A funny thing happened in 2012 after Andrew Ross Sorkin, a financial writer at the New York Times, wrote his spectacularly false narrative telling readers that the repeal of Glass-Steagall Act had nothing to do with the crash because problem firms like Lehman Brothers, Merrill Lynch and AIG didn’t own insured commercial banks — which would have been prohibited under the Glass Steagall Act, had it not been repealed in 1999. In fact, all three of the firms did, indeed, own banks insured by the FDIC at the time of the crash.
We figured that Sorkin had just made an error, or, well, three monster errors, so we wrote to his editor. We heard nothing. We wrote to the New York Times public editor who is supposed to uphold the integrity of the paper. Nothing. We wrote to the publisher. Nothing. To this very day, the errors remain in the Sorkin article. When the so-called paper of record allows three outrageously wrong errors to persist as fact, it doesn’t look like sloppy journalism, it looks like a conspiracy to deny the public an honest narrative.
Sorkin’s lie has since been regurgitated by two other writers at the New York Times:Paul Krugman and William Cohan. The lie has also spread to President Obama and Presidential candidate, Hillary Clinton, as a cover for why they won’t buck Wall Street and work to reinstate this critically needed legislation as Senators Elizabeth Warren, John McCain, Bernie Sanders and dozens of others in Congress are demanding. Marcy Kaptur’s legislation in the House of Representatives to restore the Glass-Steagall Act has 67 cosponsors.
The New York Times seems disingenuous at best and conspiratorial at worst: admitting in an editorial that it blew it big time in advocating for the repeal of Glass-Steagall while hiding in the wings as its writers are allowed to push a false narrative that the New York Times refuses to correct.
The editorial page editors wrote on July 26, 2012:
“While we are on this subject, add The New York Times editorial page to the list of the converted. We forcefully advocated the repeal of the Glass-Steagall Act. ‘Few economic historians now find the logic behind Glass-Steagall persuasive,’ one editorial said in 1988. Another, in 1990, said that the notion that ‘banks and stocks were a dangerous mixture’ ‘makes little sense now.’
“That year, we also said that the Glass-Steagall Act was one of two laws that ‘stifle commercial banks.’ The other was the McFadden-Douglas Act, which prevented banks from opening branches across the nation.
“Having seen the results of this sweeping deregulation, we now think we were wrong to have supported it.”
Last week, the opinion page of the Bloomberg News operation joined the factually-challenged chorus. Paula Dwyer wrote about the financial crash in 2008:
“Here the main actors were Lehman Brothers, Bear Stearns, Goldman Sachs, Merrill Lynch and Morgan Stanley — all free-standing investment banks with no commercial banking units. Again, Glass-Steagall played no role.”
What is particularly preposterous about this is that almost everyone on Wall Street knew that Lehman Brothers for years prior to the crash had been peddling insured certificates of deposits from its banking unit in order to raise cheap cash. Surely someone at the vast Wall Street news and data gathering behemoth known as Bloomberg L.P. should have spotted this obvious error.
Lehman Brothers owned two FDIC insured banks, Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank. Together, they held $17.2 billion in assets as of June 30, 2008, 75 days before Lehman went belly up. Merrill Lynch owned three FDIC insured banks. At a conference held at the National Press Club in 2003, Merrill Senior VP, John Qua, talked about Merrill’s sprawling bank empire:
“Merrill Lynch conducts banking in the United States through two depository institutions – Merrill Lynch Bank USA, a Utah industrial loan corporation; and Merrill Lynch Bank and Trust, a New Jersey state non-member bank. We also own a federal savings bank that offers personal trust services to our clients. And we conduct significant banking activities outside the United States through banks in London, Dublin, Switzerland, and elsewhere. The combined balance sheet of our global banks is approximately $100 billion.”
Bear Stearns owned Bear Stearns Bank Ireland, which was swallowed up by JPMorgan after Bear Stearns collapsed in March 2008. JPMorgan noted in 2012: “It is the only EU passported bank in the non-bank chain of JPMorgan and provides the firm with direct access to the European Central Bank repo window. It has also been added to the JPMorgan Jumbo issuance programs to issue structured securities for distribution outside the United States.”
Morgan Stanley, with its thousands of stock brokers, owned the Morgan Stanley Dean Witter Bank , also insured by the FDIC, and now renamed the Morgan Stanley Bank, National Association. As of June 30, 2015, this insured bank has $126.6 billion in assets, according to the FDIC.
The only firm that Paula Dwyer got right was Goldman Sachs. But today, Goldman has jumped on the bandwagon with its own insured bank, Goldman Sachs Bank USA with $122.6 billion in assets.
