I think you’re correct that ‘repeal’ of Glass-Steagall isn’t what happened. ‘Repeal of G-S’ has become a catchall term for innovations that occurred in the 1990s and 2000s that did contribute to the crisis but probably didn’t involve G-S itself.
My own suspicion is that what gets called ‘the repeal of G-S’ was largely the result of the Commodities Futures Modernization Act 2000, signed by Clinton, that kept derivatives completely unregulated.
It’s my impression that due to CFMA 2000 banks were able to take on very high levels of risk in mortgage-related derivatives. Regulators were unable to measure the level of that risk, and unable to do anything if they did know.
Because of a lack of transparency in the derivatives market banks themselves were in the dark on the real value of the derivatives that they were buying. And banks were misled on the high risk involved because the rating agencies were calling the loans that the derivatives were based upon AAA when they were more like time bombs... a result of the entire industry basing their pricing on the David X Li ‘Gaussian copula function’ IIRC.
Brooksley Born at the Commodity Futures Trading Commission (CFTC) was the voice in the wilderness warning that big trouble was coming from the derivatives market.
‘Brooksley Born is best known as the sole regulator in the Clinton administration who attempted to regulate derivatives and became the target of bullying by then Treasury Secretary Robert Rubin, his enforcer, Larry Summers, and Fed Chair Alan Greenspan. Frontline aired an expose on the guts Born summoned to stand up to the Wall Street enablers’ cartel. In the end, of course, Wall Street had its way and derivatives remained unregulated. Born resigned her post.
‘In her talk at the conference, Born takes on the preposterous proposition that markets can self-regulate. During her time at the CFTC, Born said Wall Street had poured billions of dollars into deregulation lobbying which was “supported by the fallacious beliefs championed notably by Alan Greenspan that financial markets are self regulating and that financial firms are capable of policing themselves.”
‘Born told the crowd that the dangers have only grown since the collapse:
“The power and influence of the financial sector threatens a continuation of the regulatory capture that contributed to the financial crisis. Financial firms, too often, have significant say in the appointment of high regulatory officials. The tendency of some former government officials to obtain highly lucrative positions in the financial sector after leaving government may well act as an inducement to those remaining in government to serve the interest of the financial sector rather than those of the public.”
‘Born reminded the audience that since the enactment of the Dodd-Frank financial reform legislation, the country has witnessed more frauds, manipulations and reckless behavior on the part of the very same financial firms, adding:
“With respect to derivatives trading, JPMorgan lost $6 billion through speculative trading of the London Whale and both MF Global and Peregrine Financial went bankrupt after allegedly engaging in misappropriation of customer funds. In light of all this, we must ask ourselves whether the financial and political power of our largest financial firms poses a threat to our policy making on financial regulation and seriously undercuts the administration of justice.”
‘Born also cautioned the public against believing that the derivatives’ market has been fixed, stating:
“Dodd-Frank gave the Commodity Futures Trading Commission an enormous new responsibility to impose regulation on this previously unregulated market which was a significant cause of the financial crisis and which is currently estimated to be $400 trillion in notional amount [face amount] in the United States and almost $700 trillion globally. It’s actually larger than it was at the time of the financial crisis…The jury is still out on whether the regulatory regime under Dodd-Frank will be adequate to address the dangers of this market…”
‘According to Born, too many exemptions have been carved out in the derivatives arena under Dodd-Frank, including derivatives used for hedging and foreign exchange swaps.
I don't consider typical MBS to be derivatives. They're usually a pile of mortgages. In some cases, sliced into tranches of different grades.
You can't possibly be saying that buying and selling of every single financial security derivative contract in the U.S. since 2000 happened completely w/o any government oversight at all. Like, I looked in the html text and the PDF and I didn't get that at all.