# The CRA/repeal of Glass-Steagal caused the financial crisis **URL:** \ **Category:** Great Debates\ **Created:** [August 15, 2012, 2:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564 "2012-08-15T14:21:50Z")\ **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:** [August 15, 2012, 2:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/1 "2012-08-15T14:21:50Z")
I hear on these boards that one or the other of these acts of Congress caused the financial crisis, based on the ideological persuasion of the poster. I usually skip over this thinking that it’s partisan bullshit and that the truth lies somewhere in the middle. Is there straight dope on this or is it the economic equivalent of how many angels can dance on the point of a pin? Thanks, Rob Links: [CRA](http://en.wikipedia.org/wiki/Community_Reinvestment_Act) [Glass-Steagall](http://en.wikipedia.org/wiki/Glass-Steagall_Act) ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [August 15, 2012, 2:41pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/2 "2012-08-15T14:41:32Z")
Neither of them caused the financial crisis. Glass-Steagall made the financial crisis far worse than it would have been by removing a buffer between the banking sector and market crashes. The CRA made the housing crash far worse than it would have been by artificially buoying house prices. Thing is, the latter was aimed at increasing minority home ownership, which has all sorts of benefits. The former was aimed at increasing profits, and that was pretty much it. ---
**Author:** ![Ludovic](https://avatars.discourse-cdn.com/v4/letter/l/7ab992/32.png) [@Ludovic](https://boards.straightdope.com/u/Ludovic)\ **Post date:** [August 15, 2012, 2:56pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/3 "2012-08-15T14:56:00Z")
I agree with the last poster except that I don’t think the CRA made the housing crash _far_ worse than it would have been, at least by artificially bouying housing prices. It did however provide a successful model for non-traditional loans: namely, to people who otherwise have steady jobs trying to get a lower-middle-class house who otherwise would not qualify for a loan. Bankers saw that these loans were performing much better than expected and so tried to replicate this success with solid-middle-class people buying upper-middle-class homes, also a type of non traditional loan but for a different reason. That didn’t work out quite as well. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [August 15, 2012, 3:01pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/4 "2012-08-15T15:01:40Z")
Fair enough. Just worse. ---
**Author:** ![wevets](https://avatars.discourse-cdn.com/v4/letter/w/e9a140/32.png) [@wevets](https://boards.straightdope.com/u/wevets)\ **Post date:** [August 15, 2012, 3:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/5 "2012-08-15T15:21:36Z")
Rarely will anyone find cases like these explained in the media connected to actual research conducted on these questions. To skip the middleman of the media, here’s research conducted by the Federal Reserve on that question: > [@http://www.law.nyu.edu/ecm\_dlv2/groups/public/@nyu\_law\_website\_\_academics\_\_colloquia\_\_law\_economics\_and\_politics\_of\_urban\_affairs/documents/documents/ecm\_pro\_061027.pdf](#): > > First, the data show that overall, lending to low- and moderate-income communities comprised only a small share of total lending by CRA lenders, even during the height of subprime lending in California. Second, we find loans originated by lenders regulated under the CRA, in general, were significantly less likely to be in foreclosure than those originated by IMCs. This held true even after controlling for a wide variety of borrower and loan characteristics, including credit score, income, and whether or not the loan was higher-priced. More importantly, we find that whether or not a loan was originated by a CRA lender _within its assessment area_ is an even more important predictor of foreclosure. \*\*In general, loans made by CRA lenders within their assessment areas were half as likely to go into foreclosure as those made by IMCs (Table 4). While certainly not conclusive, this suggests that the CRA, and particularly its emphasis on loans made within a lender’s assessment area, helped to ensure responsible lending, even during a period of overall declines in underwriting standards.\*\*15 > > The exception to this general finding is the significance of the CRA variables in the models that focused on loans made in low- and moderate-income neighborhoods. In these regressions, when loan source was not included as an explanatory variable, loans from CRA regulated institutions within their assessment areas performed significantly better than loans from IMCs. **But, when we included loan source, the significance of the CRA variables disappeared.** Even so, loans from CRA regulated institutions certainly performed _no worse_ than loans from IMCs. Bolding added, italics in original. It should be noted that there is at least one conflicting result from a pair of demographers at Princeton who did _not_ use loan source in their data set and only geographically associated loans and foreclosures by zip code with no information on whether the lenders were CRA regulated or not. I believe the Federal Reserve’s research including the loan source data provide a more rigorous result. ---
