

Congress passes wide-ranging bill easing bank laws (1999) - iamelgringo
http://www.nytimes.com/1999/11/05/business/congress-passes-wide-ranging-bill-easing-bank-laws.html?sec=&spon=&pagewanted=1&emc=eta1

======
fortes
"The decision to repeal the Glass-Steagall Act of 1933 provoked dire warnings
from a handful of dissenters that the deregulation of Wall Street would
someday wreak havoc on the nation's financial system. The original idea behind
Glass-Steagall was that separation between bankers and brokers would reduce
the potential conflicts of interest that were thought to have contributed to
the speculative stock frenzy before the Depression."

Being right is tough, especially when you're not vindicated until years later
(and after years of "success" by the new policies).

More:

"''Scores of banks failed in the Great Depression as a result of unsound
banking practices, and their failure only deepened the crisis,'' Mr. Wellstone
said. ''Glass-Steagall was intended to protect our financial system by
insulating commercial banking from other forms of risk. It was one of several
stabilizers designed to keep a similar tragedy from recurring. Now Congress is
about to repeal that economic stabilizer without putting any comparable
safeguard in its place.''

Supporters of the legislation rejected those arguments. They responded that
historians and economists have concluded that the Glass-Steagall Act was not
the correct response to the banking crisis because it was the failure of the
Federal Reserve in carrying out monetary policy, not speculation in the stock
market, that caused the collapse of 11,000 banks. If anything, the supporters
said, the new law will give financial companies the ability to diversify and
therefore reduce their risks. The new law, they said, will also give
regulators new tools to supervise shaky institutions.

''The concerns that we will have a meltdown like 1929 are dramatically
overblown,'' said Senator Bob Kerrey, Democrat of Nebraska."

~~~
jacoblyles
So Wachovia, instead of being sold to Wells Fargo, should have just went
bankrupt? And Merrill Lynch, instead of being bought by Bank of America,
should have went bankrupt? That would have eased the crisis, how?

Glass Stegall would have blocked both of those transactions.

Would Glass-Stegall have reduced unprecedented capital flows into the US
housing sector from overseas investors and the monetary and fiscal policies of
our own government? Because if you still have those capital flows, you still
have housing prices going up by 20% per year, you still have lenders lowering
their standards, and you still have them getting caught holding the bag.

I'm sorry, I just don't see it.

Not all deregulation is equal. Each individual policy has its own incentives.
There are not two undifferentiated piles called "regulation" and
"deregulation" that we can add and subtract from. I have a hard time seeing
how the repeal of Glass Steagall did anything but _mitigate_ the current
crisis.

And yes, during the Great Depression it was small banks that were made
artificially small by anti-banking laws that failed. The repeal of anti-size
regulation has sound historical reasoning on its side.

Meg McArdle had a good post on this. I need to find out about her background,
because she is one of about 5 people on the internet that can write INFORMED
analysis of issues like these:

[http://meganmcardle.theatlantic.com/archives/2008/09/clear_a...](http://meganmcardle.theatlantic.com/archives/2008/09/clear_as_glass_steagall.php)

" Even if you ignore the economic history indicating that Glass-Steagall
didn't help the crisis it was meant to solve--even if you assume, arguendo,
that the repeal was a bad idea--there's simply no logical reason to believe it
had anything to do with the current mess.

Securitization was not introduced in the 1990s; it was invented in the 1970s
and became popular in the 1980s, as chronicled in Liar's Poker. (As an aside,
if you haven't read it, you really must. Especially now).

GLB had nothing to do with either lending standards at commercial banks, or
leverage ratios at broker-dealers, the two most plausible candidates for
regulatory failure here.

Most importantly, commercial banks are not the main problems. If Glass-
Steagall's repeal had meaningfully contributed to this crisis, we should see
the failures concentrated among megabanks where speculation put deposits at
risk. Instead we see the exact opposite: the failures are among either
commercial banks with no significant investment arm (Washington Mutual,
Countrywide), or standalone investment banks. It is the diversified financial
institutions that are riding to the rescue."

My own take on it:

[http://distributedrepublic.net/archives/2008/09/22/the-
end-e...](http://distributedrepublic.net/archives/2008/09/22/the-end-era)

~~~
spoiledtechie
Point of interest.

