Time to put to rest the notion that Glass-Steagall wouldn't have helped in the 2008 collapse

[markpkessinger]

There is a thoroughly dishonest argument being proffered by those who wish to minimize the significance of Bernie Sanders' call to restore Glass-Steagall (who also happen to be the folks who are interested in defending the disastrous legislation signed into law by the spouse of their preferred candidate), that says, in effect, that Glass-Steagall wouldn't have helped anything in the 2008 financial collapse, because the problems originated in investment banks, not commercial banks.

The firewall between investment and commercial banking that was created by Glass-Steagall was a two-way barrier. Not only did it prevent commercial banks from undertaking investment banking activities, it also prevented investment banks from engaging in activities that were considered primarily the purview of commercial banks. One of the things that precluded was investment banks getting involved in mortgages. When Gramm-Leach-Bliley, which repealed Glass-Steagall, was enacted, investment banks were now free to buy up mortgages issued by commercial banks, bundle them together into a single investment vehicle, shares of which were then sold to investors. These were what we now call 'securitized mortgages,' or mortgage]backed securities. As these became more and more popular, investment banks began buying up mortgages like hotcakes from mortgage issuers (i.e., commercial banks). Before long, commercial banks realized they could make money simply by issuing mortgages they knew would be bought up by investment banks within a few years of being issued. There was no longer any incentive for a bank to perform adequate due diligence in issuing mortgages, because the bank knew it wasn't actually undertaking the risk of those mortgages. Combined with the quick and easy profit from selling these mortgages -- many of which should never have been issued -- this became a perverse incentive (which was further enabled and abetted by the rating agencies who gave these mortgage backed securities top ratings, despite the fact that many consisted of far too many bad loans).

These instruments were a MAJOR factor in the 2008 meltdown, and they wouldn't have existed had Glass-Steagall not been repealed!

[HassleCat]

1. Restored vs. what existed

Keep in mind, Galls-Steagall had been gutted by a series of court decisions. Many people thought it had been rendered ineffective. Part of the effort to restore it includes protections against adverse court decisions, so the new Glass-Steagall would not merely restore the old one, but put a little body armor on it, as well. Yes. it should be restored, but it might not have helped very much in the 2008 meltdown. There is a variety of opinion regarding whether or not Glass-Steagall would have prevented bundling bad mortgages and issuing worthless derivatives.

[virtualobserver]

5. what part of the OP do you disagree with?

Do you disagree that mortgage backed securities were a MAJOR factor in the 2008 meltdown,

or do you disagree they wouldn't have existed had Glass-Steagall not been repealed?

[1StrongBlackMan]

55. I suspect the OP would say the latter ...

investment banks were now free to buy up mortgages issued by commercial banks, bundle them together into a single investment vehicle, shares of which were then sold to investors.

GS would not have prevented the bundling and re-sell of MBS. There is nothing is GS that would have prevented investment banks from doing what the had been doing since the 1970s. http://www.economist.com/node/12415730

It would have stopped Commercial (deposit receiving) banks from entering the bundling market; but then, there is scant record of Commercial banks doing this.

What caused the melt-down was the lax under writing standards that allowed the creation of the underlying products, that made for these toxic instruments and further ... the bought and paid for rating agencies' failure to label these instruments based on any semblance of rationality.

[virtualobserver]

60. some argue that the blending of the IB and CB cultures when the "wall" was removed.....

was the cause of the lax underwriting standards.

How do you feel about that viewpoint?

[1StrongBlackMan]

69. I would argue that the relaxing of the underwriting standards began ...

well before GS was repealed in 1999.

