stained glass

O v a d y a F u n d i n g G r o u p I n t e r n a t i o n a l , I n c . © C o p y r i g h t

Stained Glass –or How We Got Where We Are?

Over the past couple of years, many clients and associates have asked us “how did we get where we are”???

Rising gold prices are a cold sore on the lip of central bankers. In the world of paper money, it’s a clear sign something’s not right

Central bankers are the keepers of the keys to the kingdom. The kingdom, however, is on the edge of bankruptcy and in danger as never before. Comparisons are now being made to the Great Depression of the 1930s. The comparisons, however, are just that.

In some ways, the situation is similar. In many ways, it is not. In a very fundamental way, the conditions are much worse. The systemic strains on the global financial system are today much more profound than even during the Great Depression.

One reason banks are losing money is the repeal nine years ago of the 1933 Glass‐Steagall Act, which separated securities and commercial and investment banking after excessive risk taking contributed to the Great Depression

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage‐backed securities and collateralized debt obligations and establish so‐called structured investment vehicles, or SIVs, that bought those securities.


A short “history lesson” – or – Don’t we ever learn?:

When William Jefferson Clinton first ran for office, he neglected to tell us that he would mount, nearly single handedly, a campaign to change the very law that has protected the Nation’s economic and banking community since just after the Great Depression. Why the man launched an unprecedented lobby effort on Congress to basically repeal such a law is completely enigmatic to us.

What law was established decades ago that was changed under the Clinton White House? The Glass‐Steagall Act of 1933. Like most Americans, you have probably never even heard of it….

(the below is quoted from Wikipedia – normally not the most reliable source, but we have direct knowledge of the facts, and this is a very well written and accurate article – bold type, underline, and italics added for emphasis and commentary):

“The GlassSteagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.[citation needed] Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999 by a bipartisan, conference committee version of the GrammLeachBliley Act signed by President Bill Clinton.[1][2]

Contents

• 1 Background • 2 First Glass‐Steagall Act • 3 Second Glass‐Steagall Act o 3.1 Impact on other countries • 4 Repeal of the Act • 5 References • 6 External links


Background

Senator Glass, co‐sponsor of the bill that became the Glass‐Steagall Act, and Senator Robinson:

Mr. Glass: Here [section 21] we prohibit the large private banks whose chief business is investment business, from receiving deposits. We separate them from the deposit banking business.

Mr. Robinson of Arkansas: That means if they wish to receive deposits they must have separate institutions for that purpose?

Mr. Glass: Yes.

The Court also rejected the argument that a bank and its holding company should be treated as a single entity for the purposes of sections 16 and 21, stating that the structure of the Glass‐Steagall Act itself indicates the contrary. Id. at n. 24.

“ Although the Supreme Court in Board of Governors v. ICI did not consider section 21 in the context of a bank and its subsidiary, we are of the opinion that the Court's conclusion regarding section 21 and holding company affiliates is equally applicable in this instance. Thus, the FDIC does not believe that it would be warranted in extending the reach of the prohibitions of section 21 of the Glass‐Steagall Act to bona fide subsidiaries of insured nonmember banks. The FDIC intends, however, to continue to monitor closely developments related to the securities activities of bank subsidiaries. ”

[3]

Two separate United States laws are known as the Glass‐Steagall Act. The Acts (Glass & Steagall) were both reactions of the U.S. government to cope with the collapse of a large portion of the American commercial banking system in early 1933. While many economic histories attribute the collapse to the economic problems which followed the Stock Market Crash of 1929 it


is clear that the U.S. banking collapse of 1933, which came three and a half years later, could only have been partially the result of the stock market collapse in October 1929.

The Republican Hoover administration had lost the November 1932 election to Franklin Delano Roosevelt, but his administration did not take office until March 1933. The lame duck Hoover Administration and the incoming Roosevelt Administration could not, or would not, coordinate actions to stop the run on banks affiliated with the Henry Ford family that began in Detroit Michigan in January 1933. The Federal Reserve chairman Eugene Meyer was equally ineffectual.

Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.

Congressional Research Service Summary:

In the nineteenth and early twentieth centuries, bankers and brokers were sometimes indistinguishable. Then, in the Great Depression after 1929, Congress examined the mixing of the “commercial” and “investment” banking industries that occurred in the 1920s. Hearings revealed conflicts of interest and fraud in some banking institutions’ securities activities. A formidable barrier to the mixing of these activities was then set up by the Glass Steagall Act.[4]

First GlassSteagall Act

The first Glass‐Steagall Act was the first time currency (non‐specie, paper currency etc.) was permitted to be allocated for the Federal Reserve. In addition, the G.S.A. separated investment banking from commercial banking, in effect curbing speculation. The resulting FDIC (Federal Deposit Insurance Corporation) insured all bank deposits up to $5000.