Wachovia FELL because there was a SILENT run on the bank. More than 5 trillion
dollars got taken out of the system which was largely owned by Wachovia.

Look for the day they increased the Fed Savings from $100,000 to $250,000 and
you will know the preceding day was the "Silent Run".

~~~
mrtron
Citation?

I thought the '5 trillion' silent run was fluff?

------
spoiledtechie
_the most interesting statement_

''Today Congress voted to update the rules that have governed financial
services since the Great Depression and replace them with a system for the
21st century,'' Treasury Secretary Lawrence H. Summers said. ''This historic
legislation will better enable American companies to compete in the new
economy.''

 _Yep, the same Lawrence H. Summers who is now Pres. Obama's top financial
advisor._

~~~
JesseAldridge
<http://www.newsweek.com/id/185934>

~~~
spoiledtechie
Thanks for this. Changes my opinion a bit on Summers.

------
byrneseyeview
People are complaining that this was a destabilizing bill. And yet, the
current crisis is largely due to stabilizers: Fannie and Freddie manipulated
mortgage prices to make them trade like treasuries, leading to artificial
stability; AIG sold CDSs as part of a regulatory arbitrage, leading to a
collapse later on; depositors didn't have any reason to care whether their
bank was lending to someone who put 50% down on a first home or 0% down on a
no-doc third home -- whatever happened, the FDIC would take care of it!

It is impossible to imagine an alternative history in which a lack of
ostensibly stabilizing regulations led to a larger crisis. These rules will
tend to reduce the chance of a small disaster, and amplify the effects of a
massive one. Thanks to Fannie and Freddie, housing prices couldn't drop 5% in
a year -- they could rise 10%, or they could drop by 20%.

------
biohacker42
If my recollection is correct, when this was happening The Economist magazine
was also in favor of it. And one of the reasons they gave was that _a more
diverse business will make bankruptcy less likely_.

And logically I have to agree with that. It also seems to me, that is not what
caused the crisis.

I think the core of the problem is

A) Too much risk was taken on because there was huge incentive to maximize
profit, and very little disincentive to minimize risk. People were gambling
with other people's money.

B) Companies that were allowed to get too big to fail.

So I think we can keep mark to market, and naked short selling and even the
repeal of Glass-Steagall as long as we have legislation in place to prevent
systemic risk.

Something like monopoly laws, but instead of monopoly, companies would be
charged with being too big to fail.

If the courts convict them of being systemic risk, they have to find a way to
split into at least two parts, but they can do it while preserving as much
share holder value as possible.

 _And then no more bailouts!_

I am not sure how Glass-Steagall eliminates systemic risk and the too big to
fail scenario? It makes it less likely but does it eliminate it?

~~~
gills
You do realize that the popular catchphrase "Too Big To Fail" is politician-
speak for "We know these guys are crooks and we know they committed fraud on a
massive scale, but won't indict them because it would bare our own corruption
and failure to enforce existing laws because we really wanted our friends to
make more money and donate to the campaign!"

~~~
biohacker42
I kind of agree with that, but it's also oversimplifying.

Putting banks into receivership doesn't just happen magically, there's laws
for it. There are no equivalent laws for international behemoth insurers like
AIG. The government can't just make up laws as it goes along.

As to a disorderly unwinding like Lehman, well that basically caused a run on
the banks.

