Treasury Secretary Geithner last week hinted that President Obama might effectively reinstate the Glass-Steagall Act's ban oncommercial banks getting mixed up with investment banks. Economist (and ex-Deutsche Bank and Prudential Securities strategist) Ed Yardeni, in his newsletter today, quotes Goldman Sachs ceo Lloyd Blankfein's response - "It’s hard to turn back the clock” -- then ridicules it:
"Why is it hard to turn back the clock to November 1999, when the act was gutted by a cabal of Wall Street’s power brokers and their supporters in Congress?
"The Depression-era act prohibited brokerage firms from having investment banking divisions. Following the elimination of this prohibition and restrictions on their leverage ratios in 2004 (engineered by Goldman's CEO Hank Paulson at the time), Wall Street's banks ran amuck.
"In 1999, AIG purchased a thrift in Delaware. As a result, the entire operation of AIG was regulated by the woefully understaffed Office of Thrift Supervision (OTS).
"Under a law passed in 1999, certain kinds of holding companies could choose the OTS as their regulator, provided they owned one or more thrifts. Because the OTS was viewed as more compliant than the Fed or the SEC, companies rushed to reclassify themselves as thrifts. AIG blew up in mid-September 2008 after making a wholesale rush into risky derivatives without adequate collateral.