A lot of blame has sloshed around for the sub-prime meltdown, from greedy borrowers to greedy mortgage brokers to Alan Greenspan, but if you want the real culprit, it was the repeal of the Glass-Stegall Act. On November 12, 1999, the champagne must have been shooting from the walls at Citigroup, which had worked behind the scenes for over 30 years to get the act overturned. After recovering from their hangover, they and their banking buddies went on a sub-prime lending orgy. But what was Glass-Steagall and how did it used to protect us?
Glass-Steagall was passed under the Roosevelt administration in 1933 in direct response to the Wall Street shenanigans that ushered in the Great Depression where banks shoved their own depositors into buying the stocks the banks were dealing. The basic idea was to keep banks from speculating with the savings that American citizens were entrusting within their vaults.
Its repeal, under the Gramm-Leach-Bliley Act, drafted and passed by a Republican congress, and signed by Billiam Jefferson Clinton, allowed commercial banks to merge with investment banks. For instance, Citigroup merged with Traveler’s Insurance (although this merger was announced in 1998, before the act was passed, at the time Citigroup CEO Sanford I. Weill said that he spoke with the Feds and, “that over that time the legislation will change…we have had enough discussions to believe this will not be a problem.”).
Now, on the one side they could sell mortgages to homeowners, and then invent fancy investment structures which they sold on Wall Street. Because they were “covered” on both ends, banks felt free to sell increasingly dicey mortgages, just so long as another sucker was picking up the garbage. This sucker was picking it up because he had a plan to repackage it and sell it to another sucker, and so on. Eventually we end up with no-doc stated income interest-only option-ARM no money down mortgages being repackaged as “sound investments” being sold as “stable assets” for city pension plans to park their money in. (See “Subprime Meltdown As Told By Stick Figures“).
We can only imagine the level of machination exerted over those 30 years, but we do know this. Robert Rubin was Secretary of Treasury, which had oversight over Glass-Steagall regulation. Days before he resigned, Glass-Steagall was repealed. Just over a year later, he became chairman of the Citi executive committee, with an annual compensation of $40 million, a position he still holds, despite Citigroup’s $24 billion in subprime-related losses.
(Photo: Joy Of The Mundane)
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106th Congress (1999-2001)
Majority Party: Republican (55 seats)
Minority Party: Democrat (45 seats)
@Applekid: I understand, but it’s all of their fault, not just Bill Clinton. I don’t like Clinton one bit, but to slant the article as if he was the one who brought this all together is foolish. I tried to bring up the vote record on this, but have been unable to so far. This has republican written all over it. And as noted, the overwhelming support for it by both parties. Finally, I think the late 90s tech boom and prosperity of the US is finally to blame. They laxed up and let the banks run wild!
@Applekid:
As of phildawg’s quote:
On November 4, 1999, the Senate approved by 90-8. The House followed within hours by a vote of 362-57. President Clinton signed the measure on November 12, 1999.
There was broad, bipartisan support for this measure. There still is, based on the Obama quote above. Glass-Steagall doesn’t actually solve the problem; it simply restricts corporate activities. Mr. Popken is incorrect in assuming that this law would have successfully prevented or mitigated a home price bubble. It’s impossible to substantiate that claim.
according to what i’ve read the Glass Steagall act didn’t have much to do with the meltdown. Here’s an article by a reputable economist: [meganmcardle.theatlantic.com]
A good position for any honest politician would be to vote against ANYTHING that a corporate-backed stooge was suggesting.
Of course, there are no honest politicians….
NPR was discussing the workings that allowed this mess to happen.
The statement in a nutshell was that banks were now able to package all of these crappy high risk loans as collateralized debt obligations. They sold them as extremely secure financial products out in the investment markets. So other suckers (consumers) were buying into yet other suckers (consumers) lousy home loans.
The banks thought these sub prime loans grouped together had a 90% pay rate. But only 80% paid on time or didn’t default and this threw everything into where we are today.
From what I understand is that these origination banks used to be the ones stuck holding said mortgages so they made damn sure the consumer wasn’t going to default. Since they were lumping them together and pretending they were low risk investments, they passed the risk off to anyone who happened to end up invested in these things.
Someone at these banks knew what they were doing and need to go to PMITA prison.
Consumerist, your lack of a MBA is showing.
