WITH THE U.S. GOVERNMENT PULLING THESE TWO CRITICAL SAFETY NETS FOR THE ECONOMY, THE WRITING ON THE WALL FOR YET ANOTHER CRASH SEEMS FAR TOO APPARENT.
From L. Todd Wood
I was a fairly new employee on Wall Street, a decade and a half ago. I had only been trading about five years but I clearly remember when Sandy Weill, the architect of Citigroup, walked in my office to rally the troops during a management visit. Jamie Dimon, the currency CEO of JP Morgan Chase, dutifully followed behind with a clipboard, taking notes from the master.
The reason for the show of the Citigroup brass was to conduct a pep rally for the repeal of the Glass-Steagall Act. This was the law that was passed after the 1929 market crash and ensuing depression, which caused severe hardship and pain for the entire world. The law primarily split the investment and commercial banking functions into two different types of organizations, with the intention of preventing banks from risking depositor’s money in more aggressive investment activities. As Mr. Weill explained his reasons for believing the law would be repealed, these words passed through my head: This will not end well!
A decade later, as the world collapsed during the 2008 financial crisis, I realized my worst fears were proving accurate.
The past couple weeks, I experienced a form of deja vu as the “Cromnibus” was crammed down the throat of the American public in a last-minute spasm of irresponsible rule-making by our politicians in Washington, DC. The bill was advertised as a bipartisan deal to fund the government through most of 2015, thus preventing a government shutdown that neither side wanted. But what the exercise in smoke-filled-room politics also did was hand out a grab bag of freebies to special interests wealthy enough to afford the best lobbyists on DC’s K Street.
The most egregious campaign contribution payoff was the repeal of a portion of Dodd-Frank You may recall that Dodd-Frank imposed enhanced regulatory oversight and limits on the banking sector after the 2008 financial crisis, the latest global apocalypse forced on the world by the American banking system. Specifically, the bill removed the directive for banks to “push out” their derivatives trading operations away from the FDIC protected deposits of their commercial banking customers.
A swap is a trade “derived” from other securities or markets – hence the term derivative. The basic nature the trade is to swap one instrument for another to better align an investor’s desired cash flow. Approximately 90% of swaps were exempted from Dodd-Frank, trades that were deemed necessary for institutions to be competitive and to conduct business that Congress deemed as low-risk. However, the remainder of the trades were pushed out; the restricted trades included certain types of structured finance, like the securities linked to toxic debt that caused the housing crisis. The Cromnibus bill removed these restrictions.
Again my feelings are simple: This will not end well.
In addition to the derivative issue, the Cromnibus removed the requirement for full pensions to be paid to retirees, regardless of the liabilities for future workers. In short, the bill allows corporations to reduce current retiree benefits under certain circumstances when the plan is woefully short for future liabilities. The consequences of this change are obvious, with retirees, dependent on their fixed pension income, being the losers. Companies will be seduced into lowering their costs by revoking promises made to former employees. This also could be an attempt to further reduce the concept of pension plans altogether in favor of employee self-funded retirement like in a 401(k). Those hurt the most will be retired blue collar workers who cannot recoup the loss at this point in their lives.
It seems as though Congress and President Obama, who lobbied hard for the passage of the Cromnibus, are not worried about the United States and the world having to relearn the hard lessons of the past, as they are setting the financial system up for the same type of serious financial crisis at some point down the road. Are our politicians sacrificing your future for their short-term political gain?
The lesson to be learned here is simple: You are on your own for your financial future. You cannot count of government to watch your back in your older years. One way to protect your spending power from irresponsible financial decisions is to put your hard-earned money into Gold – the only currency that has retained its value for thousands of years.
There is no central bank that can print more Gold. There is no Congress that can devalue it. As the bad policy decisions start to build after the last crisis, doesn’t it seem prudent to move some of your savings into a stable store of value?
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photo credit: eyewashdesign: A. Golden via photopin cc
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