NY Times Columnist: Glass-Steagall Wouldn't Have Prevented the JPMorgan Loss or the Financial Crisis

"Dealbook" columnisst Andrew Ross Sorkin pokes a liberal sacred cow:

A meme around Glass-Steagall has been created, repeated so often that it has almost become conventional wisdom: the repeal of Glass-Steagall led to the financial crisis of 2008. And, the thinking goes, has become almost religious for some people, that if the law were reinstated, we would avoid the next crisis.

The facts — basic facts — just aren’t that convenient. While the repeal of Glass-Steagall has seemingly become the sine qua non of the financial crisis, it is pure historical revisionism. [...]

Glass-Steagall wouldn't have prevented the last financial crisis. And it probably wouldn't have prevented JPMorgan’s $2 billion-plus trading loss. The loss occurred on the commercial side of the bank, not at the investment bank. [...]

The first domino to nearly topple over in the financial crisis was Bear Stearns, an investment bank that had nothing to do with commercial banking. Glass-Steagall would have been irrelevant. Then came Lehman Brothers; it too was an investment bank with no commercial banking business and therefore wouldn't have been covered by Glass-Steagall either. After them, Merrill Lynch was next — and yep, it too was an investment bank that had nothing to do with Glass-Steagall.

Next in line was the American International Group, an insurance company that was also unrelated to Glass-Steagall. While we're at it, we should probably throw in Fannie Mae and Freddie Mac, which similarly, had nothing to do with Glass-Steagall.

More in that vein here. My favorite part of the column comes when Sorkin gets Democratic Senate candidate Elizabeth Warren to reluctantly admit that the restoration of Glass-Steagall probably would not have prevented everything she likes to rail against, despite her constant messaging to the contrary.

In my conversation with Ms. Warren she told me that one of the reasons she's been pushing reinstating Glass-Steagall — even if it wouldn't have prevented the financial crisis — is that it is an easy issue for the public to understand and "you can build public attention behind."

She added that she considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.

What the world needs less of: symbolic governance.

Reason came to similar conclusions about Glass-Steagall a little earlier in the debate.

UPDATE: I should point out, since commenters seem to be confused about it, that the "Elizabeth Warren says" image here was put there by me (note alt text), and is not an ingenious (or foolish) advertisement.

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  • ||

    She added that she considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.

    Intentions are all that matter!!!11!1eleven!!1!

  • sarcasmic||

    Can't pave the road to hell without buttloads of good intentions!

  • Scruffy Nerfherder||

    This only goes to show how stupid the Warren voters are. She openly admits to pushing meaningless legislation that achieves nothing yet they flock to her side anyway.

  • Brandon||

    Intentions? She's not even talking about intentions. She's talking about appearances, nothing more. She's talking about a campaign slogan that will get the rubes to ignore her history of fraud and her complete lack of substance.

  • Mo' $parky||

    What makes it even worse is that she doesn't even need to do that. Her entire campaign slogan should just be "I'm not a Republican." That would almost guarantee her a victory.

  • sarcasmic||

    To be fair, Scott Brown is more RINO than Republican.

  • John||

    He is a total RINO. He serves a single good purpose. Getting liberals to cry as they see an evil Rethuglican in the beloved Ted Kennedy's Senate seat.

  • Mo' $parky||

    Yes he is. I was truly shocked when I heard he won the election.

    The point I'm going for is, like Martha Coakley, the less Warren says the better off she'll be. If Brown wins again it will be because Warren talked her way out of the seat, just like Coakley did.

  • John||

    He will win because the Mass Dems are mind numbingly stupid and arrogant.

  • Mo' $parky||

    Uh... hmmm...

  • rts||

    You know, you look back at the ancient Greek myths or Egyptian myths and their origins are, for the most part, lost in the mists of time.

    Springing up in the information age it should be easy to find the source of these modern myths and bitch-slap their originators. But that never seems to happen. Who are the left's (or the right's, for that matter) myth writers? Where do these delusions ultimately come from? How do they get repeated so far and wide with a credulity that any cult leader would love?

    I'm bored at work.

  • Mo' $parky||

    A couple of trips around the globe is all it takes to muddy the trail. After sometime has been said often enough by enough people nobody can really point to the originator.

  • Anonymous Coward||

    Who are the left's (or the right's, for that matter) myth writers?

