Monday, September 22, 2008

How We Got Here

Regarding our current financial crisis, there are a lot of voices out there. It can be hard to sort it all out.

Last night a friend sent me an email suggesting that much of the blame can be traced to the repeal of Glass-Steagal but that doesn't really make sense. (The bill repealing Glass-Steagal is called the Gramm-Leach-Bliley Act.)

Glass-Steagal put a wall between commercial banks like Bank of America and investment banks like Merril-Lynch. Of course Bank of America just came to Merril-Lynch's rescue, which is to say: the repeal of Glass Steagal, at least in this instance, kept the problem from getting a lot worse.

Here's Megan McCardle on Gramm-Leach-Bliley:
"GLB had nothing to do with either lending standards at commercial banks, or leverage ratios at broker-dealers, the two most plausible candidates for regulatory failure here.

Most importantly, commercial banks are not the main problems. If Glass-Steagall's repeal had meaningfully contributed to this crisis, we should see the failures concentrated among megabanks where speculation put deposits at risk. Instead we see the exact opposite: the failures are among either commercial banks with no significant investment arm (Washington Mutual, Countrywide), or standalone investment banks. It is the diversified financial institutions that are riding to the rescue."
So if GLB didn't cause this mess, what did?

Here are some more articles by other super smart people that helped me understand how we got here and what the next move or series of moves should be:

How Washington Failed to Rein In Fannie, Freddie

Rein In Fannie, Freddie? Not Dodd

A Bad Bank Rescue

Explaining the root causes of the crisis.

That last link was via Baseball Crank who has a post which collects the recent articles by Francis Cianfrocca, a regular contributer over at Red State. Every one of his posts is worth your time.

Boiling it all down, in the banks that have failed there was way, way, way too much leverage. Using borrowed money is a real easy way to make money when the markets are moving in your direction. It's an even easier way to be wiped out when the markets move against you. Bank of America's capital ratios are estimated to be about 10-1. Merril-Lynch's were at least 30-1.


ng2000 said...

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El Duderino said...

Nice post Z, we were just talking about Glass-Steagal this afternoon. BTW, I invited Cultman to post on WMTN.

Anonymous said...

Z -- This post was really helpful, CultMan. T'anks.

zaphod said...

... I invited Cultman to post on WMTN.

Cool! Welcome and you're welcome Cultman.