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Glass-Steagall Act
Glass-Steagall
Big US banks defy calls that they should be broken up
FT 14 April 2017
Talk from the Trump administration about restoring some kind of modern-day Glass-Steagall,
a Depression-era law that prohibited banks from trading and investing at the same time as taking deposits from consumers.
A revival of the law, which was effectively repealed in 1999, could count on support on both sides of the aisle, and would in theory slice JPMorgan, Citi and BofA in two.
Shares in the banks have soared since the Republicans’ sweep of the White House and both houses of Congress in November, partly on hopes that new people at the helm of regulatory agencies would relax crisis-hardened rules on capital and liquidity.
Glass-Steagall was one of the most successful financial laws Congress has ever enacted.
Before Glass-Steagall, financial panics, as they used to be called, were a staple of American life.
But after the Depression, financial crises stopped until 2008, by which time it had been repealed.
Joe Nocera, Bloomberg 6 April 2017
The financial crisis made people on both the left and the right aware of the “too big to fail” problem
— i.e. that the government simply could not allow a Citigroup, for instance,
to go under because its ripple effects could be powerful enough to bring about a collapse of the financial system.
Thus did the administration of President George W. Bush push through its $700 billion Troubled Asset Relief Program — money that was loaned to banks to get them through the crisis
Michel Barnier, EU:s kommissionär för den inre marknaden, väntas inom kort lägga fram ett förslag om bankuppdelning baserat på idéer från Erkki Liikanen
Bankerna bör delas upp i två delar, där den traditionella bankverksamheten separeras från tradingen
Banker med garanterade insättningar förbjudas att ägna sig åt handel med allt för hög risk
SEB är den bank som skulle drabbas hårdast.
Finansmarknadminister Peter Norman gör allt vad han kan för att stoppa EU-processen.
Dagens Industri, 5 april 2013
Enligt Erkki Liikanen, som har publicerat den så kallade Liikanen-rapporten, räcker inte ökade kapitaltäcknings- och likviditetskrav. De europeiska bankerna bör även delas upp i två delar, där den traditionella bankverksamheten separeras från tradingen.
På så vis skulle bland annat banker med garanterade insättningar förbjudas att ägna sig åt handel med allt för hög risk, enligt Erkki Liikanen.
Och inom olika europeiska länder pågår redan ett lagstiftningsarbete som syftar till att stycka banker i olika delar. Storbritannien och Frankrike har kommit längre än EU, även om de inte har gått lika långt som Liikanen som pläderar. Han vill ha en total separation.
Thomas Östros befarar att EU-kommissionens förslag blir bindande för EU:s banker.
Bland de svenska storbankerna är SEB ledande på market making. 2012 landade SEB:s rörelsevinst inom trading och kapitalmarknadstjänster, där market making ingår, på 2,2 miljarder kronor, vilket motsvarade 15 procent av bankens totala rörelseresultat.
EU:s finansmarknadskommissionär Michel Barnier förslag gäller de runt trettio största bankerna i medlemsländerna,
som är ”för stora för att gå omkull, för kostsamma att rädda och för komplexa att avveckla”.
Europaportalen 29 januari 2014
Seven Dumb Things Bankers Say
Many of the arguments used to justify the size of the largest U.S. financial institutions simply don’t stand up to scrutiny.
It's important that folks in Washington keep this in mind as the political debate over
what to do about too-big-to-fail banks heats up.
Mark Whitehouse, Bloomberg, Apr 5, 2013
Även de fyra svenska storbankerna kan behöva delas i två olika verksamheter.
Det uppger Finlands riskbankschef Erkki Liikanen, som kommit med ett förslag om att stycka flera europeiska banker
i två separata delar: en för kundverksamheten, och en för trading.
Carolina Neurath, SvD Näringsliv 15 januari 2013
Det var i slutet av förra året som Erkki Liikanen, och hans expertgrupp, lade fram den rapport som går ut på att separera bankernas hushållsbankverksamhet från tradingverksamhet.
Orsaken är helt enkelt att skattebetalare inte ska behöva vara med och rädda banker som tar för höga risker för egen räkning.
- Vi har analyserat detta, och kom fram till två alternativa lösningar. Antingen att vi skulle kräva mer kapital för tradingverksamheter, och göra en separation villkorlig.
