Who's More to Blame: Wall Street or the Repealers of the Glass-Steagall Act?

Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is the final matchup for ultimate blame. With your vote, you will declare the worst offender!    

The case for Wall Street, by Morgan Housel
How ironic that as the masses are irked over the ever-growing role of government in our economy, many of the same people are furious with a group of political renegades who allowed free markets to reign.

But it's true: The repealers of the Glass-Steagall Act really, really screwed things up. Every time you think of the damage Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) continue to inflict on our economy, please, think of those lawmakers and clench your fists. 

They should not, however, be targeted as more to blame than Wall Street itself. Ambition, instability, and most importantly greed flourished on Wall Street well before Glass-Steagall was canned a decade ago. The act's enforcement would not have prevented a tremendous amount of our financial fiasco.

For example, the shadow banking system -- nonbank lenders like Bear Stearns, Lehman Brothers, and the former incarnations of Goldman Sachs (NYSE: GS  ) , and Morgan Stanley (NYSE: MS  ) -- sits at the epicenter of the financial meltdown, yet resides largely outside of Glass-Steagall's reach. Such joys as 30-to-1 leverage, unfettered risk taking, and the threat of "too big to fail" could -- and did -- occur with Glass-Steagall in place. Anyone remember Long-Term Capital Management?

Besides, plenty of commercial banks collapsed without the investment banking units Glass-Steagall would have prevented. Look no further than the failures and absurd lending practices of Washington Mutual, Wachovia, or IndyMac. Many of these commercial banks were also pioneers of lending practices that fueled the housing boom. The machine of lax underwriting by standalone commercial banks securitized by the shadow banking system could have operated efficiently and legally with Glass-Steagall in place.

The repeal of Glass-Steagall did indeed add fuel to a roaring fire, but the fire itself was the greed, immorality, and stupidity of Wall Street.

The case for the repealers of the Glass-Steagall act, by Christopher Barker
When Shamu the killer whale performs, decked out in nature's tuxedo, the only threat to audience members is the soaking from a choreographed splash.

In the regulated aquarium environment, Shamu's predatory instincts are tamed into submission. In the wild, however, orcas are fierce and crafty predators, feasting mercilessly upon cute little seals and beloved dolphins. As deplorable as their behavior might be to the fans of charismatic sea mammals, we don't condemn the wild orca for being a killer whale.

The culture of greed that pervades Wall Street presents a similar conundrum. In boom times, greed is cheered as the engine of capitalism, and even touted in the mantras of oracles like Berkshire-Hathaway's (NYSE: BRK-A  ) Warren Buffett. Now that we've gone bust once more, greed is again unfashionable, and regulatory controls like those set by Glass-Steagall after the prior depression are destined to return.

The sharks on Wall Street have committed outrageous acts, and they swim within a sea of shame, but the greater shame belongs to their would-be handlers. In removing the Glass-Steagall safety net, Congress betrayed its constituents, Alan Greenspan doomed his legacy, and lobbyists for companies like Citigroup and JPMorgan Chase (NYSE: JPM  ) earned their keep.

By setting banks and brokerages free from the regulated swimming pool, the repealers of Glass-Steagall knowingly unleashed a swarm of killer whales into the ocean of global finance. Thomas Jefferson considered banks "more dangerous than standing armies," while Andrew Jackson called them "a den of vipers and thieves," so the nature of the beast has been well known for centuries. For ignoring that danger and permitting systemic risk to multiply in the shadows -- most notably through the $1 quadrillion global market for derivatives -- the repealers of Glass-Steagall unmistakably carry the greatest burden of blame for this ongoing crisis.

Check out the Fool’s entire 2009 March Madness bracket here.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Fool contributor Christopher Barker thinks March Madness would be a great name for Bernanke's quantitative easing initiative. He does not own shares in the companies mentioned. Berkshire Hathaway is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. The Motley Fool's disclosure policy carries zero counterparty risk.