I wrote a pretty long dissertation on the history of FannieMae and FreddieMac and how their mortgage purchase model grew into a Mortgage Backed Securities market. But deleted it (it was pretty boring) and will settle with this ... There were four distinct periods of F&F loosening their underwriting criteria; the first, in the mid 1950s, in order to spur home building (i.e., jobs) to accommodate the returning Korean War veterans; the second, in the early 1970s, to spur home building (i.e., jobs) after years of civil unrest; in the 1980's, as Reagan opened the doors to his Investment banking buddies, welcoming them into the mortgage purchase business (it was a lot safer than M&A's or underwriting junk bonds; and, in the early 2000s, in order to compete with investment banks, who had few underwriting guidelines and paid more for the loans ... because their model was to buy the loans, often without even looking at the mix of of loans, and selling them off in bulk, as quickly as possible. The investment banks didn't care whether the the loans performed or not, because the had already gotten their money out.

[virtualobserver]

75. It was the fourth phase that you mention that took us to the absolute brink....

You don't feel that Gramm–Leach–Bliley led to the need to compete with investment banks in this way?

I would like your opinion on another side detail, if you are willing.

Feel free to bore me.

Seven years of ZIRP without the economy exploding through the stratosphere only seems possible
if what we were actually facing in 2008 was a deflationary period beyond almost anyone's imagination.

I've heard that the Obama administration's advisers felt that a $3 trillion dollar stimulus was necessary
but that they knew that something that large would never fly.

Where do YOU think we were then, and how do you feel now?

I won't be offended if don't have the time (or inclination) to answer.

[1StrongBlackMan]

77. Well, yes ...

but neither, F&F, nor the investment banks were subject to GS and the fact is, F&F got it's mission confused ... it thought it was supposed to return big profits for it's investors.

Seven years of ZIRP without the economy exploding through the stratosphere only seems possible
if what we were actually facing in 2008 was a deflationary period beyond almost anyone's imagination.

I don't know that we were in so much deflationary period as uncharted behaviors of corporations and We D. People. I past times, ZIRP would have encouraged corporate (and local government) borrowing for capital improvements and investment in the company (in terms of pay raises for staff, long put off training regimes, etc.); but, this go round, corporations used the borrowed money to buy back shares, industry consolidation and pay raises for the C-Suite ... and local government were/are facing voter resistance to cheap borrowing to invest in infrastructure repair and other capital improvements.

And sadly, we are in the same space.

I've heard that the Obama administration's advisers felt that a $3 trillion dollar stimulus was necessary
but that they knew that something that large would never fly.

I heard that, too. And, in my estimation, $3 Trillion was way out of the question ... hell, $819 billion was at the upper limit. It gave rise to opposition on both the left and the right.

[MFrohike]

23. Not quite

Not court decisions, but waivers granted by Robert Rubin's Treasury Department.

[AikidoSoul]

78. Warren said it best, it was dismantled thread-by-thread

in this brilliant interview with Jon Stewart. It was her first interview with him. She said she was so nervous before going on that she threw up back stage.

https://video-atl1-1.xx.fbcdn.net/hvideo-xfp1/v/t43.1792-2/11842697_10153171532858687_1413855476_n.mp4?efg=eyJybHIiOjE1MDAsInJsYSI6MTMxM30%3D&rl=1500&vabr=389&oh=4d54c618da09fe82af2e2b80eee8a2e8&oe=55D39508



She is so articulate. She says it all in the fewest words of anyone, making it available intellectually to more people.

Love her!

[jwirr]

52. I had wondered what Bernie meant when he said that a "new Glass-Stegall

to fit the 21st Century". Thank you also.

[AikidoSoul]

62. Elizabeth Warren has a BRILLIANT explanation, that she calls a "thread by thread" dismantling of the

protections of our financial system.

This interview was the first one she did with Joh Stewart who is very taken with her. She writes that she was so terrified of being interviewed by him that she "threw up backstage" before going on.

I right clicked the link below to open it in a new tab and it works ... she as ABSOLUTELY brilliant, on target and stunningly articulate about what precipitated the financial meltdown.... first with the S & Ls... which was a little bit of melting.... and then came 2008 -- she speaks of it being slowly eroded.



https://video-atl1-1.xx.fbcdn.net/hvideo-xfp1/v/t43.1792-2/11842697_10153171532858687_1413855476_n.mp4?efg=eyJybHIiOjE1MDAsInJsYSI6MTMxM30%3D&rl=1500&vabr=389&oh=4d54c618da09fe82af2e2b80eee8a2e8&oe=55D39508





EXCELLENT POST... RECOMMENDED AND KICKED.