The Glass Steagall Act, as well as FDIC, CCC (Civilian Conservation Corps), Emergency Banking Act, and the TVA (Tennessee Valley Authority) were all products of Roosevelt’s 'Hundred Days', Roosevelt's first one hundred in office.[5]


Second GlassSteagall Act

The second Glass‐Steagall Act, passed on 16 June 1933, and officially named the Banking Act of 1933, introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Company for insuring bank deposits.[citation needed]

Literature in economics usually refers to this simply as the Glass‐Steagall Act, since it had a stronger impact on US banking regulation.[citation needed]

Impact on other countries

The Glass‐Steagall Act has had influence on the financial systems of other areas such as mainland China which maintains a separation between commercial banking and the securities industries.[6][7]

Repeal of the Act

See also Depository_Institutions_Deregulation_and_Monetary_Control_Act passed in 1980, the Garn‐St._Germain_Depository_Institutions_Act deregulating the Savings and Loan industry in 1982, and the Gramm‐Leach‐Bliley Act in 1999.

The bill that ultimately repealed the Act was introduced in the Senate by Phil Gramm (R‐TX) and in the House of Representatives by James Leach (R‐IA) in 1999. The bills were passed by a 54‐44 vote along party lines with Republican support in the Senate[8] and by a 343‐86 vote in the House of Representatives[9]. Nov 4, 1999: After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bipartisan bill resolving the differences was passed in the Senate 90‐8‐1 and in the House: 362‐57‐15. Without forcing a veto vote, this bipartisan, veto proof legislation was signed into law by President Bill Clinton on November 12, 1999. [10]

The banking industry had been seeking the repeal of GlassSteagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the case for preserving GlassSteagall and the case against preserving the act.[11]

The repeal enabled commercial lenders such as Citigroup, the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage‐backed securities and collateralized debt obligations and establish so‐called structured investment vehicles, or SIVs, that bought those securities.[citation needed] Citigroup played a major part in the repeal. Then called Citicorp, the


company merged with Travelers Insurance company the year before using loopholes in Glass‐Steagall that allowed for temporary exemptions. With lobbying led by Roger Levy, the "finance, insurance and real estate industries together are regularly the largest campaign contributors and biggest spenders on lobbying of all business sectors [in 1999]. They laid out more than $200 million for lobbying in 1998, according to the Center for Responsive Politics..." These industries succeeded in their two decades long effort to repeal the act.[12]

The argument for preserving GlassSteagall (as written in 1987):

1. Conflicts of interest characterize the granting of credit – lending – and the use of credit – investing – by the same entity, which led to abuses that originally produced the Act

2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.

3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.

4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).

The argument against preserving the Act (as written in 1987):

1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.

2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.

3. The securities activities that depository institutions are seeking are both low‐risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.


4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[13]

References

1. ^ "The Repeal of Glass‐Steagall and the Advent of Broad Banking". 2. ^ "GRAMM'S STATEMENT AT SIGNING CEREMONY FOR GRAMM‐LEACH‐BLILEY ACT". 3. ^ "FDIC Statement of Policy on the Applicability of the Glass‐Steagall Act to Securities

Activities of Subsidiaries of Insured Member Banks". 4. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1 5. ^ America's History, Fifth edition by; James A. Henretta, David Brody, Lyum Dumenil, Susan

Ware. 6. ^ Developing Institutional Investors in the People's Republic of China, paragraph 24,

<http://www.worldbank.org.cn/english/content/insinvnote.pdf> 7. ^ Langlois, John D. (2001), "The WTO and China's Financial System", China Quarterly 167:

610‐629, doi:10.1017/S0009443901000341 8. ^ On Passage of the Bill (S.900 as amended ),

<http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=106&session=1&vote=00105>. Retrieved on 19 June 2008

9. ^ On Agreeing to the Conference Report Financial Services Modernization Act, <http://clerk.house.gov/evs/1999/roll276.xml>. Retrieved on 19 June 2008

10. ^ http://www.govtrack.us/congress/bill.xpd?bill=s106‐900#votes 11. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1 12. ^ Editorial (1999‐11‐15), "Breaking Glass‐Steagall", The Nation 13. ^ http://digital.library.unt.edu/govdocs/crs/permalink/meta‐crs‐9065:1

External links

• Glass‐Steagall Act ‐ Further Readings • On the systematic dismemberment of the Act from PBS Frontline • Back to the Twenties Through the Looking Glass ‐ Steagall Hour long Wizards of Money

MP3 explaining the Glass‐Steagall Act, background to it and impact of it. “


Bill Balanced the Budget! – or – What Bill forgot to tell us about his agenda in office…

Those of us back in the days when Mr. Clinton went on his unprecedented campaign to overturn the protections afforded our Nation’s economic and banking system that realized what a terrible negative impact such an action would afford are not surprised by the scope and magnitude of the ramifications. How he convinced the lion’s share of both parties in both the House and Senate to go along with this disaster is beyond comprehension.

