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January 14, 2011

Comments

Joe Parsons

Dick, you have neglected to mention the role of Gramm-Leach-Bliley in the whole mess. As much as many would love to blame Bill Clinton, it is unlikely that we would be where we are without GLB. This legislation, sponsored by Sen. Phil Gramm (R-TX) and signed by Pres. Clinton in 1999, effectively repealed the Glass Stagall Act of 1933. This opened the door to investment banks and insurance companies to create some of the, um...creative mortgage products they were willing to buy and securitize. The Perfect Storm was the combination of 100% financing, no income or asset documentation and loans made to non-creditworthy individuals. It was furthered by the creation of Credit Default Swaps (anyone heard of American International Group?) and Collateralized Debt Obligations, which were subsequently rated AAA by the rating agencies. Yes, the GSEs were pressured to loosen their underwriting standards, but I don't see their part as being as fundamental as that of the other players, acting in the wake of GLB.

Joe Parsons
Dublin, CA

Dick Lepre

Joe,

I do not belive that GLBA really changed the landscape that much. It simply allowed a commercial bank and an investment bank to both be under the umbrella of a bank holding company. The activities which each could do were no different after GLBA than they were before. Their operations and functions remained separate. The fact that FNMA and FHLMC were wiped out has nothing to do with GLBA. Securitization of bad mortgages would have been no different absent GLBA.

While this newsletter can easily have been read as "this is all the government's fault." That was not my real point. This was not all the fault of various givernment agencies but the media discourse has portrayed this as "banks gone wild" or a failure of capitalism. My point is that we need to understand that the mortgage mess was encouraged in part by government regulation and the fatal interaction of the Basel accords and government policy.

The effects of Glass Stagall were eroded long before GLBA. GLBA formailized that which was already happening.

I do not disagree that we may not be better off to find a way to sever investment banking from commercial banking and have less government guarantee for investment banking. To me, this is a complex and long-term proposition and not something we should act on at present but at a time when we have had more time to reflect on this.

One more point: I think tha a far, far bigger problem than CDS was allowing banks to create off-sheet SIVs to hold MBS. This was a consequence not of any US policy but of Basel.

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