Posted on 07/20/2016 4:20:02 AM PDT by expat_panama
I cheered when Glass-Steagall got repealed. After 30 years in the mortgage industry I was wrong. Dodd Frank needs to be repealed and Glass-Steagall reinstated.
Now if we take Rockingham’s point and add a little to it —we’ll come to an understanding of of why the separation of commercial and investment banks was repealed in 1999—and why that provision needs to be reinstated. First
Rockingham’s point:
Perhaps the best argument in favor of GS is that commercial banking and investment banking are different lines of business that need not just different regulatory treatment but also require divergent business skills, philosophies, and personalities. Where Main Street needs banks run by sober minded professionals with regular habits who are content with unspectacular profits from fees and securitized loans, Wall Street investment banks need buccaneers who are hungry to take risks for the sake of outsize gains.
............
By repealing the provision of Glass Stegal 1999 that separated commercial and investment banks the —RISK for bad loans was shifted from the investment banks to—ultimately— the tax payers. When pirates lost—who would cover their losses—the investment banks or the taxpayers? By repealing
Glass Stegal—the democrats insured that pirates could make as many risky loans as they liked —while catching great commissions—with the full knowledge that they would be bailed out by the tax payers.
That’s what happened.
By reinstating the provision of Glass Stegal that separates Investment and Commercial Banks— what happens is that Investment Banks sink or swim on their own. Because they’re playing with their own money—they’ll be naturally motivated to be more prudent with their own investments. They’ll naturally limit their investments to ones that have a higher probability of success.
Too big to fail is fascism. It’s that ding dong simple.
https://www.youtube.com/watch?v=XbEu-OLMKLQ
https://www.youtube.com/watch?v=bKwO1onXAaI&list=RDbKwO1onXAaI#t=127
https://www.youtube.com/watch?v=v9AJcS2KsQE
Those efforts culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.
Dodd Frank needs to go.
In addition, even with a revitalized GS, Wall Street requires close watching by capable regulators because the free market alone does not fully supply the necessary checks and balances. And even with vigilance by managers and regulators, Wall Street and high level financial institutions seem to reveal nests of stunning crookedness and risk-taking every five or ten years.
Big Banks and Derivatives: Why Another Financial Crisis Is Inevitable
Analysis: “Its Crazy” Banks Don’t Have Insight Into Their Derivatives Risk
U.S. Banks And Derivatives Risk
Financial Armageddon Approaches: U.S. Banks Have 247 Trillion Dollars Of Exposure To Derivatives
Perhaps I am missing what you actually mean by stating: banks have never been in the derivatives to begin with? Clearly they are. To make matters worse, apparently there is no clear understanding of what their real exposures are and the risks they provide to the world.
Yep
Investment and commercial banks weren't allowed to hold MBS prior to the repeal of Glass-Steagall?
Glass-Steagall had been whittled down over a long period of time. It was done piecemeal.
The inflation of the 1970s created problems with the interest rate ceilings in GS that made sense when the dollar was anchored to gold, and financial firms began inventing work arounds like money market funds.
The Savings and Loan crisis of the late 1980s was also a factor in financial firms lobbying to get parts GS scrapped. I know that a deregulation bill sponsored by Ferdinand St Germain was a huge blunder that ended up costing taxpayers a fortune. It should have served as an early warning of bigger troubles to come if the commercial banking sector got similar deregulation.
The 1990s was an era of experimental financial engineering in the financial world and commercial banks and investment banks began blurring the lines between the two, violating some of the Glass Steagall rules without being ordered to stop. They lobbied Clinton and Republicans in Congress to make what they were doing legal, and as I recall they got what they wanted.
