How Millions of Americans Got Tricked Into Using a Bank That Isn't a Bank

Glass–Steagall legislation

The repeal of Glass-Steagall allowed banks

to own exchanges.  Before the repeal, banks

could not own an exchange.

Banks went to the New York Stock Exchange,

the Nasdaq and the American stock exchange

and asked them to trade mortgage-backed securities

so that the banks could thereby raise cash to

fund new mortgage lending.  The exchanges

refused, saying that mortgages were not 

investment-grade securities.

After the repeal, banks bought the Philadelphia

exchange and began packaging and trading

mortgage-backed securities.  As the fees and

Commissions on mortgages were very attractive

banks could now write mortgages, then, instead

of having to hold them to term, to raise money

to write new mortgages, they could sell them

to investors as securities that could be traded

on the exchange, the bank now owned.

This worked well until fierce competition broke  

out among the banks, each struggling to keep up

its own earnings, to ensure profitability strong

enough to fend off takeovers/corporate raiders.

To this effect, the barriers to writing new 

mortgages kept being lowered by each bank 

to allow more mortgages to be written, to 

keep pace with their competitors, setting off 

a "race-to-the-bottom". 

Soon, as you'd expect, fraudsters came in to take

advantage of these easy loan practices, and they

took mortgages on various fraudulent properties.

When people trading mortgage-backed securities

learned that there was fraud in the market, they

stopped buying, and that prevented banks from 

getting the cash to write new mortgages.  Worse

yet was, the fact that the market was pursued 

so furiously that records were not fastidiously

kept, and so the securities tainted by fraud could

not be identified.  That, in turn, led to the total

lock-up of the financial markets and the disaster

of 2008 until the government stepped in to bail

out the biggest players and unfreeze the markets.

Unfortunately, much time has passed since that 

disaster unfolded, and many people today have 

no idea of what happened, and/or the fact that

The law, whose repeal allowed it, has not been

changed back or otherwise rectified, thus we are

at risk of it all happening again in the future.