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July 17, 2013

Remember Why Glass-Steagall Was Passed

It seemed like a good idea at the time. After making loans to borrowers who were unable or unwilling to repay them, one of the nation’s biggest banks came up with a solution: Take the loans, repackage them and sell them to customers and, in effect, bail out the bank from its money-losing positions. As for telling investors about the distressed state of the borrowers, well, why bother?

The head of J.P. Morgan, perhaps the most respected banker of his era, had already sounded the tocsin about the consequences of deteriorating credit standards. “A warning needs to be given against indiscriminate lending and indiscriminate borrowing,” he said.

Yes, this is a trick. The banker wasn’t Jamie Dimon, chief executive officer of what now is JPMorgan Chase & Co.; it was Thomas W. Lamont, speaking in 1927. And the bank selling securities in the bum loans wasn’t one of today’s too-big-to-fail behemoths, but National City Co., the predecessor of Citigroup Inc.

These anecdotes come from a report issued in 1934 by the Pecora Commission, which was charged with digging into the financial industry’s misdeeds in the run-up to the stock market crash of 1929. The commission’s hearings and findings provided a rationale for many of the laws adopted in the 1930s to regulate banking and the securities markets, including the Glass-Steagall Act, which forced banks to split their lending and securities businesses.”

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Read full Bloomberg article here

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