Det andra var att göra en separation obligatorisk. Efter mycket analys kom vi fram till det senare, säger Erkki Liikanen.
Han vill inte att bankerna ska kunna spekulera med kundernas inlåningspengar, dessutom med vetskapen om att de alltid räddas tack vare deras storlek.
- Därför ska man i stället ha ett holdingbolag, där du har en del med inlåningar, som garanteras, och som fokuserar på utlåning till hushåll och företag. Och en annan del med trading som finansieras via marknaden.
Ett problem för gruppen har varit att reda ut vad som är högriskverksamhet. Skillnaden mellan så kallad proprietary trading (handel för egen räkning) och market making (kunddriven handel) kan ibland vara hårfin. Och framför allt inte alltid lätt urskilja.
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Five years after the financial crisis began, it is still too early to feel sorry for the banks that helped cause it.For all the complicity of politicians, regulators, investors and customers, the crisis could not have happened without the banks themselves
Patrick Jenkins, the Financial Times’ banking editor, 8 oktober 2012
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Liikanen report, From Wikipedia
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Banks will be allowed to fail in the future despite facing far more intrusive oversight of their businesses,
Andrew Bailey, the senior Financial Services Authority manager who will from April run the Prudential Regulation Authority (PRA)
Britain’s new regulatory system would allow banks to fail “in an orderly way”. “This will not be a zero failure regime, but one where firms can fail in an orderly way without major detriment to the wider system,”
Telegraph 22 October 2012
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The Liikanen review
The Economist Oct 6th 2012 | from the print edition
AT LEAST the lawyers will be happy. Banks are already straining to come to terms with two reforms designed to reduce the risks that investment banks pose to other bits of the banking industry: America’s Volcker rule, which aims to ban proprietary trading (trading for their own profit) by banks; and the Vickers “ring-fence”, which proposes to force British banks to isolate their retail activities from troubl
There is only one real answer - split the banks
Back in late 2008, in the immediate aftermath of the sub-prime crisis, those of us calling for a new “Glass-Steagall” split between commercial and investment banking were dubbed “Neanderthals” and “hot-heads”
Liam Halligan, Telegraph 25 Nov 2012
The Glass-Steagall divide between commercial banks (that take deposits) and investment banks (that take big risks) was removed in the UK and US in the late 1980s and 1990s. Ever since, financial markets have lurched from crisis to crisis. No other single act did more to cause “sub-prime” and transform it from a banking crisis into a broader fiscal and economic crisis.
Once the depression-era Glass-Steagall legislation was repealed in America in 1999, Wall Street investment bankers were able to use taxpayer-backed deposits to take ultra-risky bets, knowing they would be rescued if their bets went bad.
Unlike commercial banks and retail banks, investment banks do not take deposits.
From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley Act), the United States maintained a separation between investment banking and commercial banks.
Other industrialized countries, including G8 countries, have historically not maintained such a separation.
wikipedia
"And finally, in our progress towards a resumption of work, we require two safeguards against a return of the evils of the old order.
There must be a strict supervision of all banking and credits and investments. There must be an end to speculation with other people's money."
Franklin Delano Roosevelt, First Inaugural Address, 4 March 1933
Back in the late 1990’s, in America at least, two schools of thought pushed for more financial deregulation – that is, for repealing the legal separation of investment banking from commercial banking, relaxing banks’ capital requirements, and encouraging more aggressive creation and use of derivatives.
If deregulation looks like such a bad idea now, why didn’t it then?
Confessions of a Financial Deregulator
Depression-era restrictions /Glass-Steagall/ on risk seemed less urgent,
given the US Federal Reserve’s proven ability to build firewalls between financial distress and aggregate demand.
New ways to borrow and to spread risk seemed to have little downside.
J. Bradford DeLong, project-syndicate.org, 2011
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The Sorrow and the Pity of Another Liquidity Trap
I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed.
Brad DeLong, Bloomberg 5 July
“I would be cheering for the return of the Glass-Steagall Act,”
John Bogle, founder of mutual fund giant Vanguard Group
CNBC March 2, 2010
The government should restrict bank actitivities far more than proposed under the so-called Volcker plan, which would prevent banks from investing for their own accounts, John Bogle, founder of mutual fund giant Vanguard Group, told CNBC
The biggest political story of 2008 is getting little coverage. It involves the collapse of assumptions that have dominated our economic debate for three decades.