There were so many loopholes around Glass-Steagall it was ridiculous, there were no champaign corks going off the day this law was repealed because they were already in the investment business.
Aside from that European banks have no such distinction commercial and investment banks. In an international marketplace it is debilitating to maintain unfair regulations when there is no international regulating body.
While I can understand the desire for pitchfork vigilantism, the problem with the internet is ignorant bloggers can claim a mantel of intelligence.
Why don’t you go after the Community Reinvestment Act?
@Steaming Pile: not that i support them, but Congress has as much to do with this and the act itself is not the problem. Its the lack of regulation for investment banks, something that traditional banks have in place for them.
@Gari N. Corp: exactly right.
I got a (partially) no-doc mortgage in 1998 because I was running a complex Schedule C business. Those tax records can show a huge amount of detail about the internal finances of a business, and I saw no reason I should have to turn it over to a lender who wasn’t lending based on my business. I wasn’t hiding anything bad, I simply wanted to maintain a shred of control over the privacy of my business records. So I found a lender who would waive the 1040+schedules requirement and lend based on bank statements and credit reports only. I got as good a loan rate as anyone else, but now it’s described as part of the subprime fiasco. No-doc was apparently widely abused, but there are legitimate reasons for some loans to be done that way.
@Phildawg:
Republicans are mostly to blame? Did they override President Clinton’s veto? Did the Democrats in the House and Senate vote yea or nay on the bill?
Ah. yes. This is all Bill Clinton’s fault, since it was passed by a Republican congress.
@Steaming Pile: Before you go blaming just individual perhaps you should learn the history of what happened during that time. The Congress and Senate were majority republicans throughout both Clinton administrations and many of the changes that caused problems today were passed through by those same republicans as well as many democrats. Just because Clinton signed it doesn’t mean he had much of choice since the Republicans had the majority.
For thought Bill Clinton introduced an offshore banking reform bill in 1997 to prevent criminals and terrorists from using it as havens. Phil Gramm and the republicans shot it down. Phil Gramms wife Wendy went on to work at Enron’s board — remember the company that had over 900 dummy company’s using offshore banks to hide profits? Phil Gramm after the bill mentioned above went on to work on the UBS bank board as well. There’s plenty of finger pointing to go around. It’s not all ONE individual.
@ClayS: Republicans did pretty much WHATEVER the hell they wanted to do in 1990′s and in the past 8 years. Democrats try to stop them? Please. They were weak and still are – although that may be changing.
@tricky69:
The President could have vetoed the bill, but he did not.
Why would you say the Democrats are weak…their votes count the same as the Republicans.
My feeling is that no president, regardless of party should be blaming congress for passage of a bill or spending measure unless he tenders a veto and it is then overridden. Every president has tremendous power in that respect, but it is used way too infrequently.
@petrarch1608:
“Here’s an article by a reputable economist: [meganmcardle.theatlantic.com]“
(laughing, pointing)
McArdle? Not so much. I cancelled my subscription when her bleatings started appearing in the Atlantic.
@bsalamon I just logged on to the chat and I saw your post. I have been waiting for the lawsuits to start. It appears that there was some massive fraud going on or at least misrepresentation of the facts. The people left holding these worthless pieces of paper are going to want to get at least some of their money back. I’m sure that when the lawyers get involved it won’t be pretty. Watch, some loan originator’s head is going to roll and the CEOs will be standing, watching the perp walk and crying shame, shame.
@bostonmike: So now you admit to causing the whole meltdown?
Gramm-Leach-Bliley wasn’t entirely a repeal of Glass-Steagal, some of which had been repealed already.
A prosey-ish explanation can be found here, in an article entitled “Triumph of the Suits”
[www.kintera.org]
#1 – Bill should have never signed it (and Rubin should be hanged).
#2 – I believe that the Republican controlled congress could have overwritten his veto if he refused to sign it. So really, it is their fault.
sorry, overridden.
Talk all you want about lawsuits, regulations, personal responsibility, and so on. The fact remains that the banks and the brokers and the homebuyers all share a little of the blame. After all, there’s no market unless there’s buyers and sellers, right?
If any one of the parties here, from the house-flippers to the brokers raking in huge bonuses, to the bankers leveraging themselves 50:1, had decided they were going to get off the little merry-go-round, they’d have been thought stupid and irresponsible for turning down all the free money. Whose responsibility was it to pull back first?
