“If only…”

December 14, 2009 by · Leave a Comment
Filed under: Uncategorized 

In 1999 the Clinton Administration and Republican Senator Phil Gramm, the chairman of the Senate Banking Committee, ended the separation between commercial and investment banking required by the depression-era legislation, Glass-Steagall.  This change not only paved the way for a series of mega mergers that led to the formation of “too-big-to-fail” financial institutions, it enabled the investment of bank’s side to sell off risk the commercial side assumed when issuing everyday loans.

If Glass-Steagall had remained in place… if banks needed to keep loan standards high… if investment bankers hadn’t been able to bundle and sell off the toxic loans written from the commercial side of the house… if these mega banks hadn’t grown so large they couldn’t collapse without taking down the entire economy… the recession might never have happened. The 2005-2006-2007 boom might never have happened.

That is a lot of “ifs,” but the call for reinstatement of Glass-Steagall is coming from some unusual corners. Citigroup’s former CEO, John Reed, was instrumental in getting Glass-Steagall repealed. He has not only called for its return, he has apologized for role he played in revoking it.

This is refreshing on two levels.  First, on the surface it is an apology for the pain caused by the mistake. Second, and more significantly, it is a tacit admission that the investment side wasn’t playing fairly with conventional loans and FDIC insured deposits — a fact kept far from the rating agencies as well as investors.

Unfortunately there are powerful forces aligned to keep Glass-Steagall buried. This puts an impossible burden on the rating agencies to assess the funding for the institutions and securities they evaluate.

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