    Does it matter? Their myths can be slapped down regardless of the origin, though it does not stop the true believers from believing. The 20th century is full of Progressive political mythology that serves to whitewash the movement's failures, its crimes, or both.

  • Scruffy Nerfherder||

    I'm guessing Al Gore and Joe Biden are the originators of at least half of the political anecdotes.

  • Mo' $parky||

    *After something has been said

  • LTC John||

    "My favorite part of the column comes when Sorkin gets Democratic Senate candidate Elizabeth Warren to reluctantly admit that the restoration of Glass-Steagall probably would not have prevented everything she likes to rail against, despite her constant messaging to the contrary."

    Ironically, the ad right next to this remark was an Elizabeth Warren says "Pass a New Glass Steagal" from boldprogressives.org...

  • Tman||

    That's not an ad, that's a picture included in the post.

  • ||

    That faked me out too, until I tried to click it to burn Warren's cash.

  • Anonymous Coward||

    I'm surprised that Elizabeth Warren is willing to speak so highly of Glass-Steagall seeing as how one of the midwives of those acts (the first in 1932 was tha actual Glass-Steagall Act, the second, the Banking Act of 1933, includes provisions supported by Glass) Carter Glass was an known Dixiecrat who spoke openly about disenfranchising otherwise eligible black voters with poll taxes and bulk payments.

  • wareagle||

    Warren is willing to speak highly of most things that expand the scope and power of govt.

  • Anonymous Coward||

    Funny, so was Glass. He was even willing to step on minorities when it suited his needs (taking affirmative action spots at Harvard from actual Indians).

  • sarcasmic||

    Since "We are government", expanding the power and scope of government is taking power from the evil core-pour-ray-shuns and putting it in the hands of the people.

  • Anonymous Coward||

    We are government

    Bull. Shit.

  • sarcasmic||

    Did I forget my /sarc tags again?

  • ||

    Don't read the comments on the original article, for the sake of teh kittehs.

  • Scruffy Nerfherder||

    Mother of God, the idiots at the NYT never cease to amaze me.

    Can the writer suggest any single point solution to avoid financial sector catastrophes in the future ? Glass Steagal served well for over 60 years. It acted as a deterrent to banks from venturing into the deep end of uncharted oceans even if these specific acts of the banks were not explicitly prohibited by this law. An environment of prudence prevailed among banks. Only when "plain old banking" went out of fashion with the arrival of hot shot investment banks that high street banks wanted to join the party and pressurized lawmakers to rescind this law. But organization cultures are hard to change. The banks that suffered most by lending imprudently to non creditworthy borrowers did so only because of internal pressure to raise earnings by rapidly increasing the size of their loan books. This could only be done by lowering lending standards - and the rest is history.

    Elizabeth Warren is right in saying that while Glass Steagal is no silver bullet, its resurrection will send a strong message that those who refuse to learn from history are condemned to relive the lessons.
  • John||

    I love how their policies are never expected to solve everything but still okay. But something like say school vouchers is a complete waste of time because it might not fix every problem.

  • Scruffy Nerfherder||

    Their grasp of history sucks as well.

  • ||

    Intentions over results, always, every time.

  • Adam330||

    Thank goodness Glass Steagal prevented banks and bank-like institutions from making bad real estate loans and then going under, leaving taxpayers to foot the bill, until it was repealed.

    Oh wait, no it didn't: http://en.wikipedia.org/wiki/S.....an_crisis.

  • Lord Humungus||

    Elizabeth Warren Says:

    Pretend to be Indian, make cookbook, get Harvard tenure.

  • ||

    Another thing that Democrats have managed to spread memory loss dust over is the fact that the major impetus to repeal Glass-Steagall came from the Clinton Administration.

    The word was that it was essential that American banks should be able to compete in global markets with European and Asian banks which were not hampered by such restrictions.

    Plenty of Republicans voted for it but it was not at the top of the list of things in the Contract with America.

  • Michael||

    Could reason's powers-that-be PLLLEEEAAASE put an indefinite moratorium on posting any more pictures of Elizabeth Warren? My eyeballs, nerves and sense of common decency thank you graciously in advance.

  • rts||

    At the very least there should be two lobster girls (or similar) for every Warren or Feinstein.

  • Scruffy Nerfherder||

    In the face of artificially suppressed interest rates and loads of foreign cash looking for a place to park, Glass-Steagall was never going to be a roadblock to anything. The repeal of it is just a scapegoat for the cover-up of the real culprits, the Federal Reserve and its loose money ways.

