2016 Postmortem
In reply to the discussion: Why I DON'T support Bernie for President [View all]PatrickforO
(14,576 posts)From another thread, but true.
There is a thoroughly dishonest argument being proffered by those who wish to minimize the significance of Bernie Sanders' call to restore Glass-Steagall (who also happen to be the folks who are interested in defending the disastrous legislation signed into law by the spouse of their preferred candidate), that says, in effect, that Glass-Steagall wouldn't have helped anything in the 2008 financial collapse, because the problems originated in investment banks, not commercial banks.
The firewall between investment and commercial banking that was created by Glass-Steagall was a two-way barrier. Not only did it prevent commercial banks from undertaking investment banking activities, it also prevented investment banks from engaging in activities that were considered primarily the purview of commercial banks. One of the things that precluded was investment banks getting involved in mortgages. When Gramm-Leach-Bliley, which repealed Glass-Steagall, was enacted, investment banks were now free to buy up mortgages issued by commercial banks, bundle them together into a single investment vehicle, shares of which were then sold to investors. These were what we now call 'securitized mortgages,' or mortgage]backed securities. As these became more and more popular, investment banks began buying up mortgages like hotcakes from mortgage issuers (i.e., commercial banks). Before long, commercial banks realized they could make money simply by issuing mortgages they knew would be bought up by investment banks within a few years of being issued. There was no longer any incentive for a bank to perform adequate due diligence in issuing mortgages, because the bank knew it wasn't actually undertaking the risk of those mortgages. Combined with the quick and easy profit from selling these mortgages -- many of which should never have been issued -- this became a perverse incentive (which was further enabled and abetted by the rating agencies who gave these mortgage backed securities top ratings, despite the fact that many consisted of far too many bad loans).
These instruments were a MAJOR factor in the 2008 meltdown, and they wouldn't have existed had Glass-Steagall not been repealed.