In May, Robert Reich, former Labor Secretary, listed restoration of Glass-Stegall as a key Presidential candidacy criterion. Reich was in Iowa for the Raising Wages/Working Families Summit – the first of a national series – where he was the featured speaker.
The reinstatement of Glass–Steagall is steadily gathering public support. A bipartisan group of senators and congressman are proposing the “21st Century Glass-Steagall Act” in an effort to curb the power of big banks by reinstating a Depression-era rule that separated commercial and investment banking. Some believe that Glass-Steagall is the essential first step in dealing with the crises in employment, wages, and living standards in the United States.
Enacted during the Great Depression, the Glass-Steagall Act prevented commercial deposit banks, which are insured by taxpayer money through the Federal Deposit Insurance Corp (FDIC), from engaging in insurance and risky investment activities.
The 1999 repeal of Glass-Steagall, which permitted the merger resulting in Citigroup, allowed banks to expand rapidly in size, to the point where the top 0.2 percent of banks controlled nearly 70 percent of all banking assets. The 2008 financial crisis didn’t stop the biggest banks from continuing to grow even though lawmakers from both political sides have criticized these banks as being too big to fail (TBTF), and too big for jail and prosecution.
The new bill, known as H.R. 381 – The Return to Prudent Banking Act of 2015 sponsored by Marcy Kaptor (D-OH), would reinstate and update the separation between commercial and investment banking, giving financial conglomerates a five-year transitional period to split up their businesses in order to come into adherence with the absolute firewall.
However to take it a step further, the bill is more than a mere a reinstatement of the original 1933 Glass-Steagall Act. It would also bar commercial banks from some of the newer, more complex practices that they became infamous for in the wake of the recession, including trading complex derivatives and swaps or engaging in hedge fund and private equity activities. The new bill also seeks to close loopholes created by regulators’ interpretation of the original bill in the 1980s and 90s, preceding its repeal.
Support for restoring the banking firewall has come from various corners since the 2008 financial crisis. Nobel Prize-winning economist Joseph Stieglitz argued at the height of the recession, that the repeal created a “high-risk gambling mentality.”
Senator John McCain (R-AZ), said, “If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.” McCain voted for the bill that repealed Glass-Steagall in 1999 and one of its primary authors was a close economic advisor to his 2008 presidential campaign. Restoring Glass-Steagall has also historically not enjoyed White House support.
Senator Elizabeth Warren (D-MA) says, “I’ll be out there fighting, and here will be the fun part…I’ll be fighting right next to John McCain.” She believes this bill will succeed where others failed because a bipartisan group of senators are finally willing to fight for it publicly.
There are now 54 sponsors of the legislation, which aims “To repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called ‘Glass-Steagall Act,’ and for other purposes. The Lyndon LaRouche Political Action Committee’s campaign for reinstating Glass-Steagall, which went into high gear in October 2008, continues to expand as well.
LaRouche, along with many others, believe that the reestablishment of Glass-Steagall is critical to save the U.S. economy. Ironically, two former chairmen of Citigroup, Richard Parsons and Sanford Weill — who once had a portrait of himself in his office called “The Shatterer of Glass-Steagall” — have endorsed restoring the firewall. Citigroup, which was bailed out in 2008, was the first big beneficiary of the firewall’s repeal.
Looks as if the TBTF Wall Street banks are getting the message. Earlier this month, Wall Street bankers had a war council session in New York. Press leaks have reported on their campaign of threats to cut off campaign funds to Congressmen who join the drive for Glass-Steagall. As the momentum in support for this bill shows, that pressure may very well backfire.
Here’s a bit of colorful background on Glass-Steagall…
In 1933, Ferdinand Pecora held the first of many Senate hearings investigating the causes of the 1929 stock market crash and resulting Great Depression. “Pecora was appointed chief counsel to the U.S. Senate’s Committee on Banking and Currency. Assigned to probe the causes of the 1929 crash, he led what became known as the “Pecora commission,” making front-page news when he called Charles Mitchell, the head of the largest bank in America, National City Bank (now Citibank), as his first witness.
In the hard questioning of Mitchell, Pecora revealed, in addition to other abuses, “…that National City had hidden bad loans by packaging them into securities and pawning them off to unwitting investors.”
Through the hearings, the American public became outraged to learn that these and other abuses were widespread among the large banks and were major contributing factors causing the Great Depression. Laws were passed to ensure that this would never happen again, including the passage of Glass-Steagall later that year, which prohibited the banks from both making loans and selling securities.
Beginning with Bush II and Clinton, there was a big push by the large banks, to deregulate, which included the repeal of Glass-Steagall. The argument was made that the banks could effectively self-regulate and avoid conflicts of interest by forming strong, but separate, credit and investment functions.
However, an autopsy of the recent financial crisis shows that just as in the Great Depression, the banks succumbed to weak underwriting hiding and profiting from those “… bad loans by packaging them into securities and pawning them off to unwitting investors.”
Unlike the early 30’s, we do not have a Pecora Commission to educate the public about the blatant abuses again occurring which have caused the financial crisis, with the largest banks becoming ever more powerful and wrenching control from government and writing legislation and regulations favorable to them. The dangerous and reckless elements in our financial sector have become so powerful they could lead us to the brink of another more severe financial meltdown.
History does repeat. And reinstating Glass-Steagall is a step in the right direction.
[tweetthis url=”http://bit.ly/1ImvZgZ”]Reinstating #GlassSteagall is a step in the right direction. ~ @RichardMBowen #tbtf #hr381 #BankReform[/tweetthis]
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
