Many culprits contributed to the recent financial meltdown, but the financial modernization legislation of the late 1990s was not one of them.

The Gramm-Leach-Bliley Act of 1998 repealed artificial competitive barriers erected 65 years earlier by the Glass-Steagall Act. It authorized the creation of financial holding companies that could house banks, insurance companies, and securities underwriters under the same corporate roof.

The Federal Reserve Board regulates and closely supervises these holding companies, which must adhere to the capital and other international prudential standards established by the Basel Committee of bank supervisors.

As a result, financial holding companies did not fail. Instead, they came to the rescue. Bank of America bought Merrill Lynch. JPMorgan Chase bought Washington Mutual. Wells Fargo bought Wachovia, and Morgan Stanley and Goldman Sachs, which were failing as investment houses, rescued themselves by becoming financial holding companies subject to the Fed's regulation and supervision.

Bear Stearns and American International Group, which required enormous government bailouts were not financial holding companies. Neither was Lehman Brothers, which declared bankruptcy.

Wachovia, of course, was a financial holding company, and so is National City, but their near-failures were caused not by their holding company status but by an old-fashioned banking problem: too many bad loans.

A few years ago Wachovia bought Golden West, a large California thrift company, and merged it into Wachovia Bank, which thus acquired a large volume of so-called option adjustable-rate and other nontraditional mortgages.

Option ARMs permitted the borrower to decide each month the amount he or she would pay in interest and principal; if that amount was less than the monthly accrued interest, then the difference was added to principal — so-called negative amortization.

These mortgages subsequently led the parade of large-scale payment defaults.

In acquiring this mortgage portfolio, Wachovia simply bit off more than it could chew. Loan losses grew, its stock price fell precipitously, and depositors — particularly those with uninsured deposits — started an old-fashioned run on the bank.

In the late 1990s Nat City put a huge bet on expanded home mortgage lending to beef up its profits. By acquiring the subprime originator First Franklin and increasing the use of mortgage brokers, by 2003, Nat City had become the country's sixth-largest mortgage lender.

For a while Nat City was backing a winner; about half its profits came from residential mortgage lending. But the housing and mortgage markets cratered, as did Nat City's profits and stock price. It became so weak financially that not even the Treasury Department would gamble on its recovery, thus forcing a takeover by PNC.

These are sad stories, but the near-failures of Wachovia and Nat City were wholly unrelated to whatever insurance or securities underwriting activities Gramm-Leach-Bliley permitted those corporations to conduct.

It remains only to be said that the large financial holding companies — Citigroup, JPMorgan Chase, B of A, Wells, Bank of New York Mellon, and State Street — did not really need to sell their preferred stock to the government.

That investment was rammed down their respective throats as part of an agreement that the U.S. government had reached with the governments of other developed countries on a uniform, worldwide approach to the current financial crisis.

The new Congress convening in January will and should consider what regulation is needed for the new and complex financial instruments that grew so enormously during the last decade.

But there is no need to revisit the deregulation embodied in Gramm-Leach-Bliley or to restore the outdated barriers of the 1930s.

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