Many associated with the Clinton White House hail the times “when we balanced the budget”. As you can see, the fact that there was a balanced budget is more than over‐compensated, in the most negative way, by the effects the repeal of Glass‐Steagall has had on our Nation’s economic and banking system. One of the most “successful” lobbying efforts (against) Congress and a President pulling together an almost unprecedented Congressional cooperation is suspect, to say the least.


We Should Have Seen It Comin’

After 12 attempts in 25 years, Congress finally repeals Glass‐Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long‐overdue demise of a Depression‐era relic.

On Oct. 21, with the House‐Senate conference committee deadlocked after marathon negotiations, the main sticking point is partisan bickering over the bill's effect on the Community Reinvestment Act, which sets rules for lending to poor communities. Sandy Weill calls President Clinton in the evening to try to break the deadlock after Senator Phil Gramm, chairman of the Banking Committee, warned Citigroup lobbyist Roger Levy that Weill has to get White House moving on the bill or he would shut down the House‐Senate conference. Serious negotiations resume, and a deal is announced at 2:45 a.m. on Oct. 22. Whether Weill made any difference in precipitating a deal is unclear.

On Oct. 22, Weill and John Reed issue a statement congratulating Congress and President Clinton, including 19 administration officials and lawmakers by name. The House and Senate approve a final version of the bill on Nov. 4, and Clinton signs it into law later that month.

Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former cochairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill's chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, "You're buying the government?"


A little about our friends John & Sandy – or – So now the players get to be the umpires too, huh???

Sandy Weill:

In 2001, Sanford I. Weill became a Class A Director of the Federal Reserve Bank of New York. Class A Directors are Board Members who are elected by Member Banks (of the Federal Reserve System) to represent the interests of Member Banks. (See article on Federal Reserve Bank Board Membership).

In 2002 the company was hit by the wave of "scandals" that followed the stock market downturn of 2002. Chuck Prince replaced Mr. Weill as the CEO of Citigroup on October 1, 2003.

In 2003 Citigroup repurchased $300 million worth of shares from Mr. Weill. It was reported among the $1.967 billion of "treasury stock acquired" in the Citigroup consolidated statement of changes in stockholders' equity

He is a billionaire, with a net worth estimated to be $1.9 billion by Forbes Magazine (2007). As of April 2006 he held 16,518,365 shares of Citigroup, Inc. and another 3,109,173 unexercised options.

John Shepard Reed:

The former Chairman of the New York Stock Exchange. He previously served as Chairman and CEO of Citicorp, Citibank, and post-merger, Citigroup.

What was different this time from the previous 24 attempts to persuade Congress to gut this law???

Never before had a President to arduously supported the revision of the legislation. We have to hand it to old “slick Willey” – he did a great job selling both sides of the isle on this one – 90 out of 100 Senators voted for it, and 343 of 429 Congressman did also – a real cooperation with the President on Capitol Hill (or should it be spelled Capital????).

– you should ask yourself why??????????


“The Consumerist

2:47PM on Thu Apr 17 2008

By Ben Popken

20,013 views

EXPLAINERS, BANKS, CITIGROUP, FEATURES, MORTGAGES, TOP, GAWKER, GLASS‐STEAGALL ACT...

Blame the Subprime Meltdown on the Repeal of Glass‐Steagall A lot of blame has sloshed around for the sub‐prime meltdown, from greedy borrowers to

greedy mortgage brokers to Alan Greenspan, but if you want the real culprit, it was the

repeal of the Glass‐Steagall Act. On November 12, 1999, the champagne must have been

shooting from the walls at Citigroup, which had worked behind the scenes for over 30 years

to get the act overturned. After recovering from their hangover, they and their banking

buddies went on a sub‐prime lending orgy. But what was Glass‐Steagall and how did it use to

protect us?

Glass‐Steagall was passed under the Roosevelt administration in 1933 in direct response to

the Wall Street shenanigans that ushered in the Great Depression where banks shoved their

own depositors into buying the stocks the banks were dealing. The basic idea was to keep

banks from speculating with the savings that American citizens were entrusting within

their vaults.

Its repeal, under the Gramm‐Leach‐Bliley Act, drafted and passed by a Republican congress,

and signed by William Jefferson Clinton, allowed commercial banks to merge with

investment banks. For instance, Citigroup merged with Traveler's Insurance (although this

merger was announced in 1998, before the act was passed, at the time Citigroup CEO

Sanford I. Weill said that he spoke with the Feds and, "that over that time the legislation will

change...we have had enough discussions to believe this will not be a problem.").

