# Is this the problem with repealing Glass-Steagall? **URL:** \ **Category:** Great Debates\ **Created:** [December 10, 2013, 4:08pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989 "2013-12-10T16:08:48Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 4:08pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/1 "2013-12-10T16:08:48Z")
As I understand it, the problem with repealing the Glass-Steagall Act was that it enabled banks whose deposits are protected by the FDIC to engage in riskier investments that they otherwise would have.\* If that’s the case, was the problem with repealing it that it wasn’t tied to an increase in deposit insurance premiums? \*I also wonder about two issues with blaming the financial crisis on the act’s repeal: One, it’s my understanding that repealing the law was almost a formality, regulators had effectively repealed it already, and two, investments in securitized debt was insured and therefore considered low risk (although again, as I understand it, the insurance premiums were too low and the risk on individual mortgages were not sufficiently independent.) I put this in GD, but let’s try to keep the Dems said/Pubs said to a minimum. Thanks, Rob ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 10, 2013, 4:32pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/2 "2013-12-10T16:32:06Z")
Well, don’t forget that GS had to be officially revoked before Sandy Weill and Jamie Dimon could fully create Citibank via the merger of Travelers Insurance with Citicorp (formerly the National City Bank of New York) back in 1999. When the deal was announced in 1998, there were some functions of the firm that would need to be sold off within a 2-5 year window, or else the firm would be out of compliance with GS. However, Weill and Dimon successfully lobbied a bunch of Republicans, and thus the Gramm–Leach-Bliley Act of 1999 was born, which officially killed off those pesky GS restrictions. Since then, it has been economic progress and prosperity for all! ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 9:04pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/3 "2013-12-10T21:04:53Z")
Forgive my ignorance, but what did that have to do with the financial crisis? ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 10, 2013, 9:12pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/4 "2013-12-10T21:12:30Z")
Oh, God, do I have time to write a book? Not really… there’s this post I wrote from a few years ago, which should do the trick: From “[You have 100 Blame Points. Assign them to those responsible for the financial meltdown](http://boards.straightdope.com/sdmb/showthread.php?t=628504)” > [@me](#): > > 5 pts: Sandy Weill - I’m throwing the creator of Citigroup in here as a symbol of the repeal of Glass-Steagall (though the repeal really started 20 years prior to the formation of Citibank). I note that a number of people in this thread have said that the repeal of G-S was irrelevant to the crisis, but I have difficulty buying this argument as the re-attachment of speculative investment banks to depository institutions allowed the newly formed banks to use federally-guaranteed deposits as a means to increase the amount of debt on their books. > > Think of it this way: You’re Salomon Brothers with a capital base of $1 billion which allows you to borrow $10 billion, which is then used to speculate on mortgage bonds and other risky assets. Thanks to Sandy Weill, in 1999 you become attached to the old First National City Bank of NY (aka Citibank), which has federally-guaranteed deposits (through the FDIC) of another $1 billion, allowing you to essentially double your borrowings to $20 billion. Now you have an investment bank that essentially doesn’t have to worry about it’s capital base as a significant percentage is guaranteed by the US Government, which emboldens the investment bank to make even riskier speculative investments. > > Of course, not all investment banks went this route, but enough did so that they literally could not be allowed to fail, lest they, for the first time since 1933, impoverish individuals through the loss of their savings and checking accounts. In other words, savings and loans (what individuals put their money in, ala _It’s a Wonderful Life_’s Bailey’s Building and Loan) were kept separate from commercial banks so that, if the commercial bank fails, the S&L won’t be taken down with it (and, by extension, people’s savings.) With the repeal of GS, this wall was eliminated, allowing everybody access to the complex financial markets irregardless of your social position in the community. They did so with the implicit bet that they would be bailed out, because they were comingling FICA funds with investment funds, mortgages with derivatives, etc etc etc. And they were right, weren’t they? They got in trouble, money markets started breaking the buck, and the Fed had to come along and save them, else another Great Depression would come about. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 10:13pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/5 "2013-12-10T22:13:18Z")
It follows then that the FDIC wasn’t charging enough in premiums then, doesn’t it? I did read on CNN Money yesterday that the government turned a profit on TARP loans to banks (there was a bit of loss overall). Also, mortgage bonds weren’t risky (I know they were, but bear with me) because they were insured. The insurance premiums were too low because, as I understand it, the actuarial models didn’t account for the synergistic effect of defaults on variable rate mortgages due to rising interest rates. I am no expert, so feel free to correct me. Rob ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 10:15pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/6 "2013-12-10T22:15:33Z")
What would it have cost the FDIC to cover all of Citigroup’s depositors if it had been allowed to fail? Is it known how much it received from TARP? Thanks, Rob ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 10, 2013, 10:16pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/7 "2013-12-10T22:16:52Z")
