To: denizen48 who wrote (130638 ) 2/2/2013 3:25:31 PM From: John Vosilla Read Replies (3) | Respond to Glass–Steagall “repeal” and the financial crisis Robert Kuttner , Joseph Stiglitz , Elizabeth Warren , Robert Weissman, Richard D. Wolff and others have tied Glass–Steagall repeal to the late-2000s financial crisis . Kuttner acknowledged “de facto enroads” before Glass–Steagall “repeal” but argued the GLBA’s “repeal” had permitted “super-banks” to “re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s,” which he characterized as “lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way.” [7] Stiglitz argued “the most important consequence of Glass–Steagall repeal” was in changing the culture of commercial banking so that the “bigger risk” culture of investment banking “came out on top.” [8] He also argued the GLBA “created ever larger banks that were too big to be allowed to fail,” which “provided incentives for excessive risk taking.” [287] Warren explained Glass–Steagall had kept banks from doing “crazy things.” She credited FDIC insurance, the Glass–Steagall separation of investment banking, and SEC regulations as providing “50 years without a crisis” and argued that crises returned in the 1980s with the “pulling away of the threads” of regulation. [9] Weissman agrees with Stiglitz that the “most important effect” of Glass–Steagall “repeal” was to “change the culture of commercial banking to emulate Wall Street's high-risk speculative betting approach.” [288] Lawrence White and Jerry Markham rejected these claims and argued that products linked to the financial crisis were not regulated by Glass–Steagall or were available from commercial banks or their affiliates before the GLBA repealed Glass–Steagall sections 20 and 32. [11] Alan Blinder wrote in 2009 that he had “yet to hear a good answer” to the question “what bad practices would have been prevented if Glass–Steagall was still on the books?” Blinder argued that “disgraceful” mortgage underwriting standards “did not rely on any new GLB powers,” that “free-standing investment banks” not the “banking-securities conglomerates” permitted by the GLBA were the major producers of “dodgy MBS,” and that he could not “see how this crisis would have been any milder if GLB had never passed.” [289] Similarly, Melanie Fein has written that the financial crisis “was not a result of the GLBA” and that the “GLBA did not authorize any securities activities that were the cause of the financial crisis.” [290] Fein noted “[s]ecuritization was not an activity authorized by the GLBA but instead had been held by the courts in 1990 to be part of the business of banking rather than an activity proscribed by the Glass–Steagall Act.” [163] As described above, in 1978 the OCC approved a national bank securitizing residential mortgages. [87] AIG , Bear Stearns , Lehman Brothers , and Merrill Lynch ) never became “financial holding companies” under the GLBA and, therefore, never exercised any new powers available through Glass–Steagall “repeal.” [291] They joined Jonathan R. Macey and Peter J. Wallison in noting many GLBA critics do not understand that Glass–Steagall’s restrictions on banks (i.e., Sections 16 and 21) remained in effect and that the GLBA only repealed the affiliation provisions in Sections 20 and 32. [292] The American Bankers Association , former President William J. Clinton , and others have argued that the GLBA permission for affiliations between securities and commercial banking firms “helped to mitigate” or “softened” the financial crisis by permitting bank holding companies to acquire troubled securities firms or such troubled firms to convert into bank holding companies. [12] Martin Mayer argued there were “three reasonable arguments” for tying Glass–Steagall repeal to the financial crisis: (1) it invited banks to enter risks they did not understand; (2) it created “network integration” that increased contagion; and (3) it joined the incompatible businesses of commercial and investment banking. Mayer, however, then described banking developments in the 1970s and 1980s that had already established these conditions before the GLBA repealed Sections 20 and 32. [293] Mayer’s 1974 book The Bankers detailed the “revolution in banking” that followed Citibank establishing a liquid secondary market in “negotiable certificates of deposit” in 1961. This new “liability management” permitted banks to fund their activities through the “capital markets,” like nonbank lenders in the “shadow banking market,” rather than through the traditional regulated bank deposit market envisioned by the 1933 Banking Act. [294] In 1973 Sherman J. Maisel wrote of his time on the Federal Reserve Board and described how “[t]he banking system today is far different from what it was even in 1960” as “formerly little used instruments” were used in the “money markets” and “turned out to be extremely volatile.” [295] J.P. Morgan & Co. and Bankers Trust “built financial profiles similar to securities firms with a heavy emphasis on trading and investments.” [296] In 1993, Helen Garten described the transformation of the same companies into “wholesale banks” similar to European “universal banks.” [297] [298] Kregel describes Glass–Steagall as creating a “monopoly that was doomed to fail” because after World War II nonbanks were permitted to use “capital market activities” to duplicate more cheaply the deposit and commercial loan products for which Glass–Steagall had sought to provide a bank monopoly. [299] While accepting that under Glass–Steagall financial firms could still have “made, sold, and securitized risky mortgages, all the while fueling a massive housing bubble and building a highly leveraged, Ponzi-like pyramid of derivatives on top,” the New Rules Project concludes that commentators who deny the GLBA played a role in the financial crisis “fail to recognize the significance of 1999 as the pivotal policy-making moment leading up to the crash.” The Project argues 1999 was Congress’s opportunity to reject 25 years of “deregulation” and “confront the changing financial system by reaffirming the importance of effective structural safeguards, such as the Glass–Steagall Act's firewall and market share caps to limit the size of banks; bringing shadow banks into the regulatory framework; and developing new rules to control the dangers inherent in derivatives and other engineered financial products.” [300] Raj Date and Michael Konczal similarly argued that the GLBA did not create the financial crisis but that the implicit “logical premises” of the GLBA, which included a belief that “non-depository ‘shadow banks’ should continue to compete in the banking business,” “enabled the financial crisis” and “may well have hastened iten.wikipedia.org
