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.

Reverse Morris Trust Is A Tax-Free Merger Deal

In order to talk about Reverse Morris Trust, we need to discuss Morris Trust. And then we will talk about why this is relevant.

Morris Trust was a company that, in the 1960s, received a tax-bill for unpaid taxes for a $413.44. The trust was being held at American Trust Company. The tax bill was a result of ATC merging with a competitor. Mind you, nothing about the Trust had changed, it’s just that the merger created a transaction with tax consequences.

The tax liability is created for the target company because the target company, presumably, sells its shares at a premium to the buyer. The Reverse Morris Trust puts the tax liability to buyer instead, which it may be able to offset with other expenses. (Expenses reduce income, lowering the tax liability.)

Example of a Reverse Morris Trust from Tax Interpretations
Example of a Reverse Morris Trust from Tax Interpretations

The mechanics goes something like this. Buyer wants to buy Target and Target wants to sell to Buyer. Buyer divests a portion of itself into a newly created subsidiary. At this point Buyer own 100% of the subsidiary. Buy SELLS 49% of the shares of the subsidiary to Target for a price. The price costs Target its whole company. So, now, the subsidiary includes 100% of Target and a line of business from Buyer. Having sold 49% of the subsidiary, Buyer retains control. Target, having BOUGHT 49% of a company using itself as the price, it writes off the expense of purchasing those shares. The Target is allowed to merge with the subsidiary. See the trick here? Buyer SOLD while Target BOUGHT.

Executing an RMT is difficult. Buyers and Sellers must find each other for not just for the M&A and the right price, but then also willing to go through with this complicated transaction method. While tax compliance isn’t my area of expertise or interest, business is. M&A is an interesting area that creates many compliance issues, including tax compliance. Tax avoidance is legal, but tax evasion is illegal. RMT offers a way to avoid taxation when done right.

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. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.