By Marilyn Barnewall

To
whom should we listen about banking, the stock market, the economy?
There are so many differing analyses right now, it is difficult to know.

One opinion is that Wall Street is sitting on $50 plus trillion in leveraged
assets and the United States government has a $5 to $6 trillion gross
domestic product (GDP). There is, this opinion says, no way to avoid
a total meltdown.

Today
I read an analysis by Stratfor, whose opinion I respect tremendously.
Stratfor says we must focus on the political realities, not the economy.
Using this strategy, Stratfor had been correct in predicting many things
Wall Street, the Treasury, the Fed, and economists around the world
have missed. Stratfor says we will have an ugly, painful recession,
but the “fall of the housing markets will be trumped by the size
of the American economy.” They see the core problem as the fall
of the housing markets and approach problem resolution from that perspective.

Like
Stratfor, I believe it is right to look at things from the geopolitical
perspective when defining our economic problems. Governments around
the world are acting in tandem – that in and of itself is a rare
occurrence – to “solve the financial crisis and prevent
a meltdown.”

Unlike
Stratfor, I do not believe the core of the geopolitical problem is the
value of housing. I believe the core problem is a worldwide government
bid to establish a global government. They have been trying to accomplish
this since the early 1900s. The people of the world do not want it and
so they must face crisis after crisis so potentially devastating to
modern life they can be frightened into accepting what the world’s
central banks want.

Now,
in some quarters, making that kind of statement gets one labeled a “conspiracy
nut.” Maybe I am a conspiracy nut. Maybe I’m not. Maybe
those who prefer to look at the world through rose-colored glasses and
see governments as solving problems rather than causing them are the
conspiracy nuts. They conspire to trust governments around the world…
until necks are safely held under the black boot of totalitarians.

What
is the conspiracy that makes them rather than me “conspiracists”
by definition?

They
believe governments are good, not self-surviving totalitarian organizations
that crave more and more power, more and more wealth. They believe the
Federal Reserve is looking out for the American people… they even
think the Fed is part of the government.

All
I can say is, when one “nut” has more evidence on his or
her side than another “nut,” the one with the least evidence
must concede defeat and accept the title “conspiracy nut.”
It is obvious that I believe I have more evidence on my side of this
argument than do those who think governments around the world are driven
to do good for the people rather than oppressing them more and more.

Let’s
go back in time.

How
was our financial services industry structured? This is an important
question because the regulations in place from the 1930s until the 1970s
were put in place to protect America from another Great Depression.

Savings
and loans were established as the primary underwriters of American mortgages.
When granting a mortgage, it is a 20 to 30 years financial commitment
by a lender. Because the world of business and consumer banking moves
quickly, and because the cost of funds are volatile, S&Ls were established
for the specific purpose of making long-term mortgage loans. Commercial
banks did not make them. And, there was no problem with bank liquidity
because bank loan commitments are relatively short-term by comparison
to mortgages. A commercial bank must know from day-to-day that it has
sufficient funds on hand to deal with business and consumer borrowing
needs… difficult to do when your deposits are tied up for 30-year
mortgages.

We
had Regulation Q. It said that savings and loans could offer one-quarter
of a percent more in savings interest than commercial banks. S&Ls
were required to pay 5.50 for long-term savings and 5.25 percent for
short-term deposits. Commercial banks were required to pay 5.0 percent
on short-term savings and 5.25 percent on “time” savings
– like a certificate of deposit or a “time” savings
account.

We
also had commercial banks. Their primary business was to take in deposits
for checking and savings deposits and loan that money out within the
community at a profitable rate. By doing so, they stimulated business
and, thus, job growth. They were not allowed to branch across state
lines. In many states (like Colorado, Illinois and Texas), they were
not allowed to branch within the state where a bank’s corporate
headquarters was located. When did that change and why?