> [@sweeteviljesus](#): > > It follows then that the FDIC wasn’t charging enough in premiums then, doesn’t it? I did read on CNN Money yesterday that the government turned a profit on TARP loans to banks (there was a bit of loss overall). Also, mortgage bonds weren’t risky (I know they were, but bear with me) because they were insured. The insurance premiums were too low because, as I understand it, the actuarial models didn’t account for the synergistic effect of defaults on variable rate mortgages due to rising interest rates. > > I am no expert, so feel free to correct me. > > Rob It’s not up to the FDIC to order the banks to charge more for their insurance on personal savings and checking accounts because investment bankers want to invest in CDO-cubed deals alongside hedge funds. Would you want a $50 tax to be paid on every plane flight just to keep the tire manufacturer’s afloat? ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 10:29pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/8 "2013-12-10T22:29:47Z")
I hadn’t noticed the banks passing along the cost of their insurance premiums. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 10, 2013, 10:55pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/9 "2013-12-10T22:55:31Z")
Bad choice of words there, good catch. It should read “It’s not up to the FDIC to charge the banks more for their insurance…” Regardless, the FDIC exists to protect consumer household savings and checking accounts, not investment accounts. Banks can be far riskier with investment money than they can with depositor’s money, and because of that, you don’t want the investment bank to be the same legal entity as the S&L nor do you want the S&L to have the same freedom with depositors money that they have with investors money. These freedoms are what GS curtailed. GS by itself wouldn’t have prevented the housing and subsequent financial crisis, but it would have better shielded the pre-repeal Citibank from sustaining such catastrophic losses as Citi would not have been attached to Salomon-Smith Barney. By 2003, not but 4 years after the repeal, the SSB unit of Citigroup was fined almost $500 million for [conflict of interest charges between analysts and investment bankers](http://en.wikipedia.org/wiki/Global_settlement). By 2005, the group was renamed and rocking and rolling with mortgages and CDO’s. While still attached to a savings and loan. So when the crisis hit, and it did, peoples savings were at risk because the repeal meant that the entity that owned $300 billion in bad CDO’s had hundreds of billions of depositor funds at risk at the same time. No repeal, you still will have the crisis, but you don’t have personal checking and savings accounts at risk at the same time. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 11:37pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/10 "2013-12-10T23:37:40Z")
Pretend that I am stupid (not much of a stretch) and explain why the FDIC wouldn’t want to charge more for covering more risk or why the GLB Act shouldn’t have directed the FDIC to do so. Also, if the financial crisis hits and depositors accounts were not affected, is it in fact the case that the government would not have enacted TARP? The auto industry received bailout money and they have nothing to do with Glass-Steagall. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 11:41pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/11 "2013-12-10T23:41:43Z")
I am also not clear on what the Global Settlement has to do with the price of tea in China. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [December 10, 2013, 11:47pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/12 "2013-12-10T23:47:29Z")
Banking used to be so more boring, but thanks to visionaries like Phil Gramm and Jamie Dimon, it has been released to explore creative options, their entrepreneurial instincts unleashed. Exciting new securities products were born, wholly new ways of thinking developed. “Leverage” used to be a term that implied risk, seven to one leverage would make old-fogie bankers sweat. Nowadays, “leverage” means a profit multiplier, like the miracle of compounded interest only better! High and prompt returns on secure investments, just what the modern investor is looking for! Actually, come to think on it, they’ve pretty much always been looking for that, its just until now it was thought to be impossible, coming unglued right there at that “secure” part. Now, under the old boring culture, we wouldn’t know, we weren’t allowing the experiments that would verify that principle! But in the exciting, go-go environment fostered by such geniuses as Phil Gramm (bite on _that_, Krugman! you hyper-intelligent chipmonk), that environment propelled us into creative and experimenetal securities, so now we know! Yes, they were right, its impossible! ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 10, 2013, 11:56pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/13 "2013-12-10T23:56:44Z")
I keep hearing that stuff, and while I won’t defend Phil Gramm, et al., I am not satisfied that the repeal of Glass-Steagall was behind the financial crisis or the subsequent bailout. Fight my ignorance. If you take depositors money and pay them 1% and invest their money in risky ventures that return 10% and pocket the difference, I would say that you need to cover the additional risk you are taking by paying more in deposit insurance premiums. Also, weren’t mortgage-backed securities insured? What was the net return on these? Thanks, Rob ---
**Author:** ![Linden\_Arden](https://avatars.discourse-cdn.com/v4/letter/l/53a042/32.png) [@Linden\_Arden](https://boards.straightdope.com/u/Linden_Arden)\ **Post date:** [December 11, 2013, 1:15am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/14 "2013-12-11T01:15:20Z")
Glass-Steagall repeal of 1999 had nothing to do with the financial crisis of 2008. Why? Lehman, Bear, Merrill, AIG, Countrywide, IndyMac, Wachovia, and countless others were not impacted by the Glass-Steagall 1999 repeal law since they never merged commercial banking with investment banking. Only Citigroup benefited from that 1999 change. If the crisis had been confined to Citi it could have been easily contained. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 11, 2013, 1:53am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/15 "2013-12-11T01:53:19Z")
