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.