Now, on the one side they could sell mortgages to homeowners, and then invent fancy

investment structures which they sold on Wall Street. Because they were "covered" on


both ends, banks felt free to sell increasingly dicey mortgages, just so long as another

sucker was picking up the garbage. This sucker was picking it up because he had a plan to

repackage it and sell it to another sucker, and so on. Eventually we end up with no‐doc

stated income interest‐only option‐ARM no money down mortgages being repackaged as

"sound investments" being sold as "stable assets" for city pension plans to park their money

in. (See "Subprime Meltdown As Told By Stick Figures").

We can only imagine the level of machination exerted over those 30 years, but we do know

this.

Robert Rubin was (Clinton’s) Secretary of Treasury, which had oversight over GlassSteagall regulation. Days before he resigned, GlassSteagall was repealed. Just over a year later, he became chairman of the Citi executive committee, with an annual compensation of $40 million, a position he still holds, despite Citigroup's $24 billion in subprimerelated losses.”

Hummm. The media is always telling us poor folks that can’t think for ourselves that Republicans are all for the rich and Democrats are for the little guy. Wonder what happened that idea Bill & Bob???


The Timeline of the Decade of Decline – or – plenty of blame on both sides of the isle since 1999:

“MotherJones

Where Credit Is Due: A Timeline of the Mortgage Crisis

By Nomi Prins

N E W S : A field guide to the loan sharks and politicos who got us into the predatory lending mess

July/August 2008 Issue

June 20, 2000: Treasury and HUD urge

Fed to investigate subprime units of

major banks. No Fed action follows.

June 26: First Union closes The Money

Store, takes $2.8 billion write‐down.

Dec 14: As Congress heads for Christmas

recess, Sen. Gramm attaches 262‐page

amendment to an omnibus

appropriations bill. Commodity Futures

Modernization Act will deregulate

March 6, 2001: FTC sues Citigroup and

its subsidiary Associates, nation's 2nd‐

largest subprime originator, charging

"systematic abusive lending practices"

involving 2 million borrowers; 18 months

later Citigroup settles for a paltry $215

million.

April 6: Fed chair Alan Greenspan signals

concern with "abusive lending practices

that target vulnerable segments of the

population and can result in unaffordable

payments, equity stripping, and

foreclosure."

July 27: "'Predatory' is really a high‐

profile word with no definition,"

Ameriquest chairman Stephen W. Prough

tells Congress, urging rollback of

subprime regulations.


derivatives trading, give rise to Enron

debacle, and open door to an explosion

in new, unregulated securities.

Dec 27: American Homeownership and

Economic Opportunity Act makes it

harder for consumers to get out of

lender‐required insurance. National

Association of Realtors lobbies hard for it,

spending $9 million, plus $4 million in

contributions.

April 22, 2002: Georgia's new anti‐

predatory law signed; Ameriquest helps

lead campaign against it and announces

that it won't do business in Georgia until

law is changed. Standard & Poor's refuses

to rate Georgia mortgage securities,

choking credit supply to state's home

buyers; law gutted within a year.

Oct 7: Swiss investment bank UBS

announces that Sen. Gramm is joining it

to "advise clients on corporate finance

issues and strategy"; he will also lobby

Congress, Treasury, and Fed on banking

and mortgage issues as industry pushes

to eliminate predatory‐lending rules.

Dec 18: Conseco files for bankruptcy,

mostly due to its purchase of subprime

lender Green Tree. In all, 13 banks have

failed during 2002—most, according to a

Fed report, because of bad loans and

March 2003: HSBC acquires Household

Finance, nation's 4th‐largest subprime

lender.

May 1: New Jersey's anti‐predatory‐

lending law signed. Again, Ameriquest

and other lenders launch campaign to kill

it and Standard & Poor's says it won't

rate certain New Jersey securities; law

gutted within a year.


"improper accounting related to the

securitizing of assets."

2004: Ameriquest employees give total

of $200,000 to Bush campaign; founder

Roland Arnall and wife Dawn give more

than $5 million to pro‐Bush PACS. Arnall

later appointed ambassador to

Netherlands.

Jan 7, 2004: Federal Office of the

Comptroller of the Currency issues final

rule to preempt states from applying

most of their credit laws to national

banks and their subsidiaries.

March 2005: Rep. Robert Ney (R‐Ohio)—

who will later go to prison on corruption

charges related to Abramoff scandal—

introduces Responsible Lending Act,

billed as an anti‐predatory‐lending

measure but in fact designed to preempt

stronger state laws. Key supporters

include New Century Financial, nation's

2nd‐largest subprime lender, which has

contributed nearly $50,000 to Ney's

campaign. Consumer advocates call it

"Loan Shark Protection Act."