**Author:** ![BigAppleBucky](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bigapplebucky/32/178_2.png) [@BigAppleBucky](https://boards.straightdope.com/u/BigAppleBucky)\ **Post date:** [August 15, 2012, 3:51pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/6 "2012-08-15T15:51:31Z")
CRA most certainly did not mandate making bad loans. It mandated offering financial services without recourse to “red-lining” and other methods of excluding entire areas. The enforcement stick held by regulators was withholding permission for branches in desirable areas until a bank did business in a less served area. Mortgage companies and banks got greedy to pick up origination fees which yield current income. They got lazy with regard to their due-diligence which led them to grant unsound loans. CRA was nothing but a convenient excuse for the greediness and laziness and is now a convenient excuse to cover their own screw-ups. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [August 15, 2012, 3:56pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/7 "2012-08-15T15:56:07Z")
The repeal of Glass-Steagal led to the formation of Too Big To Fail banks. It mingled the safe, boring banking with the risky, speculative banking. When the speculative activities of these behemoth financial institutions put them at risk of collapse, the government was left with a dilemma. Do we follow market principles and let the banks fail, risking a seize-up of the entire banking system, or do we step in and bail them out, adding to our national debt and increasing moral hazard? The financial crisis isn’t just the collapse of the housing bubble and Lehman, it includes the depression that followed. We couldn’t deal with what happened in the same way we dealt with the S&Ls. The S&L crisis cost us quite a bit, but no major depository institutions were in danger of failing, the market share of S&Ls was brought down to a more reasonable level, people were prosecuted, and the broader banking industry continued on as before. But this time was different. With the financial institutions being so large, there wasn’t the political will to break off the healthier parts from the insolvent parts, mainly because of the fear that it would collapse the entire economy. So we had to bail them out, rotten parts and all. They’re still in business, and they’re still fundamentally rotten at their cores (rotten financially, not to mention ethically). And if they screw up again, there’s every expectation that we’ll bail them out again, resolution authority be damned. When the market can’t be sure that the banking system is fundamentally healthy, that makes any economic recovery tenuous. ---
**Author:** ![jasg](https://avatars.discourse-cdn.com/v4/letter/j/f0a364/32.png) [@jasg](https://boards.straightdope.com/u/jasg)\ **Post date:** [August 15, 2012, 4:05pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/8 "2012-08-15T16:05:37Z")
To extend this question a bit, what is the SD on the effect of the [CFMA](http://www.cftc.gov/opa/press00/opa4479-00.htm) on the financial crisis? ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 15, 2012, 4:39pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/9 "2012-08-15T16:39:31Z")
> [@wevets](#): > > Rarely will anyone find cases like these explained in the media connected to actual research conducted on these questions. To skip the middleman of the media, here’s research conducted by the Federal Reserve on that question: > > Bolding added, italics in original. > > It should be noted that there is at least one conflicting result from a pair of demographers at Princeton who did _not_ use loan source in their data set and only geographically associated loans and foreclosures by zip code with no information on whether the lenders were CRA regulated or not. I believe the Federal Reserve’s research including the loan source data provide a more rigorous result. You’re going to have to help me out here. Is an IMC an independent mortgage company? I am not clear on what loan source means either. Thanks, Rob ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 15, 2012, 4:43pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/10 "2012-08-15T16:43:36Z")