In
the mid-1970s, the Comptroller of the Currency (who has no authority
to change the laws passed by Congress… its job is to oversee regulatory
control, not change it) issued an opinion that banks could become bank
holding companies. A bank holding company in non-branch banking states
(called unit banking states) could, in the Comptroller’s opinion,
open other banks under the same bank name provided that each new bank
opened had its own Board of Directors, its own letterhead. It had to
be independent from the large bank that funded it.

The creation of branch banks in non-branching states was a necessary
piece of the plan to implement interstate branching which would come
later.

In Colorado, Governor Roy Romer all but promised the independent bankers
in the state that he would not support in-state branch banking. The
Colorado House passed House Bill 1111 banning interstate branch banking
on February 7, 1995. On February 21, 1995, the Senate approved its version
of the same legislation… banning interstate branch banking in Colorado.

However,
after receiving a telephone call from President Bill Clinton (and, it
is rumored, from NationsBank — now Bank of America), Governor Romer
decided he wanted branch banking.
Clinton told Romer that all sorts of calamities would befall Colorado
banks if the branching legislation at the state level did not get passed.
Romer passed that information on to Tim Foster.
Foster was the Colorado House Speaker and pushed the legislature, having
been told Colorado would be in violation of the law if the legislation
did not pass. I called Foster right after the legislation passed and
asked him what in the world he thought he was doing, violating the laws
of the State of Colorado. He is the one who told me why he, a Republican,
became so supportive of getting legislation passed for a Democrat governor.
The above story is a direct quote from Foster.

Shortly
after the above transpired, Roy Romer was made the head of the Democrat
National Committee where he served for several years. Later he accepted
a highly-placed position with the Department of Education in California.
Foster has been the President of Mesa State College for a number of
years.

Why
did Bill Clinton make that phone call to Governor Roy Romer? Because.
The interstate banking plan could not be implemented unless all
50 states accepted branch banking and it was part of an overall plan
to implement the credit crisis we have today.

Once
all 50 states allowed branch banking, the Comptroller decided it was
okay for banks to use bank holding companies to establish banks in other
states… a direct violation of the McFadden Act. Suddenly, we saw
First Interstate Banks all over the western United States. We saw NationsBank
of North Carolina owning banks in Florida and Citibank moved into California
and Arizona. Until this time, the McFadden Act prevented interstate
branch banking – intrastate branch banking laws were controlled
by each state.To my knowledge, the McFadden Act has never been over-turned…
just ignored by the Congress.

The
Honorable Louis T. McFadden, Congressman from Pennsylvania, leveled
charges at the Federal Reserve Board on the floor of Congress that would
have made the most aggressive conspiracy theorist blush.

McFadden
accused the Federal Reserve of swindling the U.S. Treasury, of conspiring
with their foreign principals (central banks in other nations) and others
to defraud the American government. Thus, the charges I would make against
the Federal Reserve in 2008 were first made in 1932 by a U.S. Congressman.

As
if that were not enough, McFadden further told his compatriots on the
House floor that the Fed had “…robbed the U.S. government
and the people of the United States by their theft and sale of the gold
reserves of the U.S.”

On
June 10, 1932, Congressman McFadden launched a twenty-five minute tirade
against the Fed. Some of his remarks:

"Mr.
Chairman, we have, in this country, one of the most corrupt institutions
the world has ever known. I refer to the Federal Reserve Board and the
Federal Reserve banks. The Federal Reserve Board, a government board,
has cheated the government of the United States out of enough money
to pay the national debt.”

McFadden
continued: “The depredations and the iniquities of the Federal
Reserve Board and the Federal reserve banks acting together have cost
this country enough money to pay the national debt several times over.

“This
evil institution has impoverished and ruined the people of the United
States; has bankrupted itself, and has practically bankrupted our Government.
It has done this through defects of the law under which it operates,
through the maladministration of that law by the Federal Reserve Board,
and through the corrupt practices of the moneyed vultures who control
it.”

I
would make those same charges today.

