Did the Gramm-Leach-Bliley Act cause the housing bubble?

No.  That is one common myth among the progressive left.  Because it involves financial deregulation and the unpopular Phil Gramm, the Act is vilified and assumed to be part of a broader chain of evil events.  Here are some of the articles which promulgate the myth that the Act caused or helped cause the housing bubble.  One version of the claim originates with Robert Kuttner, but if you read his article (and the others) you’ll see there’s not much to the charge.  Kuttner doesn’t do more than paint the Act as part of the general trend of allowing financial conflicts of interest. 

Most of all, the Act enabled financial diversification and thus it paved the way for a number of mergers.  Citigroup became what it is today, for instance, because of the Act.  Add Shearson and Primerica to the list.  So far in the crisis times the diversification has done considerably more good than harm.  Most importantly, GLB made it possible for JP Morgan to buy Bear Stearns
and for Bank of America to buy Merrill Lynch.  It’s why Wachovia can consider a bid for Morgan Stanley.  Wince all you want, but the reality is that we all owe a big thanks to Phil Gramm and others for pushing this legislation.  Brad DeLong recognizes this and hail to him.  Megan McArdle also exonerates the repeal of Glass-Steagall

Here is a good critique of GLB, on the grounds that it may extend "too big to fail" to too many institutions.  That may yet happen but not so far.   

The Act had other provisions concerning financial privacy.

Maybe you can blame some conflict of interest problems at Citigroup and Smith Barney on the Act.  But again that’s not the mortgage crisis or the housing bubble and furthermore those problems have been minor in scale.  Ex-worker has a very sensible comment.  The most irresponsible financial firms were not, in general, owned by commercial banks.  Here’s lots of informed detail on GLB and the bank failure process.  Here is another good article on how GLB didn’t actually change Glass-Steagall that much.

Here’s a Paul Krugman post on GLB; he attacks Phil Gramm but he doesn’t explain the mechanism by which GLB did so much harm.  The linked article has no punch on this score either, although you will learn that Barack Obama has scapegoated GLB, again without a good story much less a true story. 

I may soon cover the Commodity Futures Modernization Act as well.


The majority of left-wing blogs are absolutely loving the financial crisis.

It's the rapture of the marxists.

From Ex-Worker's comment:
"As a policy argument, those who reflexively blame all ills on vague themes like "deregulation" without understanding the industry might consider claiming "a special sort of stupid" from tongue in cheek conspiracy theorists."

Dead on!

So, let me get this straight. If GLB caused the problem, and because of the problem we are forced to take emergency measures and perform massive mergers, we should be thankful that GLB allows that to happen.

That is a really circular argument. I'm glad we're able to make even worse decisions during a crisis because of the bad decisions in the first place.


I'm curious what people think about scrapping the T+3 settlement period for US stocks?

I argue that instant settlement is more transparent, "honest", and hopefully less prone to tactics such as naked short selling.

It should be easily within the realm of current technology to guarantee the asset is available at the time of the trade.

GLB is getting boring.

I am anxiously awaiting this post on the CFMA! I guess the CDS regulation part is getting the most attention but I'm always up for discussion of Section 2(h)(3)...aka the Enron Loophole.

So, the repeal of the law allows major firms like JP Morgan to take on obviously bad assets like Bear Stearns.

I am confused as to how this is a good thing?

If GLB caused the problem, and because of the problem we are forced to take emergency measures and perform massive mergers, we should be thankful that GLB allows that to happen.

But that whole argument hinges on the premise that GLB "caused the problem," which neither you nor anyone else has remotely established. So your attempt at cleverness doesn't even get off the ground. (Same goes for the commenters over at DeLong's place who make the same argument.)

Here is a good critique of GLB, on the grounds that it may extend "too big to fail" to too many institutions. That may yet happen but not so far.

The Wilmar critique, which was probably written 2002-2003 pretty much hits the nail on the head and I am not sure why you bury it the way you did.

Complex banking organizations will take advantage of TBTF and assume too much risk. Regulators will look the other way. Seems to me pretty much what happened.

Robert Olson,

Why should the government ban JP Morgan from buying whatever assets it wants to buy? Particularly in the case of buying assets from an institution that had a liquidity crisis?

Its easy for the marxists to be in rapture over instability in the production and distribution of wealth. Their ideas have never produced any wealth to speak of.

Suppose it was smaller institutions, would that help?

Once upon a time we had a lot of small savings-and-loan companies that got in trouble. It could be argued that they got into trouble largely because of federal regulations that prevented them from succeeding.

So then the federal government relaxed the regulations that kept them from doing extra-risky transactions. Apparently the theory was that they could take risks and win and work their way out of the hole that way.