There’s a quick and simple way to blow a mile wide hole through all of these false narratives. As the Government Accountability Office (GAO) reported and Senator Elizabeth Warren stated in the Senate Banking Committee on March 3 of this year, Citigroup (the largest insured bank in the U.S. in 2008 in terms of assets), Merrill Lynch (which owned insured banks) and Morgan Stanley (also owner of an insured bank) required a cumulative total of more than $6 trillion in secret loan assistance from the Federal Reserve during the financial crash. Warren stated:
“During the financial crisis, Congress bailed out the big banks with hundreds of billions of dollars in taxpayer money; and that’s a lot of money. But the biggest money for the biggest banks was never voted on by Congress. Instead, between 2007 and 2009, the Fed provided over $13 trillion in emergency lending to just a handful of large financial institutions. That’s nearly 20 times the amount authorized in the TARP bailout.
“Now, let’s be clear, those Fed loans were a bailout too. Nearly all the money went to too-big-to-fail institutions. For example, in one emergency lending program, the Fed put out $9 trillion and over two-thirds of the money went to just three institutions: Citigroup, Morgan Stanley and Merrill Lynch.
“Those loans were made available at rock bottom interest rates – in many cases under 1 percent. And the loans could be continuously rolled over so they were effectively available for an average of about two years.”
Citigroup, not Bear Stearns or Lehman Brothers, was the institution that first undermined confidence on Wall Street and set the crisis in motion. That fact is underscored by the documentation from the GAO that Citigroup began its secret loans from the Fed on December 1, 2007 and they continued through at least July 21, 2010, aggregating to a total of $2.513 trillion. Bear Stearns didn’t fail until March of 2008 followed by Lehman on September 15, 2008.
The Federal Reserve, the very institution that allowed the merger of Citibank with an insurance company (Travelers Group), an investment bank (Salomon Brothers), a retail stock brokerage firm (Smith Barney) and 2,000 operating subsidiaries in 1998 to form Citigroup – in violation of the Glass-Steagall Act and the Bank Holding Company Act of 1956 which, respectively, barred banks from merging with securities firms and insurance companies from merging with insured banks – propped up this insolvent bank during the crisis with massive amounts of secret loans, to avoid the embarrassment of its lax regulation and permitting the Frankenbank merger in the first place.
At the time of the crisis, Citigroup had $2 trillion in assets on its balance sheet and $1.2 trillion off its balance sheet. It was the insolvent elephant in the crisis, receiving the following from the taxpayer: $45 billion in TARP funds, over $300 billion in asset guarantees and $2.513 trillion in cumulative loans from the Fed.
At the time the Glass-Steagall Act was repealed on November 12, 1999 with President Bill Clinton signing the Gramm-Leach-Bliley Act, the United Stated had enjoyed 66 years of financial stability under the legislation. It had been enacted in 1933 in the wake of the 1929 crash and the realization by Congress that corruption on Wall Street was systemic and the nation’s deposit taking banks that protect the life savings of average Americans could not be under the same roof or affiliated with high-risk speculators and the criminally-inclined on Wall Street.
The premise that high-risk gamblers cannot be adequately policed is as true today as it was in 1933. In 1995, one derivatives trader, Nick Leeson, blew up the British bank, Barings, by hiding losses of $1.3 billion. In 2012, JPMorgan Chase’s London derivatives traders were trading with insured deposits from the U.S. bank, eventually owning up to $6.2 billion in losses. We’ll never know if JPMorgan could have been another Barings because the infamous London Whale trading was exposed by Bloomberg News and the Wall Street Journal and alerted regulators. Reporters apparently knew more about the trading than JPMorgan CEO, Jamie Dimon, who initially called it a “tempest in a tea pot.”
The U.S. Senate’s Permanent Subcommittee on Investigations conducted an in-depth investigation of the matter and held hearings. The Chairman of the Subcommittee at the time, Senator Carl Levin, stated that JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.”
Thanks to the repeal of Glass-Steagall, JPMorgan Chase now owns one of America’s largest insured depository banks. And, according to this February report from the U.S. Treasury’s Office of Financial Research, JPMorgan Chase and the resuscitated Citigroup now pose the greatest interconnected risk to the U.S. financial system – seven years after the greatest financial crash since the Great Depression. In May of this year, both admitted to a criminal felony charge involving the rigging of foreign currency trading.
If that thought is not sobering, try this on for size. According to the Office of the Comptroller of the Currency, the regulator of national banks, as of the second quarter of this year, just four large commercial banks represent 91.1 percent of the total notional amount of derivatives contracts, or a total of $180.29 trillion dollars held in just four banks. (That’s trillion with a “t.”) Those commercial banks are all affiliated with stock underwriting and derivatives trading: JPMorgan Chase, Bank of America, Citibank (part of Citigroup), and Goldman Sachs.
Editor’s Note: For our readers’ enjoyment, we filed a Freedom of Information Act request and obtained video from the June 25 and June 26, 1998 hearings conducted by the Federal Reserve in the lead-up to repealing Glass-Steagall. The first video is your humble editor explaining to the “experts” what was going to happen if they allowed the Citigroup merger to proceed and repeal Glass-Steagall. The second video is Chuck Prince, eventually to become Chairman and CEO of Citigroup as it teetered toward the largest taxpayer bailout in U.S. history, explaining to the Federal Reserve officials how the bank would always remain strong and viable.