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Home > Blogs > Anthony Harrington > In case of greed, break glass… a reaction to President Clinton’s latest thoughts on the crash.

In case of greed, break glass… a reaction to President Clinton’s latest thoughts on the crash.

Finance Blogger: Anthony Harrington Anthony Harrington

Former US President Bill Clinton’s statement on ABC TV’s “This Week” program that he was wrong in listening to the advice of his advisers to the effect that derivatives did not need to be regulated (see Ian Fraser’s blog post on this) shows that the ex-president has at least an inkling that he had a role in the global crash.

However, the interview also shows that he still has some work to do coming to terms with just what his decision to throw out Glass–Steagall really meant—and how it was reached. The former president could do with looking up the transcript, safely held in the archives of the US Treasury, and available on the internet, of the actual signing of the Financial Modernization Bill, the one that repealed Glass–Steagall. President Clinton’s introductory remarks at the time have been rendered just a tad ironic by the crash. The date was November 12, 1999, and the President said:

“With this bill, the American financial system takes a major step forward towards the 21st century, one that will benefit American consumers, business, and the national economy for many years to come. This is the culmination of years of effort by many, many people, reflects the work of presidents, Treasury officials, members of Congress, those in the private sector, from both parties, and dedicated professionals, both inside and outside the government. With their help, I believe we have all found the right framework for America's future financial system.”

Er, not quite, Mr. President. So why did it look so obviously right, at the time, to “break the Glass” and allow banks who took depositors’ money to gamble that money in ever more rarified proprietary trading projects? Whatever those around him might have been thinking—which we imagine could probably be summarized in the immortal words of Abba as “Money, Money, Money” —what President Clinton was thinking of was preserving the vitality of the Community Reinvestment Act (CRA), among other things. Yes, we know that bit got forgotten by the world a day later. But at the time this mattered to Clinton. Undoing Glass–Steagall would, he said:

“… guarantee that our financial system will continue to meet the needs of underserved communities … something which has been largely done through the private sector in honouring the Community Reinvestment Act … I want to applaud the, literally, hundreds of dedicated community groups all around our country, that work so hard to make sure the CRA brings more hope and capital to hard-pressed areas.”

Reading this now, one struggles to see what the blazes the CRA had to do with Glass–Steagall. What is the man on about? Breaking Glass–Steagall was about unfettering the banks. How exactly this was supposed to trickle down to poorer communities is mystifying until you give it the correct backdrop, the sub-prime mortgage fiasco that underpins the crash. This was all about giving the likes of Goldman Sachs the freedom to write CDOs backed by selective tranches of sub-prime mortgage backed assets. The poor got homes for a week, then got bankrupted. The bankers had fun, then had to get bailed out, and we all got the crash. Nice one, Bill…

Further reading on Glass–Steagall and the banks

Tags: banking , Bill Clinton , financial crisis , Glass-Steagall Act , regulation , transparency , US
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