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How the New York Times Hides the Truth About Wall Street's Catastrophic Misdeeds

The paper of record is in serious need of a fact checker when it comes to whether the Glass-Steagall Act could have prevented the financial crisis.

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“Next in line was the American International Group, an insurance company that was also unrelated to Glass-Steagall.”

There are four companies mentioned in those five sentences and in every case, the information is spectacularly false. Lehman Brothers owned two FDIC insured banks, Lehman Brothers Bank, FSB and Lehman Brothers Commercial Bank. Together, they held $17.2 billion in assets as of June 30, 2008, 75 days before Lehman went belly up. Lehman Brothers Banks FSB is where Lehman handled its mortgage loan originations.  When the  FDIC approved the Lehman Brothers Commercial Bank application  in 2005, it specifically noted that the FDIC-insured bank “anticipates acting as a derivatives intermediary, engaged in matched trading of interest rate products, primarily interest rate swaps, as well as forward purchase agreements and options contracts.”

Merrill Lynch also owned three FDIC-insured banks. At an FDIC symposium held at the National Press Club in 2003, Merrill Senior VP, John Qua,  explained the banking side  of Merrill as follows:

“Merrill Lynch conducts banking in the United States through two depository institutions – Merrill Lynch Bank USA, a Utah industrial loan corporation; and Merrill Lynch Bank and Trust, a New Jersey state non-member bank. We also own a federal savings bank that offers personal trust services to our clients. And we conduct significant banking activities outside the United States through banks in London, Dublin, Switzerland, and elsewhere. The combined balance sheet of our global banks is approximately $100 billion.”

Bear Stearns owned Bear Stearns Bank Ireland, which is now part of JPMorgan and called JPMorgan Bank (Dublin) PLC. According to JPMorgan, “It is the only EU passported bank in the non-bank chain of JPMorgan and provides the firm with direct access to the European Central Bank repo window. It has also been added to the JPMorgan Jumbo issuance programs to issue structured securities for distribution outside the United States.” 

As for the statement that AIG was “an insurance company that was also unrelated to Glass-Steagall,” one has the initial reaction to cancel one’s subscription to the New York Times. AIG owned, in 2008 at the time of the crisis, the FDIC insured  AIG Federal Savings Bank On June 30, 2008, it held $1 billion in assets. AIG also owned 71 U.S.-based insurance entities and 176 other financial services companies throughout the world, including AIG Financial Products which blew up the whole company selling credit default derivatives. 

What this has to do with Glass-Steagall is that the same deregulation legislation, the Gramm-Leach-Bliley Act that gutted Glass-Steagall in 1999, also gutted the 1956 Bank Holding Company Act and allowed insurance companies and securities firms to be housed under the same umbrella in financial holding companies.

AIG’s annuities are owned by moms and pops all over this country and around the world. In many cases, they represent a significant source of income to retirees. Had AIG been allowed to fail, state guaranty funds for insurance products could have been wiped out and the taint of buying insurance products would have damaged legitimate businesses for a lifetime. 

For ongoing evidence as to why insured deposit banks cannot be under the same roof with speculating Wall Street firms, one need only look at what the largest banks in the U.S. are holding today. According to the Office of the Comptroller of the Currency which oversees national banks, as of December 31, 2011, inside the insured banks – not their broker-dealer components – were the following derivative holdings: $70.1 trillion at JPMorgan Chase; $52.1 trillion at Citibank; $50.1 trillion at Bank of America; $44.2 trillion at Goldman Sachs Bank USA.

These insured deposit banks have a tiny fraction of their derivative holdings in assets. For example, JPMorgan Chase has $2.3 trillion in assets in the insured bank. So why does it need to hedge to the tune of $70.1 trillion in derivatives? That’s the crux of the issue. It is not just hedging for the insured bank, it is hedging for its hedge fund clients and corporate clients and institutional clients in the investment bank as well as making proprietary bets to generate profits.