Comments on: Shattered Glass

By: James Surowiecki

James Surowiecki — Thu, 05 Feb 2004 17:01:38 +0000

Europe has never had anything resembling Glass-Steagall. European banks have always been able to be “universal” banks, and in at least some places—like Germany—have not only done both commercial lending and investment banking, but have also taken equity stakes in companies. So unless you think European economies have been fundamentally corrupted by universal banking, I think the connections between the repeal of GS and the scandals of the late 1990s has to seem very dubious. I think universal banking is a bad idea as a matter of strategy, but the case that it should be illegal is very weak.

By: nnyhav

nnyhav — Thu, 05 Feb 2004 14:20:34 +0000

Glass-Steagall addressed the problems of commercial/investment banks being simultaneously principals and agents. The measure was adapted to prevent abuses/manipulation related to direct debt or equity stakes forming the banks’ capitalisation. US capital markets migrated to a system in which bank stakes were less direct (e.g., loan syndication) and in which companies could more directly access the securities markets, in part due to the piecemeal rollback of G-S (which certain foreign banks were grandfathered out of anyway—look where Gramm ended up). Globalisation of finance and of financial regulation certainly contributed to this particular legislation becoming increasingly anomalous. All this being well past, the abbreviation GS has passed on to the stock ticker of Goldman Sachs (where Rubin started out).

By: Barry

Barry — Thu, 05 Feb 2004 13:08:51 +0000

Why can’t we punish the people involved? When the auditors conduct phony audits, when the boards of directors are boards of crony accessories, when banks/investment firms aid and abet, the people involved should be punished, and punished harshly. If I embezzled tens of thousands of dollars, I’d be kissing the judge’s *ss to get only probation. I’d probably end up doing a few years in prison. Those who embezzle/aid&abet the embezzlement of 100’s of millions of dollars should serve decades. And I’ve heard the argument (advanced by these people) that harsh punishments will only make it harder to get directors, auditors and such. It’s probably true – I’d gladly take a job which involved free money for signing off on crimes with no personal liability, compared to having some personal liability.

By: Chirag Kasbekar

Chirag Kasbekar — Thu, 05 Feb 2004 07:33:35 +0000

Raghuram Rajan has some work on this: http://gsbwww.uchicago.edu/fac/raghuram.rajan/research/#bankrel (look under 'Universal banking') or http://gsbwww.uchicago.edu/fac/raghuram.rajan/research/glass3.pdf

By: Gavin

Gavin — Thu, 05 Feb 2004 07:30:17 +0000

It’s quite hard to tell whether the extent of corporate malfeasance in the latest boom is significantly greater than in previous booms – relative to GDP for example. But if it is, then the abolition of Glass-Steagall is a serious candidate for having made it worse. Although there are a number of other institutional changes that also matter – such as the way that auditing firms have been allowed to develop their consultancy businesses (as have law firms), and also the spread of Incentive Stock Option Plans. I’m not sure of the exact timing of the latter two events, although they certainly were important throughout the 1995-2000 stockmarket bubble period. Although all the reforms mentioned had no doubt laudable goals, they also had the unintended consequence of raising the returns to corporate malfeasance, or reducing the ability of shareholders to monitor malfeasance. I’m not sure that the spread of compliance officers etc will actually achieve very much when set against those incentives. Having said that, we shouldn’t be trying to replace caveat emptor with caveat vendor! If Adelphia’s shareholders let themselves be taken for a ride, well, it might be necessary pour encourager les autres. And if you’re worried about the Aunt Agatha’s who may have held Adelphia stock, then a simple solution might be the introduction of some kind of government guarantee of small shareholdings (similar to bank deposit insurance).

By: Maynard Handley

Maynard Handley — Thu, 05 Feb 2004 07:08:27 +0000

“The Economist says, more or less, don’t bring G-S back.” And this is supposed to be an argument in FAVOR of abandoning GS? This from the same Economist that will happily print article after article admitting that, yes, in this particular case (Enron, Parmalat, Boeing, whatever) corporate self-regulation didn’t work well, and, generally in the same edition, gives us editorials and other screeds on how interference in the behavior of corporations by anyone but the shareholders, be it activists, consumers, or government, is a horrible, terrible idea that will result in the destruction of capitalism and the poverty of us all.