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Sunday, April 13, 2008

Gramm Leach Bliley Act and the Mortage Crisis

Ok, I will have to admit that this is about to be somewhat unfair to congressional men and women that passed GLB, since I have the benefit of hindsight. Nonetheless, I think I can safely say I have been on record since the beginning in condemning the repeal of the Glass Steagall Act by GLB.

Given that Birmingham is such a big banking town, I think we in Jefferson County have a sometimes unrecognized unique perspective. First off let me say I love banks, they have been great for our area and many individuals in our community. However, one of the reasons I love banks as an investment vehicle is due to their semi-protected status. Banks are so vital to our economy that they have to be protected, sometimes (such as is now clearly evidenced by the current mortgage crisis) from their own bad decisions. As such, it is appropriate for them to have additional oversight to minimize the risk of a necessary public bailout. GLB goes against that grain and allows many additional opportunities for companies with cross sector exposure to get into trouble, even while following all the rules. This is true even if you want to ignore the obvious enhanced risk for acting on conflicts of interest.

Applied to our current mess, GLB's repeal of the restrictions on cross ownership in the financial services sector likely would not have prevented the current mortgage crisis, but it may have added a few more barriers and thus created more opportunity to catch bad decisions before they got completely out of hand.

Nonetheless, even if Glass Steagall wouldn't have prevented the current situation it should scare the heck out of everyone. By allowing consolidation, GLB has opened the door for single source disasters to shut down or significantly damage our entire financial system. Banks are simply too important to our economy to allow the additional unnecessary risks created by GLB.

If our congressional elects have their wits about them hopefully they will see the current liquidity crisis as a shot across the bow and move to place some meaningful segregation of financial services back into the system.

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