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Didn’t repealing it make the 2008 financial crisis worse?

onionisafruit 4y ago
That's what NPR told me.
photochemsyn 4y ago
Yes indeed. Probably the best cinematic take on that is in the movie Margin Call - here's the senior partners meeting: https://www.youtube.com/watch?v=Hhy7JUinlu0 https://www.youtube.com/watch?v=Hhy7JUinlu0 Essentially, the dissolution of Glass-Steagall allowed investment banks to create complex financial packages, each one constructed out of dozens if not hundreds of home mortgages. Each individual mortgage was graded but the packages were built out of a mixture of low-grade and high-grade mortgages. Since trading (gambling) with these packages was very lucrative, the investment banks worked with shady mortgage brokers to increase the number of packages by pushing adjustable-rate mortgages on gullible people who probably were not that familiar with compound interest calcululations. These unlikely-to-succeed mortgages were mixed in with the high-qulaity mortages to create a wide variety of highly leveraged financial products, and then bets were placed on the outcomes of trading in these products (derivative markets, synthetic CDO squared nonsense, etc.). Once people realized that many of these mortgages were not going to be paid off, then the avalanche of collapse began. Glass-Steagall, if retained, would have made all of that impossible.
- fshbbdssbbgdd 4y ago
  All of the activity you described here was legal under Glass-Steagall. Mortgage-backed securities have existed for over 50 years. Glass-Steagall separated commercial banking from investment banking. The movie Margin Call depicts an investment bank that sells mortgage-backed securities. I don’t remember anything in the movie about commercial banking.
  - Vt71fcAqt7 4y ago
    Any more info on this? I'd like to read more.
  - photochemsyn 4y ago
    Indeed, but how about derivatives market for mortgage-backed securities? That was created by the abolition of Glass-Steagall. Heavily promoted by 'ol Alan Greenspan at the time, wasn't it? Free-market deregulation ideology in the name of international competitiveness was how it was sold as I recall.
    - fshbbdssbbgdd 4y ago
      Credit default swaps and collateralized debt obligations also predate the repeal of Glass-Steagall. I think Glass-Steagall got somewhat mythologized after the financial crisis, because there was a desire to hold related political figures responsible. It meant that people who endorsed the repeal had their fingerprints on the Great Recession. There’s some truth to the claim - Lehman was both an investment bank and a commercial bank, so it wouldn’t exist in its final form without Glass-Steagall repeal. Lehman’s demise didn’t seem to be closely related to its commercial banking activity, but that increased the blast radius. Neither AIG nor Bear Stearns did commercial banking at all.
      - ckw 4y ago
        The people who endorsed the repeal also successfully fought back attempts to regulate the OTC derivatives market, which arguably lead to the Great Recession. See https://en.m.wikipedia.org/wiki/Brooksley_Born#Born_and_the_OTC_derivatives_market https://en.m.wikipedia.org/wiki/Brooksley_Born#Born_and_the_...
      - conductr 4y ago
        Sure they existed but I always felt like the Glass-Steagall kept things separate enough and things really blew up when you had the banks merging with investment banks. They then had the mortgage product pipeline and the derivatives instruments to offload them. The guys who exploded did so because they were over leveraged and could not cover the margin call when the market dipped. Oh and also didn’t get a bail out, they were just instantly insolvent. I’ve slept since then but that’s how my brain seems to remember it.
rufus_foreman 4y ago
A better explanation might be the enactment of the Commodity Futures Modernization Act of 2000 (CFMA) which prevented regulators from treating derivatives as futures under the Commodity Exchange Act or as securities under existing securities laws. Even with that act, there is an argument that it merely codified the existing situation and the crash would have happened without the law being passed.

That's what NPR told me.

Yes indeed. Probably the best cinematic take on that is in the movie Margin Call - here's the senior partners meeting: https://www.youtube.com/watch?v=Hhy7JUinlu0 https://www.youtube.com/watch?v=Hhy7JUinlu0 Essentially, the dissolution of Glass-Steagall allowed investment banks to create complex financial packages, each one constructed out of dozens if not hundreds of home mortgages. Each individual mortgage was graded but the packages were built out of a mixture of low-grade and high-grade mortgages. Since trading (gambling) with these packages was very lucrative, the investment banks worked with shady mortgage brokers to increase the number of packages by pushing adjustable-rate mortgages on gullible people who probably were not that familiar with compound interest calcululations. These unlikely-to-succeed mortgages were mixed in with the high-qulaity mortages to create a wide variety of highly leveraged financial products, and then bets were placed on the outcomes of trading in these products (derivative markets, synthetic CDO squared nonsense, etc.). Once people realized that many of these mortgages were not going to be paid off, then the avalanche of collapse began. Glass-Steagall, if retained, would have made all of that impossible.

fshbbdssbbgdd 4y ago
All of the activity you described here was legal under Glass-Steagall. Mortgage-backed securities have existed for over 50 years. Glass-Steagall separated commercial banking from investment banking. The movie Margin Call depicts an investment bank that sells mortgage-backed securities. I don’t remember anything in the movie about commercial banking.
- Vt71fcAqt7 4y ago
  Any more info on this? I'd like to read more.
- photochemsyn 4y ago
  Indeed, but how about derivatives market for mortgage-backed securities? That was created by the abolition of Glass-Steagall. Heavily promoted by 'ol Alan Greenspan at the time, wasn't it? Free-market deregulation ideology in the name of international competitiveness was how it was sold as I recall.
  - fshbbdssbbgdd 4y ago
    Credit default swaps and collateralized debt obligations also predate the repeal of Glass-Steagall. I think Glass-Steagall got somewhat mythologized after the financial crisis, because there was a desire to hold related political figures responsible. It meant that people who endorsed the repeal had their fingerprints on the Great Recession. There’s some truth to the claim - Lehman was both an investment bank and a commercial bank, so it wouldn’t exist in its final form without Glass-Steagall repeal. Lehman’s demise didn’t seem to be closely related to its commercial banking activity, but that increased the blast radius. Neither AIG nor Bear Stearns did commercial banking at all.
    - ckw 4y ago
      The people who endorsed the repeal also successfully fought back attempts to regulate the OTC derivatives market, which arguably lead to the Great Recession. See https://en.m.wikipedia.org/wiki/Brooksley_Born#Born_and_the_OTC_derivatives_market https://en.m.wikipedia.org/wiki/Brooksley_Born#Born_and_the_...
    - conductr 4y ago
      Sure they existed but I always felt like the Glass-Steagall kept things separate enough and things really blew up when you had the banks merging with investment banks. They then had the mortgage product pipeline and the derivatives instruments to offload them. The guys who exploded did so because they were over leveraged and could not cover the margin call when the market dipped. Oh and also didn’t get a bail out, they were just instantly insolvent. I’ve slept since then but that’s how my brain seems to remember it.

rufus_foreman 4y ago

A better explanation might be the enactment of the Commodity Futures Modernization Act of 2000 (CFMA) which prevented regulators from treating derivatives as futures under the Commodity Exchange Act or as securities under existing securities laws. Even with that act, there is an argument that it merely codified the existing situation and the crash would have happened without the law being passed.