The repeal of Glass-Steagall created mega-merged “supermarket” firms that blended insurance, commercial banking, and investment banking services – companies like Citigroup. Lehman Brothers, whose collapse was a major event in the 2008 crisis, was not one of those companies. Therefore, the repeal of Glass-Steagall did not cause the financial crisis.
Now, it is true that Lehman Brothers was just an investment bank, and not one of those supermarket firms. But Lehman Brothers didn’t cause the financial crisis all by itself (more on that in a moment). Moreover, many of the giant mega-merged companies that were spawned by Glass-Steagall did in fact play huge roles in the financial crisis.
For instance, President Obama failed to mention that the company whose merger was only made legal post-factum by Bill Clinton’s repeal of Glass-Steagall – Citigroup – ultimately became the single largest recipient of federal bailout funds, taking in nearly half a trillion dollars in cash and guarantees, according to the Congressional Oversight Panel. Citigroup would almost certainly have gone under in 2008 without that massive $476 billion federal lifeline, and had Citi gone under, the impact would likely have dwarfed that of the collapse of Lehman Brothers.
In fact, as one former regulator noted to me, the fact that the most destrctive collapse in 2008 was from Lehman and not from a commercial bank – well, that is really a historical accident. Had the government elected to bail out Merrill Lynch and Lehman and let Citigroup and Bank of America fail, we’d be having an entirely different conversation today. That could easily have happened: the only thing that’s unique about Lehman Brothers is that then-CEO Dick Fuld and his minions were so loathed by Henry Paulson and the rest of the Wall Street crowd that his bank was kicked out of the lifeboat, when everyone else was ushered on board.