In US News & World Report for Aug. 27, another known Wall Street voice emphatically calls for Glass-Steagall restoration, in the person of James Rickards, a hedge fund manager and lawyer for 35 years who at one time was general counsel for Long-Term Capital Management (LTCM), the Greenwich, Conn., hedge fund that in the Fall of 1998 revealed losses on major bets on a Friday and forced emergency weekend meetings internationally for a multi-billion-dollar rescue to a prevent global “reverse leverage” disaster on Monday morning. Rickards is the author of the 2011 book, Currency Wars. “Repeal of Glass-Steagall Caused the Financial Crisis” is the headline of his valuable op-ed.
“In fact, the financial crisis might not have happened at all but for the 1999 repeal of the Glass-Steagall law that separated commercial and investment banking for seven decades,” Rickards writes. “If there is any hope of avoiding another meltdown, it’s critical to understand why Glass-Steagall repeal helped to cause the crisis.”
After explaining that the 1920s plunge of the biggest commercial banks, like Chase Bank and National City Bank, into stock and securities dealing, using their depositors’ money, led to the 1929-31 blowout; and that Glass-Steagall then prevented bank panics for 70 years, Rickards takes on the arguments of Tim Geithner and fellow Wall Street apologists against Glass-Steagall.
“One bank supporter says you cannot blame banks for fraudulent loan originations because that was done by unscrupulous mortgage brokers. This is nonsense. The brokers would not have been able to fund the loans in the first place if the banks had not been buying their production. Another apologist says the fact that no big banks failed in the crisis proves they were not the cause of the problem. This is also ludicrous. The reason the big banks did not fail was because they were bailed out by the government…. Yet another big bank spokesman says that nonbanks such as Lehman and Bear Stearns were more to blame for the crisis. This ignores the fact that nonbanks get their funding from banks in the form of mortgages, repurchase agreements, and lines of credit. Without the big banks providing easy credit on bad collateral like structured products, the nonbanks would not have been able to leverage themselves.”
Rickards is 100% right on all these points. He concludes, “Without the banks providing financing to the mortgage brokers and Wall Street while underwriting their own issues of toxic securities, the entire pyramid scheme would never have got off the ground. It was Glass-Steagall that prevented the banks from using insured depositories to underwrite private securities and dump them on their own customers. This ability, along with financing provided to all the other players, was what kept the bubble-machine going for so long.
“Now, when memories are fresh, is the time to reinstate Glass-Steagall to prevent a third cycle of fraud on [bank] customers.”