Levitin Explains What was Right with Glass-Steagall

What to do to correct the banking mess?  One of the first things you almost always here is "bring back Glass-Steagall," that bedrock of bankstructure which, from 1933 uintil 1939, kept commercial and investment banking each in its own sandbox.

I've been a skeptic.  True, repeal of Glass Steagall was a major victory for banker power. Yet it has never been evident to me that breakdown the commercial/invstment wall had much to do with the current crisis.  If breaking the wall did not create the crisis then reconsructing the wall--no matter how much banks hate it--might not be the solution.  The enemy of my enemy is not necessarily my friend.

Adam Levitin, who just keeps getting better and better on mortgage/banking issues, weights in with a really good reason to regret the demise of Glass Steagall.  It's part of a longish post that touches on several issues (worth reading in its entirety).  But here is the Glass Steagall point:

The politics of regulation is where Congress really got it wrong with Dodd-Frank. The fundamental assumption underlying Dodd-Frank is that the financial crisis's root problems stemmed from a market that had out run regulation and that the fix was to be found in adding or subtracting some regulations.  In other words, Dodd-Frank diagnosed the financial crisis as a regulatory problem. And there were certainly regulatory failures involved in the crisis.


But the real problem wasn't the regulations or financial economics, but the political economy of regulation.  Put in lay terms, the problem was political not regulatory or financial. In most instances, federal regulators had the power pre-Dodd-Frank to have cracked down on many of the practices that led to the financial crisis, in both the mortgage market and the derivatives market. They simply failed to exercise those powers. What's more, Congress and particularly the regulatory agencies themselves engaged in significant deregulation. .

The fundamental problem in financial regulation is that bank regulators and large parts of both political parties in Congress have been effectively "captured" by the financial services industry....


Dodd-Frank didn't fix the dysfunctional political economy of financial regulation. And even if the Volcker Rule had been adopted in full measure (rather than gutted by Scott Brown), it wouldn't have made any difference. The last financial regulatory measure that really addressed the political economy problem was the Glass-Steagal Act of 1933.


No one every conceives of the 1933 Glass-Steagal Act as a political economy move, but by splitting the investment banks from the commercial banks, it divided the financial services industry, which meant (1) that each segment had much less weight to throw around, and (2) they could be played against each other.  That was the story with the passage of the Trust Indenture Act of 1939 (William O. Douglas got the commercial banks to support the legislation to screw the investment banks out of the indenture trustee business), and the story of a lot of turf war litigation between commercial banks, investment banks, and insurance companies. All of that ended with the Gramm-Leach-Bliley Act of 1999, which created a financial services lobbying Vultron, much more powerful than the sum of its parts. In retrospect, the political economy effect might have been the most important aspect of Gramm-Leach-Bliley. The Volcker Rule wouldn't undo this political economy effect.


So we're still in a situation in which the fate of financial regulation is decided not on its merits, but by political clout....

"Divide and conquer."  Powers of the weak. Regulation a la Sun Tzu.  Why didn't I think of that?   

No Joke: More on Polish Cooking

More evidence that Polish food is not a Polish joke: Raraka. Cut potato thin on your mandolin. Salt it down to leach out the moisture. Skillet-fry it into a pizza-style pancake (maybe add some ground pepper). Top it with lumps of (a) salmon roe (or, hey, beluga); (b) sour cream; and ( c) chopped onion. Wrap little bits of the goodies into slices of pancake. Again, yum.

Inspiration: the Restauracja Szara on the Old Town Square in Cracow. Mushroom soup was good, too, if a bit salty. But then, the mushroom soup is good almost every place here, and they say it isn't even the season.

Cooking fact: they say that the Poles got cabbage from the Italians in the 16th Century (same time they go Leonardo's Lady with an Ermine), and that the cabbage improved the quality of Polish cuisine,. Query, what must Polish cuisine been like before cabbage? Is this a rework of the old joke about the politician who went from Palookaville to Washington and raised the intelligence level of both places?

Ecclesiastes 12:12

Packing up to leave my office at last: the library downstairs keeps a “giveaway cart” where people can dump their unwanted books as strays seeking adoption on their last stop before the pound. Lately I’ve been culling my office to see what I keep and what goes to the cart. It’s a draining exercise. Don’t listen to what Mrs. B tells you, I am really not a pack rat—I’m sure in my life time I have thrown away 2-3 times as many books as I now own. But this kind of exercise is like ripping off the husks of former selves.

Some of these show their age. Perhaps the one I've owned longest is an old Bantam Paperback of The Count of Monte Cristo. The inside cover indicates I bought it in Washington Courthouse, Ohio, in 1957. I remember reading it while tending a coal furnace when my kids were babies in the 1960s (I don’t think I realized it was abridged). And here’s an ancient copy of of Bertram D. Wolfe’s Three Who Made a Revolution, just about the first serious grownup book I ever read I (hey, I was a late starter, okay?) with a printing date of 1959.