So when the risky stuff went bad, they were *really* failing. It was a great big problem because even though no one of them was that big they still made a great big difference collectively, and their collective failure would hurt many millions of voters.

Is it a choice between having many small companies fail with disastrous consequences, versus a few large companies?

Wouldn't it be better if we could avoid the massive failure in the first place, rather than just decide how to distribute the consequences after it happens?

Citi is still in trouble. I wouldn't use it as proof of success. But what concerns me is how many of these bailouts from the gov't are justified in part by the idea that these firms are "too big to fail." It seems to me that these mergers you speak of only create more such firms that are too big to fail. I will agree that these more diversified companies have a lower chance of failing, but when they do, it can almost be guaranteed that the gov't will have to bail them out. We risk creating an entire industry that is effectively government backed. It only follows that with this backing, we shouldn't be surprised to see even riskier behavior from these firms in the future (once the present situation calms down and responsibility subsides along with fear).

As for the thesis about the Gramm bill. Is it to blame? No, I don't think so. I'm not arguing that.

I just have fears about this consolidated market place we're creating.

J Thomas writes "You talk like it's a good thing to make even bigger TBTF companies."

I was also wondering about that. Isn't BOA/Merrill now one of those TBTFs?

Will these new, larger entities have more oversight?

Maybe I'm being naive about instant equity trade settlement, but as a software engineer I know that it is possible from a technical standpoint, having worked on messaging systems used by Wall Street trading platforms.

Could it go farther?

Could you set up a stock market that leaves out the brokers entirely?

Let anybody deposit their money with the exchange, and trade for themselves over the net (or *a* net)?

Publish the specialists' books for any investor to see?

If you had the NYSE budget to work with, could you handle DOS attacks etc?

My thought is that markets are essentially monopolies. They are all about economy of scale; the more customers the faster they clear and the smaller the bid-ask range they can afford. For a second market to survive it needs a specialty niche that the main market does not fill.

The NYSE started out with the intention of being a monopoly. They insisted for example that their brokers not participate in any other stock market. Now the specialists are an excrescence on the system -- their job is done better by the automated stuff that handles a volume they can't deal with, but they hang on. And why should you be required to use a broker? You can buy investment advice from anyone you want. Why should your money sit in a brokerage account rather than an account with the market itself?

Why do we need monopolists running our markets? If the government were to set up its own market, say a nonprofit run entirely by software engineers ;-) designed to be entirely transparent, who would be worse off? Existing brokers and specialists and monopolists would be worse off, but who else?

If the federal government were to start such a nonprofit and fund it at the beginning, and let any company list with them, it wouldn't be necessary to dismantle any other markets. Any niche where it succeeds, the other markets would retreat from. If for some reason it didn't work out the other markets would keep their business.

I have no regrets in making such a long reply if only to show that the Financial Services Modernization Act of 1999 U. S. 113 Stat. 1338 is the umbrella under which the present financial mess was concocted.

I have drawn on several articles; the references are listed below each segment.
There was at least one research analyst that was more curious than Congress as to how Wall Street got stuck with these CDOs on their books:
Citigroup conference call, November 5, 2007:

Mike Mayo, Deutsche Bank analyst: "...I mean $43 billion of CDOs. And, excuse me, when were these structures established?..."

Gary Crittenden, Citigroup CFO: "...In terms of the -- so the positions, the warehouse positions have obviously been accumulated over -- the super senior portfolio positions have been accumulated over time. As I mentioned earlier on the call, the $25 billion that was effectively the liquidity puts really came on during the course of the summer. So this really happens in two different time periods..."

Merrill Lynch conference call, October 24, 2007:

Mike Mayo, Deutsche Bank analyst: "And how did you wind up with such a large concentration [of CDOs] in the place?..."

Stanley O'Neal, CEO [now retired]: "...Why do we have such a large position in the first place? We made a mistake. There were some errors of judgment made in the businesses themselves and there were some errors of judgment made within the risk management function and that is the primary reason why those exposures exist."

This kind of bobbing and weaving and ducking and speaking gibberish is why we need Wall Street under oath in a Senate hearing room.

The Citigroup translation goes like this: we've been buying the AAA-rated super senior tranches all along because we were told by the physics brainiacs that these securities were walled off from losses by over collateralization. Our pat answer for how we got $25 billion of CDOs back on our balance sheet this summer is going to be a "liquidity put." We are standing by the position that we gave our buyers the right to "put" the securities back to us without losses under certain conditions. (How that complies with securities laws banning guarantees against losses has yet to be addressed. How one can make an arms length sale of a security and still be contractually bound to take it back on the balance sheet has also not been addressed. Stockbrokers would lose their job, livelihood and licenses if they used this defense. This raises the additional question of regulatory passes for the privileged, another serious contributor to inefficient markets.)

Stan O'Neal's answer on behalf of Merrill Lynch is, on its face, very humble and simple: mistakes were made; errors of judgment. Recent articles, however, have raised suspicions that Merrill was not only holding the AAA tranches because they thought they were safe from losses because of over collateralization, but was also making hedging bets against the very subprime debt they were selling to customers; in other words, Enronomics: heads I win, tails you lose.
Clearly, as Pam Martens has shown, the complete lack of regulation has led us to the doorway of ruination, which we are now going through to enter a land of complete and utter chaos.

From an earlier analysis by someone who originally published a warning under the scholarly efforts as presented at Hudson Institute, February 15, 2007.
[ In July of 2007 S& P had to step away from a AAA rating of some CDO’s]

FOR five months, it has been clear that rising delinquencies and foreclosures, coupled with higher interest rates on adjustable mortgages and declining home price appreciation, would undermine the market for mortgage securities. Yet it took Moody’s Investors Service, Fitch Ratings and Standard & Poor’s, the three leading agencies that rate long-term debt, until this month to react to this looming financial crisis, which involves more than $1.2 trillion of subprime mortgages originated in 2005 and 2006 alone. As one investor asked during a recent S.&P. conference call, “What is it that you know today that the markets didn’t know three months ago?†

S.&P. has stated that it now has reason to “call into question the accuracy of some of the initial data provided to us.† This suggests that S.&P. may have chosen either to merely accept the data offered it by issuers without doing its own due diligence. Or worse, S.&P. could have ignored other information because it might have hurt revenues by reducing the number of assets it could have rated.--JOSHUA ROSNER
Banks simply do not understand the chain of exposure and who owns what. Senior financial regulators and bankers now admit as much. The Long-Term Capital Management hedge fund meltdown in 1998, which involved only about $5 billion in equity, revealed this. The financial structure is now infinitely more complex and far larger. The top ten hedge funds alone in March 2006 had $157 billion in assets. Hedge funds claim to be honest but those who guide them are compensated for the profits they make, which means taking risks. But there are thousands of hedge funds and many collect inside information, which is technically illegal but it occurs anyway. The system is fraught with dangers, starting with the compensation structure, but it also assumes a constantly rising stock market and much, much else. Many fund managers are incompetent. But the 26 leading hedge fund managers earned an average of $363 million each in 2005; James Simons of Renaissance Technologies earned $1.5 billion. By GABRIEL KOLKO
The greedy noises made by the current folks on Wall Street might be said to resemble pigs squealing as they continue to feed at the Fed's trough. I'll not malign the character of the hogs down on the farm and just say the current noises emanating from Wall Street are the squeaks of greed evinced by folks who are not apologetic about having no integrity at all.

I have no dog in this hunt, but I'm curious about absolving GLB completely. Didn't it loosen the restrictions on investment firms being able to get into mortgage securities? As a result, couldn't this, coupled with the SEC's ruling in 2004 that provided exemptions for the amount of debt that those firms could take on and allow them to basically regulate themselves, be considered part of the blame for things like Lehman Brothers ending up with a 33-1 debt-to-asset ratio?

I'm not all that bright when it comes to this stuff, so I was hoping someone could explain it to me. Thanks.


Thank you, meter (Sept 19th) for your considered response. I, too, am seeking and am drawn to nonpoliticized information about what went wrong and where we should go from here. It seems there is enough blame to go around so that every side has a scapegoat. Are we locked in a battle that keeps good minds busy trying to prove a point rather than find solutions?

I bet the author and many commenters are feeling pretty stupid today. Of course, Citi had nothing to do with the passage of GLB and had nothing to gain from it. They totally deserve this 20B.

Four months later, folks, the world looks a little different, eh what? Anyone still want to defend the performance of "unified banks" like BAC, Citi, RBS, HBOS, Commerzbank, Fortis? Come on, Righties, wasn't GLB just a little bit responsible for creating multiple "TBTF," excessively influential institutions, which distorted the whole political/ regulatory system? What price your ideology?

Time has certainly made a fool of this post's author.

***The majority of left-wing blogs are absolutely loving the financial crisis.

It's the rapture of the marxists.***

As a non-marxist, I'm not having a good time at all...
I guess if you don't own anything, it's fun to sit back and watch people who do own things lose everything they have.
It is nice to see that at least some common sense about Laissez-Faire capitalism may be returning...All the nonsense of the past 35 years about the government being the problem (i.e. our collective interest as a society to make sure the foxes don't raid the coup)may finally be over- although the hard right will maintain their ideology over reality at whatever cost.

You cretins are absolutely delusional.

Very grateful to a bunch of much better skills. I look forward to reading more of the future of the subject. Keep the good work。thanks!

What a useless comment, Ricardo. Of all the things you could say, you came up with that?

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