03/26/2009 04:06 pm ET Updated May 25, 2011

Beginning to Breathe Again

As I write, U.S. stocks are rising, extending the market's best monthly gain since 1987. The Standard & Poor's 500 index has risen 24 percent from its intraday low of 667 on March 6th. Although the rise seems in large part due to actions taken in Washington, we are beginning to see glimmers of hope coming from companies themselves. While still frail, the rally does seems to indicate that there is a readiness to return to normal market pricing so long as the rules are set and enforced and the economy is not in freefall. Even a mixture of good and bad news is good news today.

Turning to Washington first, on Monday, Treasury Secretary Tim Geithner announced his "public-private investment plan." This plan is targeted towards helping the banks get "toxic assets" off of their balance sheets by using federal guarantees to encourage private investors to purchase them alongside the government. It was met with wild (and from my part unexpected) enthusiasm, sending the S&P up seven percent that day. The hope is that if the banks' balance sheets are cleaned up, credit will begin flowing more freely again as banks return to their normal business of lending.

Of greater interest to me, and to the long-term well being of the financial system, is that Secretary Geithner also rolled out a proposal for comprehensive shifts in the authority of government over companies viewed as "too large to fail" or what I have called "too large to exist." Mr. Geithner, in his opening statement, called for "comprehensive reform. Not modest repairs at the margin, but new rules of the game."

A new systematic risk regulator will be created and Mr. Geithner is reaching out to the rest of the globe to join us in the initiative. The structure will need Congressional approval so is far from complete, but the administration seems quite determined to pursue the route, despite early contrary sentiments trotted out by free-market proponents. There is surely a battle looming, but it is about time.

To see how important these regulations can be, I enclose an article that is almost ten years old. In it, the core legislation allowing the crisis of these past two years was voted into existence.

The administration has also seen the need to acknowledge that community development financial institutions are key contributors of benefits and has fast-tracked capital to the sector. $140 million was recently allocated to this year's programs. An additional $1.5 Billion allocation to New Markets Tax Credit Program, and an increase of the CDFI Fund's allocation authority for tax credits from $3.5 billion to $5 billion was also passed. This may be peanuts compared to the allocation to the credit crisis but represents a tremendous shift in federal policy from a year ago.

While I do continue to be disappointed with the low level of activity that the Securities Exchange Commission seems to have taken in dampening speculation and enforcing the law, it may in part result from uncertainty as to what their role will be in the new Geithner plan. The good news is that General Counsel for Domini Social Investments, Adam Kanzer, recently met with SEC Commissioner Luis A. Aguilar and felt that the concerns of responsible investors, particularly on enforcing current disclosure requirements, will now be addressed in a meaningful way.

To turn to economics, we see tiny, but hopefully significant signs that stability may be entering the picture. The report yesterday from the Commerce Department indicating that new-home sales jumped 4.7 percent last month from a record low pace in January was most welcome. Also, mortgage rates are now low enough that those with secure equity in their homes are finding it worth while to roll to a lower rate, and home mortgage refinancing rose 41.5% last week. This could free up monthly savings, some of which may help jumpstart the economy. We also saw unexpected growth in durable goods orders. People buying refrigerators or businesses buying trucks are considered an indication of confidence in the future.

My own best hope was in seeing that Automatic Data Processing, the nation's largest payroll back office, announced that it still predicts an albeit tiny, but positive increase in revenues this year. Profits at most companies will be terrible, but if we see revenue growth, we know that the storm is largely passed. Since Wall Street looks ahead, not behind, any indication that revenues are able to grow in such an economically sensitive area as payroll processing is most welcome.

At present, my focus is entirely on the unfolding regulations for stabilizing financial markets and will continue to look for indications that corporate revenues are beginning to rise.


November 5, 1999

Congress approved landmark legislation today that opens the door for a new era on Wall Street in which commercial banks, securities houses and insurers will find it easier and cheaper to enter one another's businesses. The measure, considered by many the most important banking legislation in 66 years, was approved in the Senate by a vote of 90 to 8 and in the House tonight by 362 to 57. The bill will now be sent to the president, who is expected to sign it, aides said. It would become one of the most significant achievements this year by the White House and the Republicans leading the 106th Congress.

''Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic legislation will better enable American companies to compete in the new economy.''

The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings from a handful of dissenters that the deregulation of Wall Street would someday wreak havoc on the nation's financial system. The original idea behind Glass-Steagall was that separation between bankers and brokers would reduce the potential conflicts of interest that were thought to have contributed to the speculative stock frenzy before the Depression.