~~~
gills
_The government can't just make up laws as it goes along._

You are right, and I'm glad you are saying it :)

But didn't the Fed fail in it's regulatory role over the commercial banks _to
whom AIG was counterparty on swaps_ , when they allowed valuation of Tier
Capital assets based on the 'quality' provided by swaps from AIG and friends?
With any due diligence whatsoever the banks would have known that AIG didn't
have the capital to pay those contracts. From that angle it looks like some or
all of: The Fed was asleep, AIG misrepresented itself to CDS customers, or
banks were complicit in the misrepresentation (or they didn't care because
they could hedge the CDS with short CDS from a different counterparty -- now
that is systemic risk). Go a step further -- the Fed accepted these CDS-
wrapped assets as collateral for TSLF/TALF loans -- so the same statements
about banks could be applied to the Fed, they either didn't do the due
diligence on the collateral or they are complicit in breaking the law. Right?

Edit: for God's sake, I despise economics. I just want to get back to work and
create stuff!

~~~
biohacker42
Absolutely, regulators failed all over the damn place.

But I'm not sure how to fix that. It seems they will be merged into one giant
super regulator, I'm not sure that helps. Perhaps making the head of the super
regulator an elected office?

And sorry about keeping you from work :) I'm in a cubicle farm... but won't be
there for long.

------
feverishaaron
_But other lawmakers criticized the provisions of the legislation aimed at
discouraging community groups from pressing banks to make more loans to the
disadvantaged. Representative Maxine Waters, Democrat of California, said
during the House debate that the legislation was ''mean-spirited in the way it
had tried to undermine the Community Reinvestment Act.'' And Representative
Barney Frank, Democrat of Massachusetts, said it was ironic that while the
legislation was deregulating financial services, it had begun a new system of
onerous regulation on community advocates._

What really gets me, is that the very people that were pushing for banks to
loan money to people who couldn't afford the loans (ie Barney Frank), are out
there in the media as the biggest decriers of the financial mess we are in.
They are so eager to lay the blame on others, including big, nasty Wall
Street. Everyone is culpable here.

Can a brother get a "My Bad!"

------
verdant
If we've learned anything from history, it's that we've learned nothing from
history

------
alabut
Holy crap - this is the most succinct explanation I've seen of the economic
crisis:

 _"The opponents of the measure gloomily predicted that by unshackling banks
and enabling them to move more freely into new kinds of financial activities,
the new law could lead to an economic crisis down the road when the
marketplace is no longer growing briskly."_

~~~
byrneseyeview
What does that explain? Does anyone actually claim that the main cause of the
current crisis is that the same bank can make a loan or underwrite one?

~~~
alabut
Yes, that's definitely a big part of it - the fact that the same company can
both provide a loan and then insure that same loan creates an ethical conflict
of interest that calls into question their ability to objectively quantify
risk, as well as creating an illusion of stability with these risky assets
through false claims of insurance. The article gave an example of a company at
the time (Citigroup) that would have had to split their insurance underwriting
by law, which arguably would've created a more accountable and less entangled
situation than having it all under one roof.

So what did the less ethical banks do with these troubled assets, since I'm
sure somebody in the top ranks had to know what they were getting into? Bundle
them up with a bunch of their other more reputable financial products and
resell them to others. That's the part that's been getting a lot of the
attention lately but it's only a symptom, not the root cause of the problem.

~~~
anamax
> Yes, that's definitely a big part of it - the fact that the same company can
> both provide a loan and then insure that same loan creates an ethical
> conflict of interest that calls into question their ability to objectively
> quantify risk

> So what did the less ethical banks do with these troubled assets, since I'm
> sure somebody in the top ranks had to know what they were getting into?
> Bundle them up with a bunch of their other more reputable financial products
> and resell them to others.

The combination of those two sentences doesn't make any sense.

The inability of an insitution to objectively quantify risk wrt a given entity
doesn't matter if said institution doesn't own or insure said entity.

In other words, it doesn't matter how bad Citigroup is at estimating the risk
of assets that it sells.

~~~
Retric
The problem is they sold the "good slices of the pie" and nobody would buy the
bad slices. So they had a lot high risk assets on the books. Which was fine
until the market decline wiped their value out.

