They may have been gambling before that but now they had more resources to gamble with.
Only to the extent that the change was healthy and generated additional income that could be used to gamble.
but the speculative mania of the 00s was.
No it wasn't.
in spite of evidence to the contrary
You provide no evidence, and there is little from other sources. The main anti-Graham Leech Bliley argument seems to start with the idea that deregulation caused the crisis, then they look for remotely significant and potentially even distantly relevant financial deregulation even remotely close to the time frame in question and find only Graham Leech Bliley, so they blame it.
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For starters, most of the major institutions that cratered in 2008 were not universal banks that funded capital market activities (such as underwriting) with insured deposits. Indeed, the opposite was true. They were investment banks/broker dealers (Bear, Lehman, Merrill); GSEs (Fannie, Freddie); insurance companies (AIG); commercial or universal banks heavily dependent on wholesale funding; and SIVs (many of which did have connections to commercial banks, admittedly).
Indeed, one could make the case that those who prescribe Son of Glass-Steagall to cure our financial ilss have the diagnosis exactly backwards. Many of the institutions that cratered–notably the IBs and SIVs–did so precisely because they did not have sticky funding (like insured retail deposits): they relied on short-term, uninsured funding like repo and commercial paper. Others, like RBS, had some retail deposits, but notably were very dependent on wholesale (uninsured) funding, and that dependence had grown over time. All of these institutions suffered classic runs.
In this interpretation, it is the concentration of risk in institutions that do not fund primarily through insured deposits that is the problem. David Murphy has a new paper that looks at Lehman and RBS, and arrives at a similar conclusion. This would imply that Glass-Steagall is utterly off-point.
The history of banking in the US supports this view as well. Banking panics occurred throughout the 19th and first-third of the 20th centuries due to funding fragility. These panics destroyed banks that engaged in traditional banking activities like commercial and real estate lending. Yes, there were runs on investment houses too (Jay Cooke & Co., Barings) but the point is that it’s the liability side of the balance sheet that matters more than the asset side. There was tremendous diversity in the asset side of the balance sheets of firms that suffered runs prior to deposit insurance: there was very little diversity on the liability side. All were funded with short term liabilities that could run at the drop of a hat.
streetwiseprofessor.com
Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation — namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) — than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant. Canada had none of these stifling regulations, and had zero bank failures. (Incidentally, Canada also avoided all the post-Civil War bank panics that struck the U.S., even though Canada did not have a central bank until 1934 — yet again, reality refuses to conform to the where-would-we-be-without-our-wise-overlords comic-book version of events.) The Glass-Steagall-did-it crowd is the same crowd that likes to claim Canada avoided the worst of the U.S. crisis because it was so much better regulated. But they can’t have it both ways — Canada did not have a Glass-Steagall law!
tomwoods.com
Reason: We’ve had Fannie Mae and Freddie Mac for much longer than the past couple of decades. And we didn’t wind up with the financial crisis that occurred in the past decade. You’ve articulated that there were major changes made to the way that they operated in the 90’s. So it was the changes that happened in the 1990’s to housing policy that contributed to the build-up of the housing bubble then leading into the financial crisis. But if we look in the 90’s to try and find some significant changes that happened on Wall Street itself, we can see that there were a lot of formerly private partnerships that had become public companies. Corporate governance models changed substantially in the 90’s. The Gramm-Leach-Bliley Act allowed for investment banks and commercial banks to come together under one roof, without putting in place good resolution procedures in case complex firms got into trouble. So we can add significant changes to the way Wall Street operated in the 90’s to the story of the crisis. If that had not had happened, would we have still had the financial crisis?
Wallison: Oh, of course. Even if we assume that it was the private sector’s fault, that it was the private sector that caused the financial crisis, who got in trouble in the financial crisis? Big banks and big investment banks. After Gramm-Leach-Bliley [in 1999], banks could affiliate with investment banks. But they didn’t do so. There were no connections between the Citis, the JP Morgans, which are banks, and the Goldman Sachses, the Morgan Stanleys, the Merrill Lynches, which are investment banks. Now there are, because the government allowed Bear Stearns to be acquired by JP Morgan Chase, and Bank of America to acquire Merrill Lynch. But before that, they were completely separate from one another. So the banks got into trouble in the financial crisis by buying these very poor quality loans and believing, I think, that they were good quality loans. They held onto them and suffered major losses. The investment banks (who were completely separate from the banks) did the same thing. So if Glass-Steagall were still in effect, and had not been modified by Gramm-Leach-Bliley it wouldn’t have changed a thing. Glass-Steagall was irrelevant to the financial crisis, because even though banks and investment banks could have affiliated, they didn’t. They remained as competitors.
reason.org
Clear as Glass (Steagall) By Megan McArdle
Sep 19 2008, 10:38 AM ET Off all the most bizarre statements running around about this crisis, the most bizarre is the shockingly common belief on the left that this can somehow be traced back to the Gramm-Leach-Bliley act, which "repealed" Glass-Steagall. (The equivalent, not-quite-as-loony belief on the right is that if we hadn't had such tough redlining laws, or such deep government interest in expanding homeownership, this wouldn't have happened). This is wrong in so many ways that one hardly knows where to start.
Let's start with the history: there were actually two Glass-Steagall acts, but what we're generally referring to is the second one, passed in 1933, which did a number of things.
- It regulated interest rates, including setting a rate of zero on demand deposits. This was rolled back decades ago, which is why you now get interest on your checking account, and banks strive to offer you an attractive interest rate rather than a free toaster when you open an account with them.
- It established the FDIC to insure bank deposits. Last time I looked, the FDIC was still there, keeping my $7.67 safe from harm.
- It separated investment banking and commercial banking, which is why Morgan Stanley and JP Morgan are two different institutions. This was effectively dead letter when Traveler's bought Citigroup in 1998, but Gramm-Leach-Bliley officially repealed this provision in 1999.
The argument is that this was a bad idea because Glass-Steagall wisely prevented commercial banks from mad speculation. This is what you might call "Folk Economics"--wrapped in the lurid lore of the New Deal and very superficially appealling, it is close to an axiom of faith for many on the left. Sadly, it is simply wrong, as Alex Tabarrok ably explains:
Given a history like this people wonder how repealing the law could have been a good thing. But a significant academic literature has investigated these claims and rejected them. Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates. Randall Kroszner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks. A powerful book by George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham. My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor). Finally, my own work (pdf) unearthed the real reasons for the separation in a titanic battle between the Morgans and Rockefellers.
Yet this meme keeps coming back and back, in my comments and elsewhere. Paul Krugman and Daniel Gross are too chicken to outright claim that the "repeal" caused this mess, but they sure do strenuously imply it.
They can't say it more directly because it's moronic. Even if you ignore the economic history indicating that Glass-Steagall didn't help the crisis it was meant to solve--even if you assume, arguendo, that the repeal was a bad idea--there's simply no logical reason to believe it had anything to do with the current mess.
Securitization was not introduced in the 1990s; it was invented in the 1970s and became popular in the 1980s, as chronicled in Liar's Poker. (As an aside, if you haven't read it, you really must. Especially now).
GLB had nothing to do with either lending standards at commercial banks, or leverage ratios at broker-dealers, the two most plausible candidates for regulatory failure here.
Most importantly, commercial banks are not the main problems. If Glass-Steagall's repeal had meaningfully contributed to this crisis, we should see the failures concentrated among megabanks where speculation put deposits at risk. Instead we see the exact opposite: the failures are among either commercial banks with no significant investment arm (Washington Mutual, Countrywide), or standalone investment banks. It is the diversified financial institutions that are riding to the rescue.
theatlantic.com |
