by John M. Curtis
(310) 204-8700

Copyright June 14, 2009
All Rights Reserved.

            Looking to prevent another economic disaster, President Barack Obama weighed options to overhaul Wall Street, whose recent meltdown cost the nation $7 trillion in national wealth.  Wall Street’s latest mess spread to the banking sector like in did following the 1929 stock market crash, shuttering some of the nation’s largest financial institutions.  Four years after the 1929 crash, Congress enacted and signed into law by President Herbert Hoover the Glass Steagall Act, creating the Federal Deposit Insurance Corporation and banning banks from risky stock market investing.  Less than 70 years after Glass Steagall in 1999, the Congress passed and President Bill Clinton signed the Gramm, Leach, Bliley Act, in effect, rescinding Glass Steagall, allowing banks to once again play the stock market.   Less than 10 years later, the same wild speculation brought down the banking industry.

            Barack and his Treasury Secretary Timothy Geithner find themselves battling Wall St.  to reenact same rules that kept the banking industry from collapsing for 70 years.  America’s biggest banks an insurance companies invested heavily in complex mortgage-backed securities known as “derivatives” and “credit default swaps,” a type of insurance on risky investments.  When the recent real estate bubble burst in Dec. ’07, it collapsed the derivatives’ market seizing up banks’ and insurance industry cash.  Banks and insurance companies lost trillions, forcing the nation’s largest insurance company AIG into bankruptcy, unable to pay out trillions to banks on insured derivative investments.  Federal Reserve Board Chairman Ben S. Bernanke had to rescue AIG and cash-strapped banks, borrowing trillions  to make up losses.  Today’s massive debt has devalued the U.S. dollar.

            Geithner and Bernanke must now come up with a new regulatory system that prevents the wild speculation that collapsed U.S. financial markets.  In the new regulatory scheme, the Federal Reserve will possess controls to prevent another banking collapse, costing the government and taxpayers trillions in debt.  Today’s record budget deficits over $2 trillion and $13 trillion national debt now exceed the total U.S. Gross Domestic Product that shrunk by 5.7% in the first quarter.  Bernanke and Geithner are well-aware that the present Wall Street commodities and hedge fund industries are outside the regulatory scheme.  There’s currently no regulatory authority to prevent hedge funds from shorting the market, betting that stocks will go down—a process that prevents long-term stock market growth.  Current regulatory agencies, like the Securities and Exchange Commission, have no power.

            Without greater regulatory control, there’s no way to control hedge funds and other unregulated investment groups that resulted in Bernard Madoff’s $65 billion Wall Street scam.  Despite warnings, SEC officials turned a blind eye to hedge funds and unscrupulous investment groups scamming the public.  Bernake and Geithner will be forced to regulate hedge funds, commodities’ trading markets and investment groups, previously allowed to run wild.  “On the macro-basis, we’re very supportive of reform,” said Tim Ryan, president and CEO of the Securities Industry and Financial Markets Association.  Ryan knows that hedge funds and commodity trading floors currently run wild without any regulation.  Under President George W. Bush, commodity traders at the New York Mercantile Exchange drove oil and gas prices through the roof, damaging the U.S. economy.

            Unregulated companies like AIG were allowed to write insurance, without the cash reserves, for trillions of dollars on risky derivative investments.  Not only were the investments themselves unsound but insuring them was madness, jeopardizing the world’s banking system.  By AIG’s default, the government had to pour billions into AIG to prevent a global banking disaster.  No government agency currently regulates hedge funds, large insurers and other risky investment groups.  “If you give people enough leverage, they can lose an unbelievably large amount of their own money and that of their clients,” said Obama’s chief economic advisor, former Clinton Treasury Secretary and Harvard University President Larry Summers.  Summers points out that the SEC and Commodity Futures Trading Association have no control over unregulated hedge funds and insurance companies.

            Today’s broken regulatory scheme invites excessive risk and piracy into an already fragile U.S. financial system.  Treasury Secretary Geithner must work with Fed Chairman Bernanke to reinstate Glass Steagall and finally regulate hedge funds and insurance companies that threaten the stock market and U.S. banking system. Never again should banks or insurance companies be allowed to run wild with highly speculative derivative investing.  Without some regulation of commodity traders, the U.S. economy will remain a hostage to the oil industry, driving oil and gas prices through the roof and decimating a large swath of American business.  Democrats and Republicans must stop feuding and working toward fixing the broken regulatory system.  Businesses and consumers need a regulatory system that protects the American economy from fraud and excessive speculation.

 About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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