If the hedge funds had been paying attention, they would have realized it first, I think.
It’s notas though Clinton was the leader in this regard. Recall that the GOP ran both houses of Congress and was The Party of Ideas(tm), ramming “innovation” down our throats.
This is totally something out of the Republican playbook, however. I’d bet this was one of things horse-traded by Clinton to get policy objectives nearer and dearer to his heart.
Patsy? Yup. Ringleader? Hardly.
Put another way, would Clinton have done this alone? Absurd. Did the GOP mount the barricades to stop this reckless scheme? Hilariously absurd.
Oh, and let’s be clear. The only difference between the Dems and Repubs is: Republicans want to grow the government a little bit slower.
Sorry, but the subprime meltdown mess can’t be blamed on G-S. Nor can it be blamed on politicians of either or both parties. Poor lending practices and the lack of enforcement of existing regulations are the primary culprits. As the “problem” evolved into the current “crisis”, ignoring it rather than stopping it before it got completely out of hand became the desired approach. The “bury our heads in the sand and that will make it all go away” approach.
This round of the credit meltdown is being blamed on “subprime”. Who’s going to get the blame for the next round, which will be home equity? And the next round, which will be miscellaneous consumer debt aka credit cards, vehicle loans and student loans? Answer: whether they get the blame or not, the source of these upcoming problems will be the same as with the “subprime” mess – poor lending practices and inadequate enforcement of existing lending regulations. Lenders did virtually whatever they wanted without regard to future ramifications and regulators turned their head away from it when they should have been stopping it.
Anybody who thinks this whole disaster is over or almost over is seriously out of touch with what’s still on the books in regard to home equity and miscellaneous consumer debt. The chain reaction is far from over. We’re in phase one of a three phase meltdown, or the third inning of a nine inning game, for those of you who prefer the sports analogy. Buckle up, folks, it’s going to be a long, rough ride.
@Galls: I was wondering when someone would finally bring that up. For the love of G-d, G-S was not the end-all, be-all of financial regulations. For all the beneficial things it did, it still wound up hurting the US more than it helped, which is why it got repealed. I’ve seen this both from the economist and the MBA side of things.
Not to mention: It didn’t help matters any that these lenders all created mortgage/loan packages based on the assumption that housing prices would ALWAYS increase and NEVER decrease. What happens when that assumption doesn’t hold true (especially in the large markets)? You get a rapid devaluation of all existing mortgage loans and property values plummet in tandem. One domino tips over and the rest collapse soon after.
Another thing that they couldn’t foresee back then: Oil prices hitting $100+ a barrel. Right up until fairly recently during the bubble, the price of oil remained sub $70 per barrel. When your customers have to choose between dumping their McMansion for a smaller home and paying for fuel to get to their jobs and run the kids around, guess which is going to come first?
sounds like a pyramid scheme of epic proportions
Just taking a look at the state level, it was about this time that Texas passed laws weakening their homestead act. Before 1997 or 1998 a homeowner couldn’t lose their house to a creditor, only to the mortgage company. But they couldn’t refinance and take out their “equity” to send little Johnny to college or buy that plasma TV either.
Shortly after that the state was going crazy with banks and lenders getting people to pull equity out of their houses. It’s a tax free loan and it’s your money was the selling point. I wonder how much these lobbyists at the Federal level had to do with getting the Texas voters to weaken their homestead act? The timing seems funny to me after reading this.
The real culprits are irresponsible borrowers who weren’t able to afford their mortgages in the first place.
The regulations on the financial markets that were created in the 1930′s were done in response to the great depression . The whole deregulation movement that came out of the Regan era was fallowed by high crimes and looting. Greed and the lust for riches are not good role modles for a society. If we don’t reinstate strong regulation on our markets we shall indeed see just what the great depresion was really like.
@Bill Brasky: yeah, right. That’s why the size of the gov’t predictably grows more under Republican Presidents than Democratic ones. Look it up.
The difference is that GOP pols tell you they’re for small gov’t, ad infinitum, figuring (correctly) that their constituents lack the independent thought to verify matters on their own.
@ClayS:
He COULD have, and he WOULD have been overridden.
“…you fight the fights that need fighting” is a terrible aphorism. If you’re beaten before you begin, you simply waste your support. Clinton knew that when he signed the bill – and I’m certain he knew that it would turn around and bite the senators and congressmen in the ass.
