Glass-Steagall Act: The Senators And Economists Who Got It Right

[Ulaven_Demorte]

Sam Stein

The footage of him speaking on the Senate floor has become something of a cult flick for the particularly wonky progressive. The date was November 4, 1999. Senator Byron Dorgan, in a patterned red tie, sharp dark suit and hair with slightly more color than it has today, was captured only by the cameras of CSPAN2.

"I want to sound a warning call today about this legislation," he declared, swaying ever so slightly right, then left, occasionally punching the air in front of him with a slightly closed fist. "I think this legislation is just fundamentally terrible."

The legislation was the repeal of the Glass-Steagall Act (alternatively known as Gramm Leach Bliley), which allowed banks to merge with insurance companies and investment houses. And Dorgan was, at the time, on a proverbial island with his concerns. Only eight senators would vote against the measure -- lionized by its proponents, including senior staff in the Clinton administration and many now staffing President Obama, as the most important breakthrough in the worlds of finance and politics in decades.

"It was more like a tidal wave in 1999," the North Dakota Democrat recalled of that vote in an interview with the Huffington Post. "You've seen the roll call. We didn't really have to deal with push back because they had such a strong, strong body of support for what they call modernization that the vote was never in doubt... The title of the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."

Ten years later, Dorgan has been vindicated. His warning that banks would become "too big to fail" has proven basically true in the wake of the current financial crisis. He seems eerily prescient for claiming then that Congress would "look back ten years time and say we should not have done this." But he wasn't entirely alone. Sens. Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin and Richard Bryan also cast nay votes.

As did Sen. Russ Feingold, who, in a statement from his office, recalled that "Gramm-Leach-Bliley was just one of several bad policies that helped lead to the credit market crisis and the severe recession it helped cause."

Rachel Maddow covered this story here.

I submitted a research paper this past semester on this topic. I made the case that the repeal of post Great Depression regulations on banking industries made our current financial predicament inevitable as greed and malfeasance once again permeated banking and investment institutions. "nobody saw this coming" is a lie oft repeated by those who pushed for deregulation of the banking industry. They were warned repeatedly.

 

[busybody..]

you gonna post VIDS of BUSH axing Congress EIGHT times to overhaul FNM and FRE

cause they are a disaster waiting to happen?

and FAG Barney and teh COLOREDS like Waters et al saying

WE DONT NEED NO OVERHAUL MOFO, EVERYTHING IS OK?

You gonna post the LINKS to the MILLIONS the DUMZ like Rham and Gorelick et all made on FNM AND FRE?


You gonna tell us why the COLORED RAINES was allowed to LOOT FNM and get away with it?

I'll wait

 

[firespin]

Hmm. Something that happened almost ten years before, to repeal restrictions that were never present in Europe, caused the credit crisis? Possible. But here's another way to look at it, with a contemporaneous warning in early 2008 that things were just about to implode for an entirely different reason. (Note that Sarbanes-Oxley in 2003 made CEOs/CFOs criminally liable for failure to mark down assets, accelerating the credit crisis.)

http://www.nakedcapitalism.com/2008/02/did-mark-to-market-accounting-create.html

Friday, February 29, 2008
Did Mark-to-Market Accounting Create the Credit Bubble?

Paul Davies, in "True impact of mark-to-market accounting in the credit crisis," discusses a paper by Tobias Adrian of the New York Fed and Hyun Song Shin of Princeton University that claim that mark-to-market accounting play a direct, perhaps central role in the credit bubble, and that it works just as dramatically in reverse.

Once they explain the thesis, it's so blinding obvious that one wonders why that sort of thinking hasn't gotten top billing sooner. When asset prices rise (say because interest rates fall), the balance sheet gains lead directly to increases in a firm's equity. Financial institutions tend to maintain the same level of gearing, so when equity goes up, they want to increase their balance sheet size. Similarly, when asset prices fall, the losses are hits to equity, and balance sheets contract.

These expansions and contractions happen system-wide, and lead to what is perceived as increases and falls in liquidity. The authors argue that liquidity tantamount to the rate of growth in aggregate balance sheets.

 

[busybody..]

M 2 M was THE cause

period!

 

[firespin]

M 2 M was THE cause

period!

