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Peter Morgan / AP Photo Would a new bill bringing back Glass-Steagall prevent another banking meltdown? Nomi Prins on why change is urgently needed.
The Obama administration is talking tough but acting tame with respect to Wall Street. But a pair of senators is coming out swinging. Today, Senators Maria Cantwell (D-WA) and John McCain (R-AZ) are taking a step towards proactive reconstruction of the banking sector by introducing the Banking Integrity Act of 2009. The bill would reinstate provisions of the Glass-Steagall Act of 1933, the New Deal-era law that built a wall between commercial banks and risky investment banking.
“Federally insured deposits must not be used as fuel for the fire of speculative trading at the expense of lending or investing,” Cantwell said. The Washington state Democrat has been particularly focused on banks’ excessive use of capital for derivatives transactions and is working hard to reduce the risky nature of today’s derivatives environment. “Exactly how much capital that could be used for solid investing has been shifted towards derivatives instead?” Cantwell asks, going straight at one of the most complex issues with the current banking landscape.
“Federally insured deposits must not be used as fuel for the fire of speculative trading at the expense of lending or investing,” Cantwell says.
Unfortunately, it’s not so easy to track capital in that manner (though I wish it was). Banks don’t report the exact details of how capital gets allocated beneath each of their various derivatives or other types of trading businesses. But, with a solid focus on detail and content, Senator Cantwell, a former RealNetworks executive, will get to the bottom of it. As the big banks have grown bigger and more complex, their appetite for risk has also escalated. The trading revenues for the big banks have dramatically increased. Indeed, trading profits at the top five banks jumped from a loss of $608 million in 2008 to $119 billion for annualized 2009 (compared to $62 billion for 2007.) That kind of sheer fluctuation in itself introduces systemic risk.
At the same time, big banks are not using their capital for lending—part of Sen. Cantwell’s concern. Lending has declined. Total loan and lease balances fell by $210.4 billion (2.8%) last quarter, the largest percentage decline in any quarter since banks started reporting the figures to the FDIC in 1984. This gives a strong indication as to where banks are putting, and not putting, their capital. Trading is fine. Lending not so much. And given the current structure of the banking landscape, this is the preferred business plan. Specifically, the Banking Integrity Act would separate commercial (depository) and investment banking companies. No member bank (read: any bank that gets federal support of any kind) could be merged with any other firm that creates or trades securities.
The act would forbid investment bank employees from serving on the board—or in any senior capacity, for that matter—at a member bank. And the legislation would prohibit depository institutions from engaging in any kind of insurance business (including reinsurance—and that means you, AIG).
The result? A reduction in systemic risk and greater transparency. An end to the idea that a bank could become too big to fail. Mega-bank bailout recipients (such as Goldman Sachs, Morgan Stanley, Citigroup, JP Morgan Chase and Wells Fargo) would have to spin off their investment and insurance operations from their depository, commercial banking operations. Or, they could choose to exit the public tent altogether, and say good-bye to government life-lines when they screw up (or mega-bonuses the very next year—and that means you, Goldman Sachs).
Sen. Bernard Sanders (I-VT) certainly paved the way for Cantwell and McCain last month, when he introduced his ”Too Big To Fail, Too Big to Exist" bill. But so far, neither the recently passed House financial reform bill nor the one that Senate Banking Committee Chairman Christopher Dodd (D-CT) introduced, proactively separate commercial from investment banking.
Now, once you get past the bank language of the Act, this is a pretty interesting political development. Will more Democrat senators rally around Cantwell? Sanders bill is good, so far it hasn't been taken up publicly by many senators. She is certainly one of the most financially savvy senators around. And she’ll likely pick up support from colleagues—like Sen. Byron Dorgan (D-ND)—who have been opposed to the repeal of Glass-Steagall since it happened in 1999.
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I was SHOCKED to see a partnership between Cantwell and McCain. Strange bedfellows, I must say - but we need reform and that polar opposites can move us forward is only a plus in getting the rest of the Congress to buy in - I hope.