On
May 23, 1933 – less than a year after his 1932 tirade – Congressman
McFadden brought formal charges against the Board of Governors of the
Federal Reserve Bank system, the Comptroller of the Currency and the
United States Treasury. He charged them with "numerous criminal
acts, including but not limited to, “conspiracy, fraud, unlawful
conversion, and treason."

The
petition for Articles of Impeachment was referred to the House Judiciary
Committee, but no action was ever taken by the Congress. It was never
rejected or acted upon. Looking at Congressional records, it appears
McFadden’s charges are still pending against the Fed.

McFadden
saw the Federal Reserve and the nationalization of our banks as a great
threat to the freedom and the individual wealth of the American people.
In 1927, he authored the McFadden Act and fought hard to get it passed
by the House and the Senate.

It’s
purpose: To prevent interstate branch banking.

McFadden
felt he could hold what he perceived as a power-hungry Federal Reserve
in check. He thought he could keep them from becoming too powerful.
The way he did it was to limit the banking industry’s ability
to establish branch banks over state lines.

For
almost 70-years, this Act pre-vented interstate branch banking.

The
waters are very murky, indeed, as to whether interstate branch banking
legislation is legal. It may violate federal law… the McFadden Act
of 1927, and the National Bank Act of 1863. I can’t say I have
the greatest understanding of how federal law works, but I always thought
that you could not write a new federal law that contradicts an old federal
law without repealing the old law.

Back
to what we used to have and why it’s important:

We
had the Glass Steagall Act. Actually, there were two Glass Steagall
Acts, but the one with the most bang for bank bucks was Glass Steagall
II and it is to that I refer herein. It was passed in 1933 and the official
title is the Banking Act of 1933.

During
the Great Depression, Congress undertook to examine how conflicts of
interest existed in some commercial banks because of their involvement
in securities. Even fraud was discovered. Glass Steagall II built a
brick wall between the activities of commercial banks and investment
banks.

Investment
banks like Merrill Lynch, Bear Stearns, Lehman Brothers and Goldman
Sachs did not take deposits like commercial banks and savings and loans.
They were not commercial banks. Their entire job in the universe was
to sell stocks in America’s publicly-traded companies. Commercial
banks were prevented from selling securities or making investment recommendations.

The
above reflects how America’s financial industry was structured
until the 1970s. Part II of this article will explain how the safety
walls put in place have been eliminated, one brick at a time and, from
the author’s point of view, very intentionally. Article II will
explain how the changes to the safe structure that kept our economy
safe for so many years were eliminated – and why. Article II will
explain whose wealth has increased dramatically as a result of the change.

Part Two

In
the last article, we reviewed the protective devices put into place
by Congress to prevent the American people from going through another
Great Depression.

We had The McFadden Act, the Glass Steagall Act, and Regulation Q. These
were key pieces of legislation. They prevented interstate branch banking,
commercial bank involvement in investment banking and insurance products
(other than credit life), and kept long-term mortgage lending out of
commercial banks and in the savings and loans. The last article told
us that to gain access to deposits to fund mortgage lending, Regulation
Q permitted savings and loans to pay 25 basis points more on savings
and time deposits than commercial banks could pay.

As our ancestor legislators saw it in the 1920s and 30s, the lack of
these protections were a primary cause of the Great Depression.

Please keep some definitions in mind as we go through the structure
of the financial services industry. Until the Gramm-Leach-Bliley Act
of 1999, a commercial bank made business and consumer loans and issued
credit cards. Commercial banks were unable to sell investment or insurance
products (thanks to Glass Steagall) and investment banks could not take
deposits.

