This Obscure 1999 Law Is to Blame for the Credit Crisis
Jul 29th, 2008 | By Rick Pendergraft | Category: Featured, Financial NewsWho’s to blame for the collapse in the credit markets? The Federal Reserve? President Bush? The Treasury Department?
Rick Pendergraft in Investor’s Daily Edge says the real culprit is an obscure law known as the Gramm-Leach-Bliley Act. This allowed commercial banks, investment banks and insurance companies to operate under one roof.
Had the financial service industry been kept separate, we might have avoided the worst of the worst of the credit crisis. More from Rick…
Over the course of the past year, since the credit markets went into the crapper last August, I have read numerous accounts as to who or what is to blame. But after reading all of these articles, there is one item missing from the very crowded list.
Real quick, here is a list of people or things that I have seen get the blame for this debacle:
Former Fed Chairman Greenspan
Fed Chairman Bernanke
The Fed
The Treasury Department
Mortgage Lenders
Home Buyers
Hedge Funds
Brokerage Firms
Fannie Mae
Freddie Mac
President Bush
President Clinton
Wall Street
House Flippers
BuildersI think the list is complete, but I may have missed one or two… anyone that took out a loan for anything in the last five years, anyone associated with the Clinton Administration, or anyone associated with the Bush Administration, etc.
Out of all of these names and groups, there is one glaring omission. Can you figure it out?
How about the Gramm-Leach-Bliley Act? That just rolls off the tongue doesn’t it? Do you know what this act did?
The GLBA was passed in 1999 and it repealed the Glass-Steagall Act. The result allowed commercial banks, investment banks and insurance companies to operate under one roof.
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Tearing down the walls between these entities allowed banks and brokerage houses to operate in the same markets. Commercial bankers could now be licensed to give investment advice. Brokerage firms were now allowed to make mortgage loans. Never mind that neither had experience in these areas.
Throwing out Glass-Steagall allowed these institutions to try and be everything to everybody. A one-stop shop for all things financial.
What’s wrong with having a niche?
Delving deeper into the credit debacle, I have to place part of the blame on the GLBA. Had the financial services industry been kept separate, the problems would not run so deep. By being segmented into sub-sectors, the credit crisis may not have been avoided completely, but the entire sector would not have been hit as hard as it has been.
Yes, there was too much money floating around in the economy. This drove home prices higher as consumers, flippers and speculators pushed the prices up. This is a classic case of too many dollars chasing too few goods.
The Federal Reserve has to be held accountable for this along with the Treasury and the administrations of the past 20 years.
But when you look at the failures of Bear Stearns (NYSE:BSC), IndyMac Bank (OTC:IDMC), Freddie Mac (NYSE:FRE) and Fannie Mae (NYSE:FNM), I don’t think you would see the mixture of failures had the GLBA been voted down.
The bill was introduced by Republicans, passed by both the House and the Senate, and signed into law by President Clinton. Neither party can blame the other for this law being enacted. Perhaps that is why we haven’t seen the GLBA pointed out as part of the problem. Neither the Republicans nor the Democrats can hide from it.
There is plenty of blame to go around for the credit debacle. But let’s not forget the legislation that was enacted that cleared the way.
Go figure, the credit debacle is almost a year old now and not one mention of the GLBA to my knowledge.
Source: The Blame Game Is Missing Something
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Rick is currently the Editor-in-Chief of The ETF Options Trader and the Triple Wave Investor. At the age of 23, on the third options trade he had ever placed, Rick turned $1,800 into $22,000 in less than a week, when the company he bought became the target of a takeover. He admits it was a stroke of luck, but it was a memorable education as to the leverage that options can provide. He lives near Delray Beach, FL with his wife and three children.
