Is there hope?
According to “people with direct knowledge of the matter,” cited by Bloomberg, White House economic adviser and one of the ex-Goldman Sachs executives in the Administration, Gary Cohn, dropped a bombshell at a meeting on Capitol Hill yesterday.
The meeting was arranged by Senate Banking Committee Chairman Mike Crapo of Idaho. Lawmakers and their staffs from both parties participated in the discussion that ranged from tax reform to financial regulation.
Cohn said he generally is in favor of splitting commercial banks from everything else, in a return of sorts to the days of the Glass-Steagall Act. Bloomberg:
Cohn’s remarks were prompted by a question from Senator Elizabeth Warren, one of the finance industry’s most relentless critics, said the people who asked not to be named because Cohn’s meeting with Senate Banking Committee members was private.
The Massachusetts Democrat asked Cohn about his thoughts on Glass-Steagall. After Cohn answered, Senator Robert Corker, a Tennessee Republican, pressed the White House official to clarify his views.
The remarks surprised some senators and congressional aides who attended the Wednesday meeting, as they didn’t expect a former top Wall Street executive to speak favorably of proposals that would force banks to dramatically rethink how they do business.
After the Glass-Steagall Act was repealed in 1999, it took only eight years of banking-free-for-all, huge mergers, and all kinds of risk-taking for these banks to grow from regional banks to global government-backed hedge funds and collapse under their own recklessness. The subsequent bailouts from the Fed of the banking system and of the biggest owners of financial and other assets have ruined the functioning of the US economy.
A new version of Glass-Steagall would likely separate in some manner commercial banking – taking deposits and making loans – from investment banking and hedge fund activities. It would remove much of the risk from today’s government-backed banks, such as derivatives and other instruments that were heavily involved in the Financial Crisis. Without these hedge-fund and investment-banking activities, even large banks would be much smaller, much less interconnected, and could be allowed to fail without bailouts and without risking the entire global financial system.
Cohn’s comments parallel language in the official party platforms of both Republicans and Democrats during the campaign. The Republican Platform 2016 said tersely:
We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.
“Sensible regulations can be compatible with a vibrant economy….”
The Democratic Platform was more detailed. After claiming Democrats “will not hesitate” to “downsize or break apart financial institutions,” it added:
Banks should not be able to gamble with taxpayers’ deposits or pose an undue risk to Main Street. Democrats support a variety of ways to stop this from happening, including an updated and modernized version of Glass-Steagall and breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy.
At the time, I pooh-poohed the language from both parties as simply another effort to extract more money from Wall Street by scaring them in a sort-of bipartisan manner. I didn’t expect to ever hear of it again. With ex-Goldman executives having taken important roles in the Administration, including Steve Mnuchin as Secretary of the Treasury, the threat of a modern Glass-Steagall seemed to have entirely dissipated.
Now Bloomberg notes that Cohn’s remarks “suggest he could be a wildcard should Congress get serious about reinstating the law.”
Splitting banks from the Wall Street casino would have less impact on investment banks and hedge funds like Goldman Sachs which is not heavily involved in commercial and retail banking. It would have a much bigger impact on JP Morgan, Citibank, or Wells Fargo, which are enormous commercial banks with a huge presence in retail banking, but are also giant investment banks and hedge funds. So maybe it’s easy for an ex-Goldman guy to talk.
The White House has been mum about any new version of Glass-Steagall. And nothing visible has happened in Congress in that regard. So it’s refreshing to hear that the idea of Glass-Steagall is still percolating beneath the surface, and that there are some unexpected supporters.
As much as I want a modern version of Glass-Steagall – it could replace most of the monstrous and immensely cumbersome Dodd–Frank Wall Street Reform and Consumer Protection Act put together in response to the Financial Crisis – I’m not given to wishful thinking. There a lots of reasons why it might never happen.
These split-up smaller banks couldn’t threaten the financial system any longer and would lose much of their lobbying power – a powerful reason to lobby against it with all their might.
If Congress were really serious, the Financial Crisis would have been the moment to ramrod a new version of Glass-Steagall through. But instead, we got what we got.
I doubt that Congress will be able or even willing to tackle it now, given its struggles to pass anything at all – and given the enormous power of Wall Street. But if it somehow happens anyway, pushed forward by people inside the Administration, such as Cohn, and on both sides of the aisle in Congress, stable, much smaller, and more manageable banks would be a big step forward for the economy.
And those who lost out on the Fed’s “wealth effect?” Read… This Economy is Ruined for Many Americans
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Race against time. I hope this story is correct, but I wonder? What will come first, a new crash or a new law?
These are pretty powerful interests to buck. Will even rich politicians be able to do this? They had better double up on security, just in case.
What crash? The rich never experience any crash, just the poor.