> [@MOIDALIZE](#): > > The repeal of Glass-Steagal led to the formation of Too Big To Fail banks. The wikipedia article I linked to seemed to claim that the sections of Glass-Steagall that were repealed had been de facto repealed since the sixties anyway. Is this not true? Thanks, Rob ---
**Author:** ![wevets](https://avatars.discourse-cdn.com/v4/letter/w/e9a140/32.png) [@wevets](https://boards.straightdope.com/u/wevets)\ **Post date:** [August 15, 2012, 4:46pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/11 "2012-08-15T16:46:33Z")
You’re correct… IMC = Independent Mortgage Company (as opposed to a CRA regulated institution.) “Loan source” in my post means the company that made the loan, and what type of company it was. I look askance at the Princeton folks who thought they could ignore loan source and lump all the CRA regulated loans together with the non-CRA regulated loans and just identify all loans and foreclosures geographically without regard for who was actually making the loans, then blame the CRA for their findings. ---
**Author:** ![MOIDALIZE](https://avatars.discourse-cdn.com/v4/letter/m/e274bd/32.png) [@MOIDALIZE](https://boards.straightdope.com/u/MOIDALIZE)\ **Post date:** [August 15, 2012, 4:50pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/12 "2012-08-15T16:50:57Z")
> [@sweeteviljesus](#): > > The wikipedia article I linked to seemed to claim that the sections of Glass-Steagall that were repealed had been de facto repealed since the sixties anyway. Is this not true? > > Thanks, > Rob I’d say the formation of Citigroup marked the true end of Glass Steagall, though a culture of regulatory forbearance had already taken hold and weakened it. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [August 15, 2012, 6:10pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/13 "2012-08-15T18:10:20Z")
> [@Ludovic](#): > > I agree with the last poster except that I don’t think the CRA made the housing crash _far_ worse than it would have been, at least by artificially bouying housing prices. It did however provide a successful model for non-traditional loans: namely, to people who otherwise have steady jobs trying to get a lower-middle-class house who otherwise would not qualify for a loan. Bankers saw that these loans were performing much better than expected and so tried to replicate this success with solid-middle-class people buying upper-middle-class homes, also a type of non traditional loan but for a different reason. That didn’t work out quite as well. As other posters have noted, glass steagall repeal led to the formation of these too big to fail banks. Sure banks like citigroup, Bank of america and Chase had already gotten very large but there was a rush of consolidation in the financial services industry after the repeal of glass steagall. So to the extent that you think the existence of too big to fail banks contributed to the collapse, then you should probably dump some of the blame on the repeal of glass steagall. The CRA had exactly the effect you describe. Not a lot fo defaults but provided models for subprime mortgages that were later improperly applied to ninja loans. > [@jasg](#): > > To extend this question a bit, what is the SD on the effect of the [CFMA](http://www.cftc.gov/opa/press00/opa4479-00.htm) on the financial crisis? This had a LOT to do with the collapse of Lehman brothers and the near collapse and bailout of AIG. The CFTC was prohibited from regulating credit default swaps and people started gambling and getting paid for every bet they made. ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 15, 2012, 7:29pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/14 "2012-08-15T19:29:12Z")
> [@BigAppleBucky](#): > > Mortgage companies and banks got greedy to pick up origination fees which yield current income. They got lazy with regard to their due-diligence which led them to grant unsound loans. I’m not sure I’d call it laziness. They appear to have actively tried to write sub-prime loans because of their higher interest rates and thus higher value when resold. Not keeping proper records of where the loans went, and robo-signing and the like, could be called laziness, though I think it is more accurately an example of cost saving (otherwise known as cutting corners.) ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [August 15, 2012, 7:32pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/15 "2012-08-15T19:32:49Z")