  • ||

    Ironically, this story caused Warren's campaign to run an ad next to my article urging me to support her and her proposed revised Glass-Steagall bill.

    They soooooo did not get their money's worth out of that ad.

  • Mo' $parky||

    Except it didn't. That ad was put there by Welch, alt-text and all.

  • GILMORE||

    Aw, booo! You ruined it for me.

    The santorum ads were real! You can't take that away from me...

  • perlhaqr||

    Ugh, and the Joe Arpaio ones. Bleh.

  • ||

    While I think this article is essentially correct there is something here the author is not getting. Had G-S been in place and enforced in the manner it was, say, prior to the early 90s, the investment bank failures would not have led to such dramatic concerns over the health of the commercial banking industry. Had a Lehman style collapsed happened in the 80s only other investment banks and brokerages would have been counter-parties to the failing institutions. Commercial banks would not have had credit lines with them, derivative trades, etc etc and would not have faced much of a problem. Was it necessarily the end of G-S that created this vulnerability. No: securities trading had been seeping into commercial banking for some time.

    20 years ago I worked for a division of Chase Manhattan Bank called Chase Securities which pretty much did everything an investment bank did, but was somewhat insulated behind various Chinese Walls ... Having said this, Fed auditors did come and pour through our books once a quarter and calculated various risks and forced the corrections of problems. Back then our traders were forced to each take 2 weeks consecutive vacation so that their books could be audited. A $2 billion loss on derivative trades would have been extremely unlikely.

    Am I defending G-S? Not really. But It is overly simplistic to say it had nothing to do with the crisis.

  • Invisible Finger||

    I was going to say something similar.

    The end result of the repeal of Glass-Stegall was really to make government borrowing easier.

  • VG Zaytsev||

    ...the investment bank failures would not have led to such dramatic concerns over the health of the commercial banking industry.

    Where is the evidence that that was a real possibility in 2008?

    I know that was the con used to sell TARP, but it was exactly that, a con.

  • Bill Dalasio||

    Commercial banks would not have had credit lines with them, derivative trades, etc etc and would not have faced much of a problem.

    No disrespect, but bullshit. Commercial banks were the original participants in the derivatives market. As you yourself note, Chase was in the market 20 years ago. Also, unless you're going to imply that all structured products are derivatives, the role of derivatives in the financial crisis is grossly exaggerated. Aside from AIG, the bulk of the market participants who went down did so with cash instruments.

  • Adam330||

    Did GS prevent commercial banks from buying derivatives? My understanding is that it did not. They could still buy them to hedge risk in their loan portfolios and therefore they would have been counterparties to failing institutions. The difference in the 1980s was that derivatives were not nearly the market they were by 2006-07- there was no company that had AIG like portfolio of derivatives.

  • GILMORE||

    My favorite part of the column comes when Sorkin gets Democratic Senate candidate Elizabeth Warren to reluctantly admit that the restoration of Glass-Steagall probably would not have prevented everything she likes to rail against, despite her constant messaging to the contrary.

    And thanks to the magic of internet banner-ad targeting, Elizabeth Warren's hypocritical-meme-politikin' mug is located in an ad *right next to that paragraph*.

    Man, Reason-editors must have a giggle sometimes knowing they're regularly getting political ad-spend from the very people we badmouth lambast all day... Its too rich.

    My favorites so far were the Sherrif Joe Arapio, Santorum campaigns... but this one takes a prize for contextual brilliance.

    The irony, so sweet and tasty. The actual money is just a fringe benefit.

  • GILMORE||

    I realize now I is fooled. But its an understandable mistake! That @*#$ has happened before.

  • Alan Vanneman||

    Further update: Elizabeth Warren did not say "We need a new Glass-Steagall. Honest Injun!"

  • RPR2||

    Native Americans put great store in symbolism.

  • Huck||

    I love the commenters at the NY Times. Some sacred cows will never be skewered.

  • muirgeo||

    Some one please explain to me how the housing crisis occurs if mortgages were NOT allowed to be securitized.

  • muirgeo||

    Please... if you believe this malarky you really need to watch this. http://www.pbs.org/wgbh/pages/.....-street/#a

  • bob zimway||

    Well good, Andrew. We'll make even more regulations after Glass-Steagall is reinstated. Keep in touch.

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