theroberthogan wrote gramarye wrote Had Glass-Steagall not been repealed during the Clinton administration, the banking crisis would have been ever more climactic. The mergers that averted bankruptcies for Bear Stearns and Merrill Lynch would have been illegal, almost certainly forcing both into bankruptcy, like Lehman Bros. If there had never been a deregulatory push in this country, the crisis would be worse.
Much like the Reagan administration fought for the Garn-St. Germain Act which deregulated the Savings and Loan industry, and led to the S&L crisis, the republican led repeal of Glass-Steagall allowed for the current financial crisis. With Glass-Steagall out of the way, commercial banks were able offer high risk investment and insurance instruments like mortgage-backed securities.
This is the kind of spin--and outright falsehood--that makes me worry.
You say commercial banks were able to offer high risk investment and insurance instruments like mortgage-backed securities, yet is has been the major commercial banks--Bank of America, JP Morgan Chase, Wells Fargo--that have been buying distressed firms in this crisis.
The truth is that Glass-Steagall would have prevented the banking crisis from ever happening. Bear Stearns and Merrill Lynch would never had to merge with other companies, and there wouldn't be an IndyMac Federal Bank.
"Bear Stearns and Merrill Lynch would never had to merge with other companies" because they'd have gone bankrupt. They would have needed to sell and been prevented from doing so by Glass-Steagall. They were not commercial banks, they were investment banks. They got bought by commercial banks, meaning we're dealing with only one Lehman instead of three. Glass-Steagall would not have prevented either the issuance of subprime mortgages or their securitization, sale, and stockpiling by investment banks. Nor would it have done anything to compel more honest assessments of the stability of securitized mortgages by ratings agencies. Nor would it have prevented the purchase of MBS's and CDO's by pension funds and other major institutional investors given green lights by ratings agencies. (Many pension funds are contractually obligated not to invest in investments beyond a certain risk level; had the ratings agencies been more accurate, many major buyers of mortgage-backed securities would have been unable to purchase them.)
Yet here we go, demonstrating exactly what I was talking about: rather than talking about regulating the ratings agencies, people are talking about bringing back Glass-Steagall and regulating the least culpable major institutions in our entire financial system, the commercial banks. When the Fed and Treasury and distressed financial institutions were desperately seeking for buyers, it was the commercial banks they had in mind.
Also, Glass-Steagall was unique to America and hindered our financial players from competing on the world stage. Commercial banks in no other industrialized nation faced similar restrictions.
Last but not least, the lion's share of subprime mortgages were issued by independent mortgage brokers, not by the commercial banks. Those brokers would not have been covered by Glass-Steagall even if Glass-Steagall did regulate subprime lending.
In short, deregulation has one major mark in its favor in the last decade (eliminating Glass-Steagall) and regulation has an even larger mark against it more recently (the Inquisition of Sarbanes-Oxley). Obama campaigned on campaign promises to impose "common sense" regulation; he was not exactly long on details, at least not on TV, and I'm not going to dig through his Web site to find the specifics. I certainly hope he doesn't mean reimposing Glass-Steagall. My guess, given the pragmatists--including some Clinton operatives, and Clinton signed the repeal--is that he has no such foolish ideas in mind. Maybe he really does mean to simply impose transparency and neutrality requirements on the ratings agencies, which would probably be the most cost-effective firewall against a repeat of this possible. However, I'll admit I'm still nervous--and so are the financial markets.
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