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Comment by snowwrestler | Hacker News Reader

Repealing Glass-Steagall was not a bad thing. In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not. Even the i-banks that survived, like Goldmann and Merrill, did so by diversifying. Goldmann became a bank holding company and Merrill merged with B of A.

I don't have the background to address the other points, but the focus on Glass-Steagall annoys me because the counterproof is so obvious.

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>In the recent financial meltdown, diversified financial institutions like JP Morgan survived, and less diversified institutions like AIG, WaMu, Bear Sterns and Lehman did not.

Why is this argument still around? Yes, "diversified financial institutions" (i.e., too-big-to-fail banks) survived, because they had tremendous political power as a result of their consolidation. The idea that there were too-big-to-fail institutions is not a victory, it's a defeat. These are the institutions that caused the problem in the first place! The fact that they live on is a travesty.

Because it's true. The topic has been so politicized now that it's almost impossible to have an even discussion about it, which is part of what I find annoying.

Too big to fail is not about diversification, it is about the scope of capital assets and counterparty risk. USAA, for example, is a diversified institution that would have been illegal under Glass-Steagall but navigated the meltdown well on their own. Meanwhile every institution I list above was too big to fail but would never have been covered by Glass-Steagall--not to mention Fannie and Freddie.

Edit to add: IMO "Glass-Steagall" has become political shorthand, a sort of litmus test to see if people are for or against big banks that socialize risk and privatize profits. But G-S was a real law that was rather limited in scope. If we fail to understand the detailed realities of the financial meltdown, we will fail to prevent the next one.

This is the "regulation is ineffective, let's get rid of it" argument. Yes, by the time of its repeal banks had found ways around Glass-Steagall, both legal and illegal. The conclusion should not be that we should get rid of GS, we should extend it to cover those holes. Banks finding new ways to extend their size and reach is a metastatic event.

I think the argument persists because it accelerated the shift towards a new banking paradigm, where regional banking was swallowed up by massive financial institutions.

There are plenty of examples where the ability to diversify has strengthened many institutions. But there has also been some very negative affects. If you are too small to be big and too big to get government loan guarantees, or outside of a major metro, bank financing isn't really an option anymore.

We had a few smaller manufacturing businesses in my area that folded up not due to foreign competition, but from being starved of capital. The banks they depended on got swallowed up, and the folks in the banks that understood their business were laid off. The dude in NYC or Boston who made loan decisions had no clue.

Goldman became a bank holding company so that they could access a fed emergency lending facility. Without that lending facility, they probably would have collapsed. They didn't hesitate to organize their new bank in a way that was profitable, but they didn't diversify to survive, they begged for a different legal classification so that they could get a big loan.

AIG collapsed because instead of a boring insurance company, it was a boring insurance company with a bunch of people trading crazy financial derivatives. Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.

> Under Glass-Steagall, the insurance business wouldn't have been exposed to those derivatives.

Glass-Steagall was a law that regulated banks, i.e. financial institutions that accepted deposits. AIG would never have been covered by Glass-Steagall.

This is one reason I find the topic annoying: people ascribe all sorts of effects to Glass-Steagall that it did not actually do.

I know little about this topic. Can you please help me understand. Wikipedia says the act applies to banks and securities, https://en.m.wikipedia.org/wiki/Glass%E2%80%93Steagall_Legis...

I thought AIG provided securities. I'm sure I'm missing something obvious as it's not something I know anything about

Under federal law a bank is a financial institution that accepts deposits from consumers and businesses. If a financial institution is not accepting and holding deposits, it's not a bank. (This is greatly simplified but it's a key differentiator.)

Laws are targeted toward different types of financial institutions. Glass-Steagall was a law that applied to banks, and prevented them from selling securities.

But if a financial institution wasn't a bank, then Glass-Steagall did not apply to them. AIG did not hold deposits so it wasn't a bank. So no G-S.

Edit: to help connect the dots--what I'm referring to above are technically called "commercial banks."

https://en.wikipedia.org/wiki/Commercial_bank

From the G-S page: "The term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations within commercial banks and securities firms."

In general, different kinds of financial institutions are regulated by different regulatory agencies. This is as good a place to start as any:

https://en.wikipedia.org/wiki/Financial_regulation

Citations for either of these claims?

This sources seems to indicate that goldman's use of the discount window was absolutely minimal:

http://www.bloomberg.com/news/articles/2011-03-31/goldman-bo...

re: AIG, insurance companies were never regulated by Glass-Steagall

Back then, you could shop for your regulator. Often companies shopped for the most lax regulator. AIG purchased a tiny credit union and then got themselves to be regulated by the "Office of Thrift Supervision": https://en.wikipedia.org/wiki/Office_of_Thrift_Supervision The wikipedia article has details on the other organizations who did this.

Should AIG have been regulated by a tiny 30-person regulator? You judge, here is AIG's credit presentation: http://www.aig.com/Chartis/internet/US/en/FinalConf_revised_... AIG had a 1/2 Trillion USD one-way unhedged credit default swap exposure, amongst other exposures.

Does this have anything to do with Glass-Steagall?

Goldman converted to a bank holding company for TARP.

https://en.wikipedia.org/wiki/Troubled_Asset_Relief_Program#...

I'm think I'm wrong about AIG and don't feel like chasing it.

How could you conclude that given that many of the companies on that list are not bank holding companies?

TARP eligibility had nothing to do with being a bank holding company.

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