Is it possible that true financial reform might take place?

That the too big to fail banks might be broken up? That the era of endless taxpayer subsidy to banker speculation is coming to an end?

Quite possibly!

A Democrat and a Republican Senator, Maria Cantwell and John McCain, are trying to reinstate Glass-Steagall.

Over the past year, we’ve heard some chatter about bringing back the depression era legislation that kept commercial and investing banks separate — so when Wall Street goes bust, it does not freeze Main Street banks — but no one has put details on the table yet.

Cantwell has been aggressive on derivatives; Paul Volcker seems to be stepping up on this issue, so perhaps there is something actually occurring here. (Steny Hoyer in the House is also talking about bringing back Glass-Steagall).

Here are two recent articles:

House Discussing Glass-Steagall Revival, Hoyer Says (Bloomberg)

“The U.S. House is considering reinstituting the Depression-era Glass-Steagall Act, which barred bank holding companies from owning other financial companies, Majority Leader Steny Hoyer said.

A renewal of the 1933 law “is certainly under discussion” by House members, Hoyer told reporters in Washington today. The Glass-Steagall law was repealed in 1999 to help pave the way for the formation of Citigroup Inc. by the $46 billion merger of Citicorp and Travelers Group.”

And this:

Cantwell/McCain: An Odd Post-Crash Couple (Newsweek)

“John McCain lost the 2008 presidential election because of the financial crisis—at least that’s what his chief strategist, Steve Schmidt, suggested. “We were three points ahead on Sept. 15 when the stock market crashed. And then the election was over,” Schmidt said in a postmortem earlier this year. McCain was tarred with the regulatory failures of the Bush years, and it didn’t help that he had been a longtime acolyte of the Senate’s dean of deregulation, Phil Gramm, who once derided Americans as “a nation of whiners.” McCain also seemed to have few new ideas of his own about how to address the financial panic.

More than a year after the election, the Arizona Republican is looking to repair that reputation by joining up with Democratic firebrand Maria Cantwell to propose something that will be anathema to both Wall Street and the Obama administration. According to two congressional sources, the two maverick senators want to reinstate Glass-Steagall Act, the Depression-era law that forced the separation of regular commercial banking from Wall Street investment banking. The senators’ proposal echoes a failed amendment introduced in the House last week by Rep. Maurice Hinchey of New York.”

Fascinting — and hopeful — developments . . .

>

Previously:
Volcker: Reinstate Glass Steagall (September 24th, 2009)

http://www.ritholtz.com/blog/2009/09/volcker-reinstate-glass-steagall/

Former Chair of Citigroup: Restore Glass-Steagall (October 27th, 2009)

http://www.ritholtz.com/blog/2009/10/former-chair-of-citigroup-restore-glass-steagall/

Gramm: Glass Steagall Repeal Irrelevant (November 19th, 2009)

http://www.ritholtz.com/blog/2009/11/gramm-glass-steagall-repeal-irrelevant/

Category: Bailouts, Politics, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Will the US Reinstate Glass Steagall ?”

  1. Transor Z says:

    Watch for the following provision:

    Section 1722(c)(27):
    Bank holding companies formed between September 21 and September 30, 2008 shall be exempt from the requirements of this Act.

    ~~~

    BR: If I understand you correctly, this isn’t the law, but is something to watch out for . . .

  2. torrie-amos says:

    there you go, I was for one whole second happy, now again i have been fooled

    loophole loophole loophole grow and grow and grow

  3. flipspiceland says:

    Do chickens have lips?

  4. ZedLoch says:

    Call me a pessimist, but I wouldn’t hold my breath on this one. But I hope I’m wrong.

  5. flipspiceland says:

    Guess the Bernanke thing jammed up the servers again.

  6. bsneath says:

    Will the US Reinstate Glass Steagall ?

    No. Too much money being made by too many bankers and politicians.

    We will need a second financial crisis before this happens. Or a wholesale change in voter attitudes.

    Nevertheless I admire Cantwell & McCain for the bipartisian statement.

  7. Mannwich says:

    Wait until it gets through all the commitees (and lobbyists) in Congress before celebrating. This thing will be so watered down that by the end of it, it will be called just “Glass” (and not of the double-paned variety).

  8. bsneath says:

    Glass Sheeple ?

  9. Moss says:

    Seems like political theater, especially when coming from McCain. He is and has been absolutely clueless on every financial and economic decision that matters. The Keating five, alliance with Gramm etc.. Now all of a sudden he has changed course 360 degrees.. Highly suspect and most likely another one of his compulsive populist gimmicks. He must really miss being a maverick. The guy should retire like half the hypocrites in the Senate.

