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Will Cantwell-McCain Reinstate Glass-Steagall?

By Larry Doyle on December 19, 2009 at 9:30 AM in Current Affairs, Economy, Sense on Cents (Larry Doyle blog)

Might we turn the clock back in an attempt to make our way forward? How so?

Pressure is certainly building in America to curtail, if not derail, the excessive risks embedded in our largest banks. How may these risks be unwound? Reinstating the Glass-Steagall Act, which separated commercial and investment banking activities. If this Act were to be reinstated, that would be the end of the mega-banks (Citi, JP Morgan, Bank of America, Wells Fargo) as we know them.

Who has been harping on this? Former Fed Chair Paul Volcker. Although Wall Street and Washington turn a deaf ear to Volcker, America listens to him intently.

In September, I wrote “Volcker Launches Bombshell on Wall Street and Washington” which highlighted Volcker’s call to reinstate Glass-Steagall. That story resonated far and wide. Now we learn from the American Banker that Senators Maria Cantwell (D-WA) and John McCain (R-AZ) have introduced legislation which would once again separate commercial and investment banking activities. From American Banker’s story, Bill Offered to Reinstate Glass-Steagall:

Sens. Maria Cantwell, D-Wash., and John McCain, R-Ariz., introduced a bill Wednesday to reverse the Gramm-Leach-Bliley Act’s dismantling of the wall separating banking from the securities and insurance industries.

Under their Banking Integrity Act of 2009, commercial banks would be prohibited from affiliating with investment banks and vice versa.

The bill would also ban commercial banks from engaging in any insurance activity. The legislation would force banks to divest their commercial or investment banking operations within one year of enactment.

“America can’t afford another financial crisis,” said Cantwell in a press release.

In my opinion, the melding of commercial and investment banking activities is not the problem in and of itself. Very simply, I believe the repeal of Glass-Steagall has shown that Wall Street does not possess the leadership and risk management capabilities to properly monitor and manage the risks embedded in institutions of this size and scope.

To that end, I would be in favor of reinstating this Act. That said, we should not think that merely reinstating Glass-Steagall will solve our problems. Why? Don’t forget that Bear Stearns and Lehman were pure investment banks, both of which failed without having commercial banking activities.

LD

  • Ferd Berfle

    Very simply, I believe the repeal of Glass-Steagall has shown that Wall Street does not possess the leadership and risk management capabilities to properly monitor and manage the risks embedded in institutions of this size and scope.

    Which all boils down to the very simple, inelegant truth that Wall Street lacks a set of ethical standards by which to guide their conduct.

    • Tricia

      I agree with Ferd here–something about missing ethical standards also played a huge role.

  • Peggy Sue

    “Which all boils down to the very simple, inelegant truth that Wall Street lacks a set of ethical standards by which to guide their conduct. . .”

    That should be written in large letters, Ferd!

    I picked up a quote regarding Volcker’s opinion and I think Larry’s right, people do respect the man’s sensibility. I just wish he’d get more airtime.

    Anyway, the quote:

    “Paul Volcker looked to finance’s recent past and saw little to like, noting that he has yet to see any evidence that financial market innovations have provided any benefit to the economy.

    Apparently, Volcker thinks the industry reached a peak when it invented the ATM . . .”

    I hope Cantwell and McCain pursue this aggressively because I’m sure the investment banks will fight it tooth and nail. It may not be a solution, but it’s a start.

  • I’m a Linda too

    I hope they reinstate it.

  • ctfish

    Glad to hear your opinion on this, LD. It sounded compelling, and that Volcker too was for repealing it too is really persuasive.

    Especially persuasive was reading how much Volcker was against the repeal of Glass-Stegal in the first place, and reading WHY he was against repealing it.

  • elaine

    First order: repeal the Gramm-Leach-Billing Act & then try to unwind from there. But that still doesn’t address how to deal with the inevitable takings suits from the banks, who in case you’ve forgotten, have already merged with the investment houses i.e. BOA with Merill-Lynch, etc. This whole mess is a good example of how hard it is to put the genie back in the bottle…don’t forget Goldman-Sachs is now technically a bank holding company as are several large insurers i.e. The Hartford, etc. Also rid yourself of any illusions that many large corps remain capitalist entities, ie GE, the corruption runs both ways, this ain’t a shack up of emergency need, these clowns & the gov are actually happily married. If there was a time for remedial divorce it was before the melt down, it’s too late now. Also note the Chinese & Russians got Iraq’s oil contracts…no one wants US treasuries anymore..crappy interest rates running behind the rate of inflation…we’re screwed. Soon almost every nickle & dime we have will go to interest on the debt & entitlements.