The 2007-2008 financial crisis occurred in part because of reckless conduct within the financial system. Among the culprits was an American multinational finance and insurance company, American International Group (AIG). AIG had lost nearly $100 billion and was considered too-big-to-fail. As such, AIG received a bail out funded by U.S. taxpayers.
When it became publicly known that AIG was paying $165 million retention and bonus payments to some of their employees, members of the U.S. Congress was quick to condemn them. Among the loudest outraged politicians was New York Senator Charles “Chuck” Schumer. Mr. Schumer is a long standing member of the banking and finance committee.
On March 17, Mr. Schumer warned AIG executives to give up their bonuses or Congress would recoup them through taxes. “In the past year we have learned much about the reckless behaviour within our financial system,” he scolded.
Had Mr. Schumer followed his advice in his own op-ed published in 1987 his righteous condemnation could be justified, but he did not.
At best, Senator Schumer, given his senior leadership of the Senate, Mr. Schumer could have potentially averted the economic crisis.
Why? Because of legislation called the Glass-Steagall Act of 1933 which President Franklin Roosevelt signed into law.
Don’t Let Banks Become Casinos
Let’s rewind to 1987 to a New York Times op-ed piece authored by Mr. Schumer entitled, “Don’t Let Banks Become Casinos.”
In it Mr. Schumer wrote in part:
“Citing the pressures of rigorous worldwide competition in financial services, large American banks are pleading for the repeal of the Glass-Steagall Act, a law that keeps banks out of the more volatile and risky world of securities transactions. Their entreaties should be resisted. The reasons the act was passed are still valid…”
Mr. Schumer explained why:
“The Glass-Steagall Act of 1933 evolved from the bitter experience of the Depression, when American banking was in shambles. Left free to speculate in the 1920’s, banks naturally looked where profits seemed highest, and were inevitably drawn into risky propositions. When a few banks failed, depositors nationwide panicked. Runs on banks pushed this country over the brink of financial disaster.
Stability was restored only years later after the Federal Government insured depositors’ money and imposed tough limits on the kind of risks a bank can undertake.
Today’s bankers promise they will be more careful. But to accept their assurances runs counter to the simple principles of fairness and common sense. Banks want to keep the Federal insurance that attracts depositors and then use that capital to compete against traditional, unsubsidized securities firms.
No one could complain if banks renounced their Federal insurance and then competed evenly against securities firms. But the banks simply should not be allowed to gamble with taxpayer insured dollars.”New York Times
Read entire op-ed here:
Now, fast forward to November 1999 to Mr. Schumer’s remarks on the passage of S. 900, legislation known as Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act. The Gramm-Leach Bliley Act, sponsored by Republican Senator for Texas, Phil Gramm, repealed regulation within Glass-Steagall. President Bill Clinton signed the Gramm-Leach-Bliley Act into law.
“Mr. President, this is a historic moment,” Mr. Schumer said at the time. “… The future of America’s dominance as the financial center of the world is at stake… If we didn’t pass this bill, we could find London or Frankfurt or… Shanghai becoming the financial capital of the world. That has grave implications for all of America, where financial services are one of the areas where jobs are growing the most quickly… where our capital dominates the world. And it would be a shame if because Congress has been unable to act that all those advantages were frittered away as they well could be in a global world by our failure to realize the problems that our existing antiquated laws cause us…”
Mr. Schumer concluded:
“From Glass-Steagall to Gramm-Leach, from the Great Depression to the Golden Age, from isolationists to internationalists, from underdogs to champions, this bill, in my opinion, Mr. President, is an American success story for our economy… And I was proud to have played a role with so many others in ensuring its passage.”
The Gramm-Leach-Bliley Act passed on a 90 to 8 vote. In a statement, President Clinton said at the time, “The Gramm-Leach-Bliley Act is a major achievement that will benefit American consumers, communities, and businesses… The Act repeals provisions of the Glass-Steagall Act that, since the Great Depression, have restricted affiliations between banks and securities firms. It also amends the Bank Holding Company Act to remove restrictions on affiliations between banks and insurance companies…”
And the rest is, as they say, history.
So while Mr. Schumer feigns outrage at the financial industry over the latest economic crisis, in reality, the blame for the crisis may be directed not only at corporations but at politicians on both sides of the aisle, a Republican Congress and at former President Bill Clinton.
What provoked Mr. Schumer’s dramatic Glass-Steagall flip-flop? Calls to his office were not returned.
Here is what we know. Since Mr. Schumer’s 1987 op-ed, the Securities & Investment industries became his largest campaign donors. Citigroup, Inc., Goldman Sachs, JP Morgan, Morgan Stanley, Bear Stearns and Lehman Brothers consistently topped his list of donors.
According to the Center for Responsible Politics, during the last six election cycles Mr. Schumer received $1,284,200 in 1998; $2,263,276 in 2000; $3,483,587 in 2002, $3,495,060 in 2004, $2,651,700 in 2006, and $1,392,539 in 2008 from the Securities & Investment industry.
Recall, it was Citigroup’s 1998 merger with Travelers Insurance which quickened Glass-Steagall’s demise. Last year, Citigroup received two U.S. government bailouts totaling $45 billion.
A former investment banker who first met Mr. Schumer in late 1979 or early 1980 when the aspiring Senator first came to his office told me: “At the time, I was very favourably impressed with ‘Chuck’. Today, nothing disgusts me more about our political system than Sen. Schumer’s total pandering to his financial backers with his chameleon-like record. He is the perfect example of how the virtuous bright members of our legislature have sold out. Not to mention his constant posturing so as to be included in any positive photo-op!”
Back in 1987 Mr. Schumer wrote in his New York Times Op-ed:
“One must wonder why it is the duty of the Federal Government to insure banks that provide capital to risk-takers when that can already be handled by an increasingly competitive worldwide securities industry.
The answer… is that banks see big profits in securities. But if a bank thinks it can make more money as a securities firm, let it become one. Let’s not destroy a stable structure that since the Great Depression has provided capital for entrepreneurs, confidence for depositors, and healthy profits for America’s financial service companies.”“Don’t let banks become casinos,” New York Times
Indeed. But with Mr. Schumer’s help, that stable financial structure formerly protected by Glass-Steagall was destroyed.
Unfortunately, Mr. Schumer ignored his own prophetic conclusions. One cannot help but wonder why.
See also: “25 People to Blame for the Financial Crisis,” and why according to Time Magazine. The list includes Republican Senator Phil Gram, President Bill Clinton, and President George W. Bush.