Better Banking Law Shatters the Shattered Glass-Steagall Arguments

William Isaac and Richard Kovacevich’s April 26, 2017 Op-Ed piece on Glass-Steagall is deeply flawed. One obvious example is their statement that: “Even firms like Citigroup and Bank of America that made a series of mistakes in the 2008 crisis survived because they were diversified.” Citigroup did not survive because it was diversified; it was essentially bankrupt at that time. Citigroup survived because US taxpayers bailed it out to the tune of $45 billion dollars directly and another $431 billion* indirectly through loan guarantees and liquidity support. It was the number one beneficiary of Uncle Sam’s bailout support and Bank of America was number two.

Citigroup was the largest underwriter of collateralized debt obligations in 2007, the year before the crash. A few years later, Citigroup made a $590 million dollar settlement with its stockholders because it had earlier represented that it’s subprime exposure was $13 billion, when in fact it was more than $50 billion. Had Glass-Steagall still been in effect in 2007 and the bank prohibited from underwriting such securities, how on earth would it ever have had even $1 billion of these toxic assets in it’s inventory, let alone $13 billion, or God forbid, more than $50 billion.

*SOURCE: The Final Report of the Congressional Oversight Panel - March 16, 2011

Fed's Proposal on Merchant Banking

We at Better Banking Law have enjoyed the columns of Steven Davidoff Solomon, law professor at Cal-Berkeley, which have appeared periodically in the New York Times. For example, a fine piece was published just two days ago: "Public Companies See Gold in California".

However, the column published in the Times on September 13th, titled "Fed Proposes Ban on Merchant Banking, a Practice With Little Risk", was not well thought out and surprisingly one sided. It chided the Fed’s proposal and was written mostly from the perspective of the Too Big To Fail commercial banks, their lobbyists and law firms. He states that the Fed’s proposed ban is another step back to the Glass-Steagall Act, but neglects to mention that the Banking Act of 1933 (Glass-Steagall) created Federal Deposit Insurance in addition to separating commercial banking from investment banking. And that is why only Federally Insured commercial banks (not investment banks) were prohibited from engaging in merchant banking.

A couple of paragraphs later he states that these merchant banking limitations ended in 1999 with the Gramm-Leach-Bliley Act which ended Glass-Steagall, but neglected to note that the other section of Glass-Steagall, which created Federal Deposit Insurance, remains very much intact. He further states that the removal of this merchant banking stricture was uncontroversial at the time. The question is why would permitting Federally Insured bank holding companies to combine banking and commerce, an obvious conflict, not be controversial?

He follows these statements by quoting a trade group for bank holding companies and a law firm that represents commercial banks as being opposed to the Fed’s proposal. Their positions are predictable, but why not also quote sources that are concerned about future taxpayer bailouts of Too Big To Fail Banks, and thus supportive of the Fed’s proposal?

He then states the following:

"The reason for the industry’s exasperation is easy to see. Merchant banking is simply the practice of buying operating companies. The risk to a bank holding company is twofold. First, the bank could lose its money — as with any investment. Or second, it could be held liable for the debts of that company."

However, there is a third risk and that is potential conflicts. Does the bank holding company, which owns an operating company, favor it by extending loans on more beneficial terms over other companies it does not own? Furthermore, won't objective lending standards sometime be compromised in support of the bank's own investment?

The professor also shows concern that, under the Fed's proposal, an operating company may not benefit because a Federally Insured bank would not be an eligible investor. However, the Federal Reserve must certainly have weighed that issue in reaching its decision and one must wonder how in the world so much merchant bank financing was accomplished from 1933-1999, when Federally Insured banks were prohibited from making such investments. The nation did fine without them and there are many more eligible investors today, both individual and institutional, without resorting to funds from taxpayer supported Federally Insured banks.

The foregoing are some of Better Banking Law’s observations regarding Mr. Solomon’s September 13th column. The following is another response to his piece by Saule T. Omarova, a Cornell law professor, which appeared on the New York Times Dealbook website on September 19th, titled "Real Risks in Big Banks’ ‘Merchant Banking’ Activities". We at Better Banking Law find it compelling:

The Perfect is the Enemy of the Good - the article appears below as well.

