It wasn't only combined depository/investment banks that securitized subprime loans, everyone did it. (If Glass-Steagall was really the cause, then it's the combined banks that would constitute most of the institutional failures...) The bigger problem is that there was no accurate risk assessment on subprime loans, mostly because too many people had too much of a stake in the way thins were going to speak up.

Link

Er, that should be:

Marcus Aurelius: He didn't say it caused the meltdown. He just pointed out that banks gambling on the capital markets have no business mingling with more mundane activities.

As long as the banks are not using investor deposits to cover their own investment losses (and even Gramm-Leach-Bliley required the depository bank and the investment bank to be separate subsidiaries, although they could be owned by the same parent bank holding company), how much of a problem is this?

I'd like to add that they should never be allowed to get too big to fail as a starting point.

This too. If a bank (any bank, depository or investment) is too big to fail without taking the whole financial system down with it, then it's too big to exist and needs to be broken up.

Just goes to show the different thought processes between "illegal" and "immoral". Just because these companies had gained the legal ability to act because of the repeal of glass steagall, it doesn't mean that it's morally imperative to do so.

You say that now that you're no longer getting bonuses for taking insane risks. Thanks for nothing, jackass.

ski_adk115: Just goes to show the different thought processes between "illegal" and "immoral". Just because these companies had gained the legal ability to act because of the repeal of glass steagall, it doesn't mean that it's morally imperative to do so.

BUT, BUT, BUT PROFITS.

Anything that interferes with this quarter's earnings is a detriment to the company. If we can remove the legal problems, then we have no problems.

In hindsight, shortsightedness is dumb.

FTA: "This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector."

is there even such thing as a capital requirement for a bank? since they can borrow from the fed discount window if they fall short of their capital requirements from deposits i just dont see how capital requirements actually matter in banks

hmmmmmmmmmmmmm, ya think?

MasterThief: As long as the banks are not using investor deposits to cover their own investment losses (and even Gramm-Leach-Bliley required the depository bank and the investment bank to be separate subsidiaries, although they could be owned by the same parent bank holding company), how much of a problem is this?


A failure on the investment bank side will take out the depositing bank as losses transfer back into the common holding company. That's why the AIG situation was so dangerous, even though their organs in various states were separately and adequately capitalized, in the mad dash for capital the AIG holding institution was going to pull those funds in order to cover their investment losses.

Maybe you want to give back a few million? plx?

Benni K Rok: ]
BUT, BUT, BUT PROFITS.

Anything that interferes with this quarter's earnings is a detriment to the company. If we can remove the legal problems, then we have no problems.

In hindsight, shortsightedness is dumb.

Not to the people at the top who made a metric shiat-ton of cash from this fiscal fiasco. Even if their shortsightedness sunk the companies they worked for and nearly destroyed the economy, the individual investors and executives who caused the mess still came out rich. They got their's and that's all that matters to them.

Isn't this another example of...

Barn door opens, horses leave, trot off into sunset.

*three years pass*

Think we should close that?

/studied chemistry and math not economics

New Age Redneck: Isn't this another example of...

Barn door opens, horses leave, trot off into sunset.

*three years pass*

Think we should close that?

/studied chemistry and math not economics

Funny, most people on wall street studied math or economics, but in their off hours study chemistry.

And by chemistry I mean hookers and blow.

dogcow69: is there even such thing as a capital requirement for a bank? since they can borrow from the fed discount window if they fall short of their capital requirements from deposits i just dont see how capital requirements actually matter in banks

Yes.

A bank is only allowed to lend out a given multiple of its 'regulatory capital'. They can borrow as much from the Fed as they like, but they're not allowed to lend it out again if it's beyond their limit.

And it's lending that makes a bank money, not borrowing.

so can you be too big for capitalism?
or does the fact that institutions and government are so linked mean its no longer capitalism any more...

Unfortunately, this is about the level of understanding of the economy by the average American.

MasterThief: Er, that should be:

Your chart left out fraud. Illegal behavior on the part of everyone involved. Buyers, seller, writers, appraisers, everyone involved.

It was federal and state felonies and no one did hardly anything to stop it.

The breaking up of banks into commercial and investment banks needs to be repeated.

HAHA!

John Reed!

The man who taught me how to REALLY manipulate charts and graphs into whateverTF you want with zero remaining connection to reality!

Never doubted why HE was Chief after seeing him at work.

opiumpoopy: dogcow69: is there even such thing as a capital requirement for a bank? since they can borrow from the fed discount window if they fall short of their capital requirements from deposits i just dont see how capital requirements actually matter in banks

Yes.

A bank is only allowed to lend out a given multiple of its 'regulatory capital'. They can borrow as much from the Fed as they like, but they're not allowed to lend it out again if it's beyond their limit.

And it's lending that makes a bank money, not borrowing.

When banks talk about capital, they mean equity. So borrowing from the fed doesn't change their capital level. There are two main ways banks fail. First by making bad loans (credit) second by having a deposit run (liquidity).

