the audit

Sorkin’s Glass-Steagall straw man

Of course its repeal contributed, directly and indirectly, to the financial crisis
May 25, 2012

Here’s the headline for Andrew Ross Sorkin’s column on Tuesday about Glass-Steagall and the financial crisis:

Reinstating an Old Rule Is Not a Cure for Crisis

No kiddin’. Let’s see what else isn’t a “cure for crisis”:

— Breaking Up Too Big to Fail Banks Is Not a Cure for Crisis

— Stronger Capital Requirements Are Not a Cure for Crisis

— Quintupling Regulatory Budgets Is Not a Cure for Crisis

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— Hauling Executives to Jail Is Not a Cure for Crisis

There is no single “cure for crisis.” Period. And nobody anyone pays attention to is actually saying there is. Here’s the nut of Sorkin’s argument:

A meme around Glass-Steagall has been created, repeated so often that it has almost become conventional wisdom: the repeal of Glass-Steagall led to the financial crisis of 2008. And, the thinking goes, has become almost religious for some people, that if the law were reinstated, we would avoid the next crisis.

Just because something isn’t a cure doesn’t mean it isn’t a critical component of a plan to reduce the risk and ramifications of a future crisis. Sorkin himself admits this, as Audit contributing editor Felix Salmon writes:

A true classic of the straw-man form from Sorkin, here. He spends an entire column arguing against the people arguing for the return of Glass-Steagall. But then he concedes that the return of Glass-Steagall would actually be a good thing. He just doesn’t like people saying that it’s “the ultimate solution”. Except, he doesn’t name any such person. Grr.

There’s a broader lesson for journalists here. As NYU’s Jay Rosen says on Twitter: “‘Not a panacea’ is not an idea for a column.” It’s sloppy, simplistic thinking.

But this column is even more wrongheaded than that. Here’s Sorkin (emphasis mine):

But here’s the key: Glass-Steagall wouldn’t have prevented the last financial crisis. And it probably wouldn’t have prevented JPMorgan’s $2 billion-plus trading loss. The loss occurred on the commercial side of the bank, not at the investment bank.

That’s just not right. The whole purpose of Glass-Steagall, as David Dayen notes, was to prevent commercial banks from engaging in Wall Street-style speculation.

In other words, Glass-Steagall would have prevented JPMorgan from owning Chase, but it would have also prevented Chase from making those bets. We all know now that the bank wasn’t hedging its portfolio of loans. It was using its taxpayer-insured deposits to make $100 billion bets for profit—on synthetic credit-default-swap indexes no less.

Sorkin’s opinion matters more than most because he’s a power center at The New York Times who helps direct Wall Street coverage for the paper. When he “parrots the argument made by Wall Street’s elite,” in the words of Reuters’s Cate Long (as is not infrequent), it’s worth watching closely.

As Elizabeth Warren tried to explain to Sorkin, who tries and fails to make it seem like he’s caught her in a “gotcha” moment, Glass-Steagall is not the end-all be-all of crisis prevention. It’s an important piece of it, as well as a potent symbol of the ascendance of Wall Street’s political power and of the destruction of the New Deal regulatory apparatus that kept the financial system relatively safe for fifty years.

The demise of Glass-Steagall is part and parcel with the Commodity Futures Modernization Act, Gramm-Leach-Bliley, Riegle-Neal, the preemption doctrine, the revolving door, the Christopher Cox-style regulators, the death by a thousand cuts, and all the laws that were needed but never passed to update the regulatory system over the last three or four decades, like, say, changes to the tax code to eliminate the perverse tax incentives that favor loading up with debt over building equity.

Sorkin concedes that Glass-Steagall would have prevented or seriously mitigated Citigroup’s bubble activities that led to its quasi-nationalization. But Citi was not just a footnote to the financial crisis, as Sorkin implies.

Recall that Citigroup was brazenly created in 1998 in violation of the Glass-Steagall restrictions. Those were repealed within months with major help from Robert Rubin, who went on months later to make $15 million a year at Citigroup. The repeal was like waving the green flag at a Nascar race—part of a culture of empowerment that encouraged Wall Street to get bigger and riskier and to eventually trash the rest of the economy.

But don’t listen to me or Sorkin: Ask John Reed, Citi’s former CEO, and Dick Parsons, its former chairman.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.