Uh oh. BB agrees. I better re-consider.

But, yeah, if you have to book immediate huge devaluations of illiquid portfolios or go to jail, that's gonna wipe out a lot of tier 1 capital (and bank market value) in a hurry.

 

[unregistered]

 

[busybody..]

Uh oh. BB agrees. I better re-consider.

But, yeah, if you have to book immediate huge devaluations of illiquid portfolios or go to jail, that's gonna wipe out a lot of tier 1 capital (and bank market value) in a hurry.

when it was reversed

the MKT RAN UP

In 3/09

 

[busybody..]

you gonna post VIDS of BUSH axing Congress EIGHT times to overhaul FNM and FRE

cause they are a disaster waiting to happen?

and FAG Barney and teh COLOREDS like Waters et al saying

WE DONT NEED NO OVERHAUL MOFO, EVERYTHING IS OK?

You gonna post the LINKS to the MILLIONS the DUMZ like Rham and Gorelick et all made on FNM AND FRE?


You gonna tell us why the COLORED RAINES was allowed to LOOT FNM and get away with it?

I'll wait

Still waiting

A long wait

Had one of these already

http://www.aerostar.com/coldair/images/Soccer_Ball_with_Snickers_Bar.jpg

 

[busybody..]

you gonna post VIDS of BUSH axing Congress EIGHT times to overhaul FNM and FRE

cause they are a disaster waiting to happen?

and FAG Barney and teh COLOREDS like Waters et al saying

WE DONT NEED NO OVERHAUL MOFO, EVERYTHING IS OK?

You gonna post the LINKS to the MILLIONS the DUMZ like Rham and Gorelick et all made on FNM AND FRE?


You gonna tell us why the COLORED RAINES was allowed to LOOT FNM and get away with it?

I'll wait

Im waiting

 

[busybody..]

As I Said, Its The Coloreds Fault!

you gonna post VIDS of BUSH axing Congress EIGHT times to overhaul FNM and FRE

cause they are a disaster waiting to happen?

and FAG Barney and teh COLOREDS like Waters et al saying

WE DONT NEED NO OVERHAUL MOFO, EVERYTHING IS OK?

You gonna post the LINKS to the MILLIONS the DUMZ like Rham and Gorelick et all made on FNM AND FRE?


You gonna tell us why the COLORED RAINES was allowed to LOOT FNM and get away with it?

I'll wait

Im still waiting!!!!!!!!!!!!!!!


While I wait

READ THIS

If you dare


Remembering the Attitude of the Times: Fannie Mae, 1993. In the course of Steven Malanga's history of government policy promoting home ownership, he describes the milieu in the early to mid-1990s. Here is a nice example I found from the May 28, 1993 Washington Times:

Low-income homebuyers, especially blacks, Latinos and other minorities, are being wooed in an unusual ad campaign started this week in the Washington and Baltimore areas.

Called "Opening Doors to a Home of Your Own," the multimedia advertising blitz runs through the July Fourth weekend and is the work of the Federal National Mortgage Association (Fannie Mae).

The first organization listed as offering services in the brochure is the ACORN Housing Association.

Many of 45 area mortgage lenders and 35 local nonprofit counseling agencies are offering bilingual support for what the company anticipates could be as many as 100,000 calls from low-income potential home buyers in the region.

Specifically targeted are home buyers earning less than $59,200, the median family income in the Washington area. Half of the area's 4 million people make less than that amount, and there are more white families in that category than minorities.

But because proportionately more of the 1.5 million black, Latino and other minorities are in even lower income brackets, Fannie Mae sees the program as "positive outreach" into a community "too long ignored by mortgage lenders."

"We're not fooling ourselves," James A. Johnson, Fannie Mae chairman and chief executive officer, said at a press conference last week to announce the program. Speaking at the firm's Washington headquarters, the former Walter Mondale staff assistant cautioned, "The program can't be all things to all people.

"I believe there is discrimination in the housing industry," he told reporters, and that minorities are denied home mortgage loans "simply because of who they are."

"Any time we see it," Mr. Johnson said, "we're going to do everything we can to end it."

One lender taking up the offer to participate was American Home Funding of Richmond, which placed 22,000 mortgage loans last year totaling $2.4 billion. It has 600 employees.