Capital is there to cover an error in credit judgement and provide a cushion to cover business mistakes. The fed is there to provide liquidity in the event of a deposit run. Part of the confusion is that the Federal Reserve Banks provide liquidity (and set the reserve requirement which is a way of limiting loans to cash on hand), while the Federal Beserve Board (amongst other regulators like the OCC, OTS, and state agencies) checks out the profit and losses and evaluates capital levels.

Glass-Steagall had little to nothing to do with this whole mess

In fact, if it hadn't been repealed some of the purchase/rescues couldn't have happened

BigJake: Glass-Steagall had little to nothing to do with this whole mess

In fact, if it hadn't been repealed some of the purchase/rescues couldn't have happened

This report disagrees with you.

Here's a summary:

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

mylonitic: BigJake: Glass-Steagall had little to nothing to do with this whole mess

In fact, if it hadn't been repealed some of the purchase/rescues couldn't have happened

This report disagrees with you.

Here's a summary:

12 Key Policy Decisions Led to Cataclysm

Financial deregulation led directly to the current economic meltdown. For the last three decades, government regulators, Congress and the executive branch, on a bipartisan basis, steadily eroded the regulatory system that restrained the financial sector from acting on its own worst tendencies. "Sold Out" details a dozen key steps to financial meltdown, revealing how industry pressure led to these deregulatory moves and their consequences:

1. In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
2. Regulatory rules permitted off-balance sheet accounting -- tricks that enabled banks to hide their liabilities.
3. The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives -- which became the basis for massive speculation.
4. Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
5. The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
6. Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal "risk-assessment models."
7. Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
8. Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
9. Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
10. Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
11. The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
12. Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.

I still don't see the link between any of 2-12 and Glass-Steagall

Investment and commercial banks would have gone down together even without that act since mortgages previously held on lenders' books almost exclusively began to be packaged and sold as mortgage-backed securities or as slices of CDO's

Both banking types had these terrible loans on their books though, and both would have gone down with the Good Ship SS Economy

I don't see how these multi-million dollar per year braniacs could have seen this whole shiatbomb coming. I really don't.

BigJake:
Investment and commercial banks would have gone down together even without that act since mortgages previously held on lenders' books almost exclusively began to be packaged and sold as mortgage-backed securities or as slices of CDO's

Both banking types had these terrible loans on their books though, and both would have gone down with the Good Ship SS Economy

Not to mention that it was effectively repealed since the mid-1980s when the fed decided to allow commercial banks to engage in investment banking as long as it was under 20% of total revenue or something like that.

But yes mortgage securities had been around since the mid 70s long before the deregulation era.

Nick Nostril: I don't see how these multi-million dollar per year braniacs could have seen this whole shiatbomb coming. I really don't.

Intellectual industrywide blind spot. Every beginning (college) investments course teaches that an investment's risk consists of two variables, alpha and beta. Alpha is market risk and is treated as unknowable/unsolvable, while beta is the investment-specific risk. Almost the whole field has been focused on variations of how to reduce/eliminate beta while still earning a decent return, and in this case it was alpha that rose up and bit everyone in the ass. I don't read enough of the literature to know if this is going on yet, but I think there's a good paper/thesis or two to be had not only on how alpha blew up the models everyone was using (written about extensively now), but how the actions of those involved in the market heavily influenced that very factor through (usually) unintentional actions that inevitably led to what happened.

And thanks for the catch dogcow - mortgage securities have been around since the 1970's but the package and sale of them grew in volume enormously post-2000.

BigJake:
I still don't see the link between any of 2-12 and Glass-Steagall

Investment and commercial banks would have gone down together even without that act since mortgages previously held on lenders' books almost exclusively began to be packaged and sold as mortgage-backed securities or as slices of CDO's

Both banking types had these terrible loans on their books though, and both would have gone down with the Good Ship SS Economy

Read the whole report. Or even just the executive summary and the introduction. They explain it pretty well.

imagine that. a crony capitalist american pig banker was wrong about something because he let his Greed dominate his actions.


gee, what a shock. and ronnie raygun did a whole shhittload of Bank Deregulatin' back in the 80's too. course, that was the result of his inviting wall street crony capitalist pig bankers into his administration.

dumb actor trying to run a government.

Linux_Yes: gee, what a shock. and ronnie raygun did a whole shhittload of Bank Deregulatin' back in the 80's too. course, that was the result of his inviting wall street crony capitalist pig bankers into his administration.

Who has Obama invited into his administration? How has Obama addressed this problem? Plus ca change.

/Put down the Strawman

ski_adk115: it doesn't mean that it's morally imperative to do so.
I kant imagine why you would think that

mylonitic: Read the whole report. Or even just the executive summary and the introduction. They explain it pretty well.

the report confirms what i had said earlier banks had been allowed to freely engage in the securities business since the mid 1980s. as the Boobieser pointed out, its a post hoc fallacy...

this is a very good report on the meltdown and regulation as well (new window)

Linux_Yes: ronnie raygun did a whole shhittload of Bank Deregulatin' back in the 80's too.

don't forget he also caused AIDS!