And may Phil Gramm rot in hell!

[elleng]

2. I agree. PLEASE note that Martin O'Malley ALSO supports reinstating Glass Steagall.

It is seriously wrong for DU to ignore him.

Martin O'Malley Wants to Be the Glass-Steagall Candidate.

"Too many Democrats have been complicit in the backslide toward less regulation."

Democrats "must not allow another Wall Street meltdown to bring down hard-working families," O'Malley said in Iowa Friday, according to the Washington Post. The tough talk on Wall Street would help him in "aggressively positioning himself as an alternative to" Clinton, the Post said. In another article, the paper said O'Malley would run to the former Secretary of State's left on financial issues and quoted him as saying Democrats "can’t let ourselves become the party of Dodd-Frank-lite."

"Although job creation rates and GDP are on the upswing, there is lingering hardship for millions of families that traces back to Wall Street's reckless behavior," O'Malley's Monday email said.

http://www.bloomberg.com/politics/articles/2015-03-23/martin-o-malley-wants-to-be-the-glass-steagall-candidate

[restorefreedom]

36. its becoming clear,

at least to me, who the real progressives are in this election.

good quotes from om.

[elleng]

37. Glad to hear it. HOPE the same occurs to others SOON!

[restorefreedom]

38. :)

[davidpdx]

43. I'm very glad to hear O'Malley support this

Do we know if Hillary Clinton support it as well? I'm just asking because I'm curious since she, Sanders, and O'Malley are the three candidates who are the most likely to have a shot at the nomination.

[elleng]

59. I think she's kind of hedged, 'times have changed,' etc.,

but can't provide exact language now.

[Bradical79]

4. Thanks for the explanation

The dishonesty is really making me sick.

[markpkessinger]

6. Gramm-Leach-Bliley was not, of course, the only culprit . . .

But Gramm-Leach-Bliley paved the way for an even bigger legislative disaster, also signed into law by the spouse of a certain candidate, known as the Commodity Futures Modernization Act.

[Dont call me Shirley]

8. Yup!

[Enthusiast]

10. PLUS ONE, a huge bunch!

[1StrongBlackMan]

56. Now this ... I agree with. n/t

[muntrv]

73. Link right here for CFMA.

https://en.wikipedia.org/wiki/Commodities_Futures_Modernization_Act

[Duppers]

7. Big K & R

[think]

9. k&R /nt

[Enthusiast]

11. Kicked and recommended a whole bunch!

[URL=.html][IMG][/IMG][/URL]

[yurbud]

12. who believes that it wouldn't have helped? Does anyone even say that?

[ericson00]

13. serious students of economics/finance do, like Andrew Ross Sorkin and Steven Pearlstein

not to mention, the institutions who caused trouble, ie Bear, Lehman, AIG, weren't even banks.

Its just an anti-Clinton talking point/lie.

[JDPriestly]

21. No. It is the real story.

And now, everyone is still paying for it.

If you are a borrower, you have to pay more down to get a house, and your job is probably far less secure than it was before the banking industry and the investment houses went bananas after the repeal of Glass-Steagall and a few other changes made in our financial services laws.

AIG insured the mortgage brokers and banks. Bear and Lehman were the folks who bought the lousy derivative securities that the banks issued.

Not another anti-Clinton talking point.

People working in the mortgage industry and in the appraisal industry and who were smart and had consciences knew what was wrong.

In fact, I knew early on that houses on my street could not be selling for the prices they were selling for unless wages had risen. Wages had not risen, so I knew that we were in trouble. I knew that early on.

Glass-Steagall is utterly essential to keep our banking sector, which is insured as to deposits up to a certain level, by the US government, and us tax-payers, on an even keel.