@Trai_Dep:
And, of course, there’s the fact that Clinton actually managed to *shut down* the government, but the Republicans act like it was a bad thing.
@quail: As a native Texan who lived and bought houses in Texas up until 1995, I can attest that lobbyists for banks and mortgage lenders were all doing a huge job of “campaigning” for a change in the Homestead laws which were originally designed to protect the wife (or husband) from foreclosure because the other partner took out a second mortgage (for unrelated purposes) on the family home using the equity as collateral. Since both partners owned the “homestead” (originally the family farm or ranch) the weaker partner would not find themselves homeless and not by their own efforts. It was deemed “old-fashioned” and archaic and thwarted lenders from making a lot more money. The influx of new population from the north found it very inconvenient because it made their getting a home loan harder than they were used to before they came to TX. It also made it harder for them to pay off credit card or personal bank loan debt (the very kind that the law was designed to forestall) of one partner not necessarily agreed to or known about by that other protected partner. The laws were very “paternalistic” and presumed an inability of women (primarily)- but it did save more than one mother and children family in a divorce from being totally destitute and without a home. In reality it was a pain in the butt since it did not allow people to do with their property what they would like – but at the times the law was made were those when women were mostly disenfranchised and able to find very little good-paying employment and they weren’t allowed to own their own property unless there was no male family-member (father or husband) to “help” them. Obviously the law could have been re-written to make full-disclosure of impending additional debt that was for work on the homestead a requirement for a legal loan. But this was a hamstring that the banks didn’t want. It took a long time for Texas to change these laws. Apparently, it might have been a measure that would have allowed many families to retain their homes. It makes getting a mortgage much harder if you are only allowed one mortgage on your home – but that built in a fail-safe for people who really shouldn’t be loaned 100% financing, no interest loans and those who could have gotten a mortgage but on a smaller, less expensive home. We bought 2 homes in Texas during our years after college and before we moved here. It was VERY difficult to qualify for the (non FHA or VA) mortgage and to come up with the money for a down-payment – but we knew we were qualified and we knew that no “unscrupulous” lenders would foreclose on our house because of other kinds of consumer debt. The house was safe. This apparently is too much “government interference” in a citizen’s life now. But it enforced better loan procedures and stopped practices that have led to the present real estate situation in the US. Anyone who thinks that an investment can always only go up is a fool, especially if the investment forecast is based on false premises and unscrupulous procedures.
@Galls: What’s the beef with Community Reinvestment Act? My understanding is that it requires banks to “lend where they live.” That discourages redlining (in theory) but doesn’t mean they’re somehow forced to write a ton of NINA, low-doc stated income option ARMs.
Not an attack on your post — I’d actually like to know what’s the issue. I’ve used CRA data to look at lending practices, and if I’m missing something, lemme know.
Consumerist — Nice work. I’m a proud card carrying member of the dreaded MSM. I’ve filled hours of airtime with stories about the subprime meltdown and have rarely managed to shed as much light as you did here.
How do I get one of these gigs? Ya know, the kind where I’m a government official and I do a big favor for a large corporation, then I get a bazillion dollars shortly there-after.
@ClayS: As somebody else pointed out, this was on first vote more along party lines. However, they added more to the bill that one over the democrats to give full support to the bill and trivialize clinton’s veto power.
Don’t be stupid, if you are a republican, you know you are for deregulation, corporations, and big business. This is the kind of bill you hope to be able to vote for as a republican.
American greed has destroyed this country, and what is coming to us now is deserved and justified. We let the businesses have their way, and now their getting their labor elsewhere and insure more of our money is headed overseas.
Over the past 20 years, IMO, we balanced to budget, got really strict on our finances and then decided to forget about it and make as much money as possible, and now we are fooked.
God Bless Ron Paul’s movement, it’s the only thing that will save us.
CRA had very little to do with why we’re in the mess we’re in. Robert Gordon goes into it all here: [www.prospect.org]
One of the things that kept me up at night during the ’08 election is that the same Phil Gramm behind this catastrophark was John McCain’s chief economic adviser during the campaign. His intent, spelled out during McCain’s campaign, was to continue this “deregulation as an ethos” that keeps digging the hole we are in deeper. You may disagree with much of the economic policies of the last year, but putting Phil freakin’ Gramm in charge of the US Treasury would have been disastrous on a level that is difficult to comprehend.