Cantwell-King-McCain-Warren to re-up Glass-Steagall

Sens. Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine) proposed a 21st Century Glass-Steagall, which would separate commercial banking with investment banking. Sen. Warren has published a fact sheet, which we publish here in its entirety.


Fact Sheet

The original Glass-Steagall, the Banking Act of 1933, was introduced in reponse to the financial crash of 1929. Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the core function of the bill – a wall between investment and depository banking to curb risk. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Stegall.

The 21st Century Glass-Steagall Act would reduce risk in the financial system and dial back the likelihood of future financial crises.

  • Returning basic banking to the basics. The 21st Century Glass-Steagall Act separates traditional banks that offer savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial services, such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. The bill also separates depository institutions from products that did not exist when Glass-Steagall was originally passed, such as structured and synthetic financial products including complex derivatives and swaps.
  • Countering regulatory loopholes for risky activities. The 21st Century Glass-Steagall Act specifies what activities are considered the “business of banking” to prevent national banks from engaging in risky activities, and bars non-banking activities from being treated as “closely related” to banking. Over time, the Office of the Comptroller of the Currency and the Federal Reserve used these terms to allow traditional banks and bank holding companies to engage in a wider and wider range of high-risk activities. This bill would end those practices.
  • Taking on “Too Big to Fail.” The 21st Century Glass-Steagall Act cannot end “Too Big to Fail”on its own, but it moves the financial institutions in the right direction by making them smaller and safer. By separating depository institutions from riskier activities, large financial institutions will shrink in size and will not be able to relly on federal depository insurance as a safety net for their high-risk activities. Although some financial institutions might be large, they would no longer be intertwined with traditional depository banks, reducing the implicit government guarantee of a bailout.
  • Enforcing Glass-Stegall. The 21st Century Glass-Steagall Act institutes a five-year transition period and penalties for violating the law.

Does this proposal to separate commercial banking and investment banking forget that it was repealed because foreign banks were eating into the global financial services market share?
With China having half of the largest global banks, will this separation effectively bar the US from becoming the greatest financial center?
Is giving up much of this market a risk we are willing to take?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.

Wall Street Is Caving In

GE in the news from Bing
GE from Bing News

GE announced that it will spin off its real estate portfolio and private equity. Last year, it spun off its consumer banking business. What remains is commercial banking.

This type of segregation through divestiture and sale is exactly what Dodd-Frank wanted to Wall Street firms to do but didn’t say so directly in the law. Dodd-Frank, the landmark legislation that requires, among other things, to segregate investment banking activities with commercial banking activities. This, in effect, undoes Gramm-Leach-Bliley and reinstates Glass-Steagall. Or, in plain speak, commercial banks can no longer have investment banking operations and must focus on lending products with depository funds.

For GE, this makes sense. It was a weird mix of businesses when CEO Jeff Immelt took over. Such conglomerates were out of favor for all the right reasons. When people can choose to buy equities of companies in a mix of their own choosing, why would a company need to have a broadcasting business, medical devices, commercial lending, credit cards, mortgage banking, healthcare financing, airplane capital leasing, home appliances and grand licensing businesses? I’m sure I am missing other businesses as well.

Immelt is keeping the commercial banking business of GE Capital because it is in line with other businesses GE has kept over the years. But this means the business has shrunk immensely and quickly, from $363 Billion to $90 Billion. At its peak, it was $538 Billion in 2008.

Shareholders are generally in favor of this. The real question is how Immelt intends to deploy the funds from sale of businesses? But that’s for another blog. For Money Compliance Blog, Immelt has made the decision that Congress wanted to make. Will others cave?

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.