In assessing the recent damage on Wall Street, both John McCain and Barack Obama have placed the blame on a lack of government regulation.

While neither candidate has mentioned it by name, at issue is the Glass-Steagall Act, which regulated investment banks from 1930s until Congress repealed the law in 1999. In a CNBC interview Tuesday, U.S. Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking committee, said reviving Glass-Steagall regulations was “something we should look at.”

But several corporate lawyers around town and a legal academic argue that the lack of Glass-Steagall rules did not lead to the collapse of Lehman Brothers, to the federal bailout of Bear Stearns and AIG, and to Merrill Lynch’s sale to Bank of America Corp. Instead, they say, the repeal of the law remains a part of the solution to U.S. financial turmoil.

If the Glass-Steagall rules were still in place, Bank of America could not have rescued the failing Merrill Lynch, says Jones Day banking partner Ralph F. “Chip” MacDonald III.

Passed during the Great Depression, the Glass-Steagall Act separated investment banks like Merrill Lynch and Bear Stearns from commercial banks like Bank of America and SunTrust. President Franklin D. Roosevelt’s first act in office in 1933 was to sign Glass-Steagall into law, in order to restore depositors’ confidence in commercial banks by limiting their ability to engage in securities trading, according to Reuters. Glass-Steagall also created the Federal Deposit Insurance Corp., which insures depositors’ accounts in commercial banks.

But Congress and President Clinton repealed Glass-Steagall in 1999 with the passage of the Gramm-Leach-Bliley Act, which allowed commercial banks and investment banks to compete with each other. The repeal of Glass-Steagall led to the combination in 2000 of the investment J.P. Morgan and the commercial bank Chase Manhattan Bank.

Such combinations of investment banks and commercial banks have little to do with the current problems on Wall Street, said Powell Goldstein banking partner Walter G. Moeling IV. Instead, the problems have been caused by the problems associated with the sub-prime mortgage market and a huge increase in loan defaults.

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Back in early 2005, when credit was cheap, lenders couldn’t float loans fast enough, but critics say they approved mortgages with little regard for a borrower’s ability to pay back the debt. Investment banks bought billions of dollars of the loans and re-packaged them into mortgage-backed securities, which they then resold to other investors.

Two other key players were Fannie Mae and Freddie Mac, government-sponsored entities (GSE) that own or back about $5.3 trillion, or about half, of the U.S. mortgage market. Fannie and Freddie bought mortgages from banks and other lenders, which freed up the lenders’ money so they could make more loans.

Then, in 2006, the bubble burst. Mortgages became distressed or went into default. Foreclosures increased, and the value of investments secured by those mortgages collapsed. That made mortgages more difficult to obtain. Home values deflated.

Last month, President George W. Bush signed a law designed to clean up some of the mess. The Federal Housing and Economic Recovery Act of 2008 authorizes the Treasury Secretary to invest directly in Fannie and Freddie, and it establishes tougher regulations for the GSEs. Also, the GSE’s must abide by minimum capital requirements and limit the size of their portfolios.

Kilpatrick Stockton litigation partner Mike Crisp of Atlanta heads his firm’s complex business litigation practice group and represents a national bank in litigation against financial institutions related to securitized mortgages. Crisp also heads Kilpatrick Stockton's subprime and credit markets litigation practice group. He discussed the federal bailout of Fannie and Freddie and the outlook for subprime mortgage crisis-related litigation. The conversation was edited for brevity.

How did Fannie Mae and Freddie Mac get into their current predicaments?

On the surface, it was a perfect storm of financial circumstances and bad government. Credit was supplied too readily to unworthy borrowers. It also led to an increase in borrowers with uncertain prospects of making the mortgage payments they agreed to make.

If you dig deeper, the reasons are more systemic and the federal government’s responsibility is great. Prior to 1968, Fannie was a public entity with a public purpose—ensuring liquidity to allow maximum access to home ownership. But in 1968, Congress amended Fannie’s charter to make it a private entity. There was always tension with a private entity serving a public purpose. [Freddie Mac was established as a private GSE in 1970.]