Glass-Steagall has returned to contemporary debate, brought on by the platforms of both Democrats and Republicans calling for its re-enactment. While it seems more and more U.S. Citizens now realize the importance of Glass-Steagall, it unfortunately remains misunderstood and misrepresented by many. This includes, not surprisingly, the banks, their lobbyists, law firms, and sadly, much of the press, which has often naively parroted the opinions of the conflicted banks and their lobbyists. For this reason, though in a perfect world I would whole-heartedly support its re-enactment, in the actual world it may well be “a bridge too far.” Based on my experience and involvement with the Glass-Steagall controversy over the past 35 years, I must conclude that "the perfect is the enemy of the good".

My involvement began in the 1980's and continued in 1990, when I served as Chairman of the Securities Industry Association (SIA), whose membership at that time consisted overwhelmingly of investment banking firms, and only a handful of commercial banks. Following the financial crisis, I returned to my bank reform efforts by founding Better Banking Law - the purpose of which is to help enact meaningful Federal legislation, which would eliminate future taxpayer bailouts of banks or any other financial institutions.

As Chairman of the SIA some 25 years ago, I saw the handwriting on the wall when large, Federally Insured commercial banks were relentless in their desire to engage in the risk-taking that non-insured investment banks were permitted under Part II of Glass-Steagall. Part I of course was the creation of Federal Deposit Insurance, which necessitated the separation required under part II. Nevertheless, over the years commercial banks convinced their banking regulators to reinterpret the Glass-Steagall statute to permit them to engage in investment banking. In 1990, under my leadership, the SIA proposed Federal legislation which would have permitted separately capitalized investment banking subsidiaries of bank holding companies to compete with traditional investment banks, but only with very strong firewalls to prevent such subsidiaries access to Federal Deposit Insurance. It was called the SIA Plan. Though not providing as strong a separation as Glass-Steagall, it was another way to protect taxpayers, while maintaining a fair, safe and resilient financial system. An interview, published in 1990 in Investment Dealer’s Digest, articulates the plan put forward by the SIA, as well as my views on healthy bank reform.

One of the most encouraging bank reform developments is Sir John Vickers' ringfencing plan, which is now law in the UK. More on The Vickers Plan can be found on the Better Banking Law website. In the SIA Plan, where we used the term “firewalls” to segregate the riskier businesses from government insured deposit taking, they use the term “ring fencing” and they ring fence the retail bank rather than the investment bank, but the concept is the same.

We at Better Banking Law believe strongly that in the U.S., a similar, bipartisan solution is achievable.

It is one that avoids:

• Complex and costly regulation

• The moral hazard of To Big To Fail banks engaging in excessive risk-taking with an implicit government guarantee, which encourages privatizing profits and socializing losses

It is one that enables:

• Competition and innovation

• Failure as well as success (without a need for taxpayer bailouts)

• A balance of opinion on Capitol Hill from all types/sizes of financial institutions, including banks, investment banks, insurance companies and money managers

Further to this last point, why should these distinctly different businesses all continue to sing from the same hymnal? That was never the case when Glass-Steagall was the law of the land.

Finally, I make a strong case on the Better Banking Law website as to why our nation needs bank reform legislation and I welcome comments on how we can make a fair, safe and resilient financial system a reality.

Better Banking Law responds to "Are Big Banks Necessary?" by John Heltman on March 8th in American Banker

Neel Kashkari, the new President of the Federal Reserve Bank of Minneapolis, recently publicly expressed a view that big banks should perhaps be broken up to prevent a recurrence of the taxpayer bailout of 2008. In reaction, Mr. Heltman interviewed six big bank advocates and two supporters of Mr. Kashkari’s position. The big bank advocates Mr. Heltman quoted are as follows:

1. GREG BAER, president of the Clearinghouse Association and former executive of JP Morgan Chase and Bank of America;

2. KAREN SHAW PETROU, managing partner at Federal Financial Analytics;

3. TONY FRATTO, partner at Hamilton Place Strategies and former Treasury official in the Bush Administration;

4. DAVID HIRSCHMANN, president and chief executive of the Center for Capital Market’s Competitiveness at the US Chamber of Commerce; 