No wonder they want to get rid of free google access. [1999-The Gramm-Leach-Bliley Act, authored by McCain's principle economic advisor, Phil Gramm is the law that deregulated banking and allowed the explosion of inancial derivatives that led to the current credit crisis. John McCain voted for the bill.] excerpted from http://jontaplin.com/2008/09/07/mccain-gramm-and-the-fannie-mae-crisis/ [The Glass-Steagall Act restored public confidence in banking practices during the Great Depression. However, many historians believe that the commercial bank securities practices of the time had little actual effect on the already devastated economy and were not a major contributor to the Depression. Some legislators and bank reformers argued that the act was never necessary, or that it had become outdated and should be repealed.] excerpted from http://legal-dictionary.thefreedictionary.com/Glass-Steagall Act
Urg...so you worked at GS...well, guess you can be forgiven since it pre-meltdown and apparently you are a fan of regulation, or at least read it that way... Why are the Dems sitting around on this one?? They need to get hopping mad and start taking care of the people's business and get out of the bank business. Kudos to the senators that are making moves to re-regulate and kill too big to fail 'banking'.
While it's true Nomi worked at GS in the past, she has been one of the most thoughtful and measured commentators on the banking industry and regulation since, well, since sh1t hit the fan.
There is no doubt, in my view, that full reinstatement and restoration of the Glass-Steagall Act of 1933 will restore regular commercial banking to it's erstwhile healthy condition, while hermetically protecting them from the murderous parasites of the Wall-Street/City of London Axis. Let the so-called "investment banks" fail; let fools gamble their hard-earned cash away in these casinos (not banks); let speculation be a gambling game, totally separated - by the unbridgeable gulf which would be restored by Glass-Steagall - from our regular commercial local, and state-chartered banks. Let the "fat cats" gamble their own money, not that of the law-abiding, tax-paying Citizens. Further, it is my view that President Obama, for all his eloquent loquacity, his silvery tongue, is an incompetent advised by worse-than-incompetent criminals: the so-called "behaviorist/behavioral" economists. It is fair and just to measure the office of any given sitting president against those of others preceding: Since the discourse here is about Glass-Steagall, it is useful to compare President Obama with President Franklin Delano Roosevelt, who, less than six months into his first term, signed that excellent Act into law, on June 16th, 1933. It's also useful to recall that Glass-Steagall was preceded by the Pecora Commission, which was so effective in curtailing the vicious predatory practices of the ghouls of the Wall Street-London Axis. I, too, was one of the many who, who a growing sense of optimism for the future, enthusiastically voted for Obama. Digressing slightly, regarding the so-called economic turn-arounds which President Obama has been so glib with in his speeches and pronouncements, compare his performance, again, with that of FDR; indeed, compare the performance not only of the presidents, but also of the Congress, which, in my view, seems equally incompetent. See how quickly a team, truly dedicated to the common good of all of the Citizens of this republic and their posterity, got the nation back to work again, in real, productive infrastructure-building, manufacturing, industrial and agricultural employment.
I, too, was one of the many who, with a growing sense of optimism for the future, enthusiastically voted for Obama. See how quickly the FDR team, which was truly dedicated to the common good of all of the Citizens of this republic and their posterity, got the nation back to work again, in real, productive large-scale public infrastructure-building, manufacturing, industrial and agricultural employment. Not to mention high-skill engineering, machine-tool design, architecture, and other science-driver economic engines. Also, thanks are due to Nomi Prins, and Senators Cantwell and McCain. But Glass-Steagall must be restored with all its original powers intact; it must have the teeth and jaws to go after criminal speculation and gambling, and must not allow the disease-promoting intermingling and corruption which occurred before it was signed, and during the period following FDR's death, when Glass-Steagall was gradually - Fabian-style - eroded of its powers, and up to the recent past (1999) when it was so ignominiously repealed. Restore Glass-Steagall fully! Activate a New Pecora Commission with full powers of prosecution and indictment!
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