Paul Reid, president and chief executive officer of American Home, said, "We can't say enough" about the new program. American Home sold mortgages totaling $40 million last year to minority and low-income homebuyers, Mr. Reid said, "and we're convinced that programs like this are the way of the future in real estate."

In fact, he said American Home recently began recruiting at historically black colleges and other universities to hire new minority staffers to join 300 loan officers throughout the area, including a bilingual staff at its Annandale branch. . . .

Under laws enacted last year, lenders convicted of discriminating against blacks, Latinos, women and others will lose access to the secondary mortgage market, [Laura Duenes of Citibank] observed. "Until now, we've never seen mortgage lenders, their staffs, or Realtors, brokers or anyone else dealing in real estate who discriminates against minorities suffer any penalty.

"Now they will," Ms. Duenes said, "and it's about time."

Part of the rush to embrace minorities and low-income people "is directly a result of that legislation," observed Chris Lewis, director of bank and housing policy at the Consumer Federation of America (CFA).

Congress acted last year to codify federal obligations to Fannie Mae and the Federal Home Mortgage Corp. (Freddie Mac), both of which were chartered by Congress but now operate independently. In so doing, he said, "The legislation forced the secondary market to either help minorities or lose its federal backing."

CFA, an advocacy umbrella group of 240 organizations representing nearly 50 million persons, closely monitors the housing market, Mr. Lewis said. . . .

The sixth-largest corporation in America, Fannie Mae last year financed 3 million home loans valued at more than $250 billion.

"The question," Mr. Lewis said, "is why are taxpayers subsidizing giant corporations that discriminate against American taxpayers?"

CFA strongly supported Congressional mandates requiring that by 1994 mortgage lenders target at least 30 percent of their business to minorities and poorer home buyers.

The legislation "could work a revolution of sorts" in the way poorer people and minorities are treated by the real estate world, he said.

Lenders now must track mortgage business by a borrower's race, ethnicity, geographic location and other variables. By August, the Department of Housing and Urban Development will report to the nation on the performance of all mortgage lenders.

"That's when the mortgage community will have to face a new reality," he said. Banks not reaching the 30 percent requirement could find themselves losing federal backing in the secondary market in 1994, "a possibility that has the mortgage-financing world on the brink of something we've really not seen before in this country." . . .

Not surprisingly, when the crisis hit, Citibank was perhaps the most insolvent of the mega-commercial banks. And American Home, the organization so thrilled with the new program went out of business in the first big week of the credit crisis, on August 2, 2007. Fannie Mae had to be nationalized last year

 

[RightField]

Remembering the Attitude of the Times: Fannie Mae, 1993. In the course of Steven Malanga's history of government policy promoting home ownership, he describes the milieu in the early to mid-1990s. Here is a nice example I found from the May 28, 1993 Washington Times:

Low-income homebuyers, especially blacks, Latinos and other minorities, are being wooed in an unusual ad campaign started this week in the Washington and Baltimore areas.

Called "Opening Doors to a Home of Your Own," the multimedia advertising blitz runs through the July Fourth weekend and is the work of the Federal National Mortgage Association (Fannie Mae).

The first organization listed as offering services in the brochure is the ACORN Housing Association.

Many of 45 area mortgage lenders and 35 local nonprofit counseling agencies are offering bilingual support for what the company anticipates could be as many as 100,000 calls from low-income potential home buyers in the region.

Specifically targeted are home buyers earning less than $59,200, the median family income in the Washington area. Half of the area's 4 million people make less than that amount, and there are more white families in that category than minorities.

But because proportionately more of the 1.5 million black, Latino and other minorities are in even lower income brackets, Fannie Mae sees the program as "positive outreach" into a community "too long ignored by mortgage lenders."

"We're not fooling ourselves," James A. Johnson, Fannie Mae chairman and chief executive officer, said at a press conference last week to announce the program. Speaking at the firm's Washington headquarters, the former Walter Mondale staff assistant cautioned, "The program can't be all things to all people.

"I believe there is discrimination in the housing industry," he told reporters, and that minorities are denied home mortgage loans "simply because of who they are."