5. H. RODGIN COHEN, senior chairman at the Sullivan & Cromwell law firm; and

6. JOHN DEARIE, acting chief executive of the Financial Services Forum. 

The following supporters of Mr. Kashkari’s position quoted in the article are:

1. MARCUS STANLEY, policy director for Americans for Financial Reform; and

2. DENNIS KELLEHER, president of the public advocacy group Better Markets. 

Inasmuch as this reporting was published in the American Banker, perhaps it is not surprising that the 6 - 2 pro-big bank advocates vs. financial reform advocates ratio would be considered a fair fight. Nevertheless, a careful reading of the article demonstrates that Mssrs. Stanley and Kelleher more than held their own in the discussion. That is, they were given chances to respond to the stated pro-big bank positions until the very end of the article. However, at that point the reporter chose to end the article by quoting Mr. Fratto at length, giving him the last word with no opportunity for either Mr. Stanley or Mr. Kelleher to respond. The following comprise the final two paragraphs of the article:

Had the reporter permitted either Mr. Marcus or Mr. Kelleher to respond to Mr. Fratto, I imagine this is how they might have done so:

Mr. Fratto considers it unfair and problematic that the banking industry should require a formal cap on size inasmuch as no one is asking for similar caps on large firms engaged in aerospace, telecommunications or technology. But those businesses do not enjoy the benefit of either Federal Deposit Insurance or access to the Federal Reserve window in times of financial upheaval. Mr. Fratto must know that banks are vastly different from all other businesses in that respect.

Moreover, banks are far more heavily leveraged than the businesses of aerospace, telecommunications or technology. Banks have only 6-9% of their assets in the form of equity; the rest is all borrowed. Conversely, the other businesses mentioned are more likely to have at least 75% of their assets in equity with 25% or less in borrowed funds. Obviously Federally insured banks are very different from other businesses in this respect as well and, more fundamentally, banking and commerce have always been separate in America.

In Mr. Fratto’s second paragraph, he employs a colorful analogy, stating that after the Titanic hit the iceberg (it would have been wrong) to decide that there should be no more big boats. Obviously true. However, a better analogy was employed several years ago by John Reed, the former Citigroup CEO who, after many years of advocating for the repeal of Glass-Steagall, discovered how damaging that repeal was to the nation’s economy and changed his view entirely. Mr. Reed was quoted several years ago as follows: “I would compartmentalize the industry for the same reason you compartmentalize ships. If you have a leak, the leak doesn’t spread and sink the whole vessel.”

Additionally, here’s a quote from Mr. Reed’s recently released 2010 interview with the Financial Crisis Inquiry Commission, where he questioned the structure of combining retail and investment banking - basically, Citigroup’s entire model:

Finally, while Mssrs. Stanley and Kelleher have indeed provided excellent counter arguments to those of the big bank advocates, we at Better Banking Law have additional strong arguments which refute many of the assertions made by such big bank advocates and welcome your inquiries.

Better Banking Law responds to PIMCO's misguided assertions

In a recent FT article, PIMCO responded to Neel Kashkari's statement that the largest banks may need to be broken up, by stating that they think it is a bad idea. They make the following five assertions:

1. REGULATIONS ARE ALREADY HELPING. Better Banking Law does not disagree; however PIMCO goes on to state that several large banks have shrunk their balance sheets in recent years. But they neglect to say that, while one or two banks may well have done so, the fact remains that the four largest banks, as reported recently in the Wall Street Journal, in 2015 held $8.01 Trillion in total assets, which comprised 51% of all bank assets. Whereas in 2006, those same four banks held $5.18 Trillion of total assets, representing a mere 44% of the total. Some shrinkage!

2. A BREAK UP COULD PROMPT ANOTHER CREDIT CRUNCH. This is surely an odd argument, since it was the large universal banks that contributed in a major way to the financial crisis in '08 through their foolish underwriting of bonds backed by toxic mortgage assets and derivative securities thereof.

