Preview Newsletter
Lehman Jan 11
-
Bernie Sanders’s Claim That Glass-Steagall Banned Commercial Bank Loans To ‘Shadow Banks’
Jan 11, 2016 | The Washington Post
By Glenn Kessler
“Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits. Secretary Clinton is wrong. Shadow banks did gamble recklessly, but where did that money come from?"
Client Attorney Privileged/Attorney Work Product/At Request of Counsel
Comment - Glass-Steagall
Full Text of Stories Below
-
Bernie Sanders’s Claim That Glass-Steagall Banned Commercial Bank Loans To ‘Shadow Banks’
Jan 11, 2016 | The Washington Post
By Glenn Kessler
“Secretary Clinton says that Glass-Steagall would not have prevented the financial crisis because shadow banks like AIG and Lehman Brothers, not big commercial banks, were the real culprits. Secretary Clinton is wrong. Shadow banks did gamble recklessly, but where did that money come from? It came from the federally insured bank deposits of big commercial banks — something that would have been banned under the Glass-Steagall Act.”
...As for Sanders’s specific examples, he mentions Lehman Brothers — an aggressive investment banking firm — and AIG, an insurance company. Their failures were critical to the financial crisis, but neither example necessarily backs up Sanders’s version of history.
The 500-page report of the Financial Crisis Inquiry Commission (FCIC) — the official government-funded investigation of the crisis — said that Lehman relied primarily on non-bank sources of funding, such as money market funds: “Solvency and liquidity were essential and related. If money market funds, hedge funds, and investment banks believed Lehman’s assets were worth less than Lehman’s valuations, they would withdraw funds, demand more collateral, and curtail lending. That could force Lehman to sell its assets at resale prices, wiping out capital and liquidity virtually overnight.”
As for AIG, which required a $180 billion federal bailout, the commission said its “enormous sales of credit default swaps were made without putting up initial collateral, setting aside capital reserves, or hedging its exposure — a profound failure in corporate governance, particularly its risk-management practices.”
...Gunnels also noted reporting that J.P. Morgan Chase, a commercial bank, was the clearing bank for Lehman Brothers and advanced it billions of dollars in credit before it collapsed. (J.P. Morgan Clearing was the remains of Bear Stearns, which the bank acquired in 2008 under the government’s urging to forestall the crisis. J.P. Morgan demanded additional collateral security for clearing activities, putting pressure on Lehman.)
A 2015 report by two Yale University professors who are experts on shadow banking concluded that the “run on repo” was not because of traditional commercial banks but that it “predominantly driven by the flight of foreign financial institutions, domestic and offshore hedge funds, and other unregulated cash pools.”
...“Citi couldn’t have been like it was in 2008 without Gramm-Leach-Bliley.” Wallach said. “That is the best arrow in the Glass-Steagall revivalists’ quiver. Citibank deposits were attached to Citibank bad investments, and Citi was the Too-Big-To-Fail-iest of them all. Now that’s true enough and has to be behind what Bernie is saying for it to have any force — but of course Bear Stearns … and Lehman … and Merrill Lynch … and Morgan Stanley all managed to get enough funding to be systemically dangerous without the deposit bases, in fact in ways that would have been consistent with Glass-Steagall.”
Former Federal Reserve chairman Paul Volcker, in advocating for what became known as the Volcker rule that limited propriety trading by banks, suggested that eliminating the Glass-Steagall separation of commercial and investment banking allowed for a trading mentality to take hold at some banks.
Camden R. Fine, chief executive of the Independent Community Bankers of America, would not comment specifically on the accuracy of Sanders’s statement. But he noted that Lehman owned a federally insured industrial loan company (ILC) that held insured deposits and that “it was Lehman’s ILC that, in part, gave Lehman the funding liquidity that it needed to buy, package and originate the sub prime mortgages.”
“In my view, he is correct that the repeal of Glass Steagall gave both commercial banks and investment banks who owned ILCs much greater flexibility to deploy their capital and their deposit funds to whatever purposes they wished,” said Fine, who favors a restoration of Glass-Steagall but not Sanders’s specific proposals. “And those firms leveraged themselves many, many multiples of times more than they would have been allowed before the repeal of Glass-Steagall as a result.”
But other experts note that ILC was not what brought Lehman down, but rather it was a fragile balance sheet and bad investments in real estate, leading to demands for increased collateral by lenders...
For full story: https://www.washingtonpost.com/news/fact-checker/wp/2016/01/11/bernie-sanderss-claim-that-glass-steagall-banned-commercial-bank-loans-to-shadow-banks/
Client Attorney Privileged/Attorney Work Product/At Request of Counsel
Comment - Glass-Steagall
Full Text of Stories Below
Add recipients
Suggested