Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21
UK Covid-19 Booster Jabs Moderna, Pfizer Are They Worth the Risk of Side effects, Illness? - 22nd Nov 21
US Dollar vs Yields vs Stock Market Trends - 20th Nov 21
Inflation Risk: Milton Friedman Would Buy Gold Right Now - 20th Nov 21
How to Determine if It’s Time for You to Outsource Your Packaging Requirements to a Contract Packer - 20th Nov 21
2 easy ways to play Facebook’s Metaverse Spending Spree - 20th Nov 21
Stock Market Margin Debt WARNING! - 19th Nov 21
Gold Mid-Tier Stocks Q3’21 Fundamentals - 19th Nov 21
Protect Your Wealth From PERMANENT Transitory Inflation - 19th Nov 21
Investors Expect High Inflation. Golden Inquisition Ahead? - 19th Nov 21
Will the Senate Confirm a Marxist to Oversee the U.S. Currency System? - 19th Nov 21
When Even Stock Market Bears Act Bullishly (What It May Mean) - 19th Nov 21
Chinese People do NOT Eat Dogs Newspeak - 18th Nov 21
CHINOBLE! Evergrande Reality Exposes China Fiction! - 18th Nov 21
Kondratieff Full-Season Stock Market Sector Rotation - 18th Nov 21
What Stock Market Trends Will Drive Through To 2022? - 18th Nov 21
How to Jump Start Your Motherboard Without a Power Button With Just a Screwdriver - 18th Nov 21
Bitcoin & Ethereum 2021 Trend - 18th Nov 21
FREE TRADE How to Get 2 FREE SHARES Fractional Investing Platform and ISA Specs - 18th Nov 21
Inflation Ain’t Transitory – But the Fed’s Credibility Is - 18th Nov 21
The real reason Facebook just went “all in” on the metaverse - 18th Nov 21
Biden Signs a Bill to Revive Infrastructure… and Gold! - 18th Nov 21
Silver vs US Dollar - 17th Nov 21
Silver Supply and Demand Balance - 17th Nov 21
Sentiment Speaks: This Stock Market Makes Absolutely No Sense - 17th Nov 21
Biden Spending to Build Back Stagflation - 17th Nov 21
Meshing Cryptocurrency Wealth Generation With Global Fiat Money Demise - 17th Nov 21
Dow Stock Market Trend Forecast Into Mid 2022 - 16th Nov 21
Stock Market Minor Cycle Correcting - 16th Nov 21
The INFLATION MEGA-TREND - Ripples of Deflation on an Ocean of Inflation! - 16th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

New Glass-Steagall Act Key to Ending Too Big to Fail Banks

Politics / Market Regulation Jul 19, 2013 - 01:22 PM GMT

By: Money_Morning

Politics

Garrett Baldwin writes: Last week, four senators that include Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced a bill to reinstate the Glass-Steagall Act.

The 21st Century Glass-Steagall Act, as it's called, would bring back many of the provisions of the former law and strengthen language to limit financial speculation by the big banks, reduce risk, and attempt to end "Too Big to Fail" once and for all.


The original legislation, called The Banking Act of 1933 but commonly referred to as Glass-Steagall, was partly repealed by Congress in 1999 and signed into law by President Bill Clinton. But by the time Glass-Steagall was repealed, the law had already been watered down and full of loopholes that left the U.S. economy highly vulnerable to a financial crisis.

Many economists believe that the partial repeal of this law was responsible for the recent financial crisis.

But the reintroduction of a Glass-Steagall law would do one critical thing that should provide comfort to any American.

It would make it impossible for the Big Banks to access FDIC-insured savings and deposits, and then speculate with ordinary Americans' money. In addition, it would aim to end Too Big to Fail and reduce the size of the mega-banks, in essence break them up.

The History of Glass-Steagall Act and its Benefits

Following the stock market Crash of 1929, Congress sought in 1933 to reduce risk in the financial sector.

