If my memory of financial history is correct, G-S was enacted in response to wholesale bank failures during the depression. At the time, Congress thought that many of the bank failures could be attributed to bank activities in the stock market and other businesses not normally considered to be under the umbrella of banking operations. Among other changes, G-S stopped an institution from operating both banking and non-banking businesses, and introduced FDIC Insurance up to $2,500 of deposits.

Now Congress is ready to revoke G-S but keep FDIC insurance in force. The lawmakers are apparently paying no attention to why the law was enacted in the first place. As an example of Congressional meddling, back in 1986 we passed a tax law that significantly reduced the benefits of deductions for depreciation on buildings. It never occured to Congress that reducing a tax benefit also reduces the fair market value of real estate. As a result of the law change, S&L's saw the collateral (i.e.-real estate) decline below the values of many loans they had previously made. The resuly was a raft of bankruptcies that we, as taxpayers, had to make good. In retrospect, it seems apparent that much of the S&L crisis was caused by that ridiculous change in tax laws. Now we are doing it again- don't we ever learn?

After G-S repeal, let's say a bank goes into an insurance business that produces a huge loss. Assume further that the insurance operation loss takes out the bank. We, as taxpayers, would then have to bail out the FDIC when it makes good on the bank's deposits. Doesn't this ever end?

I hope someone can point out how I have analyzed this incorrectly.

-- mike (maples@voy.net), October 26, 1999

Answers

A bank going into the insurance business should hire actuaries (insurance mathematicians) to help them understand what their true risks are... They should also employ what is known as reinsurance to spread their risks to others. Therefore, if they operate in a prudent manner, they should not be forced to absorb undue risks. If on the other hand, they reinvest the premiums they receive in flaky investments, they may not have the money to pay legitimate, expected claims.

The question is, will they behave in a reasonable, businesslike manner? I would expect them to do so...

-- Mad Monk (madmonk@hawaiian.net), October 26, 1999.

Monk,

What if the bank goes under because of its insurance business? Who makes the depositors whole? The entire thrust of G-S was to make our citizens comfortable enough to put their money into banks by offering FDIC coverage. If this coverage is extended to a bank/insurance company, that is tantamount to having federal insurance against non- banking losses. Why should our my tax dollars go to a bailout of depositors who put their money into insurance companies? The next step is to insure investors against stock losses.

-- mike (maples@voy.net), October 27, 1999.

Glass Steagall didn't separate banking from insurance; it separated commercial banking from investment banking.

-- Jeff Donohue (jeff_donohue@hotmail.com), October 27, 1999.

At this point, Insurance companies are so far away from actuarial models in terms of assets that these are truly a joke. Ins co's are so deeply into investments (REIT's, etc) that they are paying claims from "earnings" in other sectors. Those other sectors are eventually going to make life interesting as they go illiquid or heavily decrease in value.

This has been coming for a while. What this IS is a bailout of the ins industry, across the board. Which has been in the offing for about 5 years.

Chuck

-- Chuck, a night driver (rienzoo@en.com), October 27, 1999.

I have to agree about the S&L crisis - the FSLIC was wiped out because of the devaluation of the properties they were holding, conflicting federal laws that restricted their ability to adapt to market changes, and a drop in the oil industry.

With the banks new ability to join up with the securities companies/insurance companies it will allow:

1. Larger companies to join forces, which will crush competition and raise prices; and

2. Raise the level of risk in each of the banking mergers. With the banks' basic premise is to gain more profits based on SPECULATION rather than increased customers.

The bull market is going to end sometime folks. Think about it. From the beginning of the stockmarket to Oct. 18, 1987, it was only at about 2,700 points or so. In the past TWELVE YEARS, we've gained ANOTHER 9,000 points. THAT IS NOT SUSTAINABLE GROWTH - moderation must be used in order to have stability.

Also think of it this way - layoffs and paycuts are "good news" for the stock market (profits increase). Do you actually want banks to endorse that kind of thinking. "More money for me even though someone else has to suffer for it?" What does that say about our society?! I say enough of the madness and greed - it's time to re- think our priorities!!!

If that's not enough to bother you, think of it this way: If we continue along this reckless path, I've got a feeling that we're going to have another bank crisis, just like the Asians did if we don't start looking long-term instead of making a quick buck.

-- Deb (vmcclell@columbus.rr.com), October 27, 1999.

Mike's point remains correct.

Today, however, your broker also has the SIPC which is supposed to function like the FDIC. The problem for it is that it is not backed by the full faith of the U.S. taxpayer.

G-S could go down hard, Goldman-Sachs is now public. Looks like 1929 to me.

-- nothere nothere (notherethere@hotmail.com), October 27, 1999.

SIPC (the Securities Investor Protection Corporation) does not function in a similar fashion as the FDIC -- and it never has. SIPC insurance insures the customers of insurd broker-dealers, up to $500,000 per account, against loss as a result of the trading system or on the fault of the broker-dealer (i.e., you can still lose your money when investing through an SIPC-insured firm, but you do so as a result of increases or decreases in the value of your securities, not as a result of computer glitches or similar problems).

Unlike the FDIC, the SIPC has no supervisory powers and does not assist failing firms. The corporation is funded by member assessments and portfolio income.

Now, whether or not the repeal of Glass Steagall is good policy is another question. However, one should understand the issues before making the simple statement "this is just like 1929." There is much half-educated opinion on this board.

-- Jeff Donohue (Jeff_Donohue@hotmail.com), November 07, 1999.