I will largely quote from an article written by Julian Delasantellis and published in the Asia Times,
while it deals with how the USA decided against regulating the derivatives market, I want you to keep Gordon Brown's instruction to the FSA to regulate the Banking sector with a light touch in mind.
In the USA, the Glass Steagall Act of 1933, which had kept Investment Banking separate from Commercial Banking, was repealed under the Clinton Administration in 1999 by the Gramm-Leach-Billey Act.
Gramm called the Glass-Steagall repeal an event that "will keep our markets modern, efficient and innovative, and it guarantees that the United States will maintain its global dominance of financial markets"
A little like Gordon Brown claiming "I have ended boom and bust".
However, let's look at the background in the run up to the Gramm Act … there are some major names involved in the decision by the Anglo-American economies to allow full blown Casino activity under the guise of Banking.
In 1996 Clinton appointed Brooksley Born to the chair of CFTC (The commodities and futures trading exchanges regulator). In 1998 she started expressing concern at the growth of over the counter (OTC) trade in derivitatives, which were effectively futures contracts but not traded on any exchange and therefore beyond regulatory reach.
"These instruments can be used to reduce economic risk, and they are certainly very valuable and useful economic instruments, but they can also create enormous risks, as they did at Enron and Long-Term Capital Management. Warren Buffett has recently called them financial weapons of mass destruction. I became concerned about it once I got to the commission and began to learn about the OTC market. The more I learned, the more I realized we didn't know. I realized there was a tremendous potential danger to the markets in the United States and to the international economy."
She began calling for regulation or oversight of this market.
Before a Senate Committee she gets shot down in flames;
"Then deputy secretary of the Treasury Lawrence Summers led off.
Mr Chairman, the OTC derivatives market has grown from nothing to become a highly lucrative industry of major international importance. It is reasonable to consider whether it is necessary to make changes in how this market is regulated. But there is currently no clear consensus in the government or in the private sector concerning any possible additional regulation for this market. And there is certainly no consensus that the CFTC currently has the legal authority to regulate this market or raise questions about possible regulation of this market in the future.
Then Federal Reserve chairman Greenspan. Back in 1998, the masses listened intently to each magnificent inflection of every brilliant syllable the great oracle uttered, for people literally believed that the prophet cum savior had the ability to spin gold from dross. Only now, 10-plus years later, do we realize that his true skills could be more accurately described as being just the opposite.
Not only did Greenspan oppose the expansion of CFTC jurisdiction to OTC derivatives; he even wanted it scaled back for standard, exchange-based futures trading.
The Federal Reserve believes that the fact that OTC markets function so effectively without the benefits of the CEA [the 1936 Commodity Exchange Act, which authorized the CFTC] provides a strong argument for development of a less burdensome regulatory regime for financial derivatives traded on futures exchanges. To reiterate, the existing regulatory framework for futures trading was designed in the 1920s and 1930s for the trading of grain futures by the general public. Like OTC derivatives, exchange-traded financial derivatives generally are not as susceptible to manipulation and are traded predominantly by professional counterparties.
Next up, SEC chairman Levitt. The former president of the American Stock Exchange was certainly not bullish on Brooksley Born.
The CFTC's concept release raises important policy questions that should not be addressed by the CFTC alone, but rather require the attention of Congress, members of the financial regulatory community, and interested industry participants."
Against the odds she continued the fight;
"Born tried to counterattack.
The legislative proposal offered by the Treasury Department raises serious concerns. The Treasury proposal would severely limit the CFTC's ability to fulfill its oversight responsibilities with regard to OTC derivatives transactions within its statutory authority, would result in a substantial change in the CEA, and would potentially leave the American public without federal protection in the event of an emergency in the OTC derivatives market. No justification has been offered for these sweeping changes in OTC derivatives regulation. Indeed, the Treasury proposal does not appear to be based on any principled concern about the need for a coordinated approach to the OTC derivatives market, since it aims to restrict only the activities of the CFTC.
Lugar wanted Born to drop her proposal, threatening her with writing new laws into statute limiting the CFTC's jurisdiction. Born was willing to entertain a temporary moratorium to allow the bureaucracy time to attempt to unify behind a common position, but, for the sharks circling around her, that was just her blood in the water.
Not even the September LTCM crisis, which seemed to prove her point about the dangers of derivatives, changed any minds among her critics. "Yes," there was a crisis, they sniffed, but Uncle Alan fixed everything, so why can't we go back to making more money?
Still, Born tilted at windmills. Appearing before the House Banking Committee, Born warned of an
immediate and pressing need to address whether there are unacceptable regulatory gaps … This episode should serve as a wake-up call about the unknown risks that the over-the-counter derivatives market may pose to the US economy and to financial stability around the world.
It would all be for naught, for lined up against Born's integrity and vision were the entire government/financial complex shuttling in and out of positions in Bill Clinton's administration. Congress passed the six-month hold on CFTC's regulatory authority, making it permanent in 1999. During those six months what little legislative support for tighter restrictions collapsed. Born resigned."
The rest is a matter of history … In the UK we also had whistle blowers and dissenters to the direction we were taking … they were just muscled aside without ever being allowed to get as far as Brooksley Born, who nearly succeeded in preventing the current USA financial melt down.
We have now seen the USA relaxing the accounting standards of marking assets to market … simply a way of allowing them to brush their problems under the carpet, just as Japan did and I see a similar call for International Accounting standards to be relaxed in the same way.
The Italiscised sections have been extracted from the article by Julian Delasantellis and can be viewed in the link to Asia Times provided above.