Parallels in Post '29 Crash Banking Issues

READ THE ARTICLE FROM Peter Eavis!!!!!!! (Fed Bends Rules to Help Two Big Banks) If you are interested in economics and US financial markets at all, the need to understand the legal framework and how the banking system operates is essential, as that is at the heart of the whole system. We have cited a small bit from the article:

The regulations in question effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption,” says Charlie Peabody, banks analyst at Portales Partners.

If we reach back in history, the issue then as today revolves around credit speculation. This was one of the issues behind the 1929 crash. The by-product was the Glass Steagal Act and Banking Act of 1933. The acts separated commercial banks from investment banking. In the late 20’s commercial banks where taking their assets and deposits and underwriting companies, only to then take them public in the market to sell to investors.

As bubbles go, guidelines, relationship and lending practices became lax and greed took control, until the party came crashing down. Under the Act only 10% of a bank's capital can be exposed to an affiliate operation. Granted, there where many other variables in the 29′ crash, but this one seems to lend itself, as a reference point, to today’s crisis.

Now the FED has agreed to allow a bank to lend its capital to prop up brokerage service units. The effects are a bit far-reaching. The main issue we have with the FED's move is the desire to bail out poor speculation. In the future will institutions still be encouraged to take on risky operations and over-lend? (Increasing moral hazard) In short it is a very precarious move.

Accordingly, the Glass Steagal and Banking Act of 1933 was repealed on November 1999 and replaced with Gramm-Leach-Bliley Act. The act allowed banks to diversify into other services again. We have listed a few cited in the Act; non-bank mortgage lenders, loan brokers, some financial or investment advisers, debt collectors, tax return preparers, banks, and real estate settlement service providers. The Act may have increased the risk banks are exposed to rather than the intended effect of reduced financial exposure through industry diversification. Thus, we have the FED bailing out banks from exposure to real estate lending.

The recent move confirms the crisis is far deeper and points to a structural failure in the financial system. At this point it is not a question of if, but when the FED cuts the Fed Funds rate. Accordingly, we are not sure if the shock to the financial system is over and are very worried by the rapid rise in the equity market.

References:

Fed bends rules to help to big banks

Gramm-Leach-Bliley Act

Glass Steagal Act & Banking Act of 1933