3. SMALLER BANKS ARE NOT NECESSARILY LESS RISKY. Better Banking Law has never asserted that small banks are not without risk. But when small banks have failed, the FDIC has very effectively dealt with those failures. However, when gigantic banks fail, FDIC funds become woefully inadequate and require, as in 2008, the bailout of such universal banks, to protect the nations economy. Furthermore, the smaller banks seldom deal in derivatives or other exotic financial instruments, which can lead and have lead to disaster.

4. BOND HOLDERS WOULD BE WARY OF NEW ENTITIES. At present, holders of the bonds of large US bank holding companies are unsure, due to BHCs complexity, just what the source of payment for their bonds may be. However, since all BHC bond holders were bailed out in 2008, such holders likely assume that the bank debt owed them will ultimately be paid by Uncle Sam. This moral hazard must surely end. BHC bond holders get significantly more yield than they earn on US treasuries, so why should such holders be bailed out again by the government?

5. THERE COULD BE A POTENTIAL INCREASE IN COUNTERPARTY RISK. After a breakup, a counterparty would be much more assured that a specific entity, which can be far better analyzed than the entire BHC, is responsible for its payment of its obligation.

PIMCO's final statement is as follows: "While further measures to encourage simpler and smaller balance sheets and operations may be needed, policymakers need to keep a close eye on their unintended consequences, no matter how politically appealing the measures may seem." Had this sentence not included the word "politically", it would have been fine. Sadly, with that word, the statement becomes a cheap shot. This issue is not political: it has to do with protecting taxpayers from a situation where, if things work out for the banks, their bondholders, stockholders and executives get the benefit. Whereas, if they fail, taxpayers are on the hook - as happened in 2008. Furthermore, to the extent politics is involved, the lobbyists and lawyers for the banks have far more access to Congress through their and the banks' own gigantic campaign contributions. Thus, the taxpayers become the only party without political representation in Congress.

Neel Kaskari's full speech "Lessons from the Crisis: Ending Too Big to Fail" can be viewed here.

Oddly Inconsistent Views on the Financial Crisis

Paul Krugman’s October 16th New York Times article, “Waaaaah Street Attacks” is oddly inconsistent. First, Better Banking Law certainly agrees with him that “repealing Glass-Steagall was indeed a mistake.” However, he then takes a wild turn in his very next sentence: “But it’s not what caused the financial crisis, which arose instead from ‘shadow banks’ like Lehman Brothers.”

Had he said: “The repeal of Glass Steagall was only one of the causes that contributed to the crisis and that Lehman Brothers’ failure was also a contributor” he would have had no argument from Better Banking Law. But to flatly state that the repeal did not cause the financial crisis, he is essentially asserting that the ability of Federally Insured commercial banks to underwrite toxic mortgage-backed bonds did not cause or contribute to the crisis in a major way. This is nonsense and Mr. Krugman surely must agree since several paragraphs later he reverses course once again, stating accurately but too narrowly: “After all, runaway banks brought the economy to its knees, causing millions to lose their jobs, their homes, or both. What’s more, banks themselves were bailed out, at potentially large expense to taxpayers.” I say narrowly because there were several other culprits, besides the banks, which I will allude to later.

Lehman Brothers was an old line investment bank which underwrote and traded securities that, due first to bank regulators eviscerating Glass-Steagall and then Congress repealing a key part of it in 1999, now had to compete in the investment banking arena with Federally Insured commercial banks. A prime example is Citigroup which, in addition to having FDIC insurance, could, in an emergency, also borrow funds from the Federal Reserve.  Lehman had neither advantage and, unlike Citigroup, was not bailed out by the taxpayers and instead went bankrupt. Citigroup incidentally was the #1 underwriter of Collateralized Debt Obligation Bonds in 2007 with $41.7 Billion while Lehman only ranked 10th with $16.7 Billion. In fact, in addition to Citigroup as number 1, the 3rd, 4th, 5th, and 8th ranked underwriters of such bonds were also commercial banks.

