Fact Check: Did Glass-Steagall Cause The 2008 Financial Crisis?

aking on Wall Street makes for good politics in the Democratic Party. And several of the candidates at Tuesday night’s debate had tough words about big banks. That was particularly true of former Maryland Gov. Martin O’Malley and Vermont Sen. Bernie Sanders.

Although he didn’t say so directly, O’Malley suggested several times that consolidation in the banking business was a big factor in the 2008 financial crash and that the U.S. economy remains vulnerable because of it.

His solution: Bring back Glass-Steagall, the Depression-era law that barred commercial banks from engaging in investment banking that was scaled back in the Clinton administration. We decided to look at O’Malley’s claim about the risks of bank consolidation.

The Claim:

“[T]he big banks — I mean, once we repealed Glass-Steagall back in the late 1999s, the big banks, the six of them, went from controlling, what, the equivalent of 15 percent of our GDP to now 65 percent of our GDP.”

The Big Question:

How much bigger have the largest banks gotten, what did Glass-Steagall have to do with it and, most important, did the scaling back of Glass-Steagall lead to the 2008 financial collapse?

The Broader Context:

Despite what O’Malley and many other people believe, Glass-Steagall was not technically repealed in 1999, but it was effectively neutered. Legislation was passed that year that allowed bank holding companies to engage in previously forbidden commercial activities, such as insurance and investment banking.

The change in the law opened the floodgates for giant mergers, such as the $33 billion deal between J.P. Morgan and Chase Manhattan in September of 2000. During the darkest days of the financial crisis, Bank of America acquired two troubled financial companies — Countrywide Financial Services and Merrill Lynch, deals that wouldn’t have been possible before 1999.

The Long Answer:

The biggest banks are a lot bigger than they once were, mostly because of mergers and acquisitions. What’s not in dispute is that changes to Glass-Steagall allowed the biggest banks to grow bigger, which has raised new concerns about risks to the financial system.

At issue is the “too big to fail” problem: Will the federal government once again be forced to come to the aid of federally insured megabanks that have taken outsize risks with their money?

Since 2008, regulatory changes in the U.S. and abroad have supposedly mitigated that danger. The Dodd-Frank financial overhaul bill contains complicated provisions that would allow regulators to step in and take over failing banks, if necessary.

But there’s plenty of skepticism that the changes have gone far enough.

Read on.

One response to “Fact Check: Did Glass-Steagall Cause The 2008 Financial Crisis?

  1. Your not hitting on the parts of Glass -Steagall that actually did lead to the Financial and Housing Crisis and would have never been possible without Glass -Steagall. Even Matt Taibbi had the same seems now accepted answer and after I explained it and he check it all out and was true and factual changed his entire perception. I was in NY with him digging through court houses and paper files that week and storming the SEC for force them to take all of my evidence in my case and be accountable for it. The day it all clicked he stayed up all night writing I met him for breakfast and he had it all written up in a way only Matt can. Then remember he even wrote and published that I give him nightmares. And remember a lot of the work I did even in the whistleblowing is not public there are still parts of those mega cases open. People when they hear my name they think only Chase, Credit Cards, debt collections debt buying etc. Reality I only worked at Chase/NCO a year six months on each side. Prior to that WaMu for four years and the whole WaMu story is so off it is unbelievable and I am currently testifying and have worked with Federal Prosecutors over the past year on some of that. Remember I had steered clear of the WaMu because mainly there was nothing I could do to help the consumers or regulators. But not only me with the WaMu numerous regulators became whistleblowers too all silenced. But go back to the 90’s when I was just starting out in my 20’s and working for AIG for the NY Pine Street Office and the Fairfield County, CT office. My boss was also a legislator in NY and since I was the youngest and had the post computer skills (remember people were just getting their first email accounts and most homes did not even have a computer) I got assigned representing my division for Y2K. Just saying that makes me feel old. So I had a front row on everything and all the details. I didn’t at that time understand the cause and effect because non of us had lived through a pre Glass -Steagall World. Between the crash in the fall of 98 and experiencing life on the Wall Street side I chose I didn’t want to play with individuals money I couldn’t be responsible to ruining peoples lives and retirements no matter how much I could make. So after my youngest child was born in 99 I went to GE Capital in CT and worked in Commercial Finance and M&A for GE US, Europe, Asia running multi billion dollar portfolios and M&A as well as the largest Global IT and Restructuring project even done under Jack Welch. A few years after Jack left and Immelt came in a lot of that GE team in Connecticut disbanded and were all recruited into the banks who wanted our Six Sigma knowledge and tools that could do a million things at once. I was trained on it all back in 2001 and am shocked that even today Banks and Regulators are using dinosaur tools for everything. If you even want the whole Glass-Steagall explained I would be happy to only take about 30 minutes and like everyone else it will click and make perfect sense.

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