William Black: Even Savings & Loan Crisis Proved Glass-Steagall

Former U.S. bank regulator Dr. William Black of the University of Missouri took to Op-ED News yesterday with a hard-hitting column, The 11th Lesson We Need To Learn from Keating’s Frauds: Bring Back Glass-Steagall. The piece is a polemic on his April 14 Real News Network column, ’10 Lessons We Need To Learn from Keating’s Frauds.’ The occasion was the death of Charles Keating, who ran the notorious Lincoln Savings & Loan, which was the worst disaster of the 1980s wipe-out of the United States’ S&L sector. Dr. Black was the most farseeing senior official of the Office of Thrift Supervision — Keating’s corruption of the Senate successfully blocked Black’s investigation of the banks’ scandalous practices from reaching the Hill — and then of the Resolution Trust Corporation created by Congress to “wind up” the hundreds of failed S&Ls.

Black describes how the S&Ls, after an honorable century’s history, were pushed by 1980s financial deregulation into securities speculation, and actually became the first class of U.S. commercial banks to be exempted from obeying Glass-Steagall. The bigger S&Ls’ rampant “ADC loans” (acquisition, development, and construction) were actually securities investments, not allowed to banks under Glass-Steagall, and these securities brought them down.

Black writes, “The most important lesson we should have learned from Keating and Lincoln Savings: One of the subtle aspects of the savings and loan debacle that is often overlooked is that we ran a real world test of the importance of the provisions of the 1933 Banking Act known as the Glass-Steagall Act. Glass-Steagall prohibited “commercial” banks that received federal deposit insurance (created by the same 1933 banking act) from owning equity positions in nearly all financial assets (“investment banking”). With very limited exceptions, a commercial bank could not own real estate, companies, or stock in companies…. Commercial banks received a federal subsidy through deposit insurance, so it made no sense for them to be allowed to compete against regular businesses that lacked that subsidy. It was also dangerous to allow commercial banks to make much riskier investments. Losses are much lower on prudently underwritten loans than equity investments.”

Notably, Black reports that “Alan Greenspan and George Benston’s study” (for JPMorgan) praised 33 S&Ls whose direct investments exceeded 10% of total S&L assets (the “threshold” for our rule restricting direct investments). Within two years, all 33 of the S&Ls they urged us to make the “model” for S&Ls, had failed. They were, overwhelmingly, accounting control frauds.”

Black demands, as he has repeatedly before, the restoration of Glass-Steagall by Congress.

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