    They should re-instate some from of Glass Steagall but the first thing they should do is revoke the CB status granted to Goldman and Morgan Stanley, give them 1 year.

  10. franklin411 says:

    McCain isn’t the man he once was. The old McCain (the one who thought he could get ahead in the Republican Party by actually getting stuff done–ca 2000) died when he started running for the nomination in 2006. The LA Times just did an expose on McCain’s hard right turn towards hyperpartisanship:

    http://www.latimes.com/news/nation-and-world/la-na-mccain7-2009dec07,0,7329866,full.story

  11. curbyourrisk says:

    Listen….the only chacne this gets put back on the books is if it i a watered down version of the old bill. They will never allow a bill to get passed that might damage their friends. NEVER HAPPEN!!!

    I call Barney Frank out on this……..I challenge him……I dare him to make it so.

  12. Greg0658 says:

    “changed course 360 degrees” .. fyi thats the same place .. maybe thats your point … 180 is opposite

    close and bar the doors .. after … that would be perfect for a 100 years .. for the establishment behind castle walls … bring in the beaver dams

  13. jeffshattuck says:

    I agree with the concerns about McCain being an opportunist, but still, I’ll take it. Of greater concern, of course, is the exception cited above by Transor. Sigh… Washington.

    What about derivatives? I confess, I was an English major and struggled with math, but, here’s my suggestion for derivatives regulation.

    First, a definition: I define a derivative as any investment derived from another. In other words, a CDO, sure, but also a mutual fund.

    Suggestion: because much of the problem with derivatives has to do with assessing risk, as a result of the original investment being “derived” so many times, I would suggest that derivatives be subject to a simple rule of three, so that after three derivations — say STOCK > MUTUAL FUND > FUND OF FUNDS (with the caveat that each of these funds must also be one degree of Kevin Bacon) — no more. No need to police it all in real time, but there would be a law that if you knowingly invested in a derivative — or created one — that was more than three degrees of separation, you would be forced to work as a clerk in a bank for the rest of your sad life.

    Jeff
    http://www.cerebellumblues.com

  14. Darkness says:

    I can’t believe we had to go through all this just to learn something this fucking obvious.

  15. willid3 says:

    we can hope. but there are to many on both side of the isle to actually let this happen. maybe. some of the DEMS are to beholden to wall street and banks. but the GOP is so against any control of the market that they would rather have it collapse in a regular manner. but i guess if you don’t control it, your can’t be responsible for it crashing regularly.

  16. Greg0658 says:

    Memorable quotes for Deliverance (1972) .. via imdb

    [first lines]
    Lewis: You w- you wanna… you wanna talk about the vanishing wilderness?
    Bobby: Lewis, listen – what are you so anxious about this?
    Lewis: Because they’re buildin’ a dam across the Cahulawassee River; they’re gonna flood a whole valley, Bobby, that’s why. Dammit, they’re drownin’ a river; they’re drownin’ a river, man.
    ____

    Taxi Driver: Right there’s the town hall. Right over there’s the old fire station. Played a lot of checkers over there, sure did. All this land’s gonna be covered with water–best thing ever happened to this town.
    [a truck in front of the cab is carrying a small church building on a flatbed trailer]
    Taxi Driver: We might have to wait a minute for the church to get out the way.

  17. JoWriter says:

    Regulation needed, sure, but who regulates the regulators?

    This story from the Portland (Oreg.) Business Journal shows what looks like regulatory misconduct in what could be the beginning of a huge BK case:

    http://portland.bizjournals.com/portland/stories/2009/12/14/daily16.html?ed=2009-12-15&ana=e_du_pub

    What pals they all were! Except for WaMu people, of course.

  18. jus7tme says:

    ust once I’d like someone to explain EXACTLY what the effect of Glass-Steagall is. What exactly is it that banks could not do before, but can now?

    Even wikipedia just has some of mumbo-jumbo about “separating investment banking from commercial banking”, and no specifics.

    I’m entirely convinced that Glass -Steagall should be re-instated, but how does it actually work? Actually, here is a pretty good explanation:

    http://www.investopedia.com/articles/03/071603.asp?viewed=1

    It describes some of the specific restrictions:

    1. banks cannot underwrite (i.e buy new issues and hold or resell) any bonds or other securities except government bonds.

    2. in particular banks cannot use customer deposits to buy securities for their own account.

    3. banks cannot derive > 10% of revenue from securities trading

    4. banks also cannot be securities brokerages for their customers, hence reducing risk that bank customers get fooled into thinking that securities are “as safe as the bank”.

    One matter I do not understand is how banks were barred from buying (speculating in) securities themselves, but have they not always been able to LEND money to other people that will in turn speculate in securities?

