Did the Repeal of the Glass-Steagall Act of 1933 Cause the Financial Crisis?
Car companies, banks, insurers, everyone is getting or has a bailout - except average Joes like you and I. How could all this happen? How did we get here? Why can't I get a million dollars for ruining a business?
The Federal Reserve Bank was created in 1913 to help stabilize the United States banking system. Unregulated banking and investing activities during the "roaring" twenties led to the Great Depression. After evaluating that, the U.S. passed the Glass-Steagall Act of 1933 prohibiting banks from getting involved with investments and derivatives (smart). Then in 1999 Clinton signed a bill repealing certain parts of the Glass-Steagall (the Financial Services Modernization Act aka Gramm-Leach-Bliley) whereby banks were ENABLED to get back into 40:1 leverage on their deposits (DUH!).
The Federal Reserve Bank was created in 1913 to help stabilize the United States banking system. Unregulated banking and investing activities during the "roaring" twenties led to the Great Depression. After evaluating that, the U.S. passed the Glass-Steagall Act of 1933 prohibiting banks from getting involved with investments and derivatives (smart). Then in 1999 Clinton signed a bill repealing certain parts of the Glass-Steagall (the Financial Services Modernization Act aka Gramm-Leach-Bliley) whereby banks were ENABLED to get back into 40:1 leverage on their deposits (DUH!).
Is it unreasonable to think that if we undo the very legislation intended to prevent the Great Depression from happening again, it will? This repeal enabled banks to also sell investments and releverage leveraged loans, leading us into the enormous real estate and finance bubble of 2008.
If you chart the then largest US bank by assets at the time, Citibank (NYSE:C), back 30 years, you'll notice it got hammered in the 1987 'crash' from about $2.50 to about $1.50, and then, miraculously, starting with the early 1990's recession, it grew wildly from $1.50 to $53.64 on September 1, 2000, near it's altime high of about $55 in May 2007. That's a 35x return in just ten (10) years, but then, pretty flat for the next eight years. Then, ironically, in less than two years, it fell back to $1.25. Long in the 1990's and short in 2008 would have made you very rich on Citibank.
But what mechanisms caused this? Was it the mortgage-backed securities, collateralized debt obligations (CDO's), or structured investment vehicles (SIV's) that contributed to our crash? Why was Citibank nearly flat for so long and then completely decimated? Why did it run up so quickly during the 1990's? What other banks were involved? Who had insider knowledge and benefitted from the inner workings of these events?
Starting in the 1990's the Federal Reserve Board started lifting the restrictions on the separation of banking and investing, and started allowing the banks, under PRESSURE from the banking executives and their buddies, to start selling more and more investments and related products. Then once the cat was out of the bag, to save face, the regulators passed the 1999 bill, making it legal.
Normal banks are are supposed to keep about 20% of what they loan on 'reserve' in their vaults. Once this practice was effectively loop-holed, and once most banks globally got in on it, they became extremely over-extended, but no one could discern from their books. This is why you hear about all this "deleveraging".
Notice how banks are evolving backward toward their early 1990's stock prices, because that's when the leveraging started. Cause-Effect?
But what does that matter, the United States doesn't back the dollar with gold anymore. Even the dollar is a leveraged financial instrument - it's based on the faith and trust that the USA will always be around and able to pay back its own debts.
If you chart the then largest US bank by assets at the time, Citibank (NYSE:C), back 30 years, you'll notice it got hammered in the 1987 'crash' from about $2.50 to about $1.50, and then, miraculously, starting with the early 1990's recession, it grew wildly from $1.50 to $53.64 on September 1, 2000, near it's altime high of about $55 in May 2007. That's a 35x return in just ten (10) years, but then, pretty flat for the next eight years. Then, ironically, in less than two years, it fell back to $1.25. Long in the 1990's and short in 2008 would have made you very rich on Citibank.
But what mechanisms caused this? Was it the mortgage-backed securities, collateralized debt obligations (CDO's), or structured investment vehicles (SIV's) that contributed to our crash? Why was Citibank nearly flat for so long and then completely decimated? Why did it run up so quickly during the 1990's? What other banks were involved? Who had insider knowledge and benefitted from the inner workings of these events?
Starting in the 1990's the Federal Reserve Board started lifting the restrictions on the separation of banking and investing, and started allowing the banks, under PRESSURE from the banking executives and their buddies, to start selling more and more investments and related products. Then once the cat was out of the bag, to save face, the regulators passed the 1999 bill, making it legal.
Normal banks are are supposed to keep about 20% of what they loan on 'reserve' in their vaults. Once this practice was effectively loop-holed, and once most banks globally got in on it, they became extremely over-extended, but no one could discern from their books. This is why you hear about all this "deleveraging".
Notice how banks are evolving backward toward their early 1990's stock prices, because that's when the leveraging started. Cause-Effect?
But what does that matter, the United States doesn't back the dollar with gold anymore. Even the dollar is a leveraged financial instrument - it's based on the faith and trust that the USA will always be around and able to pay back its own debts.
We need to have the "firewall" of the Glass-Steagall Act reinstated to help prevent another financial meltdown.
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