Was Glass-Steagall Termination the Key to World’s 2008 International Financial Collapse?

September 25th, 2013 | by Morris Beschloss | Comments

With the fifth anniversary of the September 2008 global financial recession stimulating the debate behind its origin, absent from the media analyses is the prime culprit, “The Glass-Steagall” act termination, which dated back to the depression era’s initiative to rein in U.S. major banks’ expansion into all aspects of domestic, as well as global financial transactions.

Stage managed by former Texas Senator Phil Gramm (R-Tex), and heavily supported by relevant bank-supported lobbies, plus support from the Clinton Administration’s second term, this 1999 removal of restraints from banks’ strict, basic involvements in the business of lending, safe-keeping, and prudent investment initiatives of their clients’ finances, came to an abrupt end.

Remarkably, in the current aftermath of fault-finding, this harsh restraint lifting has been absent from such retrospective analysis. Instead, the focus seems to be centered on the bankruptcy of Lehman Brothers, Inc., a highly respected and venerable investment firm that had made heavy bets on mortgage-backed derivative securities, that had been repackaged, resold, and distributed to banking institutions worldwide. When a last minute sale of Lehman Brothers’ assets to London’s Barclay Bank failed to materialize, the gates of “financial hell” were opened with the realization that literally trillions of dollars worth of these derivatives, still on the balance sheets of thousands of global banks, had no value.

The aftermath of this still highly discussed fiasco not only led to bank failures, but a universal fear of financial instability; since most of the world’s leading banks had participated in what many recall as the world’s greatest Ponzi scheme ever. On the other hand, such Wall Street investment institutional stalwarts as Goldman Sachs, (now an illustrious member of the Dow Jones 30 top firms), remained unscathed and have risen to the top in the banking, as well as the investment community. The involvement of major bank pacesetters, such as Citigroup, found themselves having to reorganize from the impact of heavy losses, from which they are only now extricating themselves.

An interesting sidelight of this calamity are the five major banking institutions of Canada, which are now heralded among the world’s top 25 banking institutions. This was the result of their disdain for the “Russian roulette” of sliced and diced mortgaged-based securities— and a general approach of financial conservatism, for which they had been previously criticized.

Unfortunately, the global financial community as a whole has not shown interest in closing the “barn door after the horse’s escape,” due to the involvement in insurance, travel, high-risk investments in major corporations, etc, from which they would be barred if a new Glass-Steagall-like act were to be re-instituted.

But when such latter day incidents as the MF Global use of private account funds for risky European bond investments, or billions lost by a London trader of J. P. Morgan Chase, the warning signals of a 2008 replay are still there.

The note of caution imparted to tens of millions of American bank account holders is to gain a reassurance that their banking connections are able to secure their holdings up to and beyond the Federal Deposit Insurance Corporation’s current maximum.

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