Citigroup received a minimum of $45 Billion of Uncle Sam’s bailout funds while Lehman got none. Had Glass-Steagall still been in effect, how in the world could Citigroup have lost so much money had it not been permitted to underwrite and trade securities, whether CDOs, mortgage-backed bonds or other securities?

We at Better Banking Law have never said that the repeal of Glass-Stegall was the sole reason for the financial crisis of 2008. There were several other culprits including:

1. Toxic mortgages consisting of liar loans brought to market by unscrupulous mortgage brokers which were then securitized and repackaged by Wall Street banks and securities firms;
2. Individual borrowers that took on debts which they didn’t understand and couldn’t afford unless the housing bubble continued to expand;
3. Credit rating agencies which blessed many hundreds of questionable mortgage backed securities issues with their highest ratings of AAA;
4. Irresponsible lending by Fannie Mae and Freddie Mac, which lowered their own credit standards so as not to lose market share to Wall Street; and
5. Federal banking regulators that utterly failed to do their jobs.

Of course Lehman Brothers and the other investment banks were just as guilty as the Federally Insured commercial banks of causing the financial crisis along with the other culprits mentioned. However, the issue is whether, had Glass-Steagall still been in effect in 2008, thus preventing Federally Insured commercial banks from underwriting the hundreds of $Billions of toxic bonds they did, the crisis would have grown to anywhere near the size it did. Any fair-minded person would have said no, it could not have grown nearly as big and the bubble would have burst much sooner had Federally Insured commercial banks not first joined the party and later nearly dominated it.

Furthermore, it is hard to believe that Congress would ever have bailed out stand alone investment banks. After all, commercial banks, not investment banks, are at the heart of the nation’s payments system and that was why the Fed, the Bush Administration and Congress bailed out the Federally Insured commercial banks.  

It is important to remember that no investment banks were bailed out unless and until they were first either purchased by a commercial bank or became bank holding companies themselves. Think of it. Of the five largest independent securities firms in early 2008, Bear Stearns, about to fail, was absorbed by J.P. Morgan with strong encouragement by the US Treasury and the Federal Reserve and immense financial help from the Fed; Lehman Brothers went bankrupt; a shaky Merrill Lynch was bought by Bank of America; and shortly thereafter the two strongest, Goldman Sachs and Morgan Stanley, were firmly encouraged by the Fed and the Treasury to become, and quickly became, bank holding companies.

It is also helpful to recall that, prior to the crisis, hundreds of investment banks went bankrupt or were forced into mergers. Taxpayers hardly noticed. A generation ago, Drexel Burnham, the dominant underwriter of high yield bonds, went bankrupt and the financial markets shrugged. It is not the same when a Federally Insured “Too Big To Fail” commercial bank fails. First the FDIC, and ultimately the U.S. taxpayers, bail them out. If Glass-Steagall or something similar, such as the U.K.’s current “ringfencing” statute, were the law in the United States, those commercial banks would not need to be saved by taxpayers.

The Press and Glass-Steagall: A Truth Half-told

A lot of Googling of the phrase "Glass-Steagall" has been going on across the country, following the Democratic debate. We at Better Banking Law welcome this and see it as a tremendous potential benefit to American taxpayers going forward. Unfortunately, the press is often half informing readers on just what Glass-Steagall was and is. And I intentionally said “is” as well as “was” because, though that section of the Banking Act of 1933 (AKA Glass-Steagall) that separated investment banking from commercial banking was repealed by Congress in 1999, the other section, which created Federal Deposit Insurance for commercial banks is still very much intact. And of course FDIC insurance is what assures depositors that: (1) their money will be safe; and (2) their financial transactions will go through. This is why Congress voted to bailout the commercial banks in 2008, after such banks incurred tremendous losses from underwriting mortgage-backed securities.

Neil Irwin's recent New York Times article titled "What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate" failed to even once mention Federal Deposit Insurance (FDIC) in his comprehensive piece. It’s hard to believe that had Federally insured commercial banks not been allowed to underwrite such securities that it would ever have been necessary for US taxpayers to bail them out at all.

