Tag: glass-steagall

The Return of Glass-Steagall

With both major party platforms calling for a return to some version of Glass-Steagall, it was a given that, whoever won the Presidential election, the issue would return to the public debate. However, we still need to do considerable work ending bailouts, and a return to Glass-Steagall would most likely divert us from that goal.

In order to help clarify this debate, the Cato Institute is proud to today offer a new paper on the topic, The Repeal of the Glass-Steagall Act: Myth and Reality by Oonagh McDonald, CBE. Dr. McDonald is an international financial regulatory expert, having held senior positions in several U.K. financial regulatory agencies. She was also a member of the British Parliament from 1976–87. Her most recent book details the failure of Lehman Brothers.

The new paper lays out a legislative history of Glass-Steagall, pointing out that of the provisions relating to the separation of commercial and investment banking (sections 16, 20, 21, and 32) only two of those four (sections 20 and 32) were repealed in 1999 by the Gramm-Leach-Bliley Act. Two remain current law today. Dr. McDonald further demonstrates how the two repealed provisions had already been largely eliminated by court and regulatory decisions long before 1999.

Dr. McDonald also reviews the economic literature, concluding that Glass-Steagall was not even the appropriate response to the banking problems of the 1920s and 1930s in the first place. What’s more, had Glass-Steagall remained fully in force after 1999, the financial crisis of 2008 would have largely looked the same. As I’ve written elsewhere, Glass-Steagall has essentially become a symbolic lens—a “Rorschach Test” that reflects one’s views on the power of big banks. However, if we truly wish to end bailouts, we need to get the history, law and economics right. Dr. McDonald’s paper makes an important contribution in that direction.

What to Read on the Financial Crisis, Part II: Popular

Last week I offered my suggestion on the one book you should read, if you really want to understand the financial crisis. In this Part II, I offer a list of popular books, mostly written by journalists, along with very brief thoughts.  Part III, to come, will focus on more “scholarly” books.

As general rule, these popular books lack a theoretical framework of the crisis. They often have the feel of a “bad people did bad things” narrative. These are only books I’ve actually read (and remember), so its a selective list. Some are insider stories of only a single firm, and hence, somewhat limited in their usefulness. I will also give little evidence behind my judgments, so if you don’t value my opinion, stop reading now. 

1. All the Devils Are Here, by Bethany McLean and Joe Nocera. (2 stars) There’s only one reason to read this: it is the model of the establishment Left version of the crisis. This is the book that future Harvard professors will force their students to read to “understand” the evil Bush years. Otherwise, skip it. Wildly off both in terms of fact and interpretation.  Read any of their columns and you know what the book is like.

2. Reckless Endangerment, by Gretchen Morgenson and Joshua Rosner. (4 stars) See Part I. Despite many flaws, probably the best of the “popular” books.

3. After the Fall, by Nicole Gelinas. (3 stars) I usually love Nicole’s stuff, and the story here on “too-big-to-fail’ is dead-on, but I think she’s off on Glass-Steagall and doesn’t make that case. Still, a relatively short and worthwhile read.

4. Fool’s Gold, by Gillan Tett. (4 stars) Exclusively about JP Morgan, but great background on credit default swaps. So despite its narrow focus on one firm, still a worthwhile read.

5. Chain of Blame, by Paul Muolo and Mathew Padilla. (3 stars) A narrow, but interesting, focus on subprime mortgage lending. Muolo is a long time reporter for National Mortgage News, so this has an almost insider’s feel of the mortgage industry, for that reason a worthwhile read.

6. Senseless Panic, by William Isacc. (4 stars) Author is the former FDIC Chair during the S&L crisis, and applies insights learned there to the current crisis. He misses a lot, but it’s breezy and short, and what is there is very worth reading. I wouldn’t put this at the top of your list, but if you’re going to read several, then add this one.

7. House of Cards, by William Cohen. (3 stars) Focused exclusively on Bear Stearns.  Again, a narrow focus, but generally fast moving and an interesting story line.

8. The Sellout, by Charles Gasparino. (4 stars) Despite a few minor factual errors, this was one of the better books.  He’s tough on Washington and Wall Street, and accurately so. 

9. A Colossal Failure of Common Sense, by Larry McDonald. (3 stars) Focused only on the failure of Lehman. Maybe too much useless personal detail, but otherwise an interesting story.

10. In Fed We Trust, by David Wessel. (3 stars).  Despite reading like a love letter to Bernanke, it is probably the best inside story of the Fed’s behavior during the crisis, which is also its weakness as the book offers little insight into happens outside the Fed.

Again, Part III will focus on more scholarly books, and in my opinion, generally more insightful reading.  That said, they don’t often make fun beach reading, which the above should be safe for.

The Banking Deregulation that Mattered (and Actually Happened)

One commonly heard refrain is that the deregulation of banking caused the financial crisis.  To those of us that have actually spent years working on banking policy, such a claim is met with surprise.  What banking deregulation?  The usual response, with generally an absolute lack of detail or argument, is the repeal of Glass-Steagall by the Gramm-Leach-Bliley Act (GLB).  When the proponents of this claim bother to offer any explanation (in some circles simply invoking the name “Phil Gramm” substitutes for any analysis), it usually goes like this:

With Glass-Steagall dead and gone, financial institutions were now free to grow large.

That’s taken from the recent book Reckless Endangerment.  What it misses that is that Glass-Steagall placed zero constraints on the size of banks.    

The following graph shows the share of total commercial bank assets held by banks over $10 billion in assets.  Its been quite a change, and obviously one toward growing concentration.  But was this caused by GLB?  Recall GLB was not signed into law until 1999.  By 1999 the share of assets held by the largest banks was already 65%, at the height of the bubble in 2005 it had risen to 73%.  

What could have contributed to this increase? Perhaps, just maybe, the removal of branch banking restrictions in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Prior to the passage of Riegle-Neal many states had substantial restrictions on the number of branches a bank could have, which severelylimited the size of banks. In Texas for instance, banks were limited to a single location.

Before the passage of Riegle-Neal, the large bank share of assets stood at 38%.  In the few years, between its passage and that of GLB, this 38% shot up to 65%.   Far more than GLB, Riegle-Neal was the legislative driver of commercial bank consolidation.  But then a banking deregulation passed by a Democratic Congress and signed by a Democratic president just doesn’t garner the blind emotion of blaming everything on Phil Gramm.

It should, of course, be said that  the removal of branching banks restrictions was a great thing.  There is a substantial body of academic work supporting the notion that such restrictions increased the risk of the banking system.  Because of Riegle-Neal we had a safer banking system than we would have had otherwise.  It was indeed a deregulation — one that matter and one that vastly improved our financial system.