Glass-Steagall is not the only law we need, but it is one of the fundamental ones. We also need to limit the size of banks and investment houses. Because when one goes belly up now, the entire system is jeopardized -- the entire global system with the really, really big banks.

We also need to change our laws about who has a fiduciary duty to whom when it comes to the financial sector. Banks betting (investing) against their depositors, investment houses investing against their depositors, that should at least be subject to full disclosure. I am talking about short- and long-selling and other such traces.

[Indydem]

68. Not only is it an anti-Clinton talking point....

It's just plain wrong and ignorant to act like Glass-Steagall alone could have stopped the economic collapse. It's also a favorite of those who want to blame corporations for every ill that the world has ever suffered.

Banks would have, and could have, still bought mortgages, and repackaged them as MBS - nothing in GS would have stopped that. To think otherwise is a fantasy, concocted by simpletons who want to point at one thing, and blame it for a complex, systemic failure on a number of fronts that caused the collapse.

GS wouldn't have made the mortgage issuers and appraisers any more honest.

GS wouldn't have made wages rise, made the economy any stronger, or made more people willing to pay their mortgages.

GS wouldn't have made the credit rating agencies any more honest.

GS wouldn't have stopped the collapse.

GS doesn't have anything to do with FDIC insurance or the operations of the FDIC insurance program - or how much that program is liable for.

GS is not a magic wand. It's repeal may have contributed to the collapse but it still being in place wouldn't have stopped it from happening.

Acting like it would have is bunk.

[kenfrequed]

70. Cute...

So now the naysayers are requiring that it ALONE be responsible for the financial collapse in order for dismantling it being a bad thing. What a ridiculous bit of goalpost moving.

It was a major contributing factor that led to other kinds of deregulation and financial obfuscation. The OP was fairly clear on all of this.

[laundry_queen]

22. Please. nt

[brentspeak]

26. Andrew Ross Sorkin

Currently serving as vulture fund villain Paul Singer's unofficial personal media cheerleader.

That's your "serious student of economics/finance"?

[laundry_queen]

28. Neither of the people he mentions

Even has a degree in economics, much less business. Serious students indeed.

[valerief]

67. Well, when one has an agenda, one agends.

[Martin Eden]

15. Yes, there is a thread in DU making that claim

6th paragraph under #1, linked below:
http://www.democraticunderground.com/1251524437

[markpkessinger]

16. I know it sounds unbelievable that anyone would make such a claim. . .

. . . unfortunately, it happens to be true. http://www.democraticunderground.com/1251524437

[JDPriestly]

20. Here you go.

http://www.democraticunderground.com/1251524437

[shadowmayor]

14. As Mark Twain once said

Before you take down a fence, you should find out why it was put up in the first place!

[fbc]

17. K&R let's cut the revisionist history

[cantbeserious]

18. Thank You For Sharing

eom

[JDPriestly]

19. Thank you for your clear explanation. The facts you state are not subject to opinion or challenge.

That is what happened.

I saw that after it happened when people told me about their problems with their mortgages.

The repeal of Glass-Steagall had a direct and very detrimental effect on the lives of millions of Americans who failed to make payments on mortgages and on second mortgages, and who lost their homes, their jobs and in many cases their marriages and families in the aftermath of the 2008 economic crisis.

As a Democrat, a life-long Democrat, it hurts me to have to point out the role of the Clinton administration in that and other economic policy decisions that were so irresponsible and so harmful to Americans.

Thanks for so clearly explaining this to the many DUers and others who do not understand it.

[Ilsa]

31. Clinton signed on to the repeal of Glass-Steagall with a

Warning that this could happen, if I remember correctly. He thought it was bad legislation, but it was going to get passed. I guess Gramm, etc had the banks buying up congresscritters.

[Bradical79]

32. I don't get it

Why is "it's going to pass anyway" a reason to sign something you think is bad? Wouldn't it be better to make those who vote for it really own the bad legislation by overriding your veto?

[Ilsa]

33. This was my recollection of what happened, as presented

By MSM, or another source. He went ahead and signed it with concerns. Makes no sense to me either.