Moving forward in time, here’s a paperback of Perry Miller’s collection, The Legal Mind in America (1962). I see that I bought it in February, 1963, which would have been just months before I began law school: I wonder, did I think it would help? From law school itself, I keep my old copy of Casner and Leach on Real Property, the most instructive casebook I ever went to school to. From law school also, here’s the two volume mimeo (sic) of Hart and Sachs, The Legal Process, which circulated in Samizdat for a generation before somebody got around to publishing it. Oh, and here is the three-volume set of Corpus Juris Secundum on Corporations: my first law school prize (we used it as a booster chair to get my daughter up to the dinner table).

And at last, a milestone: a four-volume set of Kent’s Commentaries, (9^th ed., 1858), given me by my Aunt Selma when I passed the bar in 1968 (she was a legal secretary back before smart girls went to law school). I suspect I have never opened it, but it sure does look pretty.

From the beginning of my own teaching career, here’s Kessler & Gilmore Contracts (1970), one of the classics of law-teaching, together with Gilmore’s inimitable teaching notes, which passed hand to hand among professors in the old days like some underground Henry Miller. More recently, here’s a lot of stuff that (aside from its value as compost) is entirely worthless: bankruptcy statutes of 1999, 2000, 2001, 2002, etc., previous editions of lawyer desk books, some written (gasp!) by me.

There are other items not so neatly dateable. Here’s a whole run of books that had certain cachet in their time, now mostly forgotten: Philip Rieff, The Triumph of the Therapeutic; Ed Banfield, The Moral Basis of a Backward Society; Leon Festinger et al., When Prophecy Fails; J. Glenn Gray, The Warriors--but just where should I rank Claude Lévi-Strauss, Tristes Tropiques? (together with Lévi-Strauss, I do find a Fontana Modern Masters paperback, purporting to explain just what in hell he was talking about).

And there are any number of books I won’t throw away but I suspect I may never read, starting with Thomas Mann, Doctor Faustus.

There are scattered fragments of various languages I have never learned very well. Ignoring the audio tapes, here’s a student edition of Pinocchio, which helped me idle away a day when I got stuck in a snowstorm in South Carolina (long story)—complete with student questions: “chi viene in aiuto di Pinocchio?” Here’s a nice antique edition of Balzac’s Le Lys Dans La Vallée, given me a thousand years by a student for my presiding over her wedding; the marriage did not last, but the book is still here (indeed, there seems to be a lot of Balzac; I did not realize I was such a fan). And looky looky: an Oxford classical edition of Plato’s Republic, in Greek (but why do they insist on putting the titles in Latin?)—I guess was full of optimism about my retirement agenda.

And there’s more, folks: there seems to be an array of poets I had quite forgotten I still owned (which probably tells you something): Edwin Muir (once a great favorite); Robert Lowell, James Merrill. And here’s a tattered old edition of Jessica Mitford, Hons and Rebels (but I bought it second hand just last year); and here’s Iona and Peter Opie’s Lore and Language of School Children, which I discovered many years ago(but this is a new copy, also purchased just last year).

I learn that I must be a sucker for dictionaries. Here is a Dictionary of Espionage. Here is Mrs. Byrne’s Dictionary of Unusual, Obscure and Preposterous Words (knibber: a male deer when the antlers first appear). Oh, and here is the three volume set of the Palgrave Dictionary of Money and Finance which I bought for $100 from a colleague when, I suspect, he needed the money. As a pendant, here is Hawkshop:The Fabulous Story of the “Emperor of Pawnbroking.”

Finance and Pawnbroking come from a more recent phase in my life, when I got interested in learning (and teaching) the basics of finance to law students. Here are some of the MBA textbooks I cribbed from so shamelessly, before writing my own. Here’s Forgotten Calculus and Forgotten Algebra, which saved my bacon more than once. Here’s a (once) pretty good one about accounting fiddles, made obsolete by the exponential growth of financial fraud in the decade of Enron.

There are tough judgment calls in this game. I suppose I do need my two-volume Pollock and Maitland, History of English Law, and Dicey on the Constitution, but do I really need volumes of political criticism written by a couple of Yale professors 15 or 20 years ago, perhaps long forgotten already even by the authors? And here is de Tocqueville, The Old Regime and the French Revolution; I have a French edition at home; do I trust my French enough to dispense with the English? And do I keep my edition of the script of Repo Man—for use, of course, in the teaching of commercial law?

And so it goes. I have 15 boxes of the stuff so far, with maybe another ten still to go (but I swear, I am not a pack rat). And this says nothing about the stuff I discarded. Which reminds me,—that library remainder cart: a month ago, I found my old copy of Charles A. Reich’s The Greening of America. I remember the day when everybody in the library seemed to have his (sic) own copy. Last month I put mine on the remainder cart. Tonight, it's still there.

Remembering Bill Bradley

Roasting the Easter lamb on Sunday while CNN droned in the background, I heard former Congressman Jim Leach interviewing former Senator Bill Bradley. I admit I have always felt a bit ambivalent about Bradley. I know he’s a serious guy but he was an awful presidential candidate—he seemed to expect the presidency as a bestowal, one of the worst cases of pompous presumption I’d seen since Arthur Goldberg ran for governor of New York.

But like I say, I concede he is a serious guy. And he said three things that stick in my mind.