There was a libertarian ethos prevalent among both parties at the time and shared by Alan Greenspan at the Fed that went along the lines of “the financial markets will regulate themselves”. I was very suspicious of that idea at the time, having the belief that Glass Steagall had served us pretty well in the decades after the Depression
Two of the significant bills signed into law at the time were Gramm-Leach-Bliley aka ‘the Financial Services Modernization Act of 1999’ and The Commodities Futures Modernization Act of 2000, CFMA. I’m not sure that either one of them actually repealed any portion of Glass-Steagall, except maybe in spirit. CFMA 2000 appears to have played a big role in setting up the 2008 financial crisis.
Glass Steagall needed some updating but I don’t know if we have any legislators with the good sense of the ones who crafted that bill in the 1930s. Too many today are on the pocket of the very firms that would be affected, and they have been passing bills written by the industry since 1999.
The financial industry isn’t like any other industry. Problems there can wreck the “real” economy, they aren’t confined to punishing just the stupid or criminal actions of the players in the financial industry. I’ll be curious to see what the GOP has in mind with calling for Glass-Steagall’s ‘revival’. The Devil is in the details. We all need to pay attention.
“but we need to get banks and investment banks out of the derivatives and gambling business one way or the other”
Trump needs to bring Brooksley Born out of retirement. She was a voice in the wilderness saying that the derivatives market at least needed to be transparent so that bank regulators could see how much risk they were taking on. She was driven out of her post at the Commodity Futures Trading Commission for her troubles. And the disaster that she foresaw grew to epic proportions.
“You have no idea what you’re talking about.”
expat_panama isn’t off the mark by much. I’m a fan of Glass Steagall and want to see something like it still in effect, but expat is correct when he says that not that much was repealed during Clinton. Other parts had been whittled away over time.
I think that the real problem is that financial engineering had created products including many derivatives that weren’t covered by GS and that needed to be. One of the worst abuses was with Credit Default Swaps, which are actually a form of insurance rather than a true derivative.
“Then who is going to supply derivatives to business customers who need to buy them?”
Investment banks. A revival of GS might keep commercial banks out of that sector. Although I think the greater problem might be from commercial banks owning derivatives rather than supplying them.
Derivatives at least need to trade on a transparent market so that the quantity and valuation of derivatives isn’t hidden from view, particularly from bank regulators.
“and my guess is that the fact that banks have never been in the derivatives to begin with is just a mere ‘fine point’. “
Are you sure that that’s true? If banks were assembling CDOs, collateralized debt obligations, out of mortgages and other loans then they were in the derivative business. I’m pretty sure that Citibank and BofA were involved.
“Unlike you, I HAVE worked in the banking industry. I understand this stuff well enough to know that you are clueless.”
So share what you know. expat_panama is not the only interested outsider.
Good points. Well said.
Derivatives also need to be regulated to assure that the counter-party has the funds available to honor their bets.
That means escrows held by truly independent third parties that are subject to audit and public disclosure.
Leverage and derivatives (the current situation) is insane—and if our only choices are leveraged derivatives or no derivatives then we would be better off with no derivatives.
” Investment and commercial banks weren’t allowed to hold MBS prior to the repeal of Glass-Steagall? “
By MBS do you mean mortgage backed securities?
There was a revolution in the mortgage industry that occurred around the same time but wasn’t directly caused by Glass Steagall. The old model of conforming paper written by in house loan officers was being replaced by independent mortgage brokers who were paid by the loan. This innovation was driven by the unregulated shadow banking sector of investment banks and hedge funds which dominated lending during the bubble. This is where all the exotic paper was being written. Their paper ended up being owned by everyone, including commercial banks. One of the big problems was that this paper was being marked AAA by the rating agencies that banks relied upon when buying debt.
“Derivatives also need to be regulated to assure that the counter-party has the funds available to honor their bets.”
I think that that problem was especially true with AIGs credit default swaps.
Derivatives of various sorts have been around a long time particularly in the securities industry, but I agree with you that having them unregulated and in the banking world is just nuts and exposes uninvolved third parties, like taxpayers, to huge risks. The derivatives market needs to be transparent as well as regulated.
Any specifics about the difference it would have made?
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