the tindog coffeehouse

The Consumerist has posted a great explanation of how the repeal of the Glass-Steagall Act in 1999 led to the subprime mortgage disaster we see today.

The act, passed in 1933 in direct response to the factors that led to the Great Depression, provided several reforms, including establishing the FDIC and authorizing the Fed to regulate interest rates in savings accounts. The act also prohibited commercial banks from merging with investment banks. (Wikipedia article here.)

In 1999 the Gramm-Leach-Bliley Act was passed, which repealed the prohibition on commercial and investment bank mergers. As a result (per The Consumerist):

Now, on the one side they could sell mortgages to homeowners, and then invent fancy investment structures which they sold on Wall Street. Because they were “covered” on both ends, banks felt free to sell increasingly dicey mortgages, just so long as another sucker was picking up the garbage. This sucker was picking it up because he had a plan to repackage it and sell it to another sucker, and so on. Eventually we end up with no-doc stated income interest-only option-ARM no money down mortgages being repackaged as “sound investments” being sold as “stable assets” for city pension plans to park their money in.

Footnotes: As the comments in the Consumerist post point out, John McCain voted for the Gramm-Leach-Bliley Act in 1999, and one of the authors of the bill, Phil Gramm, is McCain’s chief economic adviser. And another commenter (quoting Bloomberg) pointed out that Barack Obama had said that Glass-Steagall should not be restored.