Home » Who’s afraid of Glass-Steagall (or the uptick rule)?

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Who’s afraid of Glass-Steagall (or the uptick rule)? — 9 Comments

  1. The SEC issued reopened the comment period for its proposed reinstatement of some version of the “uptick rule” on August 17th and required answers by Sep 21st. This is the usual method of rule change adopted by the SEC other than for emergancy short term measures. Therefore this is still under serious consideration and I would expect something before year end.

    Glass-Steagall on the other hand would be a matter for Congess. I did see recent talk from regulators in the UK that they were in favour of some sort of split between Investment and Commercial banking activities. This is interesting as the UK has never had the equivelent rule.

  2. All you have to do to understand this is to consult those famous investment advisors, The Beatles:

    “I told you about recessional panic
    You know the place where everything’s frantic
    Well here’s another stock you can short
    When there’s an uptick yell “Abort!”
    Looking at Investment bank interests
    To see how the other half trades
    Looking through a Glass-Steagall”

  3. “So Mr. Volcker scoffs at the reports that he is losing clout. ‘I did not have influence to start with,’ he said.”

    Wonderful! The man stays in character, and should get some kind of prize for limpidly clear speech, with more than a touch of humor!

  4. I recall Charlie Gasparino saying that while geitner and volker are on the outside, jarrett has the inside track.

  5. In very brief, Carter signed the Community Reinvestment Act that required insured banks to provide credit to serve the needs of the communities they served. In the early 90’s Congress passed and Clinton signed legislation that was designed to further home ownership for those who could not afford homes. During this time community groups, such as ACORN, objected to any proposed branching or mergers or acquisitions by insured banks on the grounds that they were not meeting their CRA responsibilities. Congress goosed the federal banking agencies but especially the federal reserve board, to push the banks to meet their CRA targets. In this way, ACORN and other community groups gained enormous power and were able to force banks to pledge to make trillions in mortgage loans to those who could not afford them.

    In the meantime, FNMA and FHLBB were induced by Congress to increase the percentage of loans they purchased that were made to subprime borrowers. When they purchased all the loans that could be made using conservative underwriting guidelines, they invented liar loans, no downpayment loans, and other forms of loans that the bank regulators required the banks to originate and sell into the secondary market. The fact that these loans were crap was not material to the demand by the regulators that they be made or the banks would be deemed in violation of the CRA. The crap loans were sold to FNMA and FHLBB, which packaged and sold them with the implied guaranty of the USA taxpayer. efforts to bring this under control were fended off by Barney Frank and Chris DOdd, among others, who did not see any problem in unloading these crap loans to investors.

    The investment banks, like Lehman Bros and Goldman, which were not FDIC insured, were able to purchase large amounts of these loan portfolios because the capital requirements were reduced, I think 5 or so years ago. As any good capitalists, they sliced and diced these loan pools into various risk pools and sold interests in them to investors around the world. In the meantime, The Financial Accounting Standards Board (FASB), against the strong opposition of the bank regulators, adopted the mark-to-market rule for valuing assets. The banks and other financial companies had long valued assets using historical repayment experience. Loans that were current were valued at 100% of the outstanding balance. Loans that were 60 or 120 days days delinquent were written down, to 80% or 60% of the current balance, but not below the liquidation value of the collateral. Under the MTM rule, which became effective in the last quarter of 2007, loans had to be valued on the basis of their value in the market. Early in 2008 a portfolio of crap loans went unsold and, within days, the value of crap mortgage loans was reduced to near nothing, even though only about 10% or so, were not performing. So, by changing the accounting rules the investment banks, FNMA, FHLBB, the bank regulators and the investors in crap were caught short by the sudden loss in value of crap.

    The problems were not caused by the free market but by laws designed to put people into home they could not afford. And, Congress is considering a CRA improvements act while the FHA and Ginnie Mae (taking over for FNMA and FHLBB) are continuing to originate crap loans even though they have not been unable to unload them into the secondary market.

  6. If you believe that centrally managed economies are just more fair than market economies, and believe you must force a revolution to make this occur, you will want a major market failure. The first rule of revolution is to make things as bad as possible so people will accept radical change. So why would Obama want to fix the current system?

  7. Colby King on Inside Washington this past Sunday advocated essentially unrepealing Glass-Steagall. That would, he said, let the commercial banks go back to collecting deposits, making loans, getting those loans repaid, and being carefully regulated while investment banks would be free to take whatever risks they wanted – and pay their employees ridiculous amounts of money. Then when the investment banks took one too many risk or made one many stupid decision, they could fail without putting the taxpayers in the position of having to either bail the out or take the chance of crashing the whole economy. And Bill Clinton thought the repeal of the uptick rule was a bad idea.

    It seems to me that both Glass-Steagall and the uptick rule are excellent regulatory ideas because they help protect the economy as a whole without requiring constant hands-on government micromanagement.

  8. I have to say after all the reading I’ve done on this, I’m indifferent about the uptick rule (I think Naked Shorting was a much bigger problem). OTOH I don’t see how repealing Glass-Stegal caused any harm. If anything, it prevented some panics by allowing banks to buy trouble brokerages and vice versa. That would not have been possible before.
    A number of things are responsible for this mess:

    – Political (read Congressional) preasure on both banks and Freddie/Fannie to make bad loans.

    – Fannie, Freddie’s lower capital requirements their implicit gov guarantee.

    – The Fed keeping interest rates too low from 2005-2007.

    – Lower capital requirements for banks holding MBSes (mortgage backed securities) compared to actual mortgages. (Generally, the Basel I and II capital requirements to base capital requirements on risk led banks and rating agencies to systemically understate the level of risk. Because of the Fed window, capital requirements, not reserves, is the limiting factor in lending. In general, the financial sector is procyclical, leading to a bubble/bust cycle, unless the rules of the system are set up to slow the mania on the upside and the panic on the downside.)

    – Allowing institutions to become “to big to fail”. (Any institution that large should, at minimum, have higher capital requirements than smaller competitors. Rule: capital requirements should increase progressively with size.)

    – Naked shorting allowed short sellers to drive down the
    market by shorting stock they didn’t actually borrow.

    Did I miss anything?

  9. Pingback:Glass-Steagall: A Red Herring for the Financial Crisis | Axis of Right

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