellstone, Maxine Waters, Glass-Steagall Act

Category Tags: US Financial Deregulation, Pre-2001 Policies and Actions, Commentaries and Criticisms

Fox News senior anchor Brit Hume and Fox analyst William Bennett both make the false claim that former President Franklin D. Roosevelt wanted to replace Social Security with private accounts. In fact, Roosevelt, who implemented Social Security, was in favor of “voluntary contributory annunities” to supplement Social Security benefits, but never proposed replacing Social Security with private money. Hume and Bennett both support President Bush’s plan to partially “privatize” Social Security; Bush himself has asserted, equally falsely, that Roosevelt supported privatization. On Fox’s political talk show Hannity and Colmes, Bennett tells viewers: “Franklin Delano Roosevelt, the guy who established Social Security, said that it would be good to have it replaced by private investment over time. Private investment would be the way to really carry this thing through.” That same evening, Hume tells his audience: “In a written statement to Congress in 1935, Roosevelt said that any Social Security plans should include, quote, ‘Voluntary contributory annuities, by which individual initiative can increase the annual amounts received in old age,’ adding that government funding, quote, ‘ought to ultimately be supplanted by self-supporting annuity plans.’” Hume fails to point out that Roosevelt was not talking about “supplant[ing]” Social Security with any “self-supporting annuity plans,” but instead was talking about a different fund that provided pension benefits to Americans too old (in 1935) to contribute payroll taxes to Social Security. In 1935, Edwin Witte, the director of the Committee on Economic Security, told Congress flatly that voluntary accounts were intended as a “separate undertaking” meant to “supplement” the compulsory system, not replace it. [Media Matters, 2/4/2005] Days before the Fox broadcasts, Roosevelt’s grandson James Roosevelt Jr., a former Social Security associate commissioner, noted that “Bush invoked the name of my grandfather… as part of his campaign to privatize Social Security,” and added, “The implication that FDR would support privatization of America’s greatest national program is an attempt to deceive the American people and an outrage.” [Boston Globe, 1/31/2005] Liberal pundit Al Franken calls on Hume to resign over his historical distortions; MSNBC host Keith Olbermann calls Hume’s statements “premeditated, historical fraud,” and Roosevelt Jr. says that “outrageous distortion… calls for a retraction, an apology, maybe even a resignation.” [Media Matters, 2/18/2005] Influential conservative blogger Glenn Reynolds will acknowledge that Roosevelt was not advocating for the privatization of Social Security, instead noting that Roosevelt’s plan “would have involved, essentially, a sort of government-supplied 401k plan.” [Glenn Reynolds, 2/4/2005]

Entity Tags: George W. Bush, Al Franken, Brit Hume, Franklin Delano Roosevelt, William J. Bennett, Fox News, Glenn Reynolds, Keith Olbermann, James Roosevelt Jr

Timeline Tags: Domestic Propaganda

Category Tags: US Financial Deregulation, Bush Policies and Actions, Commentaries and Criticisms

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