This installment’s “guest vetter” is Robert Glauber of Harvard University. He led the Brady Commission in studying the 1987 stock market crash, was undersecretary of the Treasury for the first President Bush and, until recently, served as chairman of the National Association of Securities Dealers. You can check out his full bio here.
Question/Comment: In this current financial mess, why do we not hear anything being said about the repeal of Glass-Steagall? If these murky “securitization” products had not [been] available for the investment bankers to hawk, there would have been pressure on under-informed consumers to get in over their heads in an inflated housing market. Isn’t there something to be said for a regulatory wall between lending as the average citizen knows it, and investment banking activity? Didn’t our parents or grandparents see this movie before?
Paul Solman: I think you mean “there would [not] have been pressure on under-informed consumers to get in over their heads in an inflated housing market.”
Assuming I’m right (well, maybe you’re right), I don’t know how crucial the repeal of Glass-Steagall was, though it’s hard to argue it didn’t make regulation more difficult. But deregulation in general surely exacerbated the rush to debt, with ever-smaller amounts set aside in case of catastrophe and thus ever-more risk. As we saw with the Long-Term Capital Management hedge fund collapse a decade ago, the failure to regulate over-the-counter derivatives meant that investors like LTCM could borrow so heavily on margin that a major swing against them could lead to ruin, and a threat to the system as a whole.
Such investment products were then formally exempted from regulation – via legislation filed by then-Sen. Phil Gramm. And remember: LTCM was no investment bank, but a privately managed pool of capital.
Still, if Glass-Steagall still prevailed, it would have been harder for commercial banks to lend to firms like Bear Stearns.
Robert Glauber: The mess we’re in is certainly due to increasing levels of leverage in hedge funds, investment banks and consumer balance sheets (all those mortgage refinancings and home equity loans that let households spend beyond their wage incomes). But I think it’s hard to blame this leveraging and the implosion of various financial players on the repeal of Glass-Steagall and the deregulation it brought on.
Most of the detonations have been in hedge funds and investment banks. Hedge funds were never regulated before Glass-Steagall repeal and are not now. The investment bank that blew up (Bear Stearns) was not directly affected by repeal. Remember, G-S simply allowed commercial banks with insured deposits (Citibank, JPMorgan) to get into the investment banking business. Bear was never part of a commercial bank before or after G-S repeal.
Bottom line, I don’t think you can lay the blame for increased leverage or deregulation on the repeal of Glass-Steagall.