by Sherwood Ross
Global Research, April 4, 2008
MSL
Banking Act of 1999 has opened a Pandora’s Box
The desire of commercial banks to gut the Glass-Steagall Act (GS) of 1933 so they could get back into the lucrative investment banking business has resulted in today’s subprime mortgage mess, the dean of the Massachusetts School of Law (MSL), a former Justice Department anti-trust lawyer, says.
“When federal agencies began making inroads on Glass-Steagall in the 1980’s and 1990’s, so that banks were allowed by the agencies to do things that Glass-Steagall forbade, I was amazed,” says MSL Dean Lawrence Velvel, of Andover. He noted GS “had deliberately separated commercial banking from investment banking because Congress felt in the 1930’s that the combination of both types of banking in a single institution was one of the reasons for the Great Depression.”
During that era, “when both types of banking were combined in one institution and a bank’s stock business and stock investments went down, the whole bank went down because of huge losses and capital impairments,” Velvel explained. And it was to avoid any repeat of the nation’s financial collapse GS was enacted.
Once the GS safeguards were removed by enactment of the Gramm-Leach-Bliley Act of 1999 (GLBA), Velvel says, “Horrible loans were made, horrible securities were packaged and sold from these loans, and when one side of the bank got into problems, they quickly spread to the other side. As a result, huge banking companies such as Citicorp and Merrill Lynch are in big trouble.”
“If delinquencies in the fourth quarter of 2007 for subprime adjustable-rate mortgages hit an all-time record 5.29%, it’s because the visionary protections in the New Deal legislation(GS) have been abandoned,” Velvel says. Banks are holding billions in mortgage-related instruments for which there is no market.
In a related article published in MSL’s opinion journal “Long Term View,” law Professor Holly Vietzke writes GLBA has more closely connected “the banking industry to the U.S. stock market, ensuring that any significant dive on Wall Street will have disastrous effects on the nation’s financial system.”
http://dandelionsalad.wordpress.com/2008/04/05/record-home-foreclosures-across-america-by-sherwood-ross/