I recall that at the time I thought the repeal of Glass-Steagall was an inherently bad idea; I had just finished my MBA.
But I was too dumb to figure out why it was a bad idea. I guess I was in some pretty good company.
The smartest people make the biggest messes.
I agree with you 100%, Wolf, but I don’t think that even a new Glass-Steagall is going to lead to an improved standard of living for Americans or, for that matter, the rest of humanity.
That legislation does / will not address the fundamental flaws of capitalism — flaws that IMO will lead to the extinction of the human race either by nuclear war or environmental degradation. Capitalism’s march to the latter started long before the repeal of any of the Post Depression banking laws or even the Great Depression itself. The march to nuclear war started at the moment of the Trinity explosion, followed shortly thereafter by the US dropping nuclear WMDs on two cities in Japan.
LOVE the article and the sagacious rundown of the implications of the Glass Steagall repeal. But I´m way too old and have been fooled way too many times to actually believe anything will come of this. From where I sit, it looks like the oligarchs have won and the rest is window dressing.
Agreed, Barry. This seems like a tease. For all of Trump’s campaign rhetoric about “draining the swamp” he’s wasted no time being sucked into the swamp and packing his administration with its creatures, especially the “former” Goldmanites and his out-of-his-depth son-in-law. Glass-Steagal and how Trump deals with the Keynesian fraudsters at the Fed will be the defining issues of his presidency. Will Trump finally stand up for the increasingly pauperized middle and working classes, or will he like his predecessors be just another errand boy for Goldman Sachs?
My old man once said to me god gave man too heads and only enough blood to operate one at a time. In 1999 bill Clinton was to busy screwing interns and no blood to his head
Bill Clinton could bang Monica like a cheap gong for all I care. What I object to is his sodomy of the 99% by his repeal of Glass-Steagall.
“What I object to is his sodomy of the 99% by his repeal of Glass-Steagall.”
Keep on repeating the lie long enough and loud enough and the majority of uninformed fools will believe you.
On the first attempt Clinton VETOED the repeal of glass steal.
The second vote of this GOP legislation was veto proof.
Just keep on beating on clinton, it’s SO EASY.
Would this leave GS as the only major investment bank ?
Eliminate the competition with a stroke of a pen ?
I don’t think so. For example, JP Morgan’s investment bank would continue to be active, but it wouldn’t be part of JPM’s commercial bank. It would be a separate entity, and it would face much less regulation than it does now.
Wolf, you’re a national treasure and a credit to the good people who raised you. Thanks so much for the information and insights you are putting out. I wish your readership was in the millions instead of the thousands (?). Maybe then we’d have a chance of creating an awake, aware population and restoring the Republic.
Morgan Stanley? BNY Mellon?
I don´t see a way to reply to “d” so I write it here. For him to just out and out lie about the second vote for repealing Glass-Steagall is truly appalling. This sight is NOT Breitbart! The vote was FAR FROM VETO PROOF – in fact, it was 54 – 44 in the Senate (see: https://www.govtrack.us/congress/votes/106-1999/s105). And Bill Clinton, who had at first rejected it, was “convinced” by Simon Weill who was a principal in the till then technically illegal merger of Travellers and Citycorp (which became the monstrous Citigroup). Clinton has since defended his signing, but never stooped to saying it was “moot” anyway. And the reason it is so easy to beat on Clinton is because he and his wife sold out the democratic party to the corporatists. It´s that simple.
Perhaps even the banking bosses inside or outside the administration realize the dangers of monopolistic financial structures? facing the fact that “next time” there may be no bailouts. self preservation can be a powerful motivator.
Nah. When the system crashes again your masters will simply turn the screws on the subject classes a little harder and a little faster. Then all will be well again, if you can ignore the groaning and gnashing of teeth of the herds, which your masters have always done. Honestly, only parts of the country are as badly off as Haiti or Bangladesh, so they still have some squeezing to do.
When the prospect of baying mobs with pitchforks and torches becomes a real possibility, perhaps some bankers might belatedly recognize that an insolvent financial system run into the ground by the criminal private banking cartel called the Fed might not end well for them, either.
It’s like a junkie realizing that perhaps it’s not good to live somewhere that has heroin lying all around.
Meanwhile, Jamie Dimon, the phoniest of the phonies, has expressed concern of late for the state of the economy and student debt. Well, here’s an idea, dude. Write down tons of the student debt and support a return to Glass Steagall. It’ll involve some sort of huge sacrifice on your part wherein you’d still make upwards of $10-$15 million year including unrealized gains. Poor guy and his crocodile tears.