The sub-prime mortgage mess began with the Community Reinvestment Act
of 1977. I wrote long ago that this law was the cause of sub-prime mortgages
and it is pretty well agreed that I was right. CRA required commercial
banks to stop “redlining.” What is “redlining?”
It is refusing to make loans in communities where there is a high crime
rate, high unemployment, poor credit history, and, generally, where
real estate values are unstable and people cannot repay large home loans
over thirty years because of all the problems in their community. More
about CRA later…

The
first big change in banking was the Depository Institutions Deregulation
and Monetary Control Act. This Act passed the Congress in 1980. It gave
the Federal Reserve more control over non Federal Reserve banks. Not
all banks are members of the Federal Reserve. This is the law that helped
cause the failure of the savings and loan industry in the mid-to-late
1980s. The primary damage was done by removing the restraints exercised
by the Federal Reserve Board of Governors under Glass Steagall.

By
the early 1980s, Merrill Lynch was offering Cash Management Accounts.
These accounts paid high rates of deposit interest – as I recall,
up to 21 percent at one time. That sounded great to consumers. Well,
it sounded great to get 21 percent interest on a deposit account until
so much money was taken from commercial banks and savings and loans
that it caused “disintermediation.”

For
an accurate definition, I suggest you use a dictionary. It means money
was flowing out of one industry into another one… in this case,
from commercial banks and savings and loans into investment brokers
(now called “banks” – which they are not).

In
other words, 21 percent interest is great – unless jobs are lost
because businesses can’t borrow from banks with no money to lend
(because deposits are sitting in a high interest rate account with a
stock broker… who does not make loans to businesses or consumers.
The 21 percent interest was great – until mortgage loan interest
rates went into double digits because savings and loans had no money
to loan… their deposits were also going into brokerage money market
accounts. The 21 percent was great until car loans had such high interest
rates on them that no one purchased new cars and jobs were lost. This
occurred in the early 1980s.

At
the time all of the banking deregulation was passing through Congress
like castor oil through an infant, the Congress had a choice. It could
give investment banks permission to offer interest-bearing deposit accounts
but live with the same restrictions Regulation Q placed on banks and
savings and loans. Or, it could eliminate Regulation Q and allow the
investment banks to pay whatever rates of deposit interest they wanted.

Now,
anyone with an IQ two points above plant life understands that if consumers
can get 21 percent from a Merrill Lynch money market account or 5 percent
from a commercial bank or 5 ½ percent from a savings and loan,
the consumer is going to go for 21 percent. So, it should have been
no surprise to any thinking person that disintermediation would occur.
But, shock of shocks, when the prime borrowing rate at commercial banks
reached 15 percent and more, when the home mortgage rate at savings
and loans entered double digits, Congress – which had caused the
problem to begin with – decided it definitely had to do something
about this dastardly situation. So, it did away with Regulation Q. Banks
and savings and loans quickly raised their rates of deposit interest
to regain the lost deposits back into their institutions.

Why
was the cost of funds so high at banks and savings and loans? Because.
They had to compete with Merrill Lynch to get deposits from consumers.
Everyone was putting money into brokerage money market accounts to gain
the rewards of high interest deposit accounts. The cost of funds was,
at the time, determined by the cost of deposits. If a bank paid zero
percent for checking account money and 5 percent for savings, the average
cost of funds (on which the primer rate was determined) was from 3 to
6 percent. During this time frame, the prime lending rate was close
to 20 percent. The high deposit rate costs were a direct result of Congress
and legislation designed, it appears, to destroy the savings and loan
industry. It was designed to make Freddie Mac and Fannie Mae the primary
source of mortgage money for home ownership in America.

I’m
sure it was just an accident that Fannie and Freddie happened to be
the catalyst that caused the current financial crisis in America.

Is
the current financial services crisis sounding a bit like a well-crafted
plan to you yet? Having been a banker for many years, it sure sounds
that way to me.

The
Garn-St. Germain Act was passed so savings and loans could be “saved.”
They were deregulated. This is how the secure mortgage source for American
home buyers was destroyed. Savings and loans could now make commercial
business loans and consumer home repair and car loans heretofore only
available at commercial banks.