    I suppose there is a difference, though. When a bank is completely separated from the entity that borrows money to speculate, it is less likely that they will be sloppy with the loan criteria.
    Imagine if the brokers and the bankers were in the same company, and the brokers talked/bribed the bankers into letting them use the customer deposits to speculate (for a fee, of course). I think this is what occurred before the great depresson.

  19. [...] Will The US Reinstate Glass-Steagal (The Big Picture) [...]

  20. Transor Z says:

    Barry, yes, my comment above was snarky. Although it’s scary how unsurprising it would be to see a special GS exemption baked into whatever they come up with, if they do.

  21. blueoysterjoe says:

    John McCain, like 99% of other politicians, will make barking noises that sound like reform when a camera is in his face, but then he will slink away from true reform when it counts, mumbling something like “don’t let the perfect be the enemy of the good” or “not enough tax cuts” or other similar barking noises. The fact that McCain is making these barking noises only shows that true reform now has momentum, enough to get the camera whores front and center, but nothing more.

    Here’s how it works in Washington these days:

    1. A good idea comes out.
    2. It is ignored until all other ideas fail.
    3. The “mavericks” start barking about it on the Sunday Bobblehead shows.
    4. The idea gets traction.
    5. It is introduced as an amendment to a bill, somewhere between Turnip Relief for Idaho and funding for the agricultural arts.
    6. The amendment is ripped out at the last minute. The “mavericks” vote for it to get ripped out because it doesn’t cut taxes enough.
    7. The US continues to decline.
    8. China buys it.
    9. We all start wearing funny hats.

  22. constantnormal says:

    As it appears that this thread has “matured”, I’ll not feel to bad in pushing a somewhat-off-topic diversion here (I’ll connect it at the end):

    In today’s Rosenberg Breakfast with Dave newsletter (HIGHLY recommended), he makes the following observation:
    “We are not sure if this is a well known “fact”, but the U.S. government has a record $2.5 trillion of its debt, including bills, bonds and notes, rolling over in 2010. That, my friends, is 35% of the outstanding level of Uncle Sam’s marketable obligations having to be refinanced in one single year. One has to wonder how the Fed is going to be able to raise interest rates in such a backdrop of massive rollovers; and if it doesn’t and the economy manages to exceed expectations or we get some inflation, how it is that the near-record steepness in the yield curve doesn’t continue in the coming year.”

    Now this should not be a surprise, as the Treasury has been shortening the maturities of its debt issuance for many years now. I expect that 2011 will see a similar rollover in Treasury debt, and 2012 as well, and so on.

    Putting aside the glaringly obvious question of — HOW IS THIS GOING TO BE ACCOMMODATED? — my question is why does Dave think the Fed is going to have trouble raising rates in such an environment. My thought would be that rates are headed sky-high to convince foreigners to purchase our $2.5T in short-term debt, that the Fed has already demonstrated this year the limits to which it can print money to buy Treasuries without utterly destroying the USD (at a far faster rate than they plan on doing, anyhow). The Fed’s problem would seem to me to be how to restrain the rise in rates, so as to not destroy this economy.

    And to bring it all back in line with the thread topic — when the current financial industry is reduced to rubble — not merely the threat of this, as we experienced over the past 18 months, but the actual realization of it — then the stage will be set for bringing back Glass-Steagall, limiting bankster leverage, banning CDS, and perhaps instituting caps on executive compensation at publicly-owned corporations in general.

    Until we are surrounded by the ruins of our existing corrupt and decadent financial industry, nothing will happen to change things.

  23. constantnormal says:

    dammit. I CLOSED the tag on the italics in the above post. stoopid WordLess.

  24. EAR says:

    Gotta put my seatbelt on. Lemme just remove my bloody mess of a head from the windshield

  25. [...] Move to reinstate Glass-Steagall picking up [...]

  26. [...] Will The US Reinstate Glass-Steagal (The Big Picture) [...]

  27. fusionbaby says:

    Theatre.
    Theatre of the Absurd.
    Posturing.
    What they do will be ineffective.
    No blood and guts intention to turn things around.

    Wall St./Goldman Sachs/Banksters have control of the government and its currency. The power elite get rich and remain protected… the rest of America goes to the dogs.

  28. cheese says:

    Securitization killed the “wall” 30 years ago.

    I predict “wall st.” will be all for this, and, any new legislation that seeks to “curb the excesses of speculation.”

    How else are the going to get the incentives to create new products?

  29. [...] Is there a chance Glass-Steagall will be reinstated?  (Big Picture) [...]

  30. [...] Glass-Steagall needs to be reinstated, I am 100% for it (The Big Picture) [...]