Nightmare on Wall Street
Like a phoenix rising from the ashes, the spectre of Glass-Steagall returning is causing the occupants of the Wall Street C-Suites* to choke on their bagels.
W&D has been thumbing through the official 66-page US Republican Platform 2016. And found this sentence:
We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.
Good grief! Armageddon!
Work with W&D on this.
What is Glass-Steagall?
Glass-Steagall is not a hybrid glazier-chicken farming company. But an act of the US Congress in 1933 to prohibit commercial banks from engaging in higher-risk businesses e.g. securities businesses, commonly termed investment banking**.
The act was passed after the Wall Street Crash of 1929, to protect the tax-payer from bailing out banks that speculated and also to maintain banking stability#.
The Federal Reserve (the US central bank) had weakened the act by generous interpretations, culminating in allowing the merger of Citibank and Salomon Smith Barney (one of the US largest securities' firms) in 1998. Under President (Bill) Clinton, the two key provisions of Glass-Steagall were repealed in the Gramm-Leach-Bliley Act of 1999.
Wall Street had been lobbying for the repeal of the GSA since, well, 1933. Why? Well, one can make a truck load of money, lots of the time, in investment banking. But precious little, relatively, in commercial banking.
So, now there is no GSA. Why bring it back?
Many believe that the GFC was caused by the absence of the GSA. That is, banks used their federally insured deposits to leverage up and participate in extraordinary risk taking. This was essentially the creation of products that promised fiscal Nirvana but delivered purgatory.
W&D assumes that readers have read 'The Big Short' or seen the outstanding movie of the same name. And therefore would be aware of the practices that developed. And the outcomes.
Essentially, the US tax-payer bailed out the banks.
Well, GSA Believers consider that the regulatory action since the GFC to punish bad banking behavior have amounted to effectively zero (correct) and that it's all likely to again happen (possibly). And so, bring back GSA.
W&D also observes that there is a great deal of fiscal envy in all of this. There is a strong sense from those living on Main Street that those who work in Wall Street lead lives of undeserved looxery: the limmos, the house in the Hamptons, the lodge at Vail; not to mention the massive bonuses.
Who else is a GSA Believer?
Well, W&D brings readers an excerpt from the Democrat Platform:
Democrats support...an updated and modernized version of Glass-Steagall and breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy.
Hmm. The Indians are circling the Wall Street wagon.
And they will be for some time. And they won't get closer than going around in circles.
Why? W&D senses that this is just a scam to raise political donations.
(The symbol of Republicans is an elephant, for Democrats a donkey.)
Politics is all about power and money. This posturing by both parties is nothing more than extortion to extract maximum campaign contributions from Wall Street.
The Wall Street wallets will come out. Both directly and indirectly. It's not only about the companies giving to a presidential campaign. It's also about companies and senior executives giving to individual members of Congress.
Soothing noises will be made about better bank behaviour (sound familiar).
And nothing will be done.
*C-Suite is a metaphor for the occupants of a mythical suite of rooms in large companies, occupied by executives whose titles commence with 'C', such as CEO, CIO, COO, etc.
**The 'Glass-Steagall' Act is more formally known as the Banking Act of 1933. When folk speak of Glass-Steagall they generally mean the two provisions of the act relating to the separation of commercial and securities' activities by banks.
#GSA prevented commercial Federal Reserve member banks from:
- dealing in non-governmental securities for customers
- investing in non-investment grade securities for themselves
- underwriting or distributing non-governmental securities
- affiliating (or sharing employees) with companies involved in such activities
Conversely, Glass–Steagall prevented securities firms and investment banks from taking deposits.