It was big news that Sandy Weill recommended re-enacting Glass Steagall which he helped bring down. People need a history lesson to realize the lack of Glass Steagall did not cause the 2008 meltdown nor did it prevent the S&L failure of the 1980’s. Leaving aside the technicalities that used to exist between S&Ls and commercials banks – S&Ls were even more restricted in what activities they were able to engage in than commercial banks even under Glass Steagall. This did not stop 747 out of 3,234 S&Ls during the 1980’s and 1990’s from failing and around another 1,000 from disappearing through mergers with regulators’ assistance mostly allowing goodwill to be counted as tangible capital. While some blame the relaxation of these restrictions in 1980 and 1982 for the S&L crisis, people forget these bills were passed to help the S&Ls “grow” out of an already existing problem, the alternative being the federal government would have to bailout the deposit base even sooner. The core problems of the S&Ls were they restricted in what interest rates they could offer in high inflationary times, and saw deposits flee to money markets and most importantly they were “upside-down” on the mortgage portfolios because they had lent long term at fixed rates and were now having to offer higher interest rates to maintain deposits. They had a classic asset-liability mismatch – funding 30 year mortgages with short term deposits. There were even state chartered S&Ls that were not allowed to offer adjustable rate mortgages to help deal with this asset-liability mismatch, until reforms were adopted.
It is worth noting that money markets which have gotten little attention during both the S&L crisis and the 2008 crisis are actually at the center of both of them and their mere existence a major reason why Glass Steagall was repealed. The money markets siphoning off S&L deposits had to have a means to offer those higher interest rates. What they had was commercial paper. Commercial paper was not only the instrument that money markets used to distintermediate federally insured depository institutions (both banks and S&Ls) from their deposit base, it was the instrument used to disintermediate commercial banks from the corporate lending clients who used commercial paper instead of bank loans. In plain English, if IBM or GM needed some short term money rather than going to Chase Manhattan for a loan they would ask Goldman Sachs to float some commercial paper. It is also worth noting that a run on money markets caused by Reserve Fund one of the oldest money markets in the country “breaking the buck” did more to bring us close to a complete collapse than anything at any bank.
People need to familiarize themselves with term and concept of disintermediation if they want to discuss regulation. You can’t argue for regulation without having a plan to deal with non-regulated or less regulated entities from competing with banks. We need to remember that the bulk of the problem home loans that took us to brink of the disaster originated with non-bank financial institutions like Countrywide. Before Glass-Steagall was formerly repealed, it was dramatically weakened by regulatory exemptions, many given to combat the disintermediation issue. This also raises the issues if Glass-Steagall were to be re-enacted, should regulatory exemptions be allowed? – because these exemptions had pretty much gutted the law, particularly the division between commercial banking and investment banking activities even before the passage of Gramm-Leach-Bliley. Has Sandy Weill not wanted Citicorp to buy an insurance company (Travelers), Glass-Steagall would still nominally be on the books, but nothing that took place in the second half of last decade would have been precluded if the weakened Glass-Steagall had still be in effect.
Glass-Steagall didn’t preclude banks from purchasing risky securities, it only prohibited them from underwriting them. Hence, the multibillion loss at JP Morgan from the “London Whale” could have occurred even under the Glass-Steagall act as originally enacted in 1933. Except for of course there were no credit default swaps then to speculate in.