Today's action followed a rich Congressional debate about the history of finance in America in this century, the causes of the banking crisis of the 1930's, the globalization of banking and the future of the nation's economy. Administration officials and many Republicans and Democrats said the measure would save consumers billions of dollars and was necessary to keep up with trends in both domestic and international banking. Some institutions, like Citigroup, already have banking, insurance and securities arms but could have been forced to divest their insurance underwriting under existing law. Many foreign banks already enjoy the ability to enter the securities and insurance industries.

''The world changes, and we have to change with it,'' said Senator Phil Gramm of Texas, who wrote the law that will bear his name along with the two other main Republican sponsors, Representative Jim Leach of Iowa and Representative Thomas J. Bliley Jr. of Virginia. ''We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.''

In the House debate, Mr. Leach said, ''This is a historic day. The landscape for delivery of financial services will now surely shift.'' But consumer groups and civil rights advocates criticized the legislation for being a sop to the nation's biggest financial institutions. They say that it fails to protect the privacy interests of consumers and community lending standards for the disadvantaged and that it will create more problems than it solves.

The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly.

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

Senator Paul Wellstone, Democrat of Minnesota, said that Congress had ''seemed determined to unlearn the lessons from our past mistakes.''

''Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis,'' Mr. Wellstone said. ''Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.''

Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.

''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska. Others said the legislation was essential for the future leadership of the American banking system.

''If we don't pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world,'' said Senator Charles E. Schumer, Democrat of New York. ''There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.''

But other lawmakers criticized the provisions of the legislation aimed at discouraging community groups from pressing banks to make more loans to the disadvantaged. Representative Maxine Waters, Democrat of California, said during the House debate that the legislation was ''mean-spirited in the way it had tried to undermine the Community Reinvestment Act.'' And Representative Barney Frank, Democrat of Massachusetts, said it was ironic that while the legislation was deregulating financial services, it had begun a new system of onerous regulation on community advocates.

Many experts predict that, even though the legislation has been trailing market trends that have begun to see the cross-ownership of banks, securities firms and insurers, the new law is certain to lead to a wave of large financial mergers.

The White House has estimated the legislation could save consumers as much as $18 billion a year as new financial conglomerates gain economies of scale and cut costs.

Other experts have disputed those estimates as overly optimistic, and said that the bulk of any profits seen from the deregulation of financial services would be returned not to customers but to shareholders.

These are some of the key provisions of the legislation:
---Banks will be able to affiliate with insurance companies and securities concerns with far fewer restrictions than in the past.
---The legislation preserves the regulatory structure in Washington and gives the Federal Reserve and the Office of Comptroller of the Currency roles in regulating new financial conglomerates. The Securities and Exchange Commission will oversee securities operations at any bank, and the states will continue to regulate insurance.
---It will be more difficult for industrial companies to control a bank. The measure closes a loophole that had permitted a number of commercial enterprises to open savings associations known as unitary thrifts.

One Republican Senator, Richard C. Shelby of Alabama, voted against the legislation. He was joined by seven Democrats: Barbara Boxer of California, Richard H. Bryan of Nevada, Russell D. Feingold of Wisconsin, Tom Harkin of
Iowa, Barbara A. Mikulski of Maryland, Mr. Dorgan and Mr. Wellstone. In the House, 155 Democrats and 207 Republicans voted for the measure, while 51 Democrats, 5 Republicans and 1 independent opposed it. Fifteen members did not vote.

Tucked away in the legislation is a provision that some experts today warned could cost insurance policyholders as much as $50 billion. The provision would allow mutual insurance companies to move to other states to avoid payments they would otherwise owe policyholders as they reorganize their corporate structure. Many states, including New York and New Jersey, do not allow such relocations without the consent of the insurer's domicile state. But the legislation before Congress would pre-empt the states.

Both the Metropolitan Life Insurance Company and the Prudential Life Insurance Company are in the midst of reorganizing into stock-based corporations that are requiring them to pay billions of dollars to policyholders from years of accumulated surplus. In exchange, the policyholders give up their ownership in the mutual insurance company. The legislation would permit any mutual insurance company to avoid making surplus payments to policyholders by simply moving to states with more permissive laws and setting up a hybrid corporate structure known as a mutual holding company.

The provision was inserted by Representative Bliley at the urging of a trade association. It attracted little opposition because it was attached to a provision that forbids insurers from discriminating against domestic-violence victims.

In a letter sent to Congress this week, Mr. Summers said that the provision ''could allow insurance companies to avoid state law protecting policyholders, enriching insiders at the expense of consumers.''