Senators Elizabeth Warren and John McCain are introducing new legislation to “take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities.”

I have a quote in the column:

“The act also kept banks that use federal deposit insurance out of potentially volatile Wall Street activities, like trading. As a result, problems at investment banks were less likely to infect regulated banks. Losses at the Wall Street operations of Citigroup and Bank of America weighed heavily on those banks during the 2008 crisis.

For about 70 years, Glass-Steagall managed to keep the riskier, more damaging part of Wall Street away from what should be the boring, straightforward side of finance,” Barry L. Ritholtz, chief executive of FusionIQ, an asset management and research firm, said. “It was the height of stupidity repealing Glass-Steagall.”

The argument I made is summed up in this one paragraph:

“During the era of Glass-Steagall, there were no systemic banking crises like the one that occurred in 2008. The restrictions the bill put on the financial sector did not seem to do much wider harm. According to analysis of government gross domestic product statistics, the American economy grew an average of 4 percent a year from 1933 until 1999, when Glass-Steagall was in effect. Even some who championed repealing the act, like the former Citigroup chairman Sanford I. Weill, have since called for the breakup of the bank behemoths.”

As a more recent example, the 1987 crash never spilled over into the banking system. We had Glass Steagall to thank for that firebreak.



Senators Introduce Bill to Separate Trading Activities From Big Banks
NYT, July 11, 2013



Category: Bailouts, Media, 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.

24 Responses to “The Return of Glass Steagall ?”

  1. rd says:

    We have five grand economics experiments underway around the world:

    1. Social safety nets – multi-generational time frame – so far they seem to be accomplishing their primary goals but long-term budgeting is still a work in progress.

    2. China going capitalist while still remaining a one-party state – still in the middle game with uncertain ending.

    3. The Euro – the end game is approaching the time when we find out if a monetary union of economies and cultures that don’t have a central budgeting and taxing authority can work.

    4. Deregulation of the financial sector in a modern world with instant communications and trasnferrability of money – so far I would say this has been a miserable failure per your article above.

    5.Trickle down economics – so far the tax breaks have worked well in generating wealth for the top 10%, especially the top 1%. The bottom half of society is being left in the dust. The claims by the theorists of increased economic activity and tax revenues appear to have been thoroughly disproved.

    • ashpelham2 says:

      Thank you for those 5 remarks. I’d like to add that the cost of the failure of #4 and #5 has not been completely felt yet. However, the risk of failure of those experiments has been underestimated, and the generational harm that might result could be akin to the generational benefit that #1 has produced.

  2. m.jed says:

    the corporate structures of: New Century, Countrywide, Bear Stearns, Lehman, AIG, Washington Mutual, Merrill Lynch, Washington Mutual, C-BASS, Fannie, Freddie, AMBAC, IndyMac were all compliant in a Glass-Steagall regime.

    • The repeal of Glass Steagall did not cause the crisis — but it did allow it spread unchecked

      • m.jed says:

        Spread to where? Citi was the only “post-Glass-Steagall” bank at risk. BofA would’ve been absolutely fine had they not purchased Countrywide or Merrill, and even Glass-Steagall wouldn’t have prevented the Countrywide acquisition, though it would’ve prevented Merrill. Morgan Stanley was next in line to go down post-Lehman and wouldn’t have been protected by Glass-Steagall. After Morgan Stanley, it was going to be close between Goldman, which also wouldn’t have been protected, and Citi, which would’ve been. But BofA (absent Countrywide/Merrill) and Wells were fine.

      • The head long dash into the subprime syndication business was engaged in by Citi, WAMU, BofA, JPM, Wells Fargo, etc. BofA bought Countrywide to compete in the mortgage syndication business with Bear Lehman Merrill. (They bought Merrill after the crisis was in full flower).

        Do not forget that Bear Stearns and Lehman Brothers Owned Federal Thrifts that they used to thwart state laws on Mortgages. If Glass Steagall was around, that too might have been prevented.

        Much of the additional leverage to Wall Street came form Main Street bans. And when Wall Street collapsed, that massive credit line caused problems.

        As I have written repeatedly, the GLass Steagall repeal did not cause the crisis. But it did allow banks to jump into spaces that would have previously been Wall Street only; It also allowed a degree of credit creation and leverage between the two that would have been much smaller.

        It absolutely made the credit bubble bigger and the subsequent crash worse.

      • Frilton Miedman says:

        The financial crisis would have been greatly diminished if Glass Steagall were still in place.

