Glass Steagall And The Financial Crisis - 1565 Words

Glass-Steagall and the Financial Crisis In May 2012 JP Morgan Chase and Co. stated to the public a 2 billion dollar trading loss, although evidence shows that the loss was far greater. A trader out of the London branch of JP Morgan and Chase Co., Bruno Iksil, dubbed â€Å"London Whale,† had been accruing a huge bet on U.S. corporate bonds based on a flawed derivative or algorithm. He was so confident in his bet that he sold his Credit Default Swaps (CDS), based on his hunch, which is similar to insurance on your bonds if they default. Rival traders bought them, betting against Iksil. The loss was gigantic. Similarly, prior to the great depression, banks were making large unsafe bets which caused the stock market to eventually crash causing†¦show more content†¦The Glass-Steagall Act was specifically fabricated to prevent the type of close interaction between commercial and investment banks that preceded that imminent crash during the late 1920’s. Commercial b anks are banks that accept deposits, secure loans and are insured by the Federal Deposit Insurance Cooperation (FDIC). Investment banks, on the other hand, make riskier speculative bets. They invest in stocks, bonds and engage in a variety of speculative deals with their money. With investment and commercial banks being in such close quarters, the deposits in the commercial banks can potentially be used for speculative activities because of the investment banks’ influence. Glass-Steagall provided separation with three main goals: (1) prohibit commercial banks from owning securities brokerage firms (2) establish a temporary insurance program under the federal reserve (3) prohibit paying interest on commercial checking accounts and put maximum interest rate values on savings accounts. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act came into effect by identifying large financial firms that are intertwined with the rest of the financial systems and in creasing regulations on them to try and prevent failure and possible bailouts. Roy C. Smith, author of The Dilemma of bailouts, states, â€Å"The legislative process soon became