I also thought of something on the way home. Isn’t one of the major categories of commercial banks’ portfolios home mortgages? ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 11, 2013, 3:26am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/16 "2013-12-11T03:26:51Z")
> [@sweeteviljesus](#): > > I am also not clear on what the Global Settlement has to do with the price of tea in China. No S&L would have been fined a half-billion dollars because of insider trading crimes being committed by the investment banking division because there were no investment banking divisions within S&L’s in the GS regulatory environment. ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 11, 2013, 3:30am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/17 "2013-12-11T03:30:26Z")
> [@sweeteviljesus](#): > > I keep hearing that stuff, and while I won’t defend Phil Gramm, et al., I am not satisfied that the repeal of Glass-Steagall was behind the financial crisis or the subsequent bailout. Fight my ignorance. > > If you take depositors money and pay them 1% and invest their money in risky ventures that return 10% and pocket the difference, I would say that you need to cover the additional risk you are taking by paying more in deposit insurance premiums. Also, weren’t mortgage-backed securities insured? What was the net return on these? > > Thanks, > Rob The repeal of GS wasn’t behind the financial crisis, nor would have GS prevented 2008, a point I made in my 4th post. All the repeal did was help to spread the contagion to the nations largest financial institution, Citibank. ---
**Author:** ![eschereal](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/eschereal/32/18939_2.png) [@eschereal](https://boards.straightdope.com/u/eschereal)\ **Post date:** [December 11, 2013, 3:45am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/18 "2013-12-11T03:45:58Z")
> [@sweeteviljesus](#): > > I also thought of something on the way home. Isn’t one of the major categories of commercial banks’ portfolios home mortgages? No, commercial banks _securitize_ home mortgages, allowing retail banks to free up capital. A security is essentially a contract. When the US was a largely agrarian society, security contracts (options and futures) helped insulate farmers from market fluctuations. Options allowed a farmer to negotiate a crop price and contract with a distributor or processor when the crop was planted rather than when it was in bushels, protecting the farmer from wild fluctuations in price when he came to sell. I think they may have also stipulated a quantity, for which the farmer might face a penalty if he was not able to fulfill the contract. Later, securities became trading instruments, being applied to even common stocks, allowing traders to gamble on stock movement. The MBS involved in the collapse were securities composed of fractions of multiple mortgages aggregated into individual contracts, the premise being, I guess, that failure of one component mortgage would have less of an impact on the overall contract, and losses would be absorbed by the broader market. The problems arose when the banks began to get creative with mortgage lending, creating loans that a rational, reasonable person would not sign on to without being gulled into it. Basically, they were designing mortgages to fail so that they could draw loan interest for a few years, then take the property and resell it for little or no loss. What they did not count on was massive concurrent failures resulting in a buyer’s market for real estate, where the could not recoup the loaned value in resale. The MBS amounted to money loaned from the commercial banks to the retail banks, which the retail banks found themselves unable to repay. I think AIG was providing financial insurance on the securities themselves, and the claims became more than they could handle, which is how they figured into the picture. As far as I can tell, there was too much capital out on spec, and the spec was bad. GS does not appear to have had a direct effect on the collapse, but sensible banking oversight probably would have helped a lot. I think the situation was developing late in the Clinton administration, but obviously the subsequent administration was not particularly inclined to address the problem (_regulation = baaaad_) even though it was not at all a secret. There is plenty of blame to pass around, and the current administration seems no more inclined to fix things than any of the last four. It just remains to be seen when the next collapse will be (before or after the 2016 election) and whether the next president will be just slap on another band-aid or actually take action to make things better for rich guys or for average guys (both is possible but historically unlikely). ---
**Author:** ![JohnT](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/johnt/32/15048_2.png) [@JohnT](https://boards.straightdope.com/u/JohnT)\ **Post date:** [December 11, 2013, 4:45am UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/19 "2013-12-11T04:45:34Z")
Glass-Steagall was designed to prevent a recurrence of the last depression, not as a cure-all for all future ills of the finance industry. Its repeal was not critical to the problems underpinning the Great Recession, but it was very emblematic of an age where deregulation was king and TBTF banks truly became too big to fail. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [December 11, 2013, 12:45pm UTC](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989/20 "2013-12-11T12:45:46Z")
I am pretty sure that MBSs are bonds, not futures. So, if not the merger of commercial and investment banks, what was the the cause of TBTF? [Next page](https://boards.straightdope.com/t/is-this-the-problem-with-repealing-glass-steagall/675989.md?page=2)