April: Bankruptcy Abuse Prevention and

Consumer Protection Act makes it far

harder for consumers (but not

businesses) to discharge debts. Chief

sponsor, Sen. Charles Grassley (R‐Iowa),

has received $2 million‐plus from fire

sector since 1989.

Sept 1: As housing bubble begins to

deflate, administration economist Patrick

Lawler announces, "There is no evidence

here of prices topping out. On the

contrary, house price inflation continues

to accelerate."

Sept 22: Illinois Supreme Court hands

mortgage lenders a victory, blowing away

a 3% cap on fees for loans with more than


8% interest.

Jan 23, 2006: Ameriquest settles 49‐

state investigation into deceptive

subprime practices for $325 million.

April 27: Fed chairman Ben Bernanke

acknowledges "signs of softening" in

housing market, but says a "sharp

slowdown" unlikely.

July 10: Henry M. Paulson Jr. sworn in

as Treasury secretary, leaving job as

Goldman Sachs chairman and CEO. In

2005, Goldman securitized $68 billion in

residential mortgages and $23 billion in

"other assets" primarily related to CDOS.

Jan 2, 2007: Rep. Barney Frank (D‐Mass.)

assumes chairmanship of House Financial

Services Committee. FIRE sector tops his

list of contributors, with total of $746,000

for 2005‐06 cycle.

Jan 29: Paulson tells Congress, "One of

the pleasant surprises I had coming to

government has been the strong

economy we have today."

Feb 22: HSBC's head of mortgage‐lending

business resigns. Its losses reach $10.5

billion.

Feb 28: Bernanke tells House Budget

July 16: Jim Cramer, host of CNBC's Mad

Money, says the subprime "lending thing"

is "completely meaningless...It has no

relevance whatsoever." Less than 3

weeks later, Cramer will have meltdown

on air, pleading with Fed to cut rates and


Committee the housing sector "is a

concern, but at this point we don't see it

as being a broad financial concern or a

major factor in assessing the course of

the economy."

Feb 28: New‐home sales reported down

20.1% from previous year.

March 12: Sen. John McCain's

presidential campaign announces that

Sen. Gramm will join it as cochair and

economic policy adviser.

April 2: Subprime giant New Century

Financial files for Chapter 11 after being

forced to repurchase billions of dollars of

bad loans.

May 3: UBS shuts down Dillon Read

Capital Management, its US subprime

arm. GM's finance unit announces deep

losses on subprime mortgages. SEC task

force begins meeting to examine Wall

Street's handling of subprime loans.

June 9: In Wall Street Journal interview,

former Fed governor Edward Gramlich

accuses Greenspan of blocking a 2000

proposal to increase scrutiny of subprime

lenders. Greenspan responds there are "a

very large number of small institutions,

some on the margin of scrupulousness

and very hard to detect when they are

doing something wrong."

save Wall Street.

July 1920: In congressional testimony,

Bernanke cuts growth forecasts for 2007

and 2008, blaming problems in housing

market; warns that subprime crisis could

cost up to $100 billion.

Aug 6: American Home Mortgage, one of

the largest US independent home‐loan

providers, files for Chapter 11.

Aug 16: Countrywide, biggest US

mortgage lender, narrowly avoids

bankruptcy by taking out emergency

$11.5 billion loan.

Aug 31: Ameriquest goes out of business.

Sept 14: Rep. Barney Frank in Boston

Globe: Mortgage crisis "was in large part a

natural experiment on the role of

regulation." Sept 20: Treasury secretary

Paulson tells House Financial Services

Committee that "fundamental

reappraisals in the pricing and appetite of

risk have taken place numerous

times...We are in the process of another

such reappraisal."

Sept 30: UBS announces 3rd‐quarter

losses of $690 million.


Jan 2008: Number of homes facing

foreclosure up 57% compared to same

month of previous year. US

unemployment rises sharply.

Jan 10: Cleveland files lawsuit against

numerous financial institutions alleging

that their activities in connection with

securitization of subprime mortgages

created a "public nuisance." (Litigation

still pending.)

Jan 15: Citigroup reports $9.8 billion loss

for 4th quarter and writes down $18

billion in subprime losses.

Jan 22 & 30: Fed makes biggest rate cut

in 25 years—1.25 percentage points, to

3%.

Feb 6: Longest period of decline in

nationwide house prices since 1990.

March 7: Former bosses of Merrill Lynch,

Countrywide, and Citigroup questioned

by a congressional panel about the $460

million in compensation they received

between them during 5 years of subprime

boom.

March 16: Bear Stearns announces takeover by

JPMorgan Chase in Fed‐engineered bailout;

measure approved by Fed Board of Governors with

fewer votes than required by law, under a post‐

9/11 "national security emergency" exception.

