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This day in history
What is it about November 12th? On this day last year, Treasury Secretary Henry Paulson announced he was changing TARP from a toxic asset fund to a cash giveaway for banks. More significantly, 10 years ago on this day, the repeal of a banking law might’ve led to the need for TARP in the first place.
The Glass-Steagall act was a Depression-era law that separated commercial banking from investment banking. Its repeal on November 12, 1999 allowed banks to create the all-you-can-eat buffet style banking giants that henceforth became too big to fail.
The New York Times has a nice retrospective on Glass-Steagall’s death. Here’s what North Dakota Senator Bryon Dorgan said in 1999, emphasis mine:
“I think we will look back in 10 years’ time and say we should not have done this, but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010,” Mr. Dorgan said 10 years ago. “We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
Here’s what your current White House economic adviser Larry Summers said 10 years ago today:
“Today, Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” then-Treasury Secretary Lawrence H. Summers said at the time. “This historic legislation will better enable American companies to compete in the new economy.”
I assume what Summers meant is compete with global banks and that banks (and non-banks like AIG) could take advantage of the “financial innovations” Wall Street was brewing.
You know, innovations like credit derivatives.
Despite what’s happened on Wall Street in the past 10 years, President Obama doesn’t seem very keen on un-repealing this law:
Today, President Obama seems to have softened his views a bit when it comes to Glass-Steagall. The administration’s proposal for overhauling financial regulatory system makes no mention of resurrecting the firewall between commercial banks and investment banks and still allows insurance companies to deal in securities. The change of heart may have something to do with the fact that one of his senior economic advisers is Mr. Summers.