Why blame Gramm Leach Bliley?

Great Debates
1

So GLBA essentially repeals the Glass Steagall Act, which basically allowed commercial banks, investment banks, insurance companies, brokerage firms, and other financial services firms to own each other. I’m now seeing quite a bit of blame laid on GLBA for the mortgage crises and credit crunch. The argument seems to be of the elementary school type and basically boils down to: lack of regulation caused this crises and GLBA was deregulation so it caused the crises. I don’t buy it.

What regulatory oversight was lost as a result of the act? Commercial banks were still regulated by the same entities in the exact same way as before. It doesn’t matter that they may be owned by a holding company that also owns an insurance company of an investment bank.

If you want to lay the blame on lack of regulation, then fine. It doesn’t appear to me that it was lack of regulation through deregulation though. It seems like it was lack of regulation through regulation never being there in the first place. Did GLBA have anything to do with lack of regulation of hedge funds or minimal regulation of investment banks?

For what it is worth, I put the majority of the blame on too low of interest rates for too long. I think things like CRA requirements and poor regulation were minor contributing factors.

2

I hate to enter a debate like this, but for what it’s worth, I agree completely. GLBA is a complete non-starter with respect to the current financial issues we are facing. Low interest rates and the subsequent preservation of high property values and the delayed impact of marginal borrowers are much more germane.

3

Here’s a clue: Gramm (R), Leach (R), Bliley (R).

Never mind that it passed 90-8-1 in the Senate and 362-57-15 in the House. And ws signed into law by Clinton. Especially since Gramm is recently associated with McCain.

4

Post hoc, ergo propter hoc. That’s totally valid reasoning, at least as far as many commentators seem to think.

5

Glass-Steagal was introduced originally to preserve the natural conflict between the grant and use of credit. Preserving this conflict means that interest rates are set only by criteria the parties themselves bring to the transaction (and not, e.g., the ability to package the loan as a tradeable financial instrument). This is required because banking and investment require the exact opposite outlook on the market; the first is looking to avoid and limit risk, the second to exploit it with speculation.

GLB eliminated this conflict. Afterward, banks had an incentive to encourage mortgages that failed to appreciate the risk of the borrower, since in many cases the bank wouldn’t be left holding the bag.

The argument at the time was that “over-regulated” banks were losing out to the unregulated securities markets and foreign banks which didn’t play by the same rules. Focusing on GLB is obviously myopic, but it does highlight the more general problem of rampant financial deregulation (going back to Reagan) and the oversized clout Wall St. wields on the Hill, a fact noted at the time in this spot-on Tom Tomorrow cartoon.

To be fair, the original House and Senate versions each passed by much smaller margins, and IIRC the Senate version was a party-line vote; the numbers you refer to were for the bill that exited a conference committe designed to hammer out differences between the two versions, and given the vote it was obviously veto-proof so there was little Clinton could do. Also, Gramm isn’t just “recently associated” with McCain, the two have been close friends in the Senate for decades, so it’s fair to say Gramm and McCain share a similar outlook on the economy. But I agree there was enough blame to go around to both political parties.

6

To understand how Gramm-Leach-Bliley helped contribute (not cause) the current disaster it helps to think about why Glass-Steagall was created in the first place. There were significant abuses and conflicts-of-interest that were seen to have helped cause the Great Depression. These mainly stemmed from the problems that arise when the same entity both grants credit (originates loans or mortgages) and purchases credit (buying mortgage-backed-securities and other debt investment instruments). It is in the bank’s best interest to market these securities as “safe” and “high-grade” and to pitch them to their investors. The opinion of the Glass-Steagall originators was that the best way to prevent this was to keep first-line lenders (commercial banks) from also being debt purchasers (investment banks).

How much this really hurts in the current environment is open to debate, but it certainly helped cause the rapid proliferation of mortgage-backed debt and credit default swaps and also helped financial institutions truly become “too big to fail”.

7

Gramm Leach Bliley doesn’t stand alone as the sole bearer of the blame, but it was a huge contributor, in combination with the Garn-St. Germain Depository Institutions Act, the Commodity Futures Modernization Act, Alan Greenspan and other assorted characters, and $300 million in Lobbying money and $150 million in political donations over 25 years.

Cite
Cite

8

Remind me - Jim Leach spoke in prime time at which convention this year?

9

The DNC.

