On April 2, 2014, as news broke of the death of Charles Keating, the most infamous savings and loan fraud, I posted an article entitled “Ten Lessons We Must Learn from Charles Keating.” (The April 2 date was ironic, because it was the 27th anniversary of the meeting at which the senators who would become known as the “Keating Five” began to seek to intimidate the savings and loan regulators on Keating’s behalf.)
I failed to explain perhaps the most important lesson we should have learned from Keating and Lincoln Savings. One of the subtle aspects of the savings and loan debacle that is often overlooked is that we ran a real world test of the importance of the provisions of the 1933 Banking Act known as the Glass-Steagall Act. Glass-Steagall prohibited “commercial” banks that received federal deposit insurance (created by the same 1933 banking act) from owning equity positions in nearly all financial assets (“investment banking”). With very limited exceptions, a commercial bank could not own real estate, companies, or stock in companies. (Banking regulators, hostile to Glass-Steagall despite its immense success, would later add many exceptions.) The ideas behind Glass-Steagall’s separation of “banking” from “commerce” always made eminent sense from conservative and progressive perspectives. Commercial banks received a federal subsidy through deposit insurance, so it made no sense for them to be allowed to compete against regular businesses that lacked that subsidy. It would distort markets to allow such a subsidy.
