Corporate Governance

The "Benefits" of Repealing Glass Steagall

By J. Robert Brown

It's always nice to take a counterintuitive approach.  Doing so will often attract attention and may sometimes even be right.  With that in mind, we noticed the editorial by Charles Calomiris, a professor at the Columbia Business School, who contends that in fact, repealing Glass Steagall was, according to an editorial in the WSJ, a good thing.  According to his rational:

• Wasn't the ability for commercial and investment banks to merge (the result of the 1999 Gramm-Leach-Bliley Act, which repealed part of the 1933 Glass-Steagall Act) a major stabilizer to the financial system this past year? Indeed, it allowed Bear Stearns and Merrill Lynch to be acquired by J.P. Morgan Chase and Bank of America, and allowed Goldman Sachs and Morgan Stanley to convert to bank holding companies to help shore up their positions during the mid-September bear runs on their stocks.

The comment is accurate as far as it goes.  But isn't it like saying that we should build ships from Styrofoam so that when they sink, drowing passengers will have something to hold onto?  Repealing Glass-Steagall, as we have noted (The "Great Fall": The Consequences of Repealing the Glass-Steagall Act), spelled the death knell for independent investment banking firms, something that will ultimately harm US financial markets.  Moreover, in the interim, the repeal did nothing to help stabilize the industry during a period of financial turmoil, as the last few months have shown.  No matter how you spin it, the legislation repealing Glass Steagall was a mistake.    

Full post as published by The Race to the Bottom on October 28, 2008 (boomark / email).