The repeal of the Glass Steagall Act set the stage for the financial implosion

[Phoebe Loosinhouse]

Here is a concise, fascinating history of the Glass-Steagall Act from the Frontline Documentary "The Wall Street Fix"

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

A chronology tracing the life of the Glass-Steagall Act, from its passage in 1933 to its death throes in the 1990s, and how Citigroup's Sandy Weill dealt the coup de grâce.

More pigs are flying this morning. I just heard Thomas Friedman on Morning Joe say that the financial markets need "gentle shaping and regulation from government" or something like that, rejecting the self-policing and self-correcting Republican bullshit model.

[Warren Stupidity]

1. They always remember regulation when they need a huge bailout

Of course Friedman is for gummint assistance now - they need thoser gentle billions or their gentle trophy houses and wives are all up for grabs.

[SharonAnn]

24. Sen. Phil Gramm led this effort. And the deregulation of markets for Enron.

And other deregulation and privatization, including power companies.

So, Enron imploded, the combination of commercial and investment banks has permitted large financial failures, and utitlity rates have gone through the roof.

Remember, former Sen. Phil Gramm is the primary economic advisor for John McCain.

So, given his track record, we can expect that his advice is pretty bad for us.

[annabanana]

27. Ah yes... McCain's Secretary of the Treasury.... . . n/t

[Stuart G]

2. This quote from the article...4th paragraph from the bottm says it all..

"After 12 attempts in 25 years, Congress finally repeals Glass-Steagall, rewarding financial companies for more than 20 years and $300 million worth of lobbying efforts. Supporters hail the change as the long-overdue demise of a Depression-era relic. "

Depression relic?...or Wise Regulation of Financial Institutions??..
..so ...the truth is now out...take a good look at today's market..

[screembloodymurder]

3. When it was repealed, I remember thinking

that it had served us well and that we were messing with disaster. Well the chickens have come home to roost. Anyone that votes for these idiots after this mess ...

[City Lights]

4. K, R, & B.

Thanks for the excellent info!

[bemildred]

5. Yep, only took about ten years or so, like usual. nt

[SammyWinstonJack]

6. K&R!

[Dudley_DUright]

7. and who was the main sponsor in the senate?

That financial genius, Phil "mental recession" Gramm, McCain's go to guy for financial advice.

[Phoebe Loosinhouse]

10. Who also was responsible for the Commodities Futures Trading Modernization Act

These 2 Bills, taken in tandem, are really the core of the Republican Smash and Grab Omnibus Package, the greatest wealth transfer apparatus ever created under the guise of "free markets" and "deregulation".

[Dudley_DUright]

12. otherwise known as the Enron empowerment act

Excellent point, thanks for the reminder.

[alcibiades_mystery]

8. Repeal of Glass Steagall has been a disaster

It has caused at least two major meltdowns in the finance/banking center since it was passed (the first precipitated precisely by Sandy Weil's abuse of the firewall). Glass-Steagall was born in real conditions, and safeguarded these industries for 50 years.

[SammyWinstonJack]

11. Signed by President Clinton in 1999, right? I wonder how he feels about that now?

:shrug:

[central scrutinizer]

13. DINO

add this to NAFTA, GATT, welfare repeal, triangulation.

[dysfunctional press]

14. don't forget the telecom act of 94 and the defense of marriage act.

it boggles my mind how so many otherwise decent deomocrats idolize that guy...:shrug:

[greguganus]

16. And he's out stumping for Obama. Not so much a damaged good then? n/t

[SammyWinstonJack]

21. You know, on some things I think he was. I never understood the welfare reform he put through.

I was on welfare for a short time in the 70's. It wasn't enough to even get by. I was grateful for it, trust me, but I certainly wasn't living high on the hog.

[Sanity Claws]

9. Alan Greenspan's name kept coming up

He has a great deal of responsiblility for this melt down.

[Barack_America]

15. Unfortunately, we share the blame for that.

Bill Clinton signed it.

[Phoebe Loosinhouse]

17. The most prescient paragraph IMHO

In the spring of 1987, the Federal Reserve Board votes 3-2 in favor of easing regulations under Glass-Steagall Act, overriding the opposition of Chairman Paul Volcker. The vote comes after the Fed Board hears proposals from Citicorp, J.P. Morgan and Bankers Trust advocating the loosening of Glass-Steagall restrictions to allow banks to handle several underwriting businesses, including commercial paper, municipal revenue bonds, and mortgage-backed securities. Thomas Theobald, then vice chairman of Citicorp, argues that three "outside checks" on corporate misbehavior had emerged since 1933: "a very effective" SEC; knowledgeable investors, and "very sophisticated" rating agencies. Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public. For many critics, it boiled down to the issue of two different cultures - a culture of risk which was the securities business, and a culture of protection of deposits which was the culture of banking.