Since the Reagan years, free-market cliches have passed for sophisticated economic analysis.
But in the current crisis, these ideas are falling, one by one
E. J. Dionne Jr. Washington Post, July 11, 2008
You know the talking points: Regulation is the problem and deregulation is the solution. The distribution of income and wealth doesn't matter. Providing incentives for the investors of capital to "grow the pie" is the only policy that counts. Free trade produces well-distributed economic growth, and any dissent from this orthodoxy is "protectionism."
The old script is in rewrite. "We are in a worldwide crisis now because of excessive deregulation," Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview.
He noted that in 1999 when Congress replaced the New Deal-era Glass-Steagall Act with a set of looser banking rules, "we let investment banks get into a much wider range of activities without regulation."
This helped create the subprime mortgage mess and the cascading calamity in banking.
This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled.
The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era.
Stagflation in the 1970s and early '80s undermined New Deal ideas and called forth a rebirth of radical free-market notions.
What's becoming the Panic of 2008 will mean an end to the latest Capital Rules era.
What's striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad.
"You have to have the person who's writing the risk bearing the risk," he says. "That means a whole host of regulations. There's no way around that."
Banks with federally insured deposits, which are limited in the risks they’re allowed to take and the amount of leverage they can take on — have been pushed aside by unregulated financial players.
We were assured by the likes of Alan Greenspan that this was no problem: the market would enforce disciplined risk-taking
Paul Krugman 28/7 2008
Never again will the American taxpayer be held hostage by banks that are too big to fail,"
President Obama
BBC 22/1 2010
Mr Obama's proposals appear to be a return to the principles underlying the Glass-Steagall Act.
That law - from the 1930s in the aftermath of the Great Depression - separated commercial and investment banking and was eventually abolished in 1999 under President Bill Clinton.
Mr Clinton's financial secretary at the time, Robert Rubin, previously worked at Goldman Sachs and went on to be an adviser to Citigroup until last year.
The cause of our crises has not gone away
We made a mistake in the closing decades of the 20th century. We removed restrictions that had imposed functional separation on financial institutions.
John Kay FT January 5 2010
Senators John McCain and Maria Cantwell
Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative:
re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.
Bloomberg Dec. 28 2009
Those walls came down with passage of the Gramm-Leach-Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.’s acquisition of Merrill Lynch & Co.
In 1999, Gramm successfully undid the Depression-era Glass-Steagall Act, removing the decades-old wall between commercial banking, which was heavily regulated, and investment banking, which was not.
Republican presidential candidate Sen. John McCain's national campaign general co-chair was being paid by a Swiss bank to lobby Congress about the U.S. mortgage crisis at the same time he was advising McCain about his economic policy, federal records show.
"Countdown with Keith Olbermann" reported Tuesday night that lobbying disclosure forms, filed by the giant Swiss bank UBS, list McCain's campaign co-chair, former Texas Sen. Phil Gramm, as a lobbyist dealing specifically with legislation regarding the mortgage crisis as recently as Dec. 31, 2007.
Gramm joined the bank in 2002 and had registered as a lobbyist by 2004.
UBS filed paperwork deregistering Gramm on April 18 of this year. Gramm continues to serve as a UBS vice chairman.
http://www.huffingtonpost.com/2008/05/27/phil-gramm-mccain-co-chai_n_103801.html
McCain's chief economic adviser - and perhaps his closest political friend - is the ultimate pure play in free market faith, former Texas Senator Phil Gramm. If McCain follows Gramm's counsel, and most of his current positions are vintage Gramm indeed, his policies as president would represent not just a sharp departure from the Bush years, but an assault on government growth that Republicans have boasted about, but failed to achieve, for decades.
Since retiring from the Senate in 2002, Gramm - a former economics professor at Texas A&M - has been circling the globe as an investment banker at UBS (UBS). In July, McCain called on his old friend to salvage his floundering campaign.
http://money.cnn.com/2008/02/18/news/newsmakers/tully_gramm.fortune/index.htm