        The other half of the problem – CFMA allowances for non-disclosure & unlimited position sizes in derivatives & futures. (The root of the ongoing fight over Dodd-Frank position limits)

        Even the Pentagon investigated the probability of financial terrorism in 2009, finding that unknown entities had intentionally exacerbated the price of oil in 2008 to deplete consumer buying power with the intent of pushing the sub-prime/CDO market down.

        The report concluded that although they couldn’t state who it was because the CFTC isn’t allowed to disclose it, oil futures had likely been used to initiate the ’08 crisis.

        Roughly a year later, Sen Bernie Sanders “accidentally” leaked CFTC records showing the “unknown entities” were Goldman Sachs and Morgan Stanley, among others.

        Futures & derivative cornering & manipulation can be used in secert to control input costs for any sector, rendering those with enough buying power & leverAge omnipotent over any market, any sector.

      • S Brennan says:

        …but it does ban taxpayer secured banks from owning derivatives and that will reduce the density of toxic waste in the financial system.

  3. [...] Ritholtz, The Big Picture, The Return of Glass Steagull? here. Mr Ritholtz reminds me of that Ricky Bobby isn’t a thinker scene in Talladega [...]

  4. AtlasRocked says:

    It’s about time.

    The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long.

    The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: “Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.”

    • Petey Wheatstraw says:

      You can’t have loopholes without lots of superfluous language.

    • willid3 says:

      well the problem is this , if the rules aren’t spelled out, what happens next is that companies get sued and courts figure out the rules for them. this tends to be a long an involved process. and expensive. and it tends to change over time. so now we make more spelled out laws because companies really dont like how the short version turned out. though they also like it i suppose cause they can get their exceptions put into the law.

  5. slmasker says:

    rd made excellent points, summing our current status to an elite led global financial roller coaster. The bill outlined above may start to restore balance to one portion of this TOP heavy regime. Barry’s comments on the benefits that accrued from the similar Glass-Steagall lend key support.

  6. Global Eyes says:

    What this country needs is a good boomerang law and I nominate Glass-Steagall.
    Here’s the best part: it’s not a big money program. It’s almost free and had been for 70 years. It only took ten years to unwind its benefits. Bring it back.

  7. Petey Wheatstraw says:

    Charles Ponzi did nothing but invent a new “financial product.”

  8. Robert M says:

    In 1850 Sen T Hart Benton, a slave holder from Missouri, was almost shot on the Senate Floor for denouncing slavery. One has to wonder does Sen McCain have the same internal fortitude to withstand the pressure of Banking lobby. We know Sen Warren has as she has had the proverbial financial gun put to hers in her run for the Senate. The larger question does remain, i.e. does the American Public realize it is currently slave to the bankers?

    • ashpelham2 says:

      The American Public might indeed realize, though perhaps not to the extent, they are enslaven to the financial world. However, I’m of the opinion that ignorance is bliss with the majority of Americans. They know that the financial masters hold the keys, and the public appears fine with that.

    • Frilton Miedman says:

      I voted McCain in ’08, (Obama in ’12) for his record against the tobacco industry and “McCain-Feingold/ campaign finance reform, he almost lost his career in the tobacco fight, I see no reason for him to worry now at the twilight of his career.

      McCain is a dying breed, a Republican that knows the difference between budgeting wisely and depraved catering to bribers at the expense of the masses – the same party that spawned the likes of Abe Lincoln, Teddy Roosevelt and Eisenhower.

      I don’t agree with everything he does, but all things told, the GOP should start listening to him or die off as it did 80 years ago.

  9. alexd says:

    The outrageous leverage that the big banks got through direct association with the Bush White House certainly threw gasoline on the fire. it was about the same leverage used at the roulette wheel at a casino if you bet on one number. anyone here not understand why that might be problematic?

  10. Angryman1 says:

    Considering it was the repeal of glass steagall that caused leverage to rocket in the 99-02 in the first place, it would be like closing the barn door after the cows all left.

    • I don’t think there is any data that backs that up — GLASS STEAGALL did not increase or decrease leverage, but kept the two flavors of finance separate

  11. manifest says:

    The Bank Czar doing his best Canadian Shuffle. (Thanks for sharing the Daily Show report on Canadian banking philosophy recently. U.S. Banking Meltdowns 73, Canada 0)

  12. [...] Last week, I referenced the Warren-McCain bill to restore Glass Steagall. Earlier this morning, we showed Senator Warren discussing the bill. [...]

  13. [...] Barry Ritholtz, chief executive of FusionIQ, an asset management and research firm: “For about 70 years, Glass-Steagall managed to keep the riskier, more damaging part of Wall Street away from what should be the boring, straightforward side of finance. It was the height of stupidity repealing Glass-Steagall.” [...]