[virtualobserver]

47. all 44 Democrats in the Senate voted against it

Clinton could have vetoed it.

Think about that.... ALL 44 Senators voted no.

[Ilsa]

72. That makes me wonder if his statement really

Reflected his opinion. He shouldn't have given them this.

[JDPriestly]

41. Big mistake. You sign it. You own it.

I wish that Obama had simply vetoed more bills. Had Congress passed them over his veto it would have been better for the country. At least we would have known where he really stood.

[Ilsa]

71. Agreed. nt

[jwirr]

54. You are correct. He should have vetoed it and forced them to own it. He

did not.

[ibegurpard]

24. we see this shit all the time right here on DU

And it comes mostly from free-trade fetishists and supporters of a particular presidential candidate.

[DirkGently]

25. Yes. I like reminding people of "The Zippy Memo."

Once the investment houses came up with the conceit that "real estate prices never go down everywhere at once" and convinced the rating houses of that, lenders had a bottomless market for whatever garbage mortgages they could originate. Though they were the ones in the best position to ensure the loans they were making weren't imaginary, they no longer cared.

When even the crappy loans ran thin, JP Morgan Chase sent around its infamous "Zippy Cheats & Tricks" memo, helpfully advising its underwriters as to how to circumvent Chase's own underwriting software by falsifying personal income until the loan got through.

3) If you do not get Stated/Stated, try resubmitting with slightly higher income.
Inch it up $500 to see if you can get the findings you want. Do the same for assets.

It’s super easy! Give it a try!
If you get stuck, call me . . . I am happy to help!

Tammy

http://www.oregonlive.com/business/index.ssf/2008/03/chase_mortgage_memo_pushes_che.html

[Thinkingabout]

27. Glass-Stegall would have helped but not prevented the meltdown. Since this time Dodd-Frank has been

Passed. If all the regulations are not in Dodd-Frank then amend this bill to include the needed regulations. We would still have a problem if Glass-Stegall was brought back. There is a current bill, build on it.

[BlueStateLib]

29. “The answer is probably ‘No’ to both.”

Senator Warren has said that one of the reasons she’s been pushing reinstating Glass-Steagall — even if it wouldn’t have prevented the financial crisis — is that it is an easy issue for the public to understand and “you can build public attention behind.”

She added that she considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.

When Senator Warren was pressed about whether she thought the financial crisis or JPMorgan’s losses could have been avoided if Glass-Steagall were in place, she conceded: “The answer is probably ‘No’ to both.”

http://www.democraticunderground.com/?com=view_post&forum=1014&pid=1174029

[sendero]

30. Anyone that doesn't understand the importance...

.... of Glass-Stegall is a moron and should not inject their propaganda or opinions into an adult discussion. It really is that simple and the various attempts at claiming otherwise are idiotic and not worthy of any attention.

[saturnsring]

76. Senator warren's a moron?

[Octafish]

34. Repeal put the taxpayer on the hook for the gambler banksters.

Neat, huh? What's next for Phil Gramm and former president Clinton, helping the wealthy protect their loot at a Swiss bank, like UBS?

http://financialservicesinc.ubs.com/revitalizingamerica/SenatorPhilGramm.html

[Doctor_J]

35. There is a great deal of corporate baggage in the Clinton history. Besides this,

there is the Telecommunications Act and of course NAFTA. The defenders of these debacles are acting like Republicans - totally shutting out reality.

Thanks for the clear explanation mpk

[snagglepuss]

39. .

[burrowowl]

40. K&R!!!!!!

[Scuba]

42. Kickety kick kick.

[davidpdx]

44. Inside Job is a must see if you haven't watched it already

[WillyT]

45. HUGE K & R !!! - THANK YOU !!!

[Uncle Joe]

46. Kicked and recommended.

Thanks for the thread, markpkessinger.

[sabrina 1]

48. I didn't think there was any question about that.

[d_legendary1]

58. You'd be surprised how some of our resident revisionist

react when it comes to things they don't like. Just like how Bernie isn't pro civil rights despite his track record of 30+ years.

