Breaking Up The Banks And Bringing Back Glass-Steagall

Monopolies, whether they’re private or governmental, are not in the best interest of the American public. The same could be said of any company that’s supposedly “too big to fail” — like the big banks.

Sanford “Sandy” Weill, whose creation of Citigroup Inc. (C) ushered in the era of U.S. banking conglomerates a decade before the financial crisis, said it’s time to break up the largest banks to avoid more bailouts.

“What we should probably do is go and split up investment banking from banking,” Weill, 79, said yesterday in a CNBC interview. “Have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.”

…“There is finally a growing recognition among a wide range of market analysts, financial market participants and policy makers that the repeal of Glass-Steagall was a mistake,” said Thomas Hoenig, a Federal Deposit Insurance Corp. board member and former head of the Kansas City Federal Reserve. “It’s time now to restrict banks to core services.”

…Arthur Levitt, a former business partner of Weill’s who was chairman of the Securities and Exchange Commission when Citigroup was created, said Weill was “largely responsible” for the rollback of Glass-Steagall.

“He fought very hard for it, and really what Sandy did was to take advantage of regulators who weren’t and still aren’t doing their job,” said Levitt, who is a member of the board of Bloomberg LP, the parent of Bloomberg News.

Levitt said he regrets supporting the bill that overturned Glass-Steagall, and didn’t realize “how weak a job as regulators the Fed and Comptroller’s office were doing,” referring to banking oversight by the Federal Reserve and Office of the Comptroller of the Currency.

…Even Alan Greenspan, who fought for the repeal of Glass- Steagall when he was chairman of the Federal Reserve, said in 2009 that breaking up the banks might make them more valuable.

“In 1911, we broke up Standard Oil — so what happened?” Greenspan said at New York’s Council on Foreign Relations. “The individual parts became more valuable than the whole. Maybe that’s what we need to do.”

Weill altered his view about the industry because “the world changes,” he said, adding that he’s “been thinking about it a lot over the last year.”

You want to prevent another housing crisis?

Bringing back Glass-Steagall may help, but given the fact that it was still in effect when Travelers and Citicorp merged, it wouldn’t fix the entire problem. In addition, the government has to stop using its regulatory powers to encourage risky loans, Freddie and Fannie should get out of the home loan business — and breaking up “too big to fail” banks is another necessity. Put those changes together and they’ll get the job done.

The same can’t be said for Dodd-Frank.

The bill is a regulatory disaster for business, it won’t stop another banking crisis and it actually writes more bailouts into the law. As Jeb Hensarling notes, Dodd-Frank is the worst of all worlds.

Before the crisis, regulatory mistakes and incompetence abounded—but almost no examples of a lack of regulatory authority can be found. Federal regulations were not the solution to the crisis but its principal cause. Federal policy pushed financial institutions to lend money to people for home purchases they couldn’t afford. This dramatically eroded historically prudent underwriting standards. Of the subprime and Alt-A mortgages that led to the 2008 financial crisis, more than 70% were backed by the federal government through government- sponsored enterprises (GSEs, such as Fannie Mae and Freddie Mac), the Federal Housing Administration and other programs. An accommodative monetary policy, in turn, allowed an inflated housing bubble that finally burst.

Having incorrectly diagnosed the problem, Dodd-Frank’s authors wrote 400 new regulations. These generally fall into one of two categories: those that create uncertainty and those that create economic harm.

A prime example is the so-called Volcker rule. This 300-page proposal (to limit the kinds of investments banks can make) is not yet finalized by regulators. The proposal includes roughly 1,300 questions covering nearly 400 topics—and is so confusing that it elicited more than 18,000 comment letters from market participants and the public.

…The House Financial Services Committee estimates that private-sector job creators will have to spend 24,180,856 hours each year to comply with Dodd-Frank—and that’s only for the 224 rules that have been written to date.

…Perhaps most harmful, Dodd-Frank has codified into law a taxpayer-funded safety net for institutions deemed too big to fail—the Orderly Liquidation Authority, which the Congressional Budget Office predicts will cost taxpayers tens of billions of dollars. In downgrading the credit ratings of the nation’s largest banks last month, Moody’s explicitly stated that its ratings still reflect an assumption “about the very high likelihood of support from the U.S. government for bondholders or other creditors in the event that such support is required to prevent default.” So much for ending taxpayer-funded bailouts. And when we lose our ability to fail, we will soon lose our ability to succeed.

Consider also what Dodd-Frank fails to do. Instead of eliminating government-sponsored enterprises—which have received $200 billion and counting in taxpayer-funded bailouts since 2008 and were at the epicenter of the crisis—Dodd-Frank leaves them in a state of perpetual federal conservatorship. Through Fannie Mae, Freddie Mac and the Federal Housing Administration, taxpayers now back 99% of new residential mortgage securitizations.

We can’t get the government out of regulating banks and the mortgage industry, but we can at least demand some common sense solutions that will take the taxpayers off the hook for any future problems while we prevent another housing crisis.

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3 Responses to Breaking Up The Banks And Bringing Back Glass-Steagall

  1. Bill says:

    The government can no longer afford to bail out any company “to big to fail”. The Bankruptcy and Monopoly laws need to be revisited. Like in the case with GM, bankruptcy laws were in several ways usurped by the Administration. What needed to happen was to follow the law as in the case of Chrysler in the early 80′s. The law is there for a reason and has work all along. If a company cannot stand up to the demands of Bankruptcy court, then they didn’t deserve to continue. In the case of GM, bad business and financial decisions of many years caused it’s failure. If they can’t recover by the rule of law they shouldn’t be permitted to continue but they were deemed “to big to fail”.

    GM could and should be the holding company, parent of separate, publicly held companies: Chevrolet, Buick, Cadillac, GMC, GMAC, AC Delco and so on. Like with Saturn, Oldsmobile and Pontiac, Should have been sold off or closed years before they were. If they were separate corporate (SEC) entities, they would have been and the GM debacle would not have been as dire and the problems far more apparent to stock holders, the financial media and the courts.

    Whether they are manufacturing, banking, investment or insurance companies, the laws have either been watered down or regulators have turned their backs and allowed mega corporation to grow, which gave us our current economic crisis.

  2. Derek Solley says:

    Why don’t we make it where banks that want to keep their investment side do not have their deposits insured by FDIC? (of course there would still be demands that they be covered in a crisis…)

  3. Hey John Hawkins,
    I know what you mean, Stegall and other Depression Era Banking Regulations as well as to repeal the Commodities Futures Modernization Act, why is this not being done?

    American Citizens deserve no less than a Banking System that is free from the excess risk taking banks engaged in which lead to the 2008 meltdown and resulting recession.

    Obama should have broken the Too Big To Fail Banks apart already but has not.
    Of course there will be fierce resistance from Republicans but Obama is not doing his job.
    Nice One!

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