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Actually, no, most people are NOT familiar with the repeal of Glass-Steagall (not Glass-Steagal, incidentally). Including you; if you were you'd realize that t

Actually, no, most people are NOT familiar with the repeal of Glass-Steagall (not Glass-Steagal, incidentally). Including you; if you were you'd realize that there's no coherent argument for how the so-called "repeal" of Glass-Steagall[1] actually led to the financial crisis or to increased profits for GS. Lessig didn't name an actual regulation that might have caused this, and neither have you. There's a reason. Further, you fundamentally misunderstand how markets work, what GS is doing in these cases, and even what a conflict of interest is. What GS is doing is called "being a broker"[2]. If you don't understand what a broker is, then you may not be well placed to pontificate on financial markets. [1]: Everyone and their dog likes to trot out the "repeal of Glass-Steagall" and feel clever. If pressed, a few of them will even stammer out something about it being a law that seperated investment and commercial banking. In actuality, the main function of Glass-Steagall was setting up the FDIC, and it's never been repealed. It did contain a lot of other rule changes and regulations, most of which have been repealed decades ago - and good riddance. Do you think it should be illegal to offer interest on a checking account? No? Great, you too are a supporter of the "repeal" of Glass-Steagall. As for the restriction on retail and investment banking...god only knows how that's supposed to have prevented any problems. Not only did it not do what it claimed to do (Citibank merged with Saloman Smith Barney while the rules were nominally still in effect), nobody can explain how the rules intention would have done anything worthwhile. None of the competing theories of "what went wrong" and "how to stop it" have anything to do with seperating commercial and investment banking (and none of the large merged banks failed while several large banks with only commercial or only investment banking operations did fail). So... [2]: Of course, maybe you want to argue that being a broker is illegal? Or should be illegal? Pull the other one, it's got bells on.