If we were a nation of laws, Jamie Dimon and Lloyd Blankfein would be playing nightly games of “The Escaped Convict Meets the Warden’s Wife” in their Supermax cell, while Tim Geithner, Hank Paulson, Ben Bernanke, and all the other villains of the 2008 crash and subsequent bailout – the worst ripoff of US taxpayers in American history – toiled on a chain gang under the hot Georgia sun.
Obama’s second Attorney General, Loretta Lynch, sat on the Federal Reserve’s Bank of New York’s Board of Directors under then Bank President Geithner from 2003 to 2005.
WallStreetOnParade has chronicled all the felonious behavior on Wall Street and the lack of criminal indictments brought against the above mentioned CEOs.
Pam and Russ Martens are true heroes, just as is Wolf, for reporting the truth.
Alan Greenspan is part of the lot as well.
Weapons of mass destruction right there.
“Is there hope?”
Politicians may talk about bank reregulation, recognizing the clear need, but politicians do not run the country. Corporatists do. Politicians are puppets on the strings pulled by corporatists and do what they’re told, and corporatists want a free-for-all so they can feed their greed.
Without adequate regulation, the financial system will of course blow up on them again, but since the subject classes will always bail out their masters until they’re utterly destitute, corporatists have every incentive to keep on gorging.
Your overlords (and overladies) like things just the way their are.
But the ignorant masses are led to believe the problem comes from outside the country (terrorists, Mexico, China, etc.).
My understanding is the one of the reasons for the repeal of Glass Steagall was that European banks often combined both functions that that American institutions needed to be allowed to do the same if they were to compete.
My question is would it mean that banks’ business in the U.S. or globally. To put it another way, would Citi be forced to sell it’s Mexican commercial banking or only the American business? Would JP Morgan be allowed to keep an investment bank in London?
Your understanding is deficient, Scott. The repeal of Glass-Steagall was pushed by Clinton’s Treasury Secretary Rubin, who had been bought and paid for by Citibank. The repeal enabled the unfettered looting of the American middle and working classes and the speculative orgy by the banksters that led directly to the 2008 financial crisis.
Another example of market manipulation.
I don’t believe it. Trump has said he wants the banking industry even less regulated to free up loans for small and medium businesses. I smell another screw job.
Thats my thought as well ! Methinks a con job is in the making
So that’s what he meant by bringing jobs back… con jobs.
The big question would still be counterparty risk,resulting from exposure to the huge amount of derivatives.Even if the so called investment banks could be separated from their deposit taking cousins ,a cascade of counterparty failures would still take the whole system down
Of course, it is all in the hypothetical. Nobody dares to put this genie back into the bottle. Banks taking deposits, and making loans? It’s so pre-21st century.
Darn…I wanted some more froth and another crisis. After reading many off the beaten path blogs like this one I will be prepared for making some money shorting on a crash. Then buy in for the big stimulus recovery.
The game plan is pretty well known after 2000 and 2008.
Financial regulation may stop a crash :(
Apparently some one that knows the banking business and economics saw and analyzed the “real” numbers, and promptly wet their pants.
Seemingly the choice was between letting things run at full speed to completion with a catastrophic failure [with bankers hanging from streetlights], or throttling “way back,” and preserving most of their personal assets. The corporate/bank assets are a different story as there may well be *NO* net assets when the TBTF banks are dismantled, and the guys in the wire frame glasses [the auditors] get to see the “real” set of books.
While forcing the banks into a holding company structure MAY minimize self-dealing and cross subsidies across divisions, it seems apparent that a new and improved “Glass-Steagal” act is required, to not only separate depository/commercial banking from investment banking and insurance, but to recognize the multitude of “new” bank like entities and instruments that have developed since the original Glass-Steagal,” such as quasi/shadow banking, money market funds, mutual funds, hedge funds, ETF, derivatives, etc.
This opportunity should be taken to limit the size of the banks to a point where any one bank is no longer systematically important and can be allowed to fail. Very close monitoring of derivative holdings and “circular collateralization” will be required, if this is to be effective. If this is found to be impracticable, then there should be a requirement that all systemically important financial institutions, not just banks, must include at least one outside member to represent the Citizens (who bear much of the risk) on their Boards.
The reason a modern Glass-Steagall didn’t happen in 2009 is because one of the original architects, Larry Summers, was an economic advisor to the new president and had is ear. Additionally, all the big bank players that pushed the FSMA legislation in 1999 and the companion CFMA in 2000 were certainly not going to propose an unwinding of their work as the solution.
The reason why Glass-Steagall did not happen in 2009 is because the tail is wagging the dog. Pretty simple.
Glass-Stegal was pretty much being ignored by the time Clinton finally killed it. Not that this matters but his repeal simply legalized what was already in progress.
For me, this simply confirms intent to defraud taxpayers.
Everything really comes down , in the end, to “House of Rothschild “