March 25: In speech on housing market,

Sen. McCain calls for easing crisis by

"removing regulatory, accounting, and tax

impediments to raising capital."

April 18: Jerry Bowyer, chief economist

for financial services firm Benchmark,

says in New York Sun op‐ed that fault for

subprime crisis "lies with the small army

of hard‐left political hustlers who spent

the early 1990s pushing risky mortgages

on home lenders. And the fault lies

especially with the legislators that gave

them the power to do it."

April 29: Foreclosure activity reported

up 112% from first quarter of 2007.

May 6: Bush announces he will veto

legislation directing $15 billion to

neighborhoods ransacked by

foreclosures. Also threatens to veto

legislation to provide $300 billion for

struggling homeowners (and force

lenders to renegotiate some mortgages)

because it would be a "burdensome

bailout" that "opens taxpayers to too

much risk."


We couldn’t agree more, Mr. Kostigen: THOMAS KOSTIGEN'S ETHICS MONITOR

Reinstate the GlassSteagall Act

Commentary: Ending ban on bankbrokerage marriages was misguided By Thomas Kostigen, MarketWatch

Last update: 11:45 p.m. EDT Sept. 18, 2008

Comments: 50

SANTA MONICA, Calif. (MarketWatch) Exactly a year ago when the credit crisis was

beginning to unfold I wrote a column asking whether the GlassSteagall Act the law

banning brokerages and banks from marrying one another, which was lifted in 1999

would have thwarted an oncoming crisis.

We have the answer now.

"Time was when banks and brokerages were separate entities, banned from uniting for fear of

conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things," I wrote.

We should go back to that time and reenact the Glass‐Steagall Act, or a something similar to it.

The nebulous and vague talk of "fixing'" the problems on Wall Street by taking caring of "greed"

or by better defining "fundamental strengths" sidestep specific plans on how to solve the crisis at

hand. The new financial services authority and regulations that will merge functions of the

Treasury Department, the Securities and Exchange Commission and banking regulators also will

fail in correcting the underlying problems that we are seeing in the credit and equity markets

today.

Troubled banks and securities firms are being snatched up by any taker; this isn't sound

economics. It's a version of "a drowning man will grab a sharp sword." More thought ought to be

put into which entity can buy what troubled investment business. We need to straighten things

out cogently with a plan, a steady hand and leadership. Yet, President Bush is apparently planning

to nap through this crisis as well.

So in the absence of any strategy at all, here's what I think needs to be done: We need to separate

the securities business from the savings and loan business. The economies of scale and "vertical"

business models designed around the lending, packaging and trading of debt instruments for


greater profit are big moneymakers for companies in good times, but we now see what happens

when things turn bad.

The lawmakers who passed Glass‐Steagall in 1933 were determined to prohibit investment

businesses from receiving deposits. And they were wise to insist upon such prohibitions. They

had seen the fallout from the stock market collapse just a few years earlier and were facing the

Great Depression. They sought safety.

We now may be seeing the oncoming of our own version of the Great Depression. We aren't

seeing it closer than it may appear in the rearview mirror. We are seeing it splattered on our

windshield.

The government needs to put up protections in the form of regulation. Such regulation was

bashed for years by free‐market capitalists until they finally got their way in 1999 and the Glass‐

Steagall Act was repealed.

What say you today?

The government is providing capital to AIG and other financial services companies that need

assistance. This is welfare, no different than a government check to a person (or family) in need.

Except welfare for rich people and corporations is more benignly called a "bailout." That's kinda

like an "oopsie" don't you think?

As the poet Donald Trump once said (or something like it): "You owe the bank a million dollars,

and the bank owns you. You owe it a billion, and you own the bank."

Because the Treasury now owns banks, we as taxpayers own the banks. We need regulation to get

it off our hands. Lawmakers should reinstate Glass‐Steagall.

Unfortunately, Mr. Kostigen, the train has already left the station, and is going down a steep hill. People ask why Mr. Bush, when he took office he didn’t work on the reversal of the 1999 Clinton mistake. Well, that would (and will) be easier said than done. As you can see by the above timeline, politicians across both sides were involved in developing this disaster, and pretending it wasn’t going to happen.

Think about what has occurred since Clinton opened the Pandora’s box in 1999???


