The Return of Glass-Steagall?

Discussion in 'Wall St. News' started by Tsing Tao, Jul 11, 2013.

  1. Tsing Tao

    Tsing Tao

    Fat chance, I'm sure. But here's hoping.

    Senators Warren, McCain, Cantwell, and King Introduce 21st Century Glass-Steagall Act
    Jul 11, 2013

    Text of the Legislation
    Fact Sheet

    Washington, DC - Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Maria Cantwell (D-WA), and Angus King (I-ME) today will introduce the 21st Century Glass-Steagall Act, a modern version of the Banking Act of 1933 (Glass-Steagall) that reduces risk for the American taxpayer in the financial system and decreases the likelihood of future financial crises.

    The legislation introduced today would separate traditional banks that have savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. This bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall and would make "Too Big to Fail" institutions smaller and safer, minimizing the likelihood of a government bailout.

    "Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," said Senator John McCain. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer."

    "Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," said Senator Elizabeth Warren. "The four biggest banks are now 30% larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk. The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more stable and secure, and protect American families."

    "Too many Main Streets across America have paid the price for risky gambling on Wall Street," Senator Maria Cantwell said. "This bill would restore clear bright lines that separate risky activities from the traditional banking system. It's time to restore faith in our financial institutions by rebuilding the firewall that protected our economy for decades in the wake of the Great Depression. Restoring Glass-Steagall would focus our financial system where it belongs: getting capital into the hands of job creators and businesses on Main Streets across America."

    "As Maine families continue to feel the sting of the 2008 economic downturn, America's largest financial institutions continue to engage in risky banking and investment activities that threaten the health of our financial sector and our economy as a whole. While recent efforts at financial sector regulatory reform attempt to address the ‘too big to fail' phenomenon, Congress must take additional steps to see that American taxpayers aren't again faced with having to bail out big Wall Street institutions while Main Street suffers," Senator Angus King said. "While the 21st Century Glass-Steagall Act is not the silver bullet to end ‘too big to fail,' the legislation's re-establishment of clear separations between retail and investment banking, as well as its restrictions on banking activities, will limit government guarantees to insured depository institutions and provide strong protections against the spillover effects should a financial institution fail."

    The original Glass-Steagall legislation was introduced in response to the financial crash of 1929 and separated depository banks from investment banks. The idea was to divide the risky activities of investment banks from the core depository functions that consumers rely upon every day. Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the wall between investment and depository banking and weakened Glass-Steagall. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.
  2. If they reinstated that then could they trow out Dodd Frank? Might not be the worst thing in the world.
  3. This makes perfect sense to any rational individual.
  4. nitro


    Prop traders are moving to Hedge Funds:

    Hedge Fund advertising rule about to become law:

    Europe strikes deal to push cost of bank failure on investors

    Glass Stegall reinstated? Seems like a logical consequence of the first two above. The argument for the repeal of GS (not Goldman Sachs, although it is an interesting pun) the argument was that Europe did not have a similar law [they move in the opposite direction, see link 3 above], and US banks could not compete and it was actually sold as a national security issue (I don't remember where I read that).

    If you put the pieces together posted in this and the Economics forum over the years, the logic of causation is pretty straightforward, and I expect it to pass forcefully.
  5. zdreg


    please post links that work.
  6. nitro


  7. clacy


    I'm fully supportive
  8. If Glass-Steagal was the issue

    then none of the failures of Bear Stearns, Lehman, Merril, Wamu, and AIG would have created a systemic risk.

    Further when Glass-Steagal was around, the failure of Long Term Capital (a hedgefund) did create systemic risk.

    Bottom line is that universal banks are a necessity for a strong financial sector in the US. Scale matters as lower funding costs are imperitive to being competitive; diversification matters because when one business is don't poorly, another can subsidize it; and customer deposits matter because they provide stable financing. Without large banks, the US will lose competitiveness to Europe, where banks are all universal, and eventually to China who will see an opportunity (getting size never bothered them).

    The problem with the financial markets isn't investment banking tied to retail banking. It's lack of regulations to reduce leverage ratios and institutions to reduce interconnectedness.

    Every bank has risk to every other financial institution. Pull one out and the whole web comes apart. That's the problem.

    I like the idea of bail-in's, increased Tier 1 capital requirements, golden shares to the government (to exercise some controls on the companies) and the setting up of regulations in the OTC markets. But not the reinstating of Glass Steagal.
  9. All the other issues you have raised aside, you want the US taxpayer to subsidise the strength and competitiveness of the US financial sector? And sure, yeah, FDIC-insured deposits represent a stable and extremely cheap source of funding for the banks. But this source of funding is cheap and stable because of the backstop provided by Uncle Sam. Do you think it's a good idea for the taxpayer to allow the use of this backstop to the universal banks, so that they can compete with the Europeans? Moreover, as you're aware, UK is already on its way to implementing its own version of Glass-Steagall, competition or not. And no, not all banks in Europe are universal. Finally, I think this competitiveness issue that is always used by the banking industry is a total sham. As we have observed many times, competitiveness at the expense of stability and integrity is a tale that always ends in tears.
  10. Tax payers bailed out AIG directly, sold puts at zero to JPM on Bear Stears, sold puts at zero to BAC on Merril, and paid off depositers of dozens of regional banks.
    And the fed intervened in the LTCM unwind (before my time) and there was the savings and loan crisis in the 80s.

    None of this was influenced by Glass Steagal (at least directly). And size does matter because the regionals largely failed because they didn't have the scale to compete with the national banks and they were forced into markets away from their regions.

    In fact, if Glass Steagal had existed and Bear was the size that it was, who could have absorbed it (size and legaly)?

    Ken Griffin said it right at a congressional hearing (even though he was talking his book) that it's too big to fail, it's "too interconnected to fail."

    There are other solutions to protect tax payers. Glass Steagal isn't it.
    #10     Jul 13, 2013