~~~
anamax
The claim was that Citi can't distinguish good from bad. If that's true, they
can't have preferentially sold either group.

Note that we now have two stories on what they sold. One story is that they
"unethically" sold the bad. Now we're told that they sold the good.

~~~
alabut
_"The claim was that Citi can't distinguish good from bad."_

That's not the claim at all - it's that they had a sliding scale of how bad a
loan they were willing to make because of incentive to have lax ethical
standards, then they hid the "badness" of those loans by bundling them up with
other financial vehicles that they resold to others.

~~~
anamax
Actually that is the claim - "fact that the same company can both provide a
loan and then insure that same loan creates an ethical conflict of interest
that calls into question their ability to objectively quantify risk"

Of course, the insurance that we're talking about wasn't for individual
mortgages but for loan portfolios and tranches of loan portfolios. (The
"insurance" wrt the effect of individual loans comes from the portfolio -
instead of "loan fails or not", you get "fraction of loans that fail".)

> it's that they had a sliding scale of how bad a loan they were willing to
> make because of incentive to have lax ethical standards

That's completely incorrect. The "how bad a loan" stuff came from loan
orignators as pushed by CRA, govt officials, and fannie and freddie.

Ethics had nothing to do with it. Or rather, the "ethic" of "folks should get
a loan regardless of whether they can repay" overrode the financial reality of
"loans made to people who are unlikely to be able to repay are likely fail".

Citigroup wasn't big in loan origination. They did their "magic" on portfolios
that they bought from other magicians and from folks who originated loans.

------
anamax
Note that "mark to market" was reinstituted in 1999 after having been
suspended in 1934.

Mark-to-market says that the value of an asset for regulatory purposes (bank
or insurance company assets for example) is 0 on any day when no one offers to
buy said asset or something comparable.

Many/most of these loan portfolios are throwing off cash. If anyone actually
believes they're truely worth $0, I'll be happy to take as many as I can get
for $1 each.

I'll even throw in a free toaster.

~~~
Tangurena
No. You've got that wrong. There are 3 types of valuations for assets:

"Level 1" which means that there is an observable price (a market and price)
for this asset - such as a stock market. This is called "mark to market."

"Level 2" which means that there is no observable price. It takes an
observable price and uses it as an input to some formula to produce a value.
This is commonly called "mark to model" and derivatives are the most widely
known products in this area.

"Level 3" asset valuation is where the asset holder makes up a value. Many
call this "mark to make believe." Most of the profits in the past couple years
in the financial industry were "level 3 profits."

The FASB's view on valuing the balance sheet of companies is to use "level 1"
(if it exists), before using the other valuation methods. If there are enough
CDOs sold that there is now a price for that CDO, then the only rational thing
is to use that price - not the one that was made up. Until FASB 157 came out,
if a company wanted to claim that their level 3 assets were worth what they
said they were worth, then they could. Now, if there is a "street price" for
the assests, then you have to use "mark to market."

<http://www.fasb.org/pdf/fas157.pdf>

------
gills
I think GLB is irrelevant at this point, if only because regulators were
negligent in failing to enforce other existing laws which could have prevented
and/or mitigated the implosion. Would the executive branch have behaved
differently if Glass-Steagall were still in place?

------
jdavid
not only is this a warning about history, but it is one about politics.

we voted for this via popular support across the world. we took popularism and
democracy too far. the populous was wrong, so....

my question is, how do you design a system that both accommodates the
population of your system, but also allows success with counter examples?

i am afraid that wikipedia will develop a sedentary culture, and will slow
down in its rate of change, hence making it corruptible. so how do we fix
that, how do we protect communities from them selves?

------
rjurney
I find it highly ironic that the same bill that was largely responsible for
our banking crisis actually REDUCED ACORN loans, and yet talk radio blames
those loans for the whole crisis.

------
ojbyrne
Ammunition for the Paul Wellstone conspiracy theorists?
<http://www.alternet.org/story/14399/>