Now that you have been reminded, do you have an actual opinion on the usefulness of the Glass-Steagall regulations? Or any proposed remedy to the current crises? Or anything at all with any relevance to this discussion?

10

I think friend Moto is alluding slyly to the predominance of lefty-liberal thinking in the financial industry of America as a whole, and how the Democratic party slavishly defends the perquisites and privileges of the rich.

11

How do you justify putting the majority of the blame on low interest rates? What about banks contriving creative ways to break their own rules like No Doc loans, Piggyback (80/20) loans, LP/DU approval engines, etc.? People think “stated income” loans are a bad idea but I was closing loans every day where the borrower didn’t even have to prove he had a job, and the lender I worked for had a reputation among brokers for being too strict.

12

You make it sound like prior to GLBA, banks did not make loans for the purpose of resale. If this is so, why was FNMA created? Glass Steagall was passed in 1933. FNMA was created in 1938. Almost the entire purpose of FNMA was to purchase home mortgage loans in the secondary market. The practice certainly didn’t start with GLBA.

13

If the problem is that the same people that are originating loans are the ones purchasing them, then why aren’t we seeing failures from the entities that perform both functions. It seems that the majority of failures are purely investment banks (Merrill Lynch, Bear Stearns, Lehman Brothers), savings & loans which were required to hold a large percentage of mortgages per their charter (Indymac), government sponsored entities formed for the purpose of buying mortgages (FNMA and FHLMC). If GLBA was a primary contributor, then wouldn’t we be seeing the bailout of commercial banks that had investment banking arms such as BofA and JPM? We’re seeing just the opposite as it is the commercial banks that are able to bailout the investment banks (JPM with Bear Stearns and BofA with Merrill Lynch) because they’re allowed to do so without the constraints of Glass Steagall getting in the way.

14

Close it was 54 -44 in the Senate right down party lines. According to Wiki

15

Damn! Good point. I’m voting for McCain now.:rolleyes:

16

Your first link does little more than state the history of Glass Steagall from beginning to end. It does of course basically make the statement that it was rendered obsolete in December 1996: "

" which makes putting the blame on GLBA even more curious.

The second link is an incredibly poorly written article that essentially does nothing other than try to blame McCain for every economic problem facing the U.S. since the early '80s. For the very small part of it that actually addresses GLBA, it basically says that banks were no longer regulated as banks because of GLBA. This makes no sense; commercial banks still had the same regulators as before. They just now have holding companies that may also own other entities that engage in insurance, investment banking, brokerage, and other financial services.

17

Low interest rates created higher demand for debt as it was so cheap and created a disincentive for saving as it was pointless. Demand for housing naturally followed as debt was so cheap leading to inflation in housing prices. Increasing housing prices lead to looser credit standards as banks began to count on rising asset values as their source of repayment rather than cash flow.

18

Of course all it took was an agreement to do more risky lending (CRA) in order to get the Democrats on board.

19

A quibble, home boy. A minor thing, but that’s the trouble with quibbles…

Investment banks and commercial banks play by different sets of rules, and have to meet different standards of burdensome interference. I belileve that the last two dinosaurs of investment banking have decided that they would rather be plain ol’ unglamourous commercial banks after all.

Put baldly and no doubt oversimplified, investment banks can play a bit faster and looser, as they are private dancers, the rules for collateral are different, and their access to credit from the Fed is different and, of course, they are not eligible for salvation from the Feds, not being actual “banks”, but investment entities.

Until now.

The single act of Glass Steagall may not be so important in itself as it signals and codifies a philisophy fervently shared by Gramm and others, the faith in the Holy Free Market, the transcendent belief that a market free from government intervention will soar on wings, to the benefit of all.

But this is a faith, no? There has never been any such creature as the “Free Market”, money is power, power is money. Those who have one have the other, and those who have those things invariably strive to keep what they have and get some of yours. Control of government is clearly the best insurance, and this obvious truth has held sway since long before the Medici.

The “Free Market” economic religion is claptrap, hogwash, balderdash, sir! It is to ecoonomics as Objectivism is to ethics, a nullity dressed up as a philosophy.

20

Probably correct, to some extent, but doesn’t absolve the banks for loosening credit standards. I saw this mess coming back in 2005 and would’ve seen it a lot earlier had I been more experienced. In retrospect, we were making preposterous loans at least as far back as spring 2003. I find it unfathomable that people at the top of these corporations didn’t see this coming at least a year or two before I did.