One
unfortunate part of the entire mess: Consumer and business lending is
a specialized area, quite different from making mortgage loans. The
computer systems in place at savings and loans could not provide reporting
data required by law. They made bad loans, were unable to comply with
consumer protection laws and regulatory reporting requirements, and
did not properly maintain control of commercial loans (let alone evaluate
their credit worthiness).

Surprise,
surprise! They failed.

So,
we lost our source of stable mortgage lending when the Congress passed
laws that caused the savings and loan industry to fail. And, it was
unnecessary. But no one really noticed because Freddie and Fannie picked
up the slack.

How
many people today would be delighted to receive the 5.50 percent deposit
interest rate that savings and loans paid to maintain sufficient deposits
to finance mortgages? Of course, the fact that today we only get one
or two percent on large time deposits is a total accident. The Congress
didn’t know any better… or, did they?

At
the same time the savings and loans were dealing with a lose/lose financial
services environment created by Congress, they were also having to fight
for business profits with Fannie Mae and Freddie Mac. These two government
sponsored entities (GSEs) had access (from the government, of course)
to lower cost funds and they made lower cost mortgages available to
people… especially people who could not afford to repay the loans.
Commercial banks, you see, are audited at least once annually. Any bad
loans they made were tracked. The auditing procedures at Freddie and
Fannie were… criminal is a word that comes to mind.

Goodbye
savings and loans.

The
rest of the Glass-Steagall Act disappeared in 1999 when the Gramm-Leach-Blily
Act was passed. It enabled commercial and investment banks to consolidate.
Citigroup, one of the “Big 9” currently in financial hot
water, merged with Travelers Group (Insurance) in 1998. They combined
banking and insurance underwriting services. The Glass Steagall Act
had prevented the combining of insurance and securities companies. Gramm-Leach-Blily
allowed commercial banks to speculate… also heretofore prevented
by Glass Steagall.

The
end of the story cannot be made to sound pretty. None of it is pretty.
It is not only ugly, it is evil.

The
laws we had on the books from the 1930s through the 1970s kept America’s
commercial banks strong. Having independently owned savings and loans
that were not in any way government sponsored entities kept the mortgage
market strong and real estate prices increased at reasonable rates every
year. Investment banks did not offer commercial banking products and
so could be intelligently regulated and monitored by the Securities
and Exchange Commission… which hasn’t got a clue about how
to audit lending portfolios.

Combine
all of the above with an increasing philosophy within the commercial
banking industry to use risk elimination loan policies and the logical
result is the financial mess in which this country finds itself today.

Capitalism
requires a banking system – a financial system – based on
risk management. When financial risk is removed, it results in socialism.
And, my friends,
that is the new door through which we are about to walk.

At
this point in time, the U.S. government owns 80 percent of personal
real estate investments… on any home with a mortgage. It holds
that ownership because it owns Freddie Mac and Fannie Mae. Any mortgage
written by Freddie and Fannie is now owned by the U.S. government. That’s
called socialism, too.

Government
has purchased a primary position within the insurance industry with
funds “loaned” to AIG, one of the biggest insurers in the
world.

In
a novel I wrote recently, the female bank consultant tells two friends
who are trying to figure a way out of the financial crisis they see
coming (in 2006) that when the U.S. dollar fails, it was altogether
possible that they government would put up as collateral all of the
personally-owned real estate in America. The International Monetary
Fund would require such collateral to make a loan bit enough for America
to buy its way out of international debt.

At
the time I wrote it, I thought it was a stretch relative to believability.
But, I made twelve predictions about what financial crises were coming…
and so far ten of them have come true.

So…
I have removed myself from the category of “conspiracy nut”
and placed myself firmly into the “I’m not crazy, you are”
category by comparison to those who think government can solve the problems
government created. I’m not a conspiracy nut because I do not
believe in the “too big to fail” theory, either. Being too
big is what has caused much of the financial institution failure.

It
makes not sense to think that making too big institutions bigger will
solve a problem that being too big caused.

I
rest my case.               

            ©
2008 – Marilyn
Barnewall – All Rights Reserved