qdog 15y ago
Ok, you got me, more concisely, Sections 20 and 32 of the Glass-Steagall act of 1933 were repealed in 1999 after at least two decades of hard lobbying. "Then, in 1998, in an act of corporate civil disobedience, Citicorp and Travelers Group announced they were merging. Such a combination of banking and insurance companies was illegal under the Bank Holding Company Act, but was excused due to a loophole that provided a two-year review period of proposed mergers" - http://www.commondreams.org/view/2009/11/12-8 http://www.commondreams.org/view/2009/11/12-8 So, without the repeal, Citibank would have probably been forced to release Travelers, at the least. Volcker and the Fed were opposed to slackening of regulations without new regulations in 1982 when the FDIC ruled in favor of banks being able to take on subsidiaries to underwrite and deal in securities. The reason it's important to separate the banking activities, is risk. As we have recently seen with MF Global, trusting a company to follow rules about accounts not being used to cover trades are not well followed. I make no claims of expertise on brokers. GS, however, was both a partner to the trades it made and the broker to clients. Basically betting against the people it was selling securities to. http://www.sec.gov/news/press/2010/2010-59.htm http://www.sec.gov/news/press/2010/2010-59.htm Technically I suppose GS wasn't on the other side of the trade, but since Paulson & Co. were paying GS to offer trades without full disclosure, I'd say it's pretty close. I make no money (currently) from financial firms outside of my 401(k) holdings, I only make comments on random message boards, but I don't think my viewpoint is as foolish as you would have it be.
- simplefish 15y ago
  Heh. First, Commondreams is not necessarily the best source for a citation. Let's turn to Wikipedia, which explains the Citibank/Travelers merger is fairly decent detail[1]. In short, while there was a time limit of five years (the two years is only without Fed approval, which in this case they would have received), that only applied to Travelers, not to Citibank owning the investment bank Salomon Smith Barney. But that's really a minor quibble. Let's step back and think about the overall purpose of those restrictions. The standard "Glass-Steagall repeal caused the crisis!" meme focuses on the idea that we don't want banks wagering FDIC-insured retail deposits on the financial markets and going bust, taking our savings accounts with them. And maybe we don't - but this did not actually happen. No retail bank went bust due to their investment banking arms getting overextended. Instead we saw retail banks go bust due to their retail banking operations (specifically, mortgages), and we saw investment banks go bust due to their risky bets on markets. Both of those were always legal under Glass-Steagall. If the standard "Glass-Steagall repeal is evil" meme has any validity at all, it would seem to be in relation to AIG; an insurer who went bust after making risky bets on the financial markets. Surely Glass-Steagall repeal allowed THAT, right? Nope! The one form of intermingling that actually caused problems during the crisis is the one that wasn't banned by Glass-Steagall. It's no wonder that no serious analysts thinks Gramm-Leach-Bliley had any real impact on the crisis. So yes, as you say, without repeal Citibank would have been forced - eventually - to sell Travelers. And this would have done...precisely nothing, because as it turns out the purchase of Travelers by Citibank was one of the biggest duds of all time. Nobody actually wants to buy insurance at their bank, and giving access to Citibank (who already had a huge pool of retail deposits) access to the huge pool of premiums Travelers had...did, as near as we can tell, nothing whatsoever. And again, other than AIG (who had no retail banking operations), no major insurance company went under during the crisis, nor did any major bank which went under have an insurance arm. So once again, we ask: Did Glass-Steagall actually prevent anything meaningful? As for MF Global...yes, they've the villain du jour, and very bad people. But they were not a retail bank, and their operations would have been allowed (or, if you prefer, would have been just as illegal) under Glass-Steagall. Again, what purpose do you think the restrictions in Glass-Steagall served? The only answer is "not letting banks gamble with insured deposits on the financial markets", and MF Global did not do that, and so Glass-Steagall repeal did not impact MF Global. (More generally, what MF Global did is illegal, and so any attempt to argue that MF Global proves we need more regulation is inherently flawed.) As for the comments about brokers... we're talking past each other. However, since you mention it: There's a lot less than meets the eye to the ABACUS deal. At core, GS's wrongdoing was misrepresenting who picked the CDOs. That's illegal and serious, but they weren't on either end of the trade, much less both. They were more like a sporting goods store selling both AP bullets and body armor to both sides of a gang war. They profited on both ends of the deal, but they couldn't care less which side won. Mind you, GS has often managed to find themselves on both ends of a deal. Check out the deal where GS "helped" El Paso Corp sell itself - suspiciously cheaply - to Kinder Morgan, which GS had a big stake in[2]. Dodgy as fuck. And the deal where GS "helped" Burlington Northern sell itself - suspiciously cheaply - to Warren Buffet (a very big investor in GS) wasn't much better... (Mind you, neither had anything to do with Glass-Steagall.) [1]: http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Failed_1995_Leach_bill.3B_expansion_of_Section_20_affiliate_activities.3B_merger_of_Travelers_and_Citicorp http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Fail... [2]: http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman-sachs-had-all-angles-for-a-payday/ http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman...
jellicle 15y ago
There's always someone who speaks at great length about finance while being clueless about the subject. >(and none of the large merged banks failed while several large banks with only commercial or only investment banking operations did fail) They didn't fail because the government bailed them out. The government bailed them out because the disruption to society caused by large COMMERCIAL banks failing was intolerable. They needed to be bailed out because they took great risks on the INVESTMENT side. This merger of the investment and commercial side was prohibited by Glass-Steagall. Which brings us around to our initial point: the financial crisis was substantially exacerbated by the repeal of parts of the Glass-Steagall Act, which allowed the risk-taking of the investment banks to imperil commercial banking. And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts.
- simplefish 15y ago
  "There's always someone who speaks at great length about finance while being clueless about the subject. [...] And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts." snicker Try section 11(b), which was implemented as the infamous "Regulation Q". Normally I'd refrain from mocking someone for an innocent error on a side point, but the irony here is just too delicious. Even if you are completely clueless about Glass-Steagall, this is discussed in detail in the Wikipedia page about it. It takes a special person to know nothing about a subject, not even do the 20 seconds of research needed to confirm a claim, and still feel like insulting other people for their factual claims is a good idea. (As for your substantive point... No. Countrywide, for example, was not taking risks on the "investment side" under the meaning of Glass-Steagall; they didn't even have an investment side. The core damage there was a pure-play retail bank making crap loans, and Glass-Steagall says that's awesome. You're arguing against the repeal of a regulation which never existed. Might have been a good one though.)

qdog 15y ago

Ok, you got me, more concisely, Sections 20 and 32 of the Glass-Steagall act of 1933 were repealed in 1999 after at least two decades of hard lobbying. "Then, in 1998, in an act of corporate civil disobedience, Citicorp and Travelers Group announced they were merging. Such a combination of banking and insurance companies was illegal under the Bank Holding Company Act, but was excused due to a loophole that provided a two-year review period of proposed mergers" - http://www.commondreams.org/view/2009/11/12-8 http://www.commondreams.org/view/2009/11/12-8 So, without the repeal, Citibank would have probably been forced to release Travelers, at the least. Volcker and the Fed were opposed to slackening of regulations without new regulations in 1982 when the FDIC ruled in favor of banks being able to take on subsidiaries to underwrite and deal in securities. The reason it's important to separate the banking activities, is risk. As we have recently seen with MF Global, trusting a company to follow rules about accounts not being used to cover trades are not well followed. I make no claims of expertise on brokers. GS, however, was both a partner to the trades it made and the broker to clients. Basically betting against the people it was selling securities to. http://www.sec.gov/news/press/2010/2010-59.htm http://www.sec.gov/news/press/2010/2010-59.htm Technically I suppose GS wasn't on the other side of the trade, but since Paulson & Co. were paying GS to offer trades without full disclosure, I'd say it's pretty close. I make no money (currently) from financial firms outside of my 401(k) holdings, I only make comments on random message boards, but I don't think my viewpoint is as foolish as you would have it be.