Assuming only investment bankers could have underwritten such securities, the losses incurred throughout the financial system would have been far less and it is inconceivable that Congress would have bailed such investment bankers out. After all, Lehman Brothers was permitted to go bankrupt in 2008 and hundreds of investment banks had gone bankrupt or forced into mergers over the years. A prime example a generation ago was when Drexel Burnham, the then leading underwriter of high yield bonds, went bankrupt and the financial system hardly shrugged. 

The crux of what you need to know about Glass-Steagall can be found in our Legislation 101 series here.

A Response to William D. Cohan's July 30th NYT Dealbook piece

The post I write today is a response to William D. Cohan's July 30th New York Times Dealbook piece:

I am mystified as to why Mr. Cohan is so vehement in opposing the reenactment of those sections of The Banking Act of 1933 (Glass-Steagall) that separated investment banking and commercial banking. As he is well aware, the sections of that Act that created Federal Deposit Insurance are still very much intact. I say mystified because William D. Cohan has written some excellent books and thoughtful articles on American business and finance. The arguments he raises in this article are not consistent with his former work. 

While on the subject of mystification, why on Earth should “the idea of separating investment banks from commercial banks is again the rage” be mystifying to Mr. Cohan? After all, as he also stated in his opening paragraph, this was “the law of the land for more than 60 years.” During that period there were few bank failures and these were dealt with by the FDIC, not the taxpayers. Not surprisingly, since it’s a risky business, a large number of investment bank failures occurred during that period, resulting in either bankruptcy or merger with a stronger firm. In neither case, however, did these failures affect the financial health of the nation. Therefore, why should it be at all mystifying that members of Congress and most citizens/taxpayers would like to return to such a relatively benign financial environment?

In his next six paragraphs, Mr. Cohan's piece constitutes a reasonable and thoughtful report on the current status of the bipartisan Senatorial bill to re-enact these critical sections of Glass-Steagall. The sponsors are two Democrats - Elizabeth Warren and Maria Cantwell, one Republican - John McCain, and an Independent - Angus King. My only objection here is his statement that the reason the bill was not adopted in the 113th Congress was “because it was a bad idea.” He gives no support for such a conclusion. In fact, based on the sponsoring Senators’ quotes that he cites, most readers would conclude that it is a fine idea. For example, he quotes Senator McCain as follows: “Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits.” On what basis should that not be a true statement on which virtually all Americans can agree and think a very good idea?

Unfortunately, in paragraph seven, Mr. Cohan makes an inaccurate assertion when he states “the fact that commercial banks are in the investment banking business and investment banks are in the commercial banking business had almost nothing to do with causing the financial crisis of 2008.” In the next paragraph he compounds that faulty assertion by blaming “primarily pure investment banks” (and he names four of them) which had “generally gone hogwild in the manufacture and sale of mortgage-backed securities.”  Certainly the pure investment banks were equal opportunity offenders, but no more so than the commercial banks.  

Please observe the table on the left from the Wall Street Journal. It lists the top 10 CDO underwriters in 2007, the year before the financial crisis. Note that commercial banks, domestic and foreign, are ranked as #1,3,4,5, 6 and 8, whereas pure investment banks are #2, 7, 9 and 10. Further note that Bank of America did not make the top 10, but neither did Bear Stearns.

Citigroup, as pointed out by Mr. Cohan, was certainly the worst offender among the commercial banks “in large part because of the behavior of its investment bankers” but, as shown in the table, definitely not as he states “the glaring exception.” However, even if it were the exception, how can our nation again justify bailing out Citigroup for its investment banking and underwriting speculation? In August of 2012 Citigroup settled with its stockholders for $590 million because it misled them. Apparently, according to the New York Times, “Citigroup represented that subprime exposure in its investment banking unit was $13 billion or less, when in fact it was more than $50 billion.” Had the bank not been permitted to underwrite securities how on Earth would it ever have accumulated even $1 billion of these toxic assets in inventory, let alone $13 billion, or God forbid, more than $50 billion. 

