Those bad loans repackaged as mortgage backed securities were then leveraged to casino levels though the investment banks and the derivatives on MBSs.
Which would have happened even without Gramm-Leach-Bliley, since Glass Steagall didn't prevent the existence of mortgage back securities. Also the barriers where being broken down and worked around before Gramm-Leach-Bliley actually repealled Glass Steagall), this was happening atleast as far back as the 70s, so Th The repackaging and trading of the mortgages in to all sorts of securities was an important factor in allowing the bubble to be formed, but commercial banks didn't need to buy them in order for that bubble to happen, once the bubble happened any banks holding mortgages would be hit with the collapse of the value of their collateral and the reduced ability and willingness of people to pay on underwater mortgages. The banks don't actually have to hold the securities in order to fall prey to problems with them or mortgages or other loans. The S&Ls didn't hold CDS's and that didn't save them.
Did Washington Mutual, and Countrywide do fine because they didn't have a large investment arm? Of course not. They failed anyway and they where not brought down by anything directly related to Glass-Steagal or Gramm-Leach-Bliley. The investment banks (who held most of the exotic derivitives, or at least most of those held by banks of any type) where the first to get in trouble, and the combined banks (that had investment banking and non-investment banking) didn't get in to as much trouble as the pure investment banks.
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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.
meganmcardle.theatlantic.com
(I would say the failures are concentrated in those areas, its not like they where the only failures)
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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.
Thus, the history of banking before Glass-Steagall and now our recent experience after is consistent, generally speaking unified banking is safer and repeal was a good idea.
Posted by Alex Tabarrok on September 19, 2008
marginalrevolution.com
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Ferguson on Regulation and Deregulation
Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.
There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.
Niall Ferguson writing in the NYTimes. Recommended.
Posted by Alex Tabarrok
marginalrevolution.com
...So starting in the late 1970s, state bank regulations were relaxed or eliminated, increasing the efficiency of the banking sector and fostering economic growth. But the move also increased concentration. In 1980, there were 14,434 banks in the United States, about the same number as in 1934. By 1990, this number had dropped to 12,347; by 2000, to 8,315. In 2009, the number stands below 7,100. Most important, the concentration of deposits and lending grew significantly. In 1984, the top five U.S. banks controlled only 9% of the total deposits in the banking sector. By 2001, this percentage had increased to 21%, and by the end of 2008, close to 40%.
The apex of this process was the 1999 passage of the Gramm-Leach-Bliley Act, which repealed the restrictions imposed by Glass-Steagall. Gramm-Leach-Bliley has been wrongly accused of playing a major role in the current financial crisis; in fact, it had little to nothing to do with it. The major institutions that failed or were bailed out in the last two years were pure investment banks — such as Lehman Brothers, Bear Stearns, and Merrill Lynch — that did not take advantage of the repeal of Glass-Steagall; or they were pure commercial banks, like Wachovia and Washington Mutual. The only exception is Citigroup, which had merged its commercial and investment operations even before the Gramm-Leach-Bliley Act, thanks to a special exemption...
nationalaffairs.com
Also see
meganmcardle.theatlantic.com |
