Might we turn the clock back in an attempt to make our way forward? How so?
Pressure is certainly building in America to curtail, if not derail, the excessive risks embedded in our largest banks. How may these risks be unwound? Reinstating the Glass-Steagall Act, which separated commercial and investment banking activities. If this Act were to be reinstated, that would be the end of the mega-banks — Citigroup (C), JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC) — as we know them.
Who has been harping on this? Former Fed Chair Paul Volcker. Although Wall Street and Washington turn a deaf ear to Volcker, America listens to him intently.
In September, I wrote “Volcker Launches Bombshell on Wall Street and Washington” which highlighted Volcker’s call to reinstate Glass-Steagall. That story resonated far and wide. Now we learn from the American Banker that Senators Maria Cantwell (D-WA) and John McCain (R-AZ) have introduced legislation which would once again separate commercial and investment banking activities. From American Banker’s story, Bill Offered to Reinstate Glass-Steagall:
Sens. Maria Cantwell, D-Wash., and John McCain, R-Ariz., introduced a bill Wednesday to reverse the Gramm-Leach-Bliley Act’s dismantling of the wall separating banking from the securities and insurance industries.
Under their Banking Integrity Act of 2009, commercial banks would be prohibited from affiliating with investment banks and vice versa.
The bill would also ban commercial banks from engaging in any insurance activity. The legislation would force banks to divest their commercial or investment banking operations within one year of enactment.
“America can’t afford another financial crisis,” said Cantwell in a press release.
In my opinion, the melding of commercial and investment banking activities is not the problem in and of itself. Very simply, I believe the repeal of Glass-Steagall has shown that Wall Street does not possess the leadership and risk management capabilities to properly monitor and manage the risks embedded in institutions of this size and scope.
To that end, I would be in favor of reinstating this Act. That said, we should not think that merely reinstating Glass-Steagall will solve our problems. Why? Don’t forget that Bear Stearns and Lehman Brothers (LEHMQ) were pure investment banks, both of which failed without having commercial banking activities.