[Octafish]

49. S&Ls were the blueprint for ripping off the banks via deregulation.

In the 1980s, as part of Reaganomics:

Know your BFEE: They Looted Your Nation’s S&Ls for Power and Profit

[Depaysement]

50. Right town wrong street

Think of mortgage pools as a timeline. On the backside, someone had to take the bulk of the risk. That risk taker was the company "insuring" those pools via the CDS for a nice fee but nowhere near what a carrier would charge as premium. Except that company was not an insurance company charging state regulated premiums, with required reserves, walled off by Glass-Steagall, but a fake financial institution like AIG Financial run as a side bet by an insurance company.

So when Goldman and everyone else calls their CDS, there's nothing to back them up at AIG Financial, no reserves, just chump change. If AIG was acting as a carrier, state regulated, walled off by Glass-Steagall, the state regulator would have required massive reserves and/or massive premiums so no one does the swap unless the swap is funded. No insurance carrier, no reserves, no money committed to pay on default, no crisis.

It's the insurance part of GS that matters.

[jwirr]

51. Thank you for a more indepth analysis than I have been able to do because

my analysis came from experience in the past. I know what used to happen but I did not understand the ramifications of the repeal.

What we have now is a banking system that can gamble our money away with very little risk. We after all will bail them out in the end.

[Spitfire of ATJ]

53. Don't forget the "credit default swaps" where they made money by betting they'd lose.

[Jack Rabbit]

61. Simply put, those should be illegal

It's called "betting" for a reason, but it's a rigged game. Betting by banks against Greece is no small part of the crisis that nation faces, and nothing will convince me that the Greeks' debt is odious and should not have to be repaid. The people of Puerto Rico should not be left defenseless in the clutches of Wall Street mobsters.

The analogy often drawn to the Wall Street of this second Gilded Age is to a casino. That analogy is unfair to casinos. The Nevada State Gaming commission would close down any casino that influences the outcome of the game way Wall Street does.

The reason that the Greeks are suffering at the hands of deregulated (i.e., lawless) banks and their political stooges in Europe (I'm talking about you, Frau Merkel) is that once upon a time, Glass-Steagall would have kept investment banks and lending institutions separate. If a bank made a loan, it had a vested interest in making sure the borrower had the ability to repay it. The borrower's ability to repay is no longer a banker's concern. The bankers can and do knowingly made bad loans and then recover that money through instruments like credit default swaps and still take the borrower to the cleaners later.

[Spitfire of ATJ]

64. "deregulated (i.e., lawless)"

I pointed out that spin a while ago.

http://www.democraticunderground.com/1022162

Nice to see it stuck.

[Jack Rabbit]

65. I didn't see that, but yes, your were spot on

Congratulation for being ahead of the curve.

This one's for you . . .

[1StrongBlackMan]

63. Absolutely ...

CDS actually enabled the MBS investment market, as with just a little care, there was literally no way to lose on your investment. If the underlying mortgages performed, you won; if they failed, you collected less, but still collected.

[Spitfire of ATJ]

66. Some Futures Traders were dealing exclusively in CDS...

That led to an incentive for commercial banks to issue mortgages destined to fail.

They never did crack down on Standard and Poor's over their issuance of AAA ratings. In fact, when they started TALKING about the Justice Department doing an investigation that was when Standard and Poor's had the GALL to lower the rating for the United States Government.

These guys got away with all of this because the Republicans spin everything to be the Democrat's fault and the Democrats are terrified of being labeled as being bad for business.

[1StrongBlackMan]

57. I posted a response to this OP ...

but wondered ... what is the source that informed your opinion?

[hifiguy]

74. In law school I took a course in which Glass-Steagall

was the centerpiece. The essence of G-S was that it prohibited investment banks from gambling with federally-insured money. They had to use their own money. Which is why it had to go. The banksters wanted to socialize every dime of their speculative losses while keeping every penny of their profits.

Your post is absolutely accurate in every detail.