As Banks Reel, Regulation is Suddenly a Hot Topic
It has been less than a decade since the Glass-Steagall Act was repealed, and it is now becoming increasingly clear why we may have needed it.
Enacted after banks failed in the Great Depression because of reckless investment in nontraditional areas, it restricted commercial banks from the kind of lending that has now hit the Bear Stearns and Lehman Brothers investment banks hard, reports Newsweek in a lengthy article explaining the banking regulatory statute. And, although commercial banks still are subject to capitalization requirements and other government regulation that prevent them from taking as many risks as their independent cousins, the failure of IndyMac Federal Bank is a sign that they are not invincible, either.
After this week’s extraordinary market turmoil concerning not only the Lehman Brothers investment bank but Merrill Lynch & Co. and insurance giant American International Group, it is a virtual certainty that “the crisis in the financial sector will eventually be examined through the perspective of the Glass-Steagall Act and its repeal” in 1999, writes Robert Green in a Briefing.com blog post.
“There will be arguments on both sides of this issue, but the debate is almost assured, and the resolution will be the primary determinant of the future for capital markets.”
Repealing Glass-Steagall was a mistake, says Bonnie Erbe in a U.S. News & World Report blog post, even though it was replaced by the Sarbanes-Oxley Act, “which was supposed to increase transparency in the investment industry and corporate America at large.
“Instead, it allowed banks and investment houses to create new ‘vehicles,’ such as the packaging of mortgage loans into investments that were sold as soon as the loans were made,” she writes. “This prompted the mortgage industry to give out mortgage loans to all comers, whether they were qualified or not. This helps explain how mortgages in default now account for 9 percent of all American mortgages.”
Additional coverage:
McClatchy Newspapers: “Entire Regulatory System to Blame”
ABAJournal.com: “Fed Bails Out AIG, Prompting Debate on Regulation”
Economist: “The loneliness of the independent Wall Street bank”
Seeking Alpha: “Is a Glass-Steagall Redux in the Cards?”
Mother Jones: “A Taste of the Glass-Steagall Lash for Lehman”
