It’s been 10 years since Washington repealed the Glass-Steagall Act, the moment we got royally screwed by the banking system — and we’re still paying the price.
This week marks the tenth year anniversary of the repeal of the Glass-Steagall Act of 1933, by the Gramm-Leach-Bliley or Financial Services Modernization Act, marking the moment when we were royally screwed by the banking system. Thank you to all those involved.
It’s amazing how downright ebullient, President Bill Clinton was at that signing ceremony on November 12, 1999. an event introduced by then Treasury Secretary (now Obama advisor) Larry Summers, successor to Robert Rubin. Those restricting, anti-competitive Depression era, laws were finally behind us. Awesome.
Fast-forward to now and most of us know how devastatingly expensive that signature was for the American public. Yet, despite our government having deployed or made available over $14.1 trillion worth of federal subsidies to fix Wall Street, the banking landscape is less stable than it was before last year’s crisis. And, despite national unemployment approaching double digits, and another record quarter of foreclosures, we stand farther away from the intent of Glass-Steagall than ever.
Banks weren’t handled with kid gloves then. They were treated like the spoiled, reckless, destructive beings they were. After the stock market crash in 1929, the country sunk into the throes of the Great Depression, characterized by 25% unemployment, bread lines, rampant foreclosures, and general despair. In 1932, the Pecora commission examined the shady banking practices that contributed to the devastation, all of which hinged on one thing – banks had used depositor capital and loans to speculate with. Exactly like the practices going on before and since last fall’s financial calamity. The result of that speculation gone wrong tanked the economy. Glass-Steagall logically sought to ensure this wouldn’t happen again. It divided up the banking landscape into two parts, commercial banks and investment banks. The federal government would back commercial banks and consumer deposits through establishing the Federal Deposit Insurance Corporation (FDIC). But, it wouldn’t be Wall Street’s investment bank bookie and bitch.
Over the decades, the financial sector, armed with cunning lobbyists and overpaid lawyers, took many swipes at Glass-Steagall, but none as devastating as the Gramm-Leach-Bliley Act. Since then, the banking sector’s powerful ate its weak, amidst a wave of massive consolidation. Nearly half of the nation’s biggest bank mergers took place just before or since that Act was passed. All these mega banks can thus churn deposits and loans into debt or capital to fund speculation, risk, and create a roller coaster of an economy that is defined simply on whether those bets, or asset creations, work or not, at any given moment. Heads they win, tails we lose.
Last fall, the Federal Reserve, and to some extent the Treasury Department, not only blessed, but subsidized the mergers and moniker changes (like seriously, if Carrie Prejean’s title can be stripped, certainly Goldman’s behavior warrants removal of the bank holding company title), helping too big to fail to become even bigger with riskier profiles than ever before. Only this time they are floated on public assistance. This is not progress. It’s expensive insanity. And, it will blow up again. It is a matter of when, not if.
Meanwhile, as reform bills from Senator Christopher Dodd’s (D-CT) to Representative Barney Frank’s (D-MA), to the plans from the Treasury Department and the White House, make their way from concept to draft to vote, we’ve got to keep one thing in mind. The beast that is today’s complicated, convoluted, risk taking, federal capital sucking, and bonus paying mega-bank is still roaming around free.
As long as it remains out of its cage, creating plans to slow its movements are always going to be much harder, than putting it back in a stronger cage. Though, it’s important to have a Consumer Financial Protection Agency, better derivatives regulation (if only that were on the table for real), and ‘funeral plans’ as Dodd’s bill calls them, to put too big to fail banks to bed just before they keel over, it doesn’t change the nature of the beast.
And though one way to keep some of our money out of the mouths of the most rapacious banks, would be to reduce leverage limits and increase capital requirements for the riskiest banks, or as Tim Geithner and Fed Chairman, Ben Benanke like to call them, ‘the systemically important’ ones so they can pay for their own clean-up – this too has a catch.
The more capital banks are required to hold, while being allowed to operate as investment banks that use hoarded capital as collateral for increasing their own borrowing and trading businesses, the less lending they will provide to ordinary citizens and small businesses. Without splitting up the banking structure to avoid the hoard to trade, not to lend, scenario, we are creating legislation to help banks bloat on risk – they will have less than no incentive to do much else.
And as far as regulatory bodies are concerned? I dare any regulator, or for that matter human-being in Washington to come up with one single consistent risk parameter that can be used to determine exactly what percentage of each of the big bank’s profits comes from speculative vs. customer driven business. Because, by virtue of how complex they all are, and have been allowed to remain, no two balance sheets are remotely similar – and I’m not talking about accounting terms, I’m talking about risk clarification ones.
Thus, whether we merge all regulators into one ginormous one, or have a council of them to deal with the hard issues of mega-collapse and crisis, or even place one inside the office of every top bank CEO, shadowing him like a probation officer (no that’s not in one of the bills, it would just be fun to watch unfold), the beast remains out of the cage.
That’s why we need to reinstate Glass-Steagall. Now. We need to dissect the speculative from the boring within our country’s financial institutions. And yes, it’s possible to achieve. Banks split off pieces of companies and move them around every day. Plus, the Glass Steagall Act didn’t wave a magic wand that divided up bank divisions, it ingeniously used banks’ own competitive desires against them, by giving banks a one-year period to dramatically reduce the portion of profit they made from investment banking activities to 10% of total profits. Banks were free to choose how to do this, knowing commercial banking got government backing, and investment backing didn’t. Betting behaviors are more conservative when it’s your own money, and not someone else’s on the line. Stability follows.
We need to specifically reinstate section 16 of the Glass-Steagall Act that had restricted national commercial banks from engaging in most investment banking activities, up to a certain small percentage, coming from client directives, not their own proprietary trading. And, on the flip side, we need to reinstate section 21 that restricted investment banks from engaging in any commercial banking up to a certain percentage limit.
Doing these two things, would reduce the more systemically risky competitive desires between these two types of banks that spurs them to merge into institutions that are too big to exist without our help, or take the kinds of leveraged risks that drive short-term profits and bonuses, at the expense of long term financial system stability.
Similar to the original Glass-Steagall Act, commercial institutions would have say, eighteen months to reduce the percentage of their income derived from any type of equity, asset-backed securities, CDO or derivative products origination and trading to 10 percent, and one year to present a plan to do so.
While banks are learning to comply with these new-old laws, we should immediately reinstate lower deposit concentration limits on the banking industry to discourage further consolidation. Plus, we need to force the Fed to do its job to enforce existing limits, or give that enforcement power to the FDIC or another body that shows itself capable of performing this basic regulatory function. Today, two banks, Bank of America and Wells-Fargo are above 10 percent deposit concentration limits, and JPM Chase is close to 10 percent. Thank you for that, Fed. You’re fired.
It’s time to put the beast back in its cage, while taming it, by re-instating Glass Steagall, and keep it from inflicting even more danger on the rest of us. Meanwhile, we need to support all those in Washington that get this, and keep pressuring those who don’t.