Read/Post Comments (11) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2009, at 12:46 PM, Judgejewdy wrote:

    The Glass-Steagal Act clearly would have prevented insurance companys from becoming Thrifts under the guise of insurance contracts. While deratives mean higher risk, it also meant higher return in an unregulated industry, where pension funds, had limited exposure due to known unregulated risks. Commercial banking forbid risking depositors money, on such investments such as deratives, which were only sold by the Wall Street Investment Banks such as Merrill, Goldman, Morgan. In 1999 when "this protective wall" was repealed it became a free-for-all of greed seeking higher return with niave investors who had no concept of risk and only interested in 15% returns. Too many victims fell into this "den of vipers". Wall Street knew what they were doing with this "unregulated" industry and took advantage of their victims. Ignorance is no excuse to put this burden on every taxpayer. The Glass-Steagal Act needs to be reinstated immediately. It was enacted for this very reason of calamity we all are now experiencing! Wall Street is nothing more than low-life opportunists that hang out in the den of vipers, waiting for their prey!

  • Report this Comment On April 06, 2009, at 3:06 PM, smscheibel wrote:

    you mean Sandy Weill and Robert Rubin?

  • Report this Comment On April 06, 2009, at 3:47 PM, BMFPitt wrote:

    If you give a gun to a monkey and the monkey shoots someone, you don't blame the monkey...

    But anyway, I still think Greenspan should have walked away with this thing.

  • Report this Comment On April 06, 2009, at 4:48 PM, cvillav wrote:

    Clearly the people who earned 50k a year and bought 1 million dollar homes.

  • Report this Comment On April 06, 2009, at 4:57 PM, Netteligent09 wrote:

    Our beloved President George W. Bush.

    Wizardary Alan Greenspan

    Republicans owned Congress.

    Their buddies at banks, lenders, investment firms, and Wall Streets.

    Now we are paying the price. The worst has yet to come.

  • Report this Comment On April 06, 2009, at 5:06 PM, Netteligent09 wrote:

    The biggest problem in our country is Accountability. Give credits to people who earn it. Nail the crooks for their greed and betrayal.

    Best of all, we all can learn from these lessons.

    Who were the Repealers of the Glass-Steagall Act?

  • Report this Comment On April 06, 2009, at 5:09 PM, Maraith wrote:

    And who bought off the Congress? Yeah...back to Wall Street. They couldn't wait to get out from under reasonable regulation.

  • Report this Comment On April 07, 2009, at 12:07 AM, chopchop0 wrote:

    Who signed the repeal of the GSA? Oh that's right, slick willie :)

  • Report this Comment On April 07, 2009, at 8:37 AM, SensibleProphet wrote:

    Relaxed regulations and plain old human nature bordering on greed.

    There used to be a single, lifetime exclusion on profit from a home investment. That was changed to apply every two years. The situation was created where one could deduct the expenses of an investment and then not have the profits taxed. This was not solely responsible for the problem but it did create an under-damped situation that overvalued homes then being treated like stocks with no capital gains.

    The banks did not help. Sub-prime mortgages enabled people, who should not have been speculating, to invest in a home--or homes--far larger than was fiscally responsible. The "stocks" decreased in value and there were no buyers so the investor was left with a loan on a stock that decreased in value.

  • Report this Comment On April 15, 2009, at 11:49 AM, Stryder58 wrote:

    I will quote a little from the book "MELTDOWN" that everyone should read to see how this all happend.

    In September 1999. the New York Times reported that Fannie Mae was easing credit requirements on the mortgages it bought from banks. The initiative, the Times said, would encourage banks " to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans." Fannie Mae had been" under increasing pressure from the CLINTON ADMINISTRATION to expand mortgage loans among low and moderate income people." One of the program's goals was to "increase the number of minority and low-income home owners who [tended] to have worse credit ratings than non-Hispanic whites." Even the Times understood the risk involved.

    "MELTDOWN" is a must read.

  • Report this Comment On October 19, 2009, at 8:20 PM, kgeechee wrote:

    What can we do about this situation? The people and institutions responsible for the financial meltdown of retirements remain in their jobs and their companies got away scot-free. How can we expect these people not to devise other products to feed their greed if they walked away undamaged and are back earning $200 mill a year and getting mega-bonuses.

    Nothing ever effects these people, not harsh words or dirty looks. None of them went to jail, not a person from Merrill, Smith Barney, BAC, etc. I worked in the industry, left because I considered the work dishonest and the people involved no more than thieves, richly rewarded thieves.

    It will occur again because we did nothing except moan and groan. They love that. We did nothing; no gusts. Bring back Capital Punishment for Greed!

    Hang 'Em High,

    Feed the Bones

    to the Buzzards,

    Send their families

    to the Gaol.

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