Both on this board and in the media there is a popular myth that the 1999 changes to the Glass-Steagall Act caused the current credit crisis.
Glass - Steagall was passed in 1934 in response to wild Wall Street speculation that undermined the financial condition of many banks. It mandated total separation of commercial banks ( that issue credit cards; where you go for a car loan; where businesses go for lines of credit; where you have a checking account) and investment banks ( they invest in stocks, bonds, commercial paper; real estate etc. ). Essentially it separated INVESTMENT from BANKING and LENDING.
Over the years, banks of both kinds used various loopholes to creep into each other's territory and functions. In 1998 Sandy Weill and Citicorp wanted to take over Travelers and couldn't do it. Weill lobbied Clinton and Congress heavily for modifications and Phil Gramm pushed through a bill permitting conglomerated banking including insurance and brokerage.
Glass- Steagall had NOTHING to do with Fannie Mae and Freddie Mac. They weren't banks.
Glass-Steagall had NOTHING to do with credit default swaps or collateralized debt obligations. The trading in CDO's was a LEGAL "black market" with NO oversight by anybody, with or without Glass-Steagall.
Glass -Steagall had NO PROVISION that would have prevented WAMU; or any other bank; from writing sub-prime mortgages and selling them to Fannie and Freddie.
The only connection between the removal of Glass-Steagall restrictions and the current mess is that commercial banks would NOT have been able to buy mortgage backed securities. Nothing in Glass-Steagall would have stopped naked short-selling.
Everyone remembers the Enron, World-com and other corporate messes which gave us Sarbanes-Oxley which was designed to (inter alia) promote accounting integrity and transparency. The SEC by regulation required publicly traded companies to use "mark to market" accounting in listing the worth of their assets.
Assets had to be valued at the current market price which is why many banks saw their stock prices nosedive bcause the market price of their major assets - MORTGAGES and/or mortgage backed securities was going down. Glass- Steagall would not have prevented Enron or similar type scandals. It didn't require "mark to market" accounting. A big problem is the inability to value some of the mortgages and securitiesw AT ALL i.e nobody really knows or is able to tell what some of this stuff is really worth.
So when I read or hear people say that "deregulation caused this credit crisis" or that we're all paying for "Wall Street greed" I'd like someone to stand up and bring out a few annoying historical facts.
The bottom line is that Glass-Steagall ,if left alone, would have limited the size and scope of the current mess but we'd still have at least 2 to 3 trillion dollars of bad mortgages. We still would have had unregulated trading in CDO's. We'd still have banks reluctant to lend except to good risks. There would still have to be some help from the Fed and FDIC to deal with the mess.




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