One: he said—proudly—that his father, the small-town banker, foreclosed on no mortgages during the Great Depression.

Two: Leach questioned him about Lyndon Johnson and Tom Delay. What, exactly did Delay do that he didn’t learn from Johnson? Well, said Bradley, it wasn’t illegal when Johnson did it.

But the third point was perhaps the most interesting. Bradley recalled the palmy days of the 50s and 60s when people got a raise every year. The modern day equivalent, he remarked, is the home equity loan…

More on Caselaw (aka So Much for Professor Kingsfield)

Re my rhapsody on caselaw--my friend Noel weighs in on Casner & Leach :

A. James Casner was my Property I professor my first year of law school. It was one of the highlights of my law school experience. His erudition and precision were always impressive, sometimes breathtaking, and I have long thought of myself as reasonably precise and attentive to detail. Bart Leach had a very different reputation – relatively rough and tumble although none the less concerned with the life lessons to be learned from property law. A very impressive duo among a very impressive faculty.

I went to law school in the provinces & so far as I know, never laid eyes on either Casner or Leach. They both had street reps that conform to Noel's memory. Leach in particular was famous as something of an original--he wrote doggerel verse which he would perform while accompanying himself on the concertina (accordian?).

In Kentucky where I went to school, we had a case called Bedinger v. Greybill's Administrator. Decendent left money "to H for life, remainder to his children." Apparently H had no children, but he did have a W--so he adopted the W. Unencumbered by current research, my memory is that the Kentucky court sided with W. I think it is the first time I ever heard the phrase "laughing heir"--apparently the other claimants were distant cousins who had essentially nothing to do with the decedent.

Anyway, I heard that Leach had written a song about it, so I wrote him a letter asking for a copy. The next mail brings a full set of lyrics, to the tune of "On Top of Old Smoky:"

Oh father, dear father, let go of my blouse,
Since I am your daughter, I can't be your spouse.

...and so forth, for eight or ten verses (they are probably in a Tupperware bin around here somewhere). Apparently it didn't trouble him at all to share this stuff with a total stranger, and with a Kentucky postmark at that.

Fn.: My friend John tells me that "aggravated incest" is a crime in Kansas. What is that about. No, don't tell me...

The Law School Casebook as Work of Art (aka Remembering Casner & Leach)

A lot of law students profess to hate law school. Maybe they mean it; maybe they just think it is the thing to say. At any rate, I was not one. I thought law school was one of the most entertaining things I ever did in my life.

Partly, this was just personal: I was 28, in a career that seemed to be going nowhere, and this was my ticket out. But it was not just that. As my friend Ellen said: every day is a little story.

Exactly. One thing Ellen and I had in common was that we had worked for daily newspapers. So perhaps we were attuned to the possibilities of story. Anyway, I found the reading of law school cases to be high entertainment.

I remembered law school, and Ellen, and little stories, the other day as I was throwing out some old papers and I found this, which I had laboriously tapped out on my old (even then!) Underwood in the fall of ’63. It comes from the first edition of Casner and Leach Property, one of the old war-horses of the law school classroom. The piece is called “Homily on Minimum Pain and Maximum Profit in Reading Cases.” C&L (it reads like Leach) are discussing the case of one Cobb who had sued a railroad. They make my point better than I could make it myself:

The flavor of the case—the dogged persistence of the litigious Cobb, the railroad trying to wear him down, the red-faced Supreme Court having to eat its first opinion, reversing itself on the grounds of ‘excessive damages,’ and having another jury (of Cobb’s neighbors) slap the case right back at them at substantially the same figure. … The winning party and his lawyer will regale their friends with details of the triumph for years; the losers will say as little about it as possible. If you sense the humanity and drama of the conflict, while still focusing principal attention on the matters of legal significance, you will enjoy it more and, for that reason, get more out of it. … Each case should be to you an item of vicarious experience. If you could only live long enough, you would find the apprentice system the best method of learning law. … Next best is vicarious experience—and this is what the reading of cases offers you.

A. James Casner and W. Barton Leach, Property (1951)

I admit, I had embarked on the law school path with a good deal of trepidation: if this doesn’t work, what will? I can still feel the sense of recognition and relief that overtook me when I read—and grasped the point of—this passage.

To cleanse my mind while hacking through the jungle of case law, in those days I was always reading John Dos Passos’ USA trilogy about America in the decade after World War I. For all kinds of reasons, I think USA may truly be the great American novel (just a few days ago, guest-blogging for CreditSlips, I excerpted a Dos Passos bit about Henry Ford). But—as I guess I dimly recognized even back then—there is a more than trivial overlap between Dos Passos (on the one hand) and Casner & Leach. Dos Passos more or less invented the “kaleidoscope” or “jump-cut” novel—half a dozen interweaving stories, interspersed with “newsreels,” and vignettes of more-or-less-accurate history, to paint a full-bodied three-dimensional picture of the world. Note to self, write an essay on the casebook as work of art. Or maybe this is it.

Fn.: Apparently C&L is still in print, but Cobb and the railroad have gone on to the great casebook in the sky. For the next edition, the editors might want to rethink that decision.