Transforming Big Banks into Bucket Shops

The Impact of Gramm-Leach-Bliley Act & The Commodity Futures Modernization Act

Research output: Working paper

Abstract

Gramm-Leach-Bliley Act (1999) and the Commodity Futures Modernization Act (2000) are perhaps the two most significant laws signed by President Clinton. They have opened the door for banks to invest, speculate and gamble on the paths of price movements of securities and commodities without any type of meaningful boundaries or controls. In this paper, I hypothesize that these two legislations have taken the country back to pre-1908 economic environment with rampant bucket shops undermining the real economic activity. A brief review of the history of bucket shops is followed by addressing the similarities between Over-the-Counter derivatives and the bets placed with bucket shops. The volume and growth of OTC derivatives since 2000 is testimonial of a system that has skewed big banks to be more like bucket shops than financial intermediaries. This is documented by examining the relationship between OTC derivatives to total assets of the largest holders of these derivatives as well as by the high magnitudes of the revenues they earn from OTC derivatives.
Original languageEnglish (US)
Number of pages46
DOIs
StatePublished - Jul 26 2016

Fingerprint

Derivatives
Modernization
Gramm-Leach-Bliley Act
Commodity futures
Assets
Commodities
Economic activity
Economic environment
Gambles
Financial intermediaries
Revenue
Legislation

Keywords

  • gambling
  • financial derivatives
  • transparency
  • financial concentration

Cite this

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abstract = "Gramm-Leach-Bliley Act (1999) and the Commodity Futures Modernization Act (2000) are perhaps the two most significant laws signed by President Clinton. They have opened the door for banks to invest, speculate and gamble on the paths of price movements of securities and commodities without any type of meaningful boundaries or controls. In this paper, I hypothesize that these two legislations have taken the country back to pre-1908 economic environment with rampant bucket shops undermining the real economic activity. A brief review of the history of bucket shops is followed by addressing the similarities between Over-the-Counter derivatives and the bets placed with bucket shops. The volume and growth of OTC derivatives since 2000 is testimonial of a system that has skewed big banks to be more like bucket shops than financial intermediaries. This is documented by examining the relationship between OTC derivatives to total assets of the largest holders of these derivatives as well as by the high magnitudes of the revenues they earn from OTC derivatives.",
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AB - Gramm-Leach-Bliley Act (1999) and the Commodity Futures Modernization Act (2000) are perhaps the two most significant laws signed by President Clinton. They have opened the door for banks to invest, speculate and gamble on the paths of price movements of securities and commodities without any type of meaningful boundaries or controls. In this paper, I hypothesize that these two legislations have taken the country back to pre-1908 economic environment with rampant bucket shops undermining the real economic activity. A brief review of the history of bucket shops is followed by addressing the similarities between Over-the-Counter derivatives and the bets placed with bucket shops. The volume and growth of OTC derivatives since 2000 is testimonial of a system that has skewed big banks to be more like bucket shops than financial intermediaries. This is documented by examining the relationship between OTC derivatives to total assets of the largest holders of these derivatives as well as by the high magnitudes of the revenues they earn from OTC derivatives.

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