Since 1999, the derivatives have grown on a parabolic curve. There are now over $516 trillion in derivatives outstanding. In a short eight years, the rapid proliferation of derivative contracts has become the Trojan horse that is likely to undermine the entire modern banking system. The collapse of Bear Stearns should act as a warning for the entire financial market. It is time for regulators to step in and properly unwind the most troubled instruments, while providing concrete oversight to the entire derivatives industry. Obviously the lunatics have been found unfit to run the derivative financial asylum. Deregulation has run amok, and financial checks and balances must be restored to protect the economies of major nations. Investment banks’ culture of risk is diametrically opposed to the purpose of commercial savings banks which is the preservation of customers’ assets. The introduction of derivatives as the primary under‐pinning for the mortgage industry with little regulatory oversight was an event that was obviously going to end in a calamity; similar to giving liquor and a car to a chronic drunk. The continuous reduction of the protections of GlassSteagall, by politicians in Washington driven by banking PAC money, is the root cause of the current painful credit crunch which is undermining the entire U.S. economy. In order to fix the core problems, the protections created by GlassSteagall after the harsh lessons of the Great Depression must be restored by Congress. A clear separation of commercial and investment banking must be reestablished.


Of Mice and Men – of late:

Newsweek:

MONEY CULTURE

Daniel Gross

Shattering GlassSteagall

Lehman's failure marks the end of an era.

Sep 15, 2008 | Updated: 3:45 p.m. ET Sep 15, 2008

“Aside from signaling the end of an era for Lehman Brothers and Merrill Lynch, this weekend's activity definitively drew a line at the end of another historical era: the Age of Glass‐Steagall.

The Glass‐Steagall Act is the Depression‐era law that separated commercial and investment banking. It was functionally repealed in 1998, when Travelers (the parent company of Salomon Smith Barney) acquired Citicorp. And it was officially repealed in 1999. But recent events on Wall Street‐the failure or sale of three of the five largest independent investment banks‐have effectively turned back the clock to the 1920s, when investment banks and commercial banks cohabited under the same corporate umbrella. Glass‐Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Crudely speaking, in the 1920s commercial banks (the types that took deposits, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and trading stocks. When the bubble popped in 1929, exposure to Wall Street helped drag down the commercial banks. In the absence of deposit insurance and other backstops, the results were devastating. Wall Street's failure helped destroy Main Street.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass‐Steagall. Commercial banks were eager to get into high‐margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks,


with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors. In April 1998, Sandy Weill's Travelers, which owned Salomon Smith Barney, merged with Citicorp. The following year, Congress passed and President Clinton signed the Financial Services Modernization Act of 1999, known as the Gramm‐Leach‐Bliley Act. This law effectively deleted the prohibition on commercial banks owning investment banks and vice versa.

Since then, the two industries have come together to a degree. And generally, the investment banks, which weren't subject to regulation by the Federal Reserve and didn't have to adhere to stodgy capital requirements, have been the alpha dogs. In 2000, the investment banking firm J.P. Morgan bought commercial bank Chase. Commercial banks like Bank of America and Wachovia have tried to build up their own investment‐banking operations, but they haven't had much success in eating into the core franchises of the five big independent investment banks: Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns.

Up until the summer of 2007, the debt‐powered independent broker‐dealers who minted money with stock brokering, proprietary trading, and advising on mergers and acquisitions looked set to leave boring commercial‐banks in their dust. But 2008 has been another story. In March, a faltering Bear Stearns was swallowed by JPMorgan Chase. Lehman has gone bankrupt. Now the investment bank with the largest brokerage force, Merrill Lynch, is being bought by Bank of America. The historic democratizer of stock ownership will henceforth be owned by the historic democratizer of credit.

And then there were two: Goldman Sachs (Wall Street's last great partnership until it went public a few years ago), and Morgan Stanley (a portion of the House of Morgan that was set up as an independent entity after Glass‐Steagall). But there are now doubts as to whether even these titans can survive as independents. The reason: In the wake of the global credit crunch, the investments banks' 2006 source of relative strength has become a major 2008 weakness. Investment banks are creatures of the global capital markets. They can borrow seemingly unlimited amounts of funds from investors around the world and deploy them as they see fit. By contrast, fuddy‐duddy commercial banks, which borrow money from their depositors; from the Federal Reserve; and from outfits like the Federal Home Loan Banks; accept greater restrictions on the amount of leverage they coan use. Between 2001 and 2006, that meant investment banks were better businesses to own than commercial banks. In today's climate, that means highly leveraged independent investment banks now face continuing struggles to finance their operations while less‐leveraged commercial banks enjoy relatively stable sources of capital. The alpha dogs have essentially turned tail and are now scared of their own shadows. After today's press


conference announcing the sale of once‐proud Merrill Lynch to Bank of America, Merrill CEO John Thain, one of the biggest shots on Wall Street in the last decade, practically scurried‐scurried!‐away as a reporter called out to bid him farewell and wish him luck. “.

