Over on Breakingviews, Hugo Dixon is taking issue with those who believe bringing back some version of the Glass-Steagall Act would prevent the financial collapse we’re now fighting through every day.
Why would anybody run a casino and a utility under the same roof? That is the supposedly killer argument of those who want to bring back some variation of the Glass-Steagall Act.
Dixon’s basic argument is that you can’t just say, “Well, we let banks engage in investment-bank-like activity and they wrecked themselves in the casino”. The truth is, the guys with the big trading losses weren’t really the traditional banks, they were the Bears, the Lehmans and the AIGs.
The traditional banks destroyed themselves primarily in the course of their regular business, lending!
True, these “universal” banks lost money in the casino. But they also lost pots of cash through straightforward bad lending. What’s more, there are plenty of other simple utility-like financial institutions that got into trouble: Fannie Mae, Freddie Mac, the UK’s Northern Rock, Countrywide, Washington Mutual and Wachovia.
Since Clinton repealed Glass-Steagall in 1999, there have been scores of bank/broker combinations, mergers and spin-offs but when all was said and done, they must have laid off all the risk managers, because clearly, that’s what’s been missing.
If you don’t have strong risk management, or you do but you decide to ignore the internal naysayers in pursuit of hedge fund-like returns, then you end up like Citigroup, Glass-Steagall or not.