simplefish 15y ago
Heh. First, Commondreams is not necessarily the best source for a citation. Let's turn to Wikipedia, which explains the Citibank/Travelers merger is fairly decent detail[1]. In short, while there was a time limit of five years (the two years is only without Fed approval, which in this case they would have received), that only applied to Travelers, not to Citibank owning the investment bank Salomon Smith Barney. But that's really a minor quibble. Let's step back and think about the overall purpose of those restrictions. The standard "Glass-Steagall repeal caused the crisis!" meme focuses on the idea that we don't want banks wagering FDIC-insured retail deposits on the financial markets and going bust, taking our savings accounts with them. And maybe we don't - but this did not actually happen. No retail bank went bust due to their investment banking arms getting overextended. Instead we saw retail banks go bust due to their retail banking operations (specifically, mortgages), and we saw investment banks go bust due to their risky bets on markets. Both of those were always legal under Glass-Steagall. If the standard "Glass-Steagall repeal is evil" meme has any validity at all, it would seem to be in relation to AIG; an insurer who went bust after making risky bets on the financial markets. Surely Glass-Steagall repeal allowed THAT, right? Nope! The one form of intermingling that actually caused problems during the crisis is the one that wasn't banned by Glass-Steagall. It's no wonder that no serious analysts thinks Gramm-Leach-Bliley had any real impact on the crisis. So yes, as you say, without repeal Citibank would have been forced - eventually - to sell Travelers. And this would have done...precisely nothing, because as it turns out the purchase of Travelers by Citibank was one of the biggest duds of all time. Nobody actually wants to buy insurance at their bank, and giving access to Citibank (who already had a huge pool of retail deposits) access to the huge pool of premiums Travelers had...did, as near as we can tell, nothing whatsoever. And again, other than AIG (who had no retail banking operations), no major insurance company went under during the crisis, nor did any major bank which went under have an insurance arm. So once again, we ask: Did Glass-Steagall actually prevent anything meaningful? As for MF Global...yes, they've the villain du jour, and very bad people. But they were not a retail bank, and their operations would have been allowed (or, if you prefer, would have been just as illegal) under Glass-Steagall. Again, what purpose do you think the restrictions in Glass-Steagall served? The only answer is "not letting banks gamble with insured deposits on the financial markets", and MF Global did not do that, and so Glass-Steagall repeal did not impact MF Global. (More generally, what MF Global did is illegal, and so any attempt to argue that MF Global proves we need more regulation is inherently flawed.) As for the comments about brokers... we're talking past each other. However, since you mention it: There's a lot less than meets the eye to the ABACUS deal. At core, GS's wrongdoing was misrepresenting who picked the CDOs. That's illegal and serious, but they weren't on either end of the trade, much less both. They were more like a sporting goods store selling both AP bullets and body armor to both sides of a gang war. They profited on both ends of the deal, but they couldn't care less which side won. Mind you, GS has often managed to find themselves on both ends of a deal. Check out the deal where GS "helped" El Paso Corp sell itself - suspiciously cheaply - to Kinder Morgan, which GS had a big stake in[2]. Dodgy as fuck. And the deal where GS "helped" Burlington Northern sell itself - suspiciously cheaply - to Warren Buffet (a very big investor in GS) wasn't much better... (Mind you, neither had anything to do with Glass-Steagall.) [1]: http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Failed_1995_Leach_bill.3B_expansion_of_Section_20_affiliate_activities.3B_merger_of_Travelers_and_Citicorp http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act#Fail... [2]: http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman-sachs-had-all-angles-for-a-payday/ http://dealbook.nytimes.com/2012/03/05/advising-deal-goldman...

jellicle 15y ago

There's always someone who speaks at great length about finance while being clueless about the subject. >(and none of the large merged banks failed while several large banks with only commercial or only investment banking operations did fail) They didn't fail because the government bailed them out. The government bailed them out because the disruption to society caused by large COMMERCIAL banks failing was intolerable. They needed to be bailed out because they took great risks on the INVESTMENT side. This merger of the investment and commercial side was prohibited by Glass-Steagall. Which brings us around to our initial point: the financial crisis was substantially exacerbated by the repeal of parts of the Glass-Steagall Act, which allowed the risk-taking of the investment banks to imperil commercial banking. And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts.

simplefish 15y ago
"There's always someone who speaks at great length about finance while being clueless about the subject. [...] And no, Glass-Steagall doesn't have anything to do with offering interest on checking accounts." snicker Try section 11(b), which was implemented as the infamous "Regulation Q". Normally I'd refrain from mocking someone for an innocent error on a side point, but the irony here is just too delicious. Even if you are completely clueless about Glass-Steagall, this is discussed in detail in the Wikipedia page about it. It takes a special person to know nothing about a subject, not even do the 20 seconds of research needed to confirm a claim, and still feel like insulting other people for their factual claims is a good idea. (As for your substantive point... No. Countrywide, for example, was not taking risks on the "investment side" under the meaning of Glass-Steagall; they didn't even have an investment side. The core damage there was a pure-play retail bank making crap loans, and Glass-Steagall says that's awesome. You're arguing against the repeal of a regulation which never existed. Might have been a good one though.)