Four key provisions were central to the Depression-era law. Here is what each of them did for more than 60 years:

  • Section 16 made it illegal for national commercial banks (banks overseen by the Office of the Comptroller of the Currency) from engaging in securities trading. It would be illegal for a company like Bank of America to engage in speculation of commodities and derivatives.
  • Section 20 banned state-chartered or national banks that are Federal Reserve members from being engaging in operations with investment banks that were engaged in securities dealing.
  • Section 21 banned investment banks from accepting deposits. It would be illegal for a company like Goldman Sachs to allow customers to open a savings or checking account.
  • Section 32 made it illegal for Federal Reserve member banks from sharing corporate board members with investment banks.

Sections 20 and 32 are the primary firewalls that many mention when speaking of this law.

From the 1980s until its repeal, numerous loopholes were chiseled out.

As financial institutions became publicl- traded companies, the interest in short-term profits overcame the desire for long-term stability. The creation of exotic securitization products and widespread subprime lending became critical parts of the banking industry's profits from the late 1970s on.

And we know how well that went.

The banks' ability to engage in insurance and credit default swap trading was, at the time, far more controversial than the movement to replace this law. But the emphasis on share prices drove banking leaders to eye Glass-Steagall as a significant limitation on their profit potential using taxpayer insured deposits.

And there was big potential for profits in their line of business.

Commercial banks wanted to be able to take increased risks with the money they had in their vaults, while investment banks, the real risk takers, wanted access to the deposits of traditional banks in order to maximize their profits.

At the time, a number of loopholes were discovered in the law, which corporate lawyers and banks exploited, and the banks increased lobbying to weaken the legislation.

While the impact of the law's repeal is hotly debated among economists, it's hard to argue against one thing: The investment banking culture significantly overtook the conservative models of commercial banking.

A New Firewall

The proposed bill is only 30 pages long and is rather explicit in its language that would reinstate these core provisions and seek to increase oversight of financial instruments like credit default swaps, which were not part of the financial industry in the 1930s.

Re-implementing this famous firewall between the banking divisions would likely lead companies like Citigroup and JPMorgan to spinning off portions of their businesses, and reduce communication between commercial banks and companies that engage in securities trading like investment banks and hedge funds.

The war drums for Glass-Steagall have been booming since the $6 billion-plus loss reported by JPMorgan caused by the trades of the "London Whale" in 2012.

But Glass-Steagall wouldn't have prevented this loss, as the problems actually occurred on the commercial side of the bank. In addition, companies that collapsed in 2008, Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and the American International Group (AIG) would not have been regulated by Glass-Steagall, as they have no commercial banking arms to regulate.

While Glass-Steagall would reduce companies like Citigroup, JPMorgan, Goldman Sachs, among others from getting "Too Big to Fail," the regulators still need to engage in proper regulation to address vulnerabilities in the derivatives markets.

The Dodd-Frank bill in 2010 was supposed to draw greater attention to the Financial "Weapons of Mass Destruction," as termed by investment legend Warren Buffett.

However, Dodd-Frank has been an abysmal failure, a law essentially written by corporate lobbyists. JPMorgan, which convinced Americans through a robust grassroots movement in 2010 that it was innocent in taking part in the faulty derivatives game, has come out far stronger and better poised to capitalize in the commodity derivatives markets.

Ironically, JPMorgan was named Derivatives House of the Year in 2012 by Risk Awards. The company then proceeded to lose $6 billion on derivatives.

Yet a renewed Glass-Steagall will reduce the influence of investment banking speculation on commercial banking. The bill also should seek to increase bank capital requirements and reduce leverage ratios.

Want to know more about this new Glass-Steagall Act will work? Here's the lowdown on the 21st Century Glass-Steagall

Source :http://moneymorning.com/2013/07/19/new-glass-steagall-act-key-to-ending-too-big-to-fail/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in