Consumerist
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 use 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 Days before he resigned, Glass-Steagall was repealed.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)
Comments
If there was ever a reason to do whatever possible to keep the Clintons from moving back into the White House, this is it.
So, Rubin got to screw hundreds of thousands of home "owners," city pension funds, and facilitate the collapse of the entire market and he gets to profit from it?
If this isn't illegal, what we need is some vigilantism, don't we?
Good ol slick willie. My hate for that bastard and his shrew wife grows more everyday.
fantastic!
Awesome.
He screws things up.
And she pretends she'll fix it all for us.
@GotanOrange:
Look who else voted for it. There is plenty of hate to go around.
@GotanOrange: If I recall correctly, it was a Republican controlled Congress. While GWB ignores laws, treaties, the Constitution at will, my understanding is that Bill couldn't have passed the law on his own. Do you have any support that shows Republicans were firmly against this legislation? If so, how did it pass? The Republicans were bigger cheerleaders of this Act than Clinton. Clinton isn't without blame. He signed it and offered support so he shares some blame. But it was a Republican Congress that pushed this. Also, SEC's implementation in 2004 provided much more deregulation through its rulemaking activities. Who was in charge of SEC in 2004?
@Steaming Pile: Not that Obama would have done anything different:
MR. HUNT: But was the repeal of Glass-Steagall a mistake?
SEN. OBAMA: Well, Glass-Steagall I think, is an example of where maybe we didn't entirely think it through. You had $300 million worth of lobbying done by the financial institutions. They wanted to compete because they were seeing big profits in some of these areas. It wasn't necessarily the best thing to assure that U.S. consumers were protected or that the financial markets remained stable and sound.
MR. HUNT: Well, should you restore Glass-Steagall then?
SEN. OBAMA: Well, no. The argument is not to go back to the regulatory framework of the 1930's because, as I said, the financial markets have changed substantially.
-Via Bloomberg
Wow. Nice work, Consumerist.
[upload.wikimedia.org]
Wow. I am in the wrong line of work. Really? $40 million a year? I'd work one year and retire. Meanwhile, a CSR types out "Are you nucking futs?" on a computer screen and gets fired, but we can't do anything about these a-holes?
@G-16: C'mon, you know how the proximity of the "B" and "W" on the keyboard... oh.. wait, nevermind.
Informative article. Helped me get some perspective on the sub prime mortgage business that's going down. Someone always makes out like a bandit when the regular person suffers.
I knew it!!!
We bought a house in late 1998 and another one in 2006. The entire process between the two was totally different. Real estate agents were trying to refer me to mortgage brokers who didn't want much of any documentation. Even our bank had totally changed from a serious scrutiny to here have a bag of money.
We got a sensible government backed loan but the whole process seemed way too easy compared to our previous (2nd) home purchase.
corruption 101! thanks consumerist!
@iMe2: That isn't saying he wouldn't change and put back some regulations. He said he wouldn't put back the regulations FROM THE THIRTIES. Gawd I hate it when people try to twist words.
Ben, don't you know that we don't believe anything said on a blog unless there's a link?
I guess I have Google, which via Wikipedia tells me that the Economist agrees, which means it must be true because they're not a blog. Print publications are never, ever wrong.
(Actually, in all seriousness, good work. I hadn't heard of Glass-Steagall before, which means I learned something today.)
@iMe2: That doesn't sound to me like exactly the same position. It sounds like he's expressing reservations about it being repealed without really wanting to totally restore it. What I would take from that is that he might go for some middle-of-the-road regulation.
Here is some information on the bill from 1999 including who voted what way.
McCain voted for it.
Of course neither Clinton or Obama were in Congress at that point.
I did notice that much of the Senate Democrats didn't initially vote for it but did in the final vote.
[thomas.loc.gov]
[www.senate.gov]
[clerk.house.gov]
[www.senate.gov]
If the links don't work go to thomas.loc.gov look up 106th Congress and S900
Of the fathers of this bill, Phil Graham is on John McCain's campaign as a "fiscal" adviser and possible Treasury Sec candidate under McCain.