But Fannie remained a government “sponsored” private entity. Nobody has ever been quite certain what “sponsored” meant. Does it mean “guaranteed” or something less? This probably contributed to the current problems because management likely believed that it was immune from the consequences of bad decisions, or that the government would step in and mitigate those consequences. It turns out they were right.

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Alston & Bird’s California dreams haven’t been for naught. The Atlanta law firm has been tapped as co-lead counsel on the liquidation of a California company that had been one of the biggest American mortgage lenders.

On Wednesday, Alston managing partner Richard Hays [left] announced the acquisition of 83-lawyer firm Weston Benshoof Rochefort Rubalcava & MacCuish of Los Angeles. The same day, Alston acquired the 11-lawyer Silicon Valley office of Akin Gump Strauss Hauer & Feld.

Now comes news of a big California assignment for Alston. Alston is serving as co-lead counsel on IndyMac Bancorp Inc.’s bankruptcy liquidation. IndyMac filed for Chapter 7 bankruptcy protection on Thursday in the U.S. Bankruptcy Court for the Central District of California.

Alston partner John C. “Kit” Weitnauer in Atlanta is listed as IndyMac’s co-lead counsel, along with Weston Benshoof partner Dean G. Rallis Jr. in Los Angeles. Orrick, Harrington & Sutcliffe litigation partner Edwin V. Woodsome Jr. in Los Angeles is also listed as IndyMac’s counsel.

It had previously been reported that Alston banking partner Dwight C. Smith III in Washington was advising IndyMac on certain matters. Smith is a former deputy chief counsel at the U.S. Office of Thrift Supervision. Smith declined to elaborate to Deal Watch Blog on his work for IndyMac.

IndyMac, headquartered in Pasadena, Calif., had been the second-largest independent mortgage lender in the U.S. But IndyMac was hammered by the subprime mortgage meltdown, which led to a run on the bank. The Office of Thrift Supervision closed IndyMac on July 11, and the Federal Deposit Insurance Corp. on July 14 seized IndyMac’s assets.

Although banks are not allowed to file for bankruptcy, bank holding companies are, The Deal’s Dealscape column said.

Alston & Bird has been retained by troubled mortgage lender IndyMac Bancorp Inc. To what extent Alston is working for IndyMac, however, is unclear.

IndyMac, which was shut down by the federal government earlier this month, hired Alston partner Dwight C. Smith III to advise the company on a number of issues, “including the transfer of its assets to the government,” according to British publication TheLawyer.com.

Smith, reached at his Washington office, declined to comment. Tony Wilbert, a senior vice president with Edelman who serves as an Alston spokesman, also declined to comment.

Alston’s Smith practices in the area of bank regulatory matters. Before joining Alston he was deputy chief counsel at the U.S. Office of Thrift Supervision.

TheLawyer.com also said that Alston is “expected to have a role advising [IndyMac’s] directors and executives in relation to a current investigation by the Federal Bureau of Investigation into possible mortgage fraud.”

IndyMac, a regulated thrift based in Pasadena, Calif., was closed by the Office of Thrift Supervision on July 11 and placed into receivership with the Federal Deposit Insurance Corp. The OTS transferred the assets and some liabilities of IndyMac Bank to a new institution called IndyMac Federal Bank.

IndyMac had been hammered by defaults on its mortgages; earlier this year, depositors pulled $1.3 billion from the bank during an 11-day period. IndyMac, which had been the largest savings-and-loan association in Southern California, was one of the largest bank failures in U.S. history.

FDIC Chairwoman Sheila Bair last week said that FDIC intends to sell all of IndyMac’s assets to a single buyer, Bloomberg News reported.

Alston has done work previously for IndyMac. Alston partner Michael L. Stevens in Atlanta in 2007 advised IndyMac on a securities sale.