> This can really be traced back to the repeal of Glass Steagal
Can it? Because none of the banks who initially failed would have been firewalled by Glass-Steagal. Bear Stearns, Lehman Brothers, AIG...none of these were deposit-taking institutions.
The problem erupted from corn-fed mortgages, something Glass-Steagall wouldn't have saved us from. This isn't just my opinion. Most economists see Gramm-Leach-Bliley (the Act that repealed Glass-Steagall) as having had a minor effect, at most, on the 2008 financial crisis [1].
One of the driving factors behind the bad mortgages that were issued pre-2008 was the lack of ongoing oversight and poor risk assessment with regards to those mortgages, driven primarily by securitization.
Your linked article itself tells that Geithner and his ilk admit to securitization being at the heart of the crisis, saying that "other factors were more important in causing the 2008 crisis, such as bad mortgage underwriting, poor work by the ratings agencies and a securitization market gone crazy."
But strangely, they write this as a defense of Glass-Steagall's repeal, as if those factors came from nowhere. In fact, those factors were the specific result of the efforts by the largest banks to sell as many of their banking products as possible--and offload as much of their risk as possible--through their investment banking and securities divisions. Many suspect that some banks took advantage of the inherent opacity of mortgage-backed-securities to knowingly hide bad assets (and possibly even fraudulent, non-existant assets) and sell them to unsuspecting securities buyers at fraudulently inflated prices.
Would securitization have become such a problem if the repeal of Glass Steagall hadn't effectively pushed all of the money center banks to acquire or build their own investment banks? Would it have been so easy for bad actors to have committed fraud in this area if it wasn't so easy to keep everything "in house"?
The main reason that Glass-Steagal was enacted in 1933 was because the Crash of 1929 was in-part caused by Banks' selling over-hyped, over-priced securities to ordinary, unsophisticated banking consumers. OK, so it happened in the reverse this time. That doesn't mean that the crisis wouldn't have been prevented by the same firewall, had it existed, from 2003-2006.
Yes, none of the institutions that failed initially were deposit taking. But maybe that was because this time around they were the outsiders and the rubes. Who had a better sense of what kind of risk mortgage-backed-securities actually represented, than the people who were originating them?
And if we look at the UK, all the banks that failed (RBS, HBOS, Northern Rock) failed because of their bad loans or over-reliance on short-term funding, not because of investment banking activities.
The problem erupted because of a gigantic grey market in CDOs and other esoteric "financial products" which mainly appear to have been designed primarily to siphon money from their customers.
Glass-Steagal never envisioned the Rube Goldberg tower of cards this market created, with many transactions being so complex that they resist analysis.
AIG wasn't a bad, but an insurance company that failed because it took on too much risk. If, for example, AIG was that only one to fail I'm not sure it would have taken down the economy with it. I see them as someone that got embroiled in the "sub-prime mortgage crisis", but not necessarily a perpetrator (unless I'm missing something).
AIG wasn't a bank but it was insuring a lot of the bank's assets, including securitized mortgages. By taking that risk off the banks' balance sheets, they let the banks take on more risk than they otherwise could have. So maybe AIG wasn't a perpetrator, but it was an enabler.
The mortgages themselves weren't the problem - the problem was the way they were allowed to be bundled into mortgage backed securities, which created a firehose of investment money piling in from Wall Street to the mortgage market, which created bad incentives to issue more low quality mortgages (NINJA - no income, no job, no assets).
Can it? Because none of the banks who initially failed would have been firewalled by Glass-Steagal. Bear Stearns, Lehman Brothers, AIG...none of these were deposit-taking institutions.
The problem erupted from corn-fed mortgages, something Glass-Steagall wouldn't have saved us from. This isn't just my opinion. Most economists see Gramm-Leach-Bliley (the Act that repealed Glass-Steagall) as having had a minor effect, at most, on the 2008 financial crisis [1].
[1] http://www.npr.org/sections/thetwo-way/2015/10/14/448685233/...