@johnva: Sorry if I came across as partisan, I meant to imply that we shouldn't demonize Bill Clinton; in the same situation, based on Obama's statement, he would have done exactly the same thing in terms of repealing Glass-Steagall. Whether he could have (or would have had the foresight to) push through effective regulation that would have prevented this crisis, we'll never know.
@Michael Belisle: Oh snap, that article is in The America Prospect. But I get to blame Wikipedia: the citation said "Economist". I didn't question because I saw red. Doesn't the AP know that the Economist owns red?
/me is off to correct Wikipedia again.
A nice narrative, but no, not really. While the elimination of the G-S barriers did let some companies cross over to lines of finance that had been closed to them, there's absolutely nothing that would have stopped investment banks from buying subprime loans generated by nonbank lenders prior to the 1999 law. Countrywide and Capital One, two lenders who relied on securitizations for all their funding years and years ago, are products of the Glass-Steagall era.
Might things have played out differently? Sure, but in all likelihood, it's the names that would have changed, not the events themselves.
Ben, I don't agree. I think one can blame the excesses on the lax regulation of banks and hedge funds. I think you might even be able to blame the extent of losses at the banks during Enron on Glass-Steagall. But combining investment banks/brokers and commercial banks, which Glass-Steagall facilitated, did not cause this crisis. The two largest victims of the crisis, Merrill Lynch and Bear Stearns, don't own commercial banks. Citigroup is probably the exception. These guys all made really shitty calls in pursuit of greater profits, which you could use as a generalised indictment of short-termism on stock markets, and one could argue that the Feds or whoever should have kept an eye on the magnitude of their positions, but Glass Steagall had nothing to do with it. There were plenty of outfits, say Countrywide, who were totally independent and managed to come up with staggering volumes of terrible loans for the investment banks to choke on.
@ARP: According to the NY Times ([query.nytimes.com]), the vote was 54 - 44 and along party lines. It was written by Senator Phil Gramm (R, Texas)
Something happened or some deal was made. The article above looks like it might have been concessions to water down the bill, but I believe it was the privacy rules that were enacted that got placed in that probably swayed him.
@iMe2: If you're going to pass another law, dusting off a 75 year old law and passing it as is is probably not the smartest thing to do. You can sue Glass-Steagall as a guideline, but you still gotta get off your lazy ass and write a new, up-to-date law.
@GotanOrange: I'm fairly sure there was a strong-arming Republican Congress trying everything they could to overthrown Clinton's lawful election due to a blowjob, and that they might have had something to do with changing the law, since no law can be changed without Congress.
I'm comfortably guessing that you were less than stellar in your Social Studies classes when 'how your government works' was discussed.
But you go right ahead and hatefully make shit up, and then believe it even though you're the one who made it up, so you should probably be aware it isn't even true, but strangely you're not aware that the things you make up are made up.
Dumb and angry is no way to go through your so-called life, son.
@iMe2: Here's the extra twist to the problem that makes Obama's answer make a little more sense: at the same time that the big banks were coming up with exotic ways to disguise the underlying securities' lack of value, they were signing agreements ensuring each other's risk. These counterparty agreements have made bigger, more profitable deals possible. But since they also tie the entire market together, they've magnified the current troubles, and make it difficult to talk about reimposing Glass-Stegall without the threat of the entire house of cards collapsing.
Here's what seems to me to be a more promising approach: simple fraud prosecutions. If the mortage brokers, banks, hedge funds, etc., could reasonably been expected to know that the products they were repackaging were worthless, then they should be criminally liable and should be expected to forfeit their ill-gotten gains.
The gutting of Glass Steagal was part of the issue, the part about the investors, and how these businesses could hide these losses from investors, home owners, feds, ect. Also, how the banks thought they could stack the deck, but ended up just screwing themselves over.
[www.npr.org]
More than half of our economy moves through totally unregulated markets that don't actually add anything back.