> [@wevets](#): > > Rarely will anyone find cases like these explained in the media connected to actual research conducted on these questions. To skip the middleman of the media, here’s research conducted by the Federal Reserve on that question: Excellent cite, thank you. Does anyone know of a mortgage banker who blamed CRA for making them write bad loans? I do know of some who claimed lots of bad loans were done to increase home ownership, and thus for good motives and not just for profit. But that was Countrywide, an IMC. ---
**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:** [August 15, 2012, 7:49pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/16 "2012-08-15T19:49:54Z")
> [@sweeteviljesus](#): > > The wikipedia article I linked to seemed to claim that the sections of Glass-Steagall that were repealed had been de facto repealed since the sixties anyway. Is this not true? > > Thanks, > Rob No. If it were true, then Weill/Dimon would not have had to had GS repealed in order to create Citigroup (the Gramm-Leach-Bliley Act in 1999.) It literally took an act of Congress to form Citi. The CRA wasn’t the cause of the meltdown. The securitization of debt and the resulting systemic risk this securitization set up is what caused the meltdown (if you’re looking for one-size-fits-all answers, that is. The whole story is much, much larger, of course.) ---
**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:** [August 15, 2012, 8:02pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/17 "2012-08-15T20:02:17Z")
I notice that the Wiki cite said this: > [@](#): > > By the time the affiliation restrictions in the Glass–Steagall Act were repealed through the Gramm-Leach-Bliley Act in 1999 by President Bill Clinton, many commentators argued Glass-Steagall was already “dead.”[4] Most notably, Citibank’s 1998 affiliation with Salomon Smith Barney, one of the largest US securities firms, was permitted under the Federal Reserve Board’s then existing interpretation of the Glass-Steagall Act.[5] Clinton publicly declared, “The Glass-Steagall Act is no longer relevant.”[6] But the 1998 affiliation wasn’t truly legal until Congress passed the 1999 act. It was allowed in 1998 under a temporary waiver by the Treasury Department, but this waiver was granted with the expectation that Congress would pass the bill in 1999 - which it did. Had it not, Citi would have had to break up again. ---
**Author:** ![Damuri\_Ajashi](https://avatars.discourse-cdn.com/v4/letter/d/898d66/32.png) [@Damuri\_Ajashi](https://boards.straightdope.com/u/Damuri_Ajashi)\ **Post date:** [August 15, 2012, 9:14pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/18 "2012-08-15T21:14:48Z")
> [@JohnT](#): > > No. If it were true, then Weill/Dimon would not have had to had GS repealed in order to create Citigroup (the Gramm-Leach-Bliley Act in 1999.) It literally took an act of Congress to form Citi. > > The CRA wasn’t the cause of the meltdown. The securitization of debt and the resulting systemic risk this securitization set up is what caused the meltdown (if you’re looking for one-size-fits-all answers, that is. The whole story is much, much larger, of course.) True, we can’t forget the role of credit rating agencies, poor regulation of mortgage brokers, poor regulations regarding securitization, the interest rate environment that drove real estate prices and drove capital to chase returns being offered by mortgage securities, the “innovative” new reverse amortizations mortgages, etc. ---
**Author:** ![sweeteviljesus](https://avatars.discourse-cdn.com/v4/letter/s/898d66/32.png) [@sweeteviljesus](https://boards.straightdope.com/u/sweeteviljesus)\ **Post date:** [August 15, 2012, 10:13pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/19 "2012-08-15T22:13:41Z")
By which you mean the incentive of the ratings agencies to overrate securities (because they were insured by credit default swaps), lack of rules or enforcement of rules preventing lying on mortgage applications, lack of rules regarding disclosure of the underlying mortgages, low interest rates designed to stimulate the economy which required businesses to take on more risk, and, well, I am not sure about the last thing. Is that correct? I ask because I don’t know that I see anything fundamentally unsound about securitizing debt. I would also assume that insuring the debt lowers the risk on the debt. I thought the problem was that the insurers undercharged for the insurance because they couldn’t adequately assess the risk of the component mortgages. 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:** [August 15, 2012, 10:21pm UTC](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564/20 "2012-08-15T22:21:57Z")
The CRA and Glass had nothing to do with the 2008 financial crisis. Lehman, Bear, Merrill, AIG, Fannie, Freddie, and countless others were exempt from both. [Next page](https://boards.straightdope.com/t/the-cra-repeal-of-glass-steagal-caused-the-financial-crisis/631564.md?page=2)