In his paragraph 11, Mr. Cohan eludes to JP Morgan Chase’s “rescue” of Bear Stearns.  Having written House of Cards, a history of the last days of Bear Stearns, this statement is surprising. He surely must know that, while JP Morgan invested $1.2 billion in its acquisition of Bear and agreed to absorb any losses on the first $1 billion of $30 billion of Bear’s riskiest assets, the Federal Reserve guaranteed the remaining$29 billion of those assets.

It’s interesting to note that 18 years earlier, the Securities Industry Association requested that, should commercial banks ever be permitted to also become investment banks, then pure investment banks, based on simple fairness, should have access to the Fed window in times of financial crisis - just as their commercial banking competitors did and do. After all, when your main source of financing is your commercial bank, which is also your fierce investment banking competitor, that bank may not always take your calls during a financial crisis regardless of the quality of the collateral you offer.  We shall never know, had that request to access the Fed window been accepted, whether the fates of Bear Stearns, Merrill Lynch and even Lehman might have been different. We do know for certain, however, that in the fall of 2008 Citigroup received, in addition to access to the Fed window and other substantial federal benefits, a $45 billion taxpayer funded bailout.  Today, Citigroup is still very much with us while those three pure investment banks are history.

The following is Mr. Cohan’s final paragraph:

While I disagree with the first sentence above, I certainly agree with the next four. However, I take great issue with his final sentence. With respect to the initial phrase of that sentence, he gives no suggestion as to how he would change the culture of Wall Street unless he plans to either: (i) change human nature; and/or (ii) convert all the gigantic publicly owned commercial bank corporations into privately owned partnerships. Both changes are near impossible.

With respect to its final phrase, WOW! That “outdated, cockamamie notion” kept America’s financial system safe and sound for over 60 years. How can preventing Federally insured banks from speculating with Federally insured deposits be considered outdated and cockamamie? For capitalism to function, failure as well as success must be allowed to occur. How can it be capitalism when we once again privatize gains and socialize losses? Why were all the lenders to failing commercial banks made whole in 2008, thus perpetuating moral hazard? If commercial banks want to speculate with minimal regulation, they should change their charters, give up FDIC insurance and become truly private banks. However, if they choose to remain Federally insured banks, they must stop speculating with Uncle Sam’s money. America must protect its taxpayers.

A Celebration of Yesterday, Today, and Tomorrow

Today is a small celebration for us at Better Banking Law, as it marks the first of many posts on the subject of bank reform. Your comments and questions are always welcome, with the hope that together, we can contribute meaningful dialogue to this important movement.

Yesterday, June 16th, we celebrated the 82nd Birthday of the Banking Act of 1933 aka Glass-Steagall. The Act served the nation extremely well for 66 years by: (1) creating Federal deposit insurance; and (2) separating commercial banking from investment banking. Unfortunately, the separation part of the Act was repealed in 1999, permitting Federally insured banks to engage in investment banking, i.e. securities underwriting and trading. That repeal contributed greatly to the nation’s financial Armageddon in 2008 which required U.S. taxpayers to bailout the banking industry. America is still recovering from that disaster.

Tomorrow, June 18th, is the 25th Anniversary of the publication in Investment Dealer’s Digest of an interview with Robert Downey, the Founder of Better Banking Law, who was then Chairman of the Securities Industry Association (SIA). In the interview, Mr. Downey described the SIA Plan which would have permitted subsidiaries of Bank Holding Companies (BHCs) to engage in securities underwriting and trading. However, those separately capitalized investment banking subsidiaries must succeed or fail on their own and would be completely separated (ring fenced) from the BHC’s Federally insured commercial banking subsidiaries. Commercial banks had been eager to enter the securities business and had constantly advocated for the repeal of Glass-Steagall. However, if commercial banks were to participate in the risky, cyclical securities business, there was a need for Congress to adopt a law in a way that would be safe and fair, while keeping federal deposit insurance (and Uncle Sam) separate. The SIA Plan accomplished those goals.

Aside from the re-enactment of the full Glass-Steagall Act, the SIA Plan (with some minor updating), if enacted into law, would be the best method to prevent future bailouts of the nation’s banking system and to end once and for all the concept of Too Big To Fail.

You can read the IDD interview and discover more detail about the SIA Plan within the Better Banking Law website.