"Volcker is unconvinced, and expresses his fear that lenders will recklessly lower loan standards in pursuit of lucrative securities offerings and market bad loans to the public." That sentence shows Volcker was the smartest guy on the block and knew exactly who and what he was dealing with. Everything he feared came to pass.

[many a good man]

26. That's the money quote right there!

The birth of the "imaginary economy."

[PDittie]

18. Phil Gramm led the charge in the Senate, IIRC

He's going to be the Secretary of the Treasury if we don't stop them.

[Phoebe Loosinhouse]

19. Phil Gramm should be hung like a giant albatross around McCain's campaign

The admittedly non savvy in economics McCain is pretty much a Gramm puppet.

[Bigmack]

20. I agree the Repubs get the blame...

but... 155 Dems in the house voted for the Gramm Giveaway Bill.

Didn't change the final outcome, but those Dems got some 'splainin' to do.

[HamdenRice]

22. Repeal of Glass Steagal had little to do with the current crisis

I agree that repealing Glass Steagal was a bad idea. But we really need to understand the situation we are in, how we got here and how to get out.

Focusing on Glass Steagal is a red herring. It may have been bad policy, but it has little to do with our current situation. If you want to know what Glass Steagal actually did, and it's tangential relationship to the current crisis, you can read the dialogue on this thread, especially posts 4, 14, 15 and 16:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=114&topic_id=42908&mesg_id=42965

[Phoebe Loosinhouse]

23. Well, I guess Volcker disagrees with you.

I did read the link you provided, thanks. And I have to say that I have always enjoyed reading your financial posts. I think you did a great job of explaining CDOs to people, including me.

"How would the fact that the issuer and underwriter are under the same corporate umbrella create less oversight?" I honestly think the answer is self-evident. It's similar to what is SUPPOSED to be the Wall Street firewall between the analysts and the sales side. They get entwined trying to serve the same coporate master.

Glass-Steagal has a particular resonance due to the timing and cause of both it's inception and it's dissolution. I realize it is not the only cause for the current melt-down and that there are a number of other factors.

You appear to place the majority of the blame on the SEC for not fulfilling their regulatory function. Anyone in particular?

[HamdenRice]

25. "This American Life"

It's funny because I was going to write about this as a separate article, and a segment on TAL has pushed me to do it sooner rather than later.

I accept that the "Chinese Wall" supposedly required after Glass Steagal between commerical banking and underwriting was always a semi-fiction. My main point though is that underwriters, whether merged with or separate from issuers, never were a force for disclosure. They've always been terrible and willing to sell virtually any crap that any issuer brought to them. The Securities Act is set up in such a way that it is the corporate lawyers and accountants who, by being required to bet their entire firms on each issue of securities, were the ones who forced disclosure. So the merging of commercial and investment banking while not a good idea had little of the effect that people are ascribing to it.

The way the securities system works is very counter-intuitive to outsiders. No federal government body has every regulated the quality of securities. You've always been able to sell whatever shit an issuer brings to the Street. All our system does do, however, is require that you tell the investing public exactly what your security consisted of.

This led to many every day humorous disclosures in the form of SEC required prospectuses. A company issuing stock during the Clinton years typically described his own business in the direst terms, warning that you are likely to loose your shirt by buying this stuff. The SEC's job was to review draft prospectuses and write stern critiques to the investment bank's and issuer's lawyers saying "you haven't explained this asset," or "you haven't made this sound as risky as we think it is." And if you didn't do what they said, they wouldn't give the go ahead for the issuance. It was as simple as that: obey or you can't sell.

The current crisis is entirely a crisis of disclosure. The issuers of mortgage backed securities did not describe how risky these securities were. Everyone who bought them, including the most sophisticated investors of all, the investment and commerical banks themselves, now say "we didn't understand what we were buying." If they didn't understand, that's because the SEC didn't force them to completely and accurately disclose (describe) what was in them.

In the TAL segment broadcast over the weekend, one segment was about Christopher Cox, head of the Bush era SEC. He is described as totally asleep at the wheel. He has gone on vacation during parts of this crisis. Asked by Congress if he thought the SEC needed more regulatory power, he said no, even after the crisis began.

He's a complete political hack appointed from Congress and the Republican policy apparatus with almost no securities experience, but does have a free market fundamentalist philosophy.This faceless (to the public) unknown hack is the main culprit for the current crisis.

On edit: About Volker -- he was making a prediction, not describing a problem. It is possible that the prediction that Volker made may come true, but that's not the cause of the current crisis.