The FBI is investigating those that took advantage of the trap set by Congress & President Clinton:

In Judaism, there is a concept of the potential responsibility of a victim. The idea works something like this. If you place your billfold our purse out in plain sight where it might be a temptation for someone (who otherwise might not even think of stealing) and a person comes along, responds to the temptation, and steals your money – you the “victim” have some part of the responsibility for the crime having been committed. Keep that in mind as you read the following news report from the AP:

“AP FBI investigating companies at heart of meltdown Tuesday September 23, 10:07 pm ET By Lara Jakes Jordan, Associated Press Writer

Sources: FBI investigating possible fraud by Fannie, Freddie, Lehman, AIG and their executives

WASHINGTON (AP) ‐‐ The FBI is investigating four major U.S. financial institutions whose collapse helped trigger a $700 billion bailout plan by the Bush administration, The Associated Press has learned.

Two law enforcement officials said Tuesday the FBI is looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation.

The inquiries will focus on the financial institutions and the individuals that ran them, the senior law enforcement official said.

The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.

Officials said the new inquiries bring to 26 the number of corporate lenders under investigation over the past year.

Spokesmen for AIG, Fannie Mae and Freddie Mac did not immediately return calls for comment Tuesday evening. A Lehman spokesman did not have an immediate comment.

Just last week, FBI Director Robert Mueller put the number of large financial firms under investigation at 24. He did not name any of the companies under investigation but said the FBI also was looking at whether any of them have misrepresented their assets.


Over the past year as the housing market cratered, the FBI has opened a wide‐ranging probe of companies across the financial services industry, from mortgage lenders to investment banks that bundle home loans into securities sold to investors. Mueller has previously said the FBI's hunt for culprits in the nation's subprime mortgage crisis focused on accounting fraud, insider trading, and failure to disclose the value of mortgage‐related securities and other investments.

The investigations revealed Tuesday come as lawmakers began considering whether to approve emergency legislation that would give the government broad power to buy up devalued assets from troubled financial firms.

The bailout proposed by the Bush administration is aimed at helping unlock credit and stabilize badly shaken markets in the United States and around the globe.

In the past two weeks, the government has taken over Fannie Mae and Freddie Mac, the country's two biggest mortgage companies, with a bailout plan that could require the Treasury Department to put up as much as $100 billion for each of them over time if needed to keep them afloat as mortgage losses mount.

Last week, the Federal Reserve provided an emergency $85 billion loan to AIG, which teetered on the brink of bankruptcy. Lehman Brothers was forced to file for bankruptcy after attempts to engineer a private rescue fell apart. All the companies were laid low from bad bets on complex mortgage‐related securities.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke made the joint decision last week that the only way to stop the carnage was to deal with the root cause of all the troubles, billions of dollars of bad mortgage debt sitting on the books of major financial companies. This debt has triggered the worst credit crisis in decades, causing credit markets to essentially freeze up despite the fact that the Fed joined with major central banks around the world to pump billions of dollars of reserves into the financial system.

Additionally, the FBI is investigating failed bank IndyMac Bancorp Inc. for possible fraud. Countrywide Financial Corp., formerly the nation's largest mortgage lender and now owned by Bank of America Corp., is also under scrutiny.”


Impact on OFGI Clients & Associates – or – Even a Dark Cloud has a Silver Lining

What impact will this decade of decay spawned by greed and Government duplicity have on project funding?

1. The current standard in the commercial lending industry is 60% of the REMAINING “all in costs” for a loan. That means, if a project has already spent say, $20M, and needs an additional $100M, the project better have AT LEAST $40M in hand on cash ready to commit to the project, or can’t even be submitted for consideration to most lenders.

2. Private investment based loans will become all the more important.

3. Lenders willing to provide financing above the 60% of remaining “all in costs” will become all the more important.

4. Think about your Freshman High School Economics class. What market blossoms when there is economic uncertainty – especially on Wall Street? The answer: BONDS. As OFGI utilizes well constructed bond issues, as provided by our Merchants Banking relationship as a “back stop” or “takeout” strategy for initial loans (and to fund projects outright for that matter) this feature of our business model will become all the more important – notwithstanding that the mechanism is SELF‐LIQUIDATING – as BOTH to PRINCIPAL and INTEREST.

5. Basically, we are sad to say because of the overall effects on the U.S. and the World – this situation actually makes OFGI’s resources more valuable in our industry than ever before.

We do hope that clear heads in Washington will be able to figure out how to get the World out of the mess that they themselves have created. It’s rather like wishing that the fox will guard the hen‐house, but it is the only hope we have.


Ovadya Funding Group International, Inc. does NOT sell insurance, is NOT licensed to buy or sell insurance, or to buy or sell securities, etc. Furthermore, OFGI is not a professional investment advisor and does NOT give investment advice. Nor, does OFGI give tax or legal advice of any kind. This information is presented for EDUCATIONAL PURPOSES ONLY.

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