"Any time we see it," Mr. Johnson said, "we're going to do everything we can to end it."

One lender taking up the offer to participate was American Home Funding of Richmond, which placed 22,000 mortgage loans last year totaling $2.4 billion. It has 600 employees.

Paul Reid, president and chief executive officer of American Home, said, "We can't say enough" about the new program. American Home sold mortgages totaling $40 million last year to minority and low-income homebuyers, Mr. Reid said, "and we're convinced that programs like this are the way of the future in real estate."

In fact, he said American Home recently began recruiting at historically black colleges and other universities to hire new minority staffers to join 300 loan officers throughout the area, including a bilingual staff at its Annandale branch. . . .

Under laws enacted last year, lenders convicted of discriminating against blacks, Latinos, women and others will lose access to the secondary mortgage market, [Laura Duenes of Citibank] observed. "Until now, we've never seen mortgage lenders, their staffs, or Realtors, brokers or anyone else dealing in real estate who discriminates against minorities suffer any penalty.

"Now they will," Ms. Duenes said, "and it's about time."

Part of the rush to embrace minorities and low-income people "is directly a result of that legislation," observed Chris Lewis, director of bank and housing policy at the Consumer Federation of America (CFA).

Congress acted last year to codify federal obligations to Fannie Mae and the Federal Home Mortgage Corp. (Freddie Mac), both of which were chartered by Congress but now operate independently. In so doing, he said, "The legislation forced the secondary market to either help minorities or lose its federal backing."

CFA, an advocacy umbrella group of 240 organizations representing nearly 50 million persons, closely monitors the housing market, Mr. Lewis said. . . .

The sixth-largest corporation in America, Fannie Mae last year financed 3 million home loans valued at more than $250 billion.

"The question," Mr. Lewis said, "is why are taxpayers subsidizing giant corporations that discriminate against American taxpayers?"

CFA strongly supported Congressional mandates requiring that by 1994 mortgage lenders target at least 30 percent of their business to minorities and poorer home buyers.

The legislation "could work a revolution of sorts" in the way poorer people and minorities are treated by the real estate world, he said.

Lenders now must track mortgage business by a borrower's race, ethnicity, geographic location and other variables. By August, the Department of Housing and Urban Development will report to the nation on the performance of all mortgage lenders.

"That's when the mortgage community will have to face a new reality," he said. Banks not reaching the 30 percent requirement could find themselves losing federal backing in the secondary market in 1994, "a possibility that has the mortgage-financing world on the brink of something we've really not seen before in this country." . . .

Not surprisingly, when the crisis hit, Citibank was perhaps the most insolvent of the mega-commercial banks. And American Home, the organization so thrilled with the new program went out of business in the first big week of the credit crisis, on August 2, 2007. Fannie Mae had to be nationalized last year

Looks pretty clear to me. The truth is liberating. Too bad so many people are deceived by smooth talking - truth twisting democrats though.

 

[zipman]

Uh oh. BB agrees. I better re-consider.

But, yeah, if you have to book immediate huge devaluations of illiquid portfolios or go to jail, that's gonna wipe out a lot of tier 1 capital (and bank market value) in a hurry.

Which exposed an inherent weakness in the flawed and overleveraged banking model.

M 2 M exposed the bubble for what it was.

 

[firespin]

Which exposed an inherent weakness in the flawed and overleveraged banking model.

M 2 M exposed the bubble for what it was.

Hard core M2M was a stupid rule, and contributed to many of the layoffs and hardships we are seeing today.

Imagine if that did that with other leverage assets, such as houses?

You and your neighbors all own houses with (say) 90% mortgages, and the market is flat (for argument's sake).

However, if your house assessed value declines by 10%, then you are underwater, and your mortgage company (i.e. regulators) can declare you in default and sell your other possessions to regain "their" down payment.

Now suppose a neighbor down the street divorces and has to sell at any price, so they take a 10% reduction on asking price. Now is M2M was in effect, you would have to mark down your house value immediately, and the mortgage company could take your other possessions. That's bad. You better sell your place quickly, it's too risky to hold it. Sell at any price, even well below asking price.

It's a vicious downward spiral, where the house value hasn't really gone down, but the regulators made holding the asset too risky.