@Steaming Pile: So why blame Bill Clinton? That's the job of Congress.
Nice work Ben!
@midgard: isn't the point that the repeal of G-S made investment banks feel better about doing this because other players could now be involved? I'm actually asking, cause I had to watch the stick figure video.
@ManchuCandidate: very important to note. I'm not voting for him anyway, but now my mom won't either!
@bohemian: like you did by highlighting the from the 30's bit.
Look folks, none of them are really looking uot for us, not a single one. They all have and want too much money to even be bother with us.
None of them care and would screw us anytime.
i smell a giant lawsuit coming.
@ARP: Believe me, both sides of the aisle deserve a place in hell as far as I'm concerned.
@char: More than half of our economy moves through totally unregulated markets that don't actually add anything back.
Sort of like our federal budget...zing?
@missbehave:
There were a lot of things going on at the same time, some of them it the result of loose regulation. But even the loose regulation was largely outside of the territory governed by G-S.
But all else being equal, investment banks are like any other companies in that they prefer to have businesses all to themselves. Competition cuts into profit margins, so in general, you want to keep the number of sheep in the flock small enough for optimal grazing.
I notice no mention has been made of the bankruptcy "reform" bill or BAPCPA, that Congress passed in 2005.
I've idly speculated that one of the reasons why banks were so cavalier about mortgage lending standards was a mistaken belief that the tighter BAPCPA standards that applied to discharging consumer debt like credit cards would also apply to mortgages.
As some of these lenders are now finding out via walkaways and "jingle mail," those tighter standards do not apply. Perhaps they should have read the bill more closely before they paid their Congressmen and Senators to pass it.
Yes, but what role did Best Buy, Comcast, and Sears have in this? Surely they are to blame somewhere along the way!
Nice article, btw.
I worked at Citi at the time. There was much whooting and patting on the back. Yay! Deregulation.
Something like this is the answer:
[wh40k.lexicanum.com]
Me, I blame it on Americans not being able to spend within their means and overextending their credit.
Believe it or not, you don't HAVE to buy that 52 inch plasma TV at all. That's called a WANT not a NEED.
The repeal of the Glass-Steagall act brought with it competition for assets that allowed everyday people to invest in American corporations. This increased the value of their stocks, interest in IPOs, and bank profits. In turn, banks had wider spreads and consequently more flexibility in interest rates, more creativity with financing structures, and a greater appetite for risk.
You make a good point about the incentive for banks to take risk being increased, but keep in mind - consumer banks and loan originators in mortgage-specific entities originated these loans. The ability of banks to securitize loans and their subsequent entry into origination perhaps increased the depth of the crisis, but is hardly the precipitating factor.
Worse, Glass-Steagall would have prevented the rapidity of credit repair after the crisis was underway. Bank of America's acquisition of Countrywide would not have been possible and could have precipitated a massive run on the American consumer in the form of called loans. Bear would have been impossible to save. The Fed would not have been able to purchase cut-rate loans which they will profit from.
MUCH worse, a repeal of this prevents banks from selling investments to individuals who elect to stash their money in risk-free investments like savings accounts, money-market accounts, etc. Not only is that bad for most investors, it's bad for cash-starved businesses who need investment capital to advance the American economy. The vast majority of prudent investors will come through even this ahead of where they would have in a savings accounts.
Policies that discourage investment over savings are an economic non-starter.
@Steaming Pile:
Nice try but this mess looks like a classic case of Bush asleep at the wheel.
@hilighter:
That makes sense - Citi had the most at stake. The Citi-Travelers merger needed the law change and unraveling that quickly would have been a very messy, expensive exercise.
Now they get to do it messy and slowly, the way things are meant to be done.
I'm not turning away from being a Democrat anytime soon, but to me, this seems like a good reminder that it's always a good idea to keep an eye on your own team, and never think they won't screw up just as bad as the other guy.
[epic.org]
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.
I don't think this was completely Clinton's fault... maybe a lot of lobbying???