Well, So Much For Real Financial Reform
Reading some newswire stories about derivatives reform, already modest, are being watered down further, I then realized that the odds of reversing Gramm-Leach are zero (no surprise, since they are making $B’s daily with these things). What would it take to undo it? In 1933, Glass-Steagall was passed, saying that commercial banks could not play around with equities since they were too risky for depositors’ money, thus was born the investment bank. In 1956, the Bank Holding Company Act was passed, and Transamerica had to disgorge BAC.
I suddenly realized that none of this was the root cause of our banking crisis. Were not these just after-affects? The problem was not that the houses were flattened, but that there was a hurricane in the first place. Here, the eye of the hurricane were CDO/MBS’ based upon millions mortgages given to people who could not afford them. Even if Glass-Steagall were still in effect, could not commercial banks still buy boat loads of MBS’, since they are interest bearing instruments resembling bonds? Even if the derivatives market were regulated, would this have stopped the value of MBS’ from plummeting? Just because stocks are regulated does not mean that there cannot be a stock market crash.
Right now, our financial system might actually be more dangerous than before. True, Gramm-Leach blurred the distinction between commercial and investment bank, but at least we still had safer BAC, WFC, and JPM over here, and more volatile LEH, BSC, MER, GS, and MS over there. Now, BSC and MER are owned by commercial banks, and GS and MS are commercial banks. Doesn’t this increase the risk to depositor’s money? Worse, the root cause is still with us. Not only has Congress refused to put a wooden stake through the heart of FNM and FRE, but they are now jumping up and down and screaming at the banks “STOP FORCLOSING FAMILIES OUT OF THEIR HOMES JUST BECAUSE THEY CANNOT PAY THE